Germany's standard for automotive quality, Bayerische Motoren Werke (BMW, traded on the Frankfurt Stock Exchange), advised on Wednesday that its 2004 profits should be the best on record. The company ascribes much of its recent success to the popularity of its new edition of the Mini, as well as the continuing appeal of its flagship BMW and Rolls-Royce brands.
But a few things ring false about the company's statement. For one, BMW claims that American consumers are inclined to buy premium brands. That may be true, but according to the recently released 2004 Consumer Reports "Best and Worst Cars" survey, BMW seems to be no longer synonymous with premium. That honor goes primarily to the various Japanese brands and, believe it or not, to a couple of American brands -- notably, General Motors'
For another, BMW is counting on sales to China and Japan to boost its bottom line next year. China, sure, "new rich" always go in for buying the kind of high-priced stuff they think the "old rich" have. But Japan? They already have premium brands, and of higher quality than BMW. Of its top three picks for both quality and reliability in a luxury car, Consumer Reports gave highest honors to models made by Toyota's
Finally, BMW's 2003 earnings dropped nearly 4% from their 2002 levels, outpacing the revenue decline of 2%. So, the earnings trend is not looking good. Part of the reason for the unimpressive 2003 results was certainly the decline in the value of the dollar versus the euro. This had two effects on the German car maker. First, it made dollar purchases of BMW products less valuable to BMW's euro-denominated income statement. Second, it made BMWs even more expensive than they usually are, depressing U.S. demand for the products.
The dollar-euro value gap does not appear to be closing with any rapidity, and Madrid-inspired fears of an election-year terrorist attack in the U.S. will likely keep the gap open for much of 2004. So, if BMW expects U.S. sales to contribute to better profits in 2004, it may well have to consider shifting production of some of its planned new car models -- for example, the new 1-series BMW -- to its Spartanburg, S.C., plant, and thus do an end-run around the exchange rate.
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Motley Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.