What's going on?
BMW’s investment in innovation is weighing on its profit, and revenue from its car business is expected to slow, the automaker reported on Tuesday. It’ll need to come out with one powerful engine to bring things back up to speed!
What does this mean?
BMW enjoyed over a decade in pole position as the world’s top seller of luxury cars, before being overtaken by Mercedes-Benz in 2016. BMW subsequently launched its biggest-ever new product rollout, with 40 new and revised car models. It’s also been investing in research and development to produce innovative new cars drawing on the latest technology (like internet-connected cars) in an attempt to future-proof its business.
But Tuesday’s results showed that all this increased spending is hurting BMW’s profitability (a.k.a. margins), bringing it below that of its main rivals – fellow German automakers Mercedes and Audi. BMW also lowered its revenue forecast for the year for its core car-making business, partly because the strengthening of the euro this year has made BMWs more expensive for customers outside the eurozone.
Why should I care?
For the stock: BMW is going through a classic “investment cycle”.
While BMW’s investment may be necessary to remain competitive in the long run, it’s created some speed bumps in the near term. Investors, who are often focused on the near term, weren’t happy to see increased spending weigh on BMW’s profits – especially when coupled with slower-than-anticipated sales. Usually, a company’s stock doesn’t perform well as it spends more money investing in the future (BMW’s stock was off 2% on Tuesday).
The bigger picture: Technology and new entrants could see carmakers hitting the skids.
Traditional carmakers across the board are all investing in technology as they gear up for competition from the likes of Tesla’s and Google’s electric and self-driving cars. The race is on to see if carmakers (and their shareholders) can withstand the hit to profits long enough to be able to develop cars that provide a route to future profitability.