- BMW vastly decreases its profit projection - brake-related recall issue
Car maker, BMW, has adjusted its sales and income projections for the current year. The adjustments are attributed to vehicle recalls and delivery pauses due to problems with Continental's braking systems, along with poor sales in China. The company anticipates that profit before tax will decrease by at least 10% compared to the preceding year.
Over 1.5 million vehicles worldwide are affected by the braking system issues, with about 150,000 in Germany. Between 3% and 5% of the delivered parts are flawed, necessitating inspection of all parts.
Technical glitches in certain instances cause the vehicle's anti-lock braking system (ABS) and dynamic stability control (DSC) to become inoperable, although the driver can still brake. The driver is encouraged to visit a BMW or Mini service center as soon as possible.
Software updates could be performed remotely ("over the air"), if required. Repairs involving component replacement could take up to four hours. Vehicles without diagnostic software will be recalled for installation.
The issues are resulting in high warranty costs in the millions in the current quarter. The delay in delivering 320,000 vehicles yet to be handed over to customers is causing sales setbacks worldwide in the second half of the year.
Business in China remains sluggish. BMW had been more hopeful about the market than its competitors. Despite government support measures, consumer uncertainty remains.
As a result, BMW's board has revised its annual forecast. Instead of a slight increase, customer deliveries are now predicted to decrease slightly compared to the previous year. The Ebit margin in the automotive segment is now anticipated to be between 6% and 7% - previously, BMW aimed for 8% to 10%. Pre-tax profit is expected to be significantly lower than the previous year. In the previous year, BMW sold 2.55 million vehicles, achieved an Ebit margin of 9.8% in its core business, and generated 17.1 billion euros in pre-tax profit.
Continental, the supplier, manufactures the integrated braking system for BMW, which is partially being replaced. The performance of an electronic component may be compromised, but braking efficiency remains above legally required standards. Continental has established provisions in the mid-double-digit million euro range and believes this will be sufficient for the warranty case. BMW has announced its intention to seek compensation.
Following the profit warning, BMW's share price fell by almost 8% in the afternoon, while Continental's share price declined by 7%. Other automotive stocks also decreased.
The German automotive industry is currently facing a crisis. In addition to location-specific challenges, there are the burdens of transformation, weak demand in the largest single market, China, and reduced demand for electric vehicles in Europe, where companies have invested heavily. German industry leader VW is not ruling out plant closures and job cuts in Germany. Continental, one of the largest suppliers, plans to cut thousands of jobs, ZF is also reducing employment on a large scale, and even industry leader Bosch is having to cut costs.
BMW has announced a recall of affected vehicles due to the braking system issues, aiming to install necessary software updates or replace faulty components. The vehicle recalls and delivery pauses are significant factors contributing to BMW's adjusted sales and income projections, projecting a decrease in profit before tax by at least 10%.
The financial implications of the vehicle recalls are evident in BMW's current quarter, with high warranty costs arising from the issues and millions spent on repairs.
