A Work Project, presented as part of the requirements for the Award of a Master Degree in Finance from the NOVA – School of Business and Economics.
EQUITY RESEARCH IN THE AUTOMOTIVE INDUSTRY: VALUATION OF BMW
BRUNO ALEXANDRE MOTA AZEVEDO, 24245 MARCEL PHILIPP OLSCHEWSKI, 29855
A Project carried out on the Master in Finance Program, under the supervision of:
Nuno Quartin Bastos de Vasconcelos e Sá
January 3, 2020 Abstract This work project “Equity Research – Valuation of BMW” analyzes BMW’s business within the automotive industry. Given a strong demand for BMW’s luxury cars, e.g. SUVs, we estimate further modest sales growth of 1.2%-1.6% in a challenging environment. However, this imposes potential fines for missing EU CO2 fleet emission target but also finance the necessary R&D and CAPEX needs to master the current sector trends. This results in a lower operating profitability in the future. Our valuation for BMW yields a price target of €75.52 for FY20, which results in a 7.4% total shareholder return and hence, a HOLD recommendation.
Keywords Equity Research, Automotive Industry, BMW, Valuation
This work used infrastructure and resources funded by Fundação para a Ciência e a Tecnologia (UID/ECO/00124/2013, UID/ECO/00124/2019 and Social Sciences DataLab, Project 22209), POR Lisboa (LISBOA-01-0145-FEDER-007722 and Social Sciences DataLab, Project 22209) and POR Norte (Social Sciences DataLab, Project 22209) MASTER’S IN FINANCE
BAYERISCHE MOTOREN WERKE AG COMPANY REPORT
AUTOMOTIVE INDUSTRY 3 JANUARY 2020 STUDENTS: BRUNO AZEVEDO, MARCEL OLSCHEWSKI [email protected], [email protected]
BMW’s success at crossroads Recommendation: HOLD
Vs Previous Recommendation HOLD Technology and electrification challenge profitability Price Target FY20: 75.52 € § Despite a global market sales downturn of about -5.8% in Vs Previous Price Target 74.41 € 2019, with China’s weakening momentum, ongoing trade tariffs Price (as of 31-Dec-19) 73.14 € conflict and Brexit uncertainty, BMW unit sales are expected to Reuters: BMWG.DE, Bloomberg: BMW.GR increase by 1.4% to 2.525m.
§ Changeover from ICE to lower-margin EV drivetrains 52-week range (€) 57.99-78.30 Market Cap (€m) 47,120 challenges BMW and its profitability. Our forecasts estimate a lower Outstanding Common Shares 601,995,196 profitability (6.1-6.4% EBIT-margin) than historically (7.2-9.6%) Outstanding Preferred Shares 56,126,904 Price Preferred Shares (as of 31-Dec-19) 55.05 € for the automotive segment in the future due to negative impact from Source: Company data, Bloomberg higher R&D investments.
§ Increasing SUV sales finance BMW’s CAPEX and R&D BMW vs STOXX Europe 600 (indexed) 130 needs and are likely to result in fines for missing EU CO2 fleet 120 emission target of 101 g/km in 2021 (currently at 128 g/km). 110
100 § Consumers are projected to continue to withhold EV 90 purchases due to concerns on pricing, charging infrastructure and 80 range capacity. Ceased or expiry of governmental financial stimulus 1/19 4/19 7/19 10/19 STOXX Europe 600 BMW will further decelerate adoption rates. Source: Bloomberg, Analysts estimates
§ Based on a sum of the parts valuation of Automotive & (in € millions) 2018 2019E 2020F Motorcycles, Financial Services and the Chinese JV, BMW’s price Revenues 97,480 100,009 102,304 target is €75.52 for FY20, meaning a shareholder return of 7.4%, Automotive sales (‘000) 2,490 2,525 2,560 Gross margin 19.0% 18.1% 17.8% considering a €3.00 dividend. Hence, this results in a HOLD EBIT 9,121 7,229 8,763 recommendation. EBIT margin 9.4% 6.9% 8.1% Net income 7,117 5,079 6,097 Company description Earnings/Share (in €) 10.82 7.72 9.26 Dividend/Share (in €) 3.50 3.00 3.10 Munich-based BMW Group is a German manufacturer of automotives P/E 6.50x 9.28x 7.54x and motorcycles. The company operates globally with plants and Source: Company data, Analysts estimates offices in more than 150 countries on 6 continents. With a focus on the premium segment, the group markets cars under its brands BMW,
MINI and Rolls-Royce. Additionally, it also distributes BMW motorcycles and complements its product offerings with financial services, such as financing, leasing, insurance brokerage, and fleet management for private and business customers.
THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY BRUNO ALEXANDRE MOTA AZEVEDO AND MARCEL PHILIPP OLSCHEWSKI, MASTER’S IN FINANCE STUDENTS OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (PLEASE REFER TO THE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT)
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Table of Contents EXECUTIVE SUMMARY ...... 3 COMPANY OVERVIEW ...... 4 COMPANY HISTORY ...... 4 MANAGEMENT BOARD AND SUPERVISORY BOARD ...... 4 SHAREHOLDER STRUCTURE ...... 5 BUSINESS MODEL ...... 5 MARKET OVERVIEW AND SECTOR OUTLOOK ...... 7 MACROECONOMIC OUTLOOK AND SECTOR EVOLUTION ...... 7 EUROPEAN MARKETS ...... 7 UNITED STATES MARKET ...... 9 CHINESE MARKET ...... 9 BUSINESS CHALLENGES AND TRENDS ...... 10 BUSINESS CHALLENGES AND OPPORTUNITIES ...... 10 SECTOR TRENDS (CASE) ...... 12 COMPETITIVE PERFORMANCE ...... 14 INTRINSIC VALUATION ...... 15 AUTOMOTIVE SEGMENT ...... 15 REVENUE EVOLUTION ...... 15 R&D EXPENSES ...... 16 OPERATING PROFITABILITY ...... 16 CAPITAL EXPENDITURE ...... 17 CHINESE JOINT VENTURES: BMW BRILLIANCE AND SPOTLIGHT ...... 18 MOTORCYCLES SEGMENT ...... 19 INDUSTRIAL ROIC AND FCFF EVOLUTION ...... 19 FINANCIAL SERVICES SEGMENT ...... 20 OTHER ENTITIES AND ELIMINATIONS SEGMENTS ...... 21 COST OF CAPITAL ...... 21 SCENARIO ANALYSIS ...... 22 SENSITIVITY ANALYSIS ...... 23 MULTIPLES VALUATION ...... 23 FINAL RECOMMENDATION ...... 23 REFERENCES ...... 24 APPENDIX 1 ...... 28 INCOME STATEMENT ...... 28 BALANCE SHEET ...... 28 CASHFLOW STATEMENT AND JV BMW BRILLIANCE AUTOMOTIVE ...... 29 APPENDIX 2: DISCLOSURES AND DISCLAIMERS ...... 30
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Executive summary
Changing consumer habits and expectations due to the digitalization as well as the
BMW Group unit sales technological progress paired with environmental concerns within the society lead
2,368 2,464 2,491 2,525 automotive industry to undergo a major transformation. The sector trends, which 2,118 2,247 BMW faces, are summarized under the term CASE (Connectivity, Autonomous Driving, Sharing Mobility and Electrification/Environment). By unit sales in 2018, BMW is the second largest premium car manufacturer globally. The group has '14 '15 '16 '17 '18 '19E BMW MINI Rolls-Royce Total increased its sales by more than one million units (CAGR of 6.8%) since the 2008 Figure 1: BMW Group unit sales by brand (in ‘000 units) financial crisis. Despite challenging market conditions with decreasing global car Source: Company data, Analyst estimation sales caused by tariff conflicts and Brexit uncertainty, in 2018 BMW’s unit sales increased for ten consecutive years, primarily attributable to increasing demand from China. While the domestic market, Germany, is expected to grow only slightly at a CAGR of 1.0% from 2020 onwards, China will continue to drive growth with a CAGR of 3.5%. With an ongoing model offensive geared towards Battery Electric Vehicles (BEV) and Plug-In Hybrid-Engine Vehicles (PHEV), BMW sales growth is projected to continue, albeit at a slower pace (1.2%-1.6%) due to market maturity, saturation, and negative impacts caused by CASE trends.
Higher competition in the sector, alongside a shift away from Internal Combustion Engines (ICE) towards lower-margin Alternative Fuel Vehicles (AFV), will cause headwinds for BMW’s profitability. However, a rise in high-margin SUV unit sales is projected to counteract this trend, helping to finance increasing R&D and CAPEX needs, which negatively impact profitability. As a result, the projected EBIT-margin is expected to be around 6.0-6.4%, lower than management target (8-10%) but higher than industry average (5%). AFV sales are expected to grow slower than anticipated due to customer reservations on price, charging infrastructure and Group and Automotive & Motorcycle ROIC and Financial range capacity. Due to this, CO2 emission fines are expected for BMW to occur as Services ROE they are likely to fail to meet EU fleet emission targets by 2021, resulting in a 24% cumulative fine of €1.7bn. However, BMW’s motorcycle and financial services 20% 16% segments are projected to remain robust throughout the forecasting period. 12% 8% 4% At group level, BMW’s ROIC is set to decline during the forecasting period from 0% '18 '19E '20F '21F '22F '23F '24F '25F '26F 4.8% in 2018 and stabilize around 3.6% in 2026. Nevertheless, due to consumer
Group perceptions of BMW’s premium brand positioning, the automotive segment is Automotive & Motorcycles anticipated to sustain a high ROIC of around 12-16% (down from 19.6% in 2018). Financial Services Figure 2: Evolution of Group and industrial ROIC and Financial Services ROE (in %) For this reason, we forecast a share price of €75.52 for December 2020, yielding Source: Company data, Analyst estimation a total shareholder return of 7.4% from the current BMW share price of €73.14 and an expected dividend of €3.00 per share.
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Company overview
Company history
The founding of BMW can be traced back to the engineer Karl Rapp and aircraft manufacturer Gustav Otto, son of the inventor of the Otto engine, Nicolaus August BMW AG established in 1916 Otto, in 1916 (BMW, 2019d). Initially starting as an aircraft engine manufacturer, a post-world-war production ban for army suppliers forced BMW to shift to the production of motorcycles and automotives in 1923. After the Second World War, the allied powers limited production further to household appliances, causing BMW to only return to car manufacturing in 1952. Hence, BMW demonstrated its ability to adjust its business model to changing market conditions. Following this, BMW’s financial health deteriorated caused by faltering sales and absent cost savings (Biss, 2017). In 1959, BMW’s shareholder and workforce rejected a restructuring offer from Daimler-Benz and backed Herbert Quandt to expand his share package in order to take over the management of the company and returned to profit generation. Since then, the Quandt family has maintained its ownership in BMW.
In the early 1960s and after a spate of successful new model introductions, BMW rolled-out its expansion to other countries. Following this, in the 1990s BMW acquired the Rover Group in order to enter new automotive market segments with Rover, Land Rover, MG and MINI brands. Additionally, the Swedish motorcycle manufacturer Husqvarna was acquired to strengthen BMW’s market position in the Acquisition strategy of BMW turned out to be unsuccessful motorcycle segment. However, continuing losses of both acquisitions prompted the disposal in 2000 and 2013, respectively. Since then, BMW solely focused on organic growth and the premium segment. For these reasons, we expect BMW to primarily rely on strategic partnerships, e.g. JV, instead of acquisitions or mergers. With the founding of the BMW Kredit GmbH in 1971, BMW completed its product offerings with a financial services segment to promote the sales of its products.
Management board and supervisory board
BMW implemented the Continental Model of corporate governance (Cernat, 2014), which consists of a two-tier board: supervisory board and management board. According to the German Aktiengesetz (Company Act) (§105 Abs. 1), a strict separation between the supervisory and management board is imperative. BMW’s supervisory board comprises a total of 20 representatives (same as VW, Daimler and Audi). Due to German idiosyncrasies, half of the supervisory board is represented by shareholders while the other half consists of employee
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representatives. Hence, we expect employee some sort of resistance against efficiency programs for the purpose of job retention.
The management board experienced a major transition in 2019 after CEO Harald Krüger announced that he did not plan to extend his contract, which would have expired in April 2020. According to press reports, he wanted to forestall a dismissal by the supervisory board (Fasse, 2019b). Former chief of production, Oliver Zipse, Major transition in BMW's was appointed his successor and took over as CEO in August 2019. Given his management board in 2019 previous position and despite above mentioned employee resistance, we anticipate him to take effective actions to counter BMW’s diminishing margins in order to cover required R&D and CAPEX investments. The change in leadership entailed further changes as the chief personal officer and chief transformation officer left the board upon own request (Handelsblatt, 2019a) and were replaced by internal managers. Shareholder structure
As of the end of December 2019, a total of 601,995,196 common shares were Shareholder Structure outstanding. Despite the latest transitions in the management board, the shareholder structure has remained constant over decades. Since the acquisition 25.83% of a major share package by Herbert Quandt in the late 1950s, the Quandt family 50.05% has kept its equity stake in BMW and currently holds 46.77% of all outstanding 20.94% voting shares. The family stake was split by the direct descendants Stefan Quandt and Susanne Klatten, who either directly or indirectly hold 25.83% (blocking 3.18% minority) and 20.94%, respectively. Both also sit on the supervisory board as Stefan Quandt Susanne Klatten
BlackRock Others deputy chairman (Stefan Quandt) and as director (Susanne Klatten). The next
Figure 3: Shareholder structure of BMW largest shareholder is BlackRock with 3.18%. The remaining 50.05% are held by Source: Bloomberg, Company data minor investors with less than 3% ownership. Since BMW’s top 3 shareholders account for almost half of the outstanding shares (49.95%), the shareholder structure can be described as concentrated and dependent on a few investors. Due to their long-term commitment, we expect BMW investors to be willing to sacrifice short-term returns for sustainable long-term profit generation.
Revenues by segment Business model
99 97 92 94 77 76 80 The focus of BMW lies on individual premium mobility, hence the group bundles 69 60 53 51 its operations in automotive, motorcycles and financial services. Since the financial crisis in 2008, the company revenues have almost doubled from €50.6bn in 2009 to €97.5bn in 2018. For the future, we expect BMW to continue growing, '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Automotive Motorcycles albeit at lower pace as a result of emerging trends, government restrictions and a Financial Services Other FigureTotal 4: Revenues by segment in €bn global economic slowdown. Source: Company data
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The main growth driver is the automotive segment, with 70% and 80% of the group’s revenues and operating profit, respectively. Alongside revenue growth, the group’s unit sales of BMW, MINI and Rolls-Royce cars nearly doubled from 1.29m units in 2009 to 2.49m units in 2018, representing nine years of consecutive growth. This increase is mainly attributed to China, which was the largest single market by unit sales (25.7%) in 2018. Since 2009, group unit sales in China have grown at a CAGR of 23% and outpaced all other regions (5%). However, this above-average growth is expected to diminish in the forecasting period as the Chinese market will normalize due to government regulation (see chapter “Chinese market”). For the other regions a further contraction is forecasted because of market maturity and saturation. However, we expect BMW to slightly grow due to the increasing demand for SUVs and the expected 25 newly electrified models until 2023, which address the emerging trend shifting from ICE to AFV drivetrains. As margins deteriorate due to increasing competition in saturated markets and low-margin EV sales, new sources of revenue generation gain higher importance. Thus, we estimate connectivity services to allow BMW monetizing the entire lifecycle of its cars and offering additional services while improving its Motorcycle sales by brand customer experience. 350 300 The manufacturing of motorcycles accounts for approximately 2% of the group’s 250 200 revenues. After the 2008 financial crisis, BMW’s motorcycle unit sales have 150 increased from 87,306 in 2009 to a peak of 165,566 in 2018 (increase of 89.5%). 100 50 Although exporting motorcycles to more than 90 markets worldwide, European 0 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 countries account for the lion’s share of sales (45.1%), led by Germany with 14.4%.
BMW Harley Davidson KTM After realigning its product portfolio in 2013, we project the segment to further gain
Figure 5: Historical unit sales of BMW Motorrad, Harley Davidson and KTM (in '000 units) traction. As a result of this, we expect BMW to increase its market share in the Source: Company data, Analyst computation premium motorcycle segment by taking advantage of former market leader's,
Harley Davidson, declining sales (Figure 5). Financial Services: managed portfolio The group’s financial services focus on the financing and leasing of automobiles 133 123 125 111 and motorcycles and is closely linked with both segments. In addition, insurance 96 84 75 81 brokerage and banking services are offered, such as car insurances or customer 61 66 deposits, which also serve as a main refinancing resource. In 2018, the segment contributed about one-quarter to the group revenues. Main contributors are sales of previously leased products (37%), lease installments (34%) and interest on loan '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Receivables from sales financing financing (13%). Compared to 2009 figures, the managed portfolio (retail financing, Leased products Figure 6: Financial1 Services managed portfolio in €bn finance leases and leased products) more than doubled from €61bn to €133bn in Source: Company data 2018, and thus reached a level of 137% of the group’s revenue. The share of vehicles financed or leased has steadily grown to 50% in 2018 and is anticipated to increase further to support the sale of new vehicles.
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Market overview and sector outlook
Macroeconomic outlook and sector evolution
Global real GDP growth and The automotive industry is widely interconnected with the global economy and inflation rate accounted for around 5.7% of global economic output in 2018 (IMF, 2019b). The 5% inflation rate, which we estimate to be relevant for price development, rose from 4% 3.2% in 2017 to 3.6% in 2018 (IMF, 2019c). The slowdown in GDP growth in 2018 3% of 3.6% compared with the previous year’s figure of 3.8% also impacted the 2% worldwide car sales (IMF, 2019a). In conjunction with the slowdown, worldwide car 1% '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F sales in 2018 declined for the first time since 2008. Decisive factors were Real GDP growth Inflation rate increasing trade tensions between US and China as well as Europe, which led to Figure 7: Historical and forecasted global real GDP growth and inflation rate (in %) Source: IMF a 0.6% decline in unit volume (OICA, 2019). It is expected that global car sales will develop in line with the GDP growth. For 2019, a further contraction of global GDP Worldwide car sales growth to 3% is expected before recovering to 2018 levels in the following years. 106 108 101 104 98 96 95 95 This is supported by the Economist Intelligence Unit (EIU), which expects a further 90 91 drop (-5.8%) in 2019, since car sales in major markets (US, UK and especially China) declined year-to-date, and a slight growth of 1.8% for 2020 (EIU, 2019). In absolute terms, this results in a decrease from 95m units in 2018 to 90m units for '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F Figure 8: Historic and forecasted global car sales (in 2019. Due to the GDP development in conjunction with the rise of shared-mobility million units) Source: OICA, The Economist Intelligence Unit services (McKinsey, 2017) a lower growth is expected for the upcoming years. Thus, it is forecasted 108m unit sales in 2026.
European markets
Despite constant growth over the last years since the financial crisis in 2008, the European real GDP growth and inflation rate economic growth in Europe has weakened in momentum. Especially within the
3% European Union (EU), unfavorable market data, in particular in the manufacturing 3% sector, caused a deteriorated outlook for the economy (European Commission, 2% 2% 2019). Stagnating international trades, mainly ongoing trade tensions with the US, 1% 1% diminishing consumer demand from China, and uncertainty about the outcome and '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F timing of the Brexit are perceived major challenges according to the European Real GDP growth Inflation rate Figure 9: Historical and forecasted European real GDP Commission (EC) forecasts. Both, the EC as well as the IMF estimate the growth and inflation rate (in %) Source: IMF manufacturing segment to further lose momentum due to structural and environmental changes (IMF, 2019b). For the European economy, the automotive sector is of great importance. According to a study of the European Automotive Manufacturer Association (ACEA), the European car manufacturing industry directly and indirectly accounts for approximately 6.1% of all jobs within the EU (ACEA, 2019a) and contributes about 7% to the total EU GDP (ACEA, 2019b). Consistent with Europe’s GDP, after declining by 0.3% in 2018, car sales in Europe
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are expected to further deteriorate (-3%) in 2019 and to stagnate (1.3%) in 2020 Car sales in Europe Figure 10 2 23.1 23.6 ( ). New CO emission tests in Europe caused the car demand to diminish by 22.2 22.6 20.8 21.0 21.6 20.7 20.1 20.3 restraining manufacturers due to the delay of certification procedures in 2018. Despite macroeconomic headwinds, the labor market has remained resilient and robust to recent market data and the effect of latest announced layoffs is expected to be of modest effect, which is also reflected in the development of the disposable income with a CAGR of 3% until 2026 (growing from $25,580 per capita in 2018 to '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F Figure 10: Historical and forecasted car European car $34,048 per capita in 2026). However, this increase is not expected to transform sales (in million units) Source: OICA, The Economist Intelligence Unit into higher spending on individual mobility like cars, as urbanization and new mobility services are expected to deflate this behavior. But about one quarter of the population is expected to live in rural or suburban areas by 2026, therefore the car will remain the mean of transportation for them (United Nations, 2018a). Hence, for the car sales a modest CAGR of 1.5% is forecasted from 2021 onwards reaching a market volume of 23.6m units in 2026.
In mid-2019, the German economy was close to a technical recession and is German real GDP growth and inflation rate therefore expected to stagnate (growth of 0.5%) for the full year (European 3% Commission, 2019) (IMF, 2019a). As it relies heavily on the manufacturing sector 2% and external trade, it suffered a severe setback after foreign demand declined,
1% although this was mitigated by robust domestic demand, especially private
0% consumption. The disposable income per capita is forecasted to decline to $26,970 '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F in 2019 before constantly growing at a CAGR of 3.3% to $38,093 in 2026. Despite Real GDP growth Inflation rate Figure 11: German real GDP growth and inflation rate the trends of moving to urban areas and increasing presence of shared-mobility (in %) Source: IMF services, the passenger car stock per 1,000 inhabitants in Germany is projected to Car sales in Germany rise from 569.1 in 2018 to 592.3 in 2019 (EIU, 2019). In order to support the
4.0 4.1 4.1 3.8 3.8 3.9 3.8 3.9 3.9 4.0 weakening German automotive industry as well as to meet the EU CO2 fleet emission targets for 2021, the German government has committed to subsidize 700,000 Electrified Vehicles (EV) over the next six years (Handelsblatt, 2019d). Thus, on the basis of these macro-economic influences in combination with its '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F Figure 12: Historic and forecasted car sales in mature state, the German automotive market is projected to move sideways with Germany in million units Source: OICA, The Economist Intelligence Unit a CAGR of 0.9% reaching 4.1m unit sales in 2026.
Regarding the United Kingdom, uncertainty about the Brexit alongside the current UK real GDP growth and inflation rate international trade conflicts negatively impact economic growth prospects.
3% According to the EC, the private consumption and public investments in the UK 2% should support the outlook of real GDP growth, albeit the foreign trade remains a 1% burden for economic growth due to the doubts involving the outcome and timing of 0% '17 '18 '19E'20F '21F '22F '23F '24F '25F '26F leaving the EU (European Commission, 2019). Thus, real GDP growth is expected Real GDP growth Inflation rate to decline to 1.2% in 2019 before reaching a level of 1.5% from 2021 onwards. Figure 13: UK real GDP growth and inflation rate (in %) Source: IMF However, this forecast is subject to volatility related to the outcome of the EU exit
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Car Sales in UK process. With high private consumption being the major driver of economic growth 3.03 3.09 2.91 2.81 2.89 2.96 2.73 2.65 2.71 2.72 in the UK, which is reflected by an increasing disposable income per capita from $27,980 (2019) to $37,447 by 2026 (CAGR of 2.8%), also car sales growth is expected, albeit at a slower pace of CAGR 1.4% until 2026 (EIU, 2019). As a result of higher concentration of people in urban areas and the increasing shared mobility
'17 '18 '19E '20F '21F '22F '23F '24F '25F '26F services, passenger car stock per 1,000 inhabitants is projected to peak in 2020 Figure 14: Historic and forecasted car sales in the UK in million units with 506 cars before declining smoothly to 502 in 2023 (EIU, 2019). Source: OICA, The Economist Intelligence Unit United States market
The US economy defied the global trend in 2018 and improved its real GDP growth US real GDP growth and inflation rate to 2.9% despite increasing tariffs on steel and aluminum imports (IMF, 2019b). For 4% the following years, the IMF projects a downward trend for real economic growth 3% 2% until reaching 1.6% from 2022 onwards. In addition, a stabilization of inflation is 1% expected with no further stimulus from interest rates as recently announced by the 0% '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F FED (Greeley, 2019). The disposable income per capita is projected to rise to Real GDP growth Inflation rate $49,070 in 2019 despite a slowdown of the economic growth (EIU, 2019). For the Figure 15: US real GDP growth and inflation rate (in %) Source: IMF medium-term, the income is forecasted to improve further reaching $54,190 by
Car sales in the US 2026. Apart from this increase, car demand is expected to contract to 16.7m units 17.6 17.7 16.7 16.5 16.6 15.7 15.6 15.9 16.1 16.3 in 2019. Thus, ongoing tariff conflicts with China and the EU adversely impact new vehicle demand. This trade conflict caused a fall in US production, as well as delayed exports of large SUVs to China (Sachgau & Welch, 2019). Therefore, it is forecasted that in the medium-term car sales will not reach historical demand. This is also reflected in passenger car stocks, which is predicted to slightly decrease '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F from 353 cars per 1,000 inhabitants in 2018 to 330 in 2023. Increasing urbanization Figure 16: Historic and forecasted car sales in the US in million units Source: OICA, The Economist Intelligence Unit and newly mobility services will support this trend (McKinsey, 2017). Chinese market
Over the past decade, the Chinese market has evolved to become the second China real GDP growth and inflation largest economy and the largest single market in terms of automotive sales. rate
8% Between the financial crisis and 2018, annual car sales have more than doubled 6% from 13.7m units to 28.1m units. Historically, vehicle ownership was massively 4% supported by the Chinese government, with tax reductions combined with 2%
0% subsidies leading to above-average growth. According to industry analysts, lower '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F tax rates contributed to about 2 to 7m unit sales in 2016-17 (IMF, 2019b). Since Real GDP growth Inflation rate Figure 17: China real GDP growth and inflation rate the tax incentives have been revoked in 2018 and the hurdle for obtaining EV (in %) Source: IMF subsidies have increased, the Chinese car market declined for the 17th consecutive month and is projected to decline further by 10% in 2019 (Handelsblatt, 2019b) (EIU, 2019). Furthermore, the imposed tariffs on automotive imports from the US negatively impacted car demand. Moreover, the willingness to buy EVs is projected
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to keep on hold, due to lower purchasing subsidies and higher prices for AFVs Car sales in China compared to ICEs. Besides this, registration of new cars in urban areas becomes 32.2 30.3 31.2 28.9 29.4 28.1 27.6 28.3 stricter, being limited by a license plate lottery which further hinders car sales 26.3 25.2 growth (Bloomberg, 2019). The Chinese government uses these restrictions to counteract pollution and smog issues in metropolitan areas. As of UN’s research, in 2018 over 800m people lived in urban areas and it will reach 970m in 2026
'17 '18 '19E '20F '21F '22F '23F '24F '25F '26F (United Nations, 2018b). The market potential for car manufacturers increases with Figure 18: Historic and forecasted car sales in China in million units the almost three times higher income in urban areas compared to rural areas. Source: OICA, The Economist Intelligence Unit However, double-digit real GDP growth rates are no longer expected to occur as the economy is expected to normalize and to converge towards an annual growth rate of about 5.3% by 2023 (IMF, 2019d). As ride-hailing services will gain further momentum due to government objective to reduce traffic in metropolitan areas, it appears to be an attractive market for western companies and is expected to double within the next decade (Hubik, 2019). However, entry barriers are high as local provider Didi Chuxing accounts for about 90% of all on-demand trips. To sum up, the local car market is assumed to move to future technology with lower growth rates due to mobility trends and governmental restrictions.
Business challenges and trends
The automotive industry undergoes a major transformation. After more than 100 years of ICEs in place, environmental concerns and regulations have caused a
Top 50 most innovative companies in 2019 shift towards lower or zero emission drivetrains. Alongside this shift, niche players Automakers ranking 9th Tesla emerge with new trends and try to challenge traditional business models of OEMs. 27th BMW 37th Toyota 38th Volkswagen (includes Audi and Porsche) Business challenges and opportunities 40th General Motors 47th Daimler (includes Mercedes-Benz) Figure 19: Top 50 most innovative companies in 2019 This ranking was computed according to senior executives’ Increasing competition has caused the gross margins of traditional manufacturers responses regarding the most innovative companies inside and outside their industry’s experience, alongside a financial measure of the last 3 years total shareholders’ return. to diminish over the past years. Thus, OEMs are demanded to improve their Source: BCG profitability while also to deliver new innovative products. In order to retain their R&D automotive industry spening in $bn competitive advantage, car manufacturer’s long-term success relies on R&D
136 125 130 development. This spending on innovation is also acknowledged by a study from 109 109 105 105 BCG, which lists six automakers in the list of the top 50 most innovative companies in 2019 (BCG, 2019a). In 2018, $125bn have been allocated to R&D to foster innovation, which represents about 4.1% of the sectors revenues (strategy&,
'14 '15 '16 '17 '18 '19E '20F 2018). Key focus areas are advanced production technologies, lighter materials Figure 20: R&D spending automotive industry in $bn Source: strategy& and fuel efficiency in vehicles, autonomous driving and AFVs according to D&B Hoovers. CASE trends itself require an estimated individual investment of over CASE trends require an individual investment of $70bn until 2030 (McKinsey, 2019b). Since OEMs cannot afford such investments $70bn until 2030
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BAYERISCHE MOTOREN WERKE AG COMPANY REPORT
individually, strategic partnerships and industry consolidations form a chance to turn these challenges into new market opportunities for the near future.
Mergers and acquisitions are a way to grow inorganically. For instance, Fiat Chrysler and Peugeot signed a merger of equals, making them the fourth-largest car manufacturer in the world (Eckl-Dorna, 2019). The transaction will enhance their ability to compete in the EV segment and to meet EU standards by implementing best practices and innovative products as well as cost efficiencies and synergies savings. For BMW itself, this form of cooperation has so far tended to be less of a possibility in light of historical experiences. Nevertheless, this consolidation trend might negatively affect BMW’s EV sales growth in the future.
Another strategic approach are partnerships between industry players or with complementary service providers, like technology or software companies, allowing OEMs to deliver innovative products/services for its customers while sharing the burden of innovation expenses in new areas. This method is being widely applied, i.e. Toyota’s partnership with Uber (Toyota, 2018) or GM with Lyft (GM, 2016) to SAE levels of autonomous driving jointly develop autonomous driving or shared mobility solutions. At the same time, Level Description Level 0 Not autonomous systems in place industry movements show existing players to partner in order to strengthen their Level 1 Assistance systems supporting the driver Level 2 Driver still engaged, combination of different assistance systems position in the car market, such as the Renault-Nissan-Mitsubishi’s alliance, which Level 3 Driver necessary to monitor and taking over control in some situations i.a. relies on cost sharing for R&D and CAPEX. Moreover, with an agreement on Level 4 Vehicle is capable of driving, no monitor necessity, but intervention in some occasions developing an autonomous driving platform up to SAE level 4, BMW also partners Level 5 Driverless car with full automation Figure 21: SAE levels of autonomous driving classification with its direct rival Daimler (BMW & Daimler, 2019). We therefore estimate that Source: SAE BMW will expand its partnership program to benefit from shorter development cycles and improved profitability through cost sharing.
Lastly, JVs form strategies to combine operations to become profitable or to operate in certain geographies with local companies due to regulatory requirements, e.g. China (Perkowski, 2018). So far, with the regulatory operating license paired with local market knowledge, they primarily represented an opportunity for western car manufacturers to enter emerging markets. Until now, German JVs with locals in China solely focused on the production of cars, and thus benefited from double-digit growth rates over the years. Apart from this and although the mobility market in China is monopoly-like, Daimler operates a JV together with Geely focusing on mobility services. Meanwhile, BMW sticks with its core business with Chinese partners. Hence, the group announced another JV together with Great Wall Motors for the construction of electric MINI cars in order to participate in the world largest electric car market. Outside China and the car manufacturing, BMW and Daimler formed a JV to improve its unprofitable mobility service businesses by combining their services of car-sharing, ride-hailing,
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parking, charging and multimodal transport. Having invested more than €1bn each, expansion and profitable plans rely on external investors, hence reducing the investment needs for both.
Sector trends (CASE)
Connectivity
In a world where individuals are always connected to the internet through their Forecast Worldwide Stock of Connected Cars smartphones, consumers also demand their cars to be connected. Connectivity
400 40% services will contribute to the reduction of accidents and traffic by acknowledging 35% 300 30% 25% traffic info. Additionally, information for available parking slots or a personal digital 200 20% 15% ConnectedDrive 100 10% assistant improve customer experience. Currently, BMW offers , 5% 0 0% which entails a wide variety of services ranging from: (i) CarData, a telematics '18 '19E '20F '21F '22F '23F service to transmit selected vehicle data, over (ii) ParkNow, which enables the Stock of Connected Cars Y-o-Y growth in % driver through this platform to find a parking slot and pay cashless to (iii) driving Figure 22: Forecasted global stock of connected cars (in million units) assistant features which relates to level 1 and 2 of autonomous vehicles. Globally, Source: Statista revenues for connectivity are forecasted to reach €28bn in 2023 (up from €17bn in Forecast Worldwide Connectivity Revenues 2018) due to the increasing stock of connected cars, which are expected to reach
30 30% 353m units by 2023. Given this market opportunity, we expect BMW to 25 25% 20 20% continuously improve its connectivity services in order to further exploit the entire 15 15% 10 10% lifecycle of its cars through an annual subscription. Thus, we estimate connectivity 5 5% 0 0% '18 '19E '20F '21F '22F '23F services to not only become valuable for customers, but also for BMW to Connectivity Revenues counteract diminishing margins. Y-o-Y growth in % Figure 23: Forecasted global connectivity revenues (in $bn) Autonomous Source: Statista Autonomous driving is a long-lasting desire that might become reality in the long- term future. Globally, investments in the autonomous vehicle (AV) ecosystems have ramped up over the past from €6bn in 2015 to €56bn in 2018 and is expected to remain at a high level in order to attain the first-mover advantage (AlixPartners, 2018). Despite huge upfront costs in R&D, industry experts expect the commercialization of AVs to take more than a decade (LeBeau, 2019). Even though a survey conducted by BCG that the majority of consumers is willing to pay Consumers are willing to pay a premium (more than $5,000) a premium of more than $5,000 for an autonomous car (BCG, 2019b), we expect for a private autonomous car production costs to exceed the potential premium. Thus, it is questionable if the burden of higher R&D expenses will monetize in the long-term. Moreover, joining forces with Daimler for developing an SAE level 4 platform, BMW might reduce the burden of high upfront costs as a first step (BMW & Daimler, 2019). Nevertheless, the inclusion of Audi to this partnership could jeopardize the competitive/innovative advantages, and hence reduce the probability of a profitable investment.
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Sharing
The concept of a shared economy is already present in today’s world. Consumers increasingly value access over ownership, where pay-per-use is preferred over the burden of owning the asset (Barbu et al., 2018). This trend can be seen by the forecasted worldwide revenues for sharing economy platform providers, which are projected to grow from $18.6bn in 2017 to $40.2bn in 2022 (CAGR of 16.7%) (Statista, 2019). Also, the automotive industry is affected by this trend as car sharing is expected to reduce car sales by 23 million units until 2030 (McKinsey, 2017). Simultaneously, higher utilization rates will reduce the average age of Shared mobility is expected to only dampen car sales growth vehicles in use and partially offset the decrease (Modi et al., 2018). According to McKinsey, this impact is projected to increase car sales by 10 million units until 2030 (McKinsey, 2017). Overall, it is estimated that this trend will lower car sales growth rates but not cause a decline. In line with this trend, automotive manufacturer emerged with shared mobility concepts like “mobility-as-a-service” in order to explore alternative revenue streams and monetize this shift. However, these concepts turned out to be unsuccessful as the business model remained unprofitable. So, manufacturers like GM, Opel, Mazda or Citroen have ceased their operations and also BMW’s car sharing service DriveNow continued to incur losses. Therefore, combining its service with Daimler in the JV YourNow was the only consequence to further alleviate losses and benefit from synergy effects. In our opinion, we expect BMW to continue on its core operations while YourNow’s expansions and profitability plans primarily rely on external investors. CO2 fleet emission: g/km in Europe in 2018 Electrification/Environmental 160 132 140 128 126 123 132 114 Growing concerns around environmental issues in combination with the aftermath 120 110 120
100 of the diesel emission scandal impact the car manufacturing industry. Increasing 95 80 regulatory constraints regarding fuel economy and CO2 emission targets force 60 automakers to lower car emissions by either improving fuel efficiency or marketing 40 alternative drivetrains. Major car markets, like Europe, US and China, set specific BMW Audi PSA Daimler Toyota Volkswagen targets for OEMs to reduce CO2 emissions. Europe indicates the highest targets, Figure 24: CO2 fleet emission by OEM in 2018 (in g/km) and emission targets USA (132), China (120) which especially challenges premium OEMs whose fleet emissions stagnated over and Europe (95) Source: Company data the past. Hence, as non-compliance with the targets until 2021 will adversely Lowering CO2 emissions ($ Costs per vehicle) impact their income statement due to fines of €95 per missed gram per vehicle for 2,596 sales in Europe. Due to BMW’s fleet being predominantly ICEs, we estimate huge 1,809 R&D expenses in near future to comply with EU standards for improving fuel
800 efficiency (Goldman Sachs, 2019). Nevertheless, we expect this not to be sufficient to avert fines. Regarding the customer acceptance of BEVs, we believe that the
'15 '20F '25F price is not yet affordable for mass population as efficiencies of batteries are not
Figure 25: Fuel efficiency costs by year in USD per vehicle Source: Goldman Sachs fully developed. Besides this, high battery replacement costs and limited charging
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infrastructure also create anxiety on customers decision despite public awareness and importance of environmental issues (Modi et al., 2018). Since the EV cannot keep up with those of ICEs, demand for EVs is mainly driven by regulatory requirements and governmental subsidies. This is evidenced by the EV subsidy cut in China, which lead EV sales figures to plunge by almost 46% in October 2019. Although the company benefited from its first-mover advantage with its BMW i3 introduced in 2013 as the only premium offer in the compact-EV market (IHS Markit, 2019), global EV sales represent only 5.2% of its unit sales. Thus, in our forecasting period, we expect BMW’s EV sales to only slightly increase this share to 14.2% by 2026. Competitive performance
Unit sales by brand In the premium segment, BMW was able to consolidate its position behind
2,200 Mercedes-Benz with respect to units sold. After being overtaken by Mercedes- Benz in terms of unit sales in 2015, BMW caught up while Audi experienced 1,700 negative sales growth. We expect this trend to continue for BMW in our forecasting 1,200 period as new launched models are projected to foster unit sales growth. 700 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
BMW Mercedes-Benz Audi Among its competitors, BMW maintained its leadership position in terms of
Figure 26: Historical unit sales of BMW, Mercedes-Benz operating profitability over the past years and we project it to continue in the future. and Audi (in '000 units) Source: Company data, Analyst computation The Cluster Architecture (CLAR), a modular assembly framework, introduced by BMW in 2015, allows the group to reduce the production complexity as well as fix Competitive performance on consolidated basis EBIT-margin 2015 2016 2017 2018 costs and lead to a higher profitability (Boeriu, 2015). Additionally, the global BMW 10.4%) 10.0%) 10.0%) 9.4%) Daimler 8.5%) 7.9%) 8.0%) 6.1%) production network with an “one platform fits all drivetrains” approach combined Audi 8.1%) 5.2%) 8.2%) 5.9%) Volkswagen (1.9%) 3.3%) 6.0%) 5.9%) Tesla (17.7%) (9.5%) (13.9%) (1.8%) with local suppliers further contributes to BMW’s superior profitability. Due to an Industry 8.1%) 5.2%) 8.2%) 5.9%) ROA explicit job guarantee by Daimler until 2029, the company has a more expensive BMW 4.7%) 3.9%) 4.9%) 3.4%) Daimler 4.7%) 4.1%) 4.1%) 2.9%) Audi 6.8%) 3.1%) 4.5%) 3.9%) and deeper vertical production than BMW. Hence, Daimler’s profitability ratios are Volkswagen (1.6%) 0.6%) 2.6%) 2.4%) Tesla (13.5%) (8.9%) (8.2%) (2.0%) inferior to BMW’s as they employ 25,000 more workers in the car division with Industry 3.9%) 4.1%) 4.9%) 3.6%) ROIC roughly similar unit sales. Furthermore, this internal supply chain translates into BMW 5.4%) 5.1%) 6.0%) 4.8%) Daimler 7.0%) 5.6%) 5.6%) 3.8%) Audi 18.4%) 8.4%) 10.3%) 7.6%) higher inventory figures and a worse working capital efficiency when compared to Volkswagen (2.5%) 1.0%) 4.4%) 3.8%) Tesla (22.6%) (18.6%) (14.5%) (3.6%) BMW. For Audi, it can be noted that they partially benefit from being embedded in Industry 6.6%) 5.9% 6.2%) 4.2%) ROE BMW 17.1%) 16.2%) 18.4%) 13.2%) the Volkswagen Group. We estimate large-scale procurement orders within the Daimler 18.9%) 15.6%) 17.4%) 11.1%) Audi 21.9%) 9.1%) 13.9%) 12.0%) VW Group combined with its bargaining power to positively impact unit costs and Volkswagen (1.5%) 6.1%) 12.3%) 11.1%) Tesla (97.5%) (59.7%) (33.2%) (17.3%) Industry 12.7% 14.9%) 16.2%) 11.7%) working capital for Audi. However, stagnating and declining sales figures over the Cash Conversion Cycle (Working Capital) BMW 27.2 27.1 23.8 25.2 last two years in conjunction with an increasing workforce caused its profitability to Daimler 63.0 66.9 64.0 69.1 Audi 18.7 28.8 38.0 41.9 Volkswagen 48.8 54.0 55.4 70.4 deteriorate and an increase in inventory which translates into a worse working Tesla 57.6 40.1 11.2 10.0 Figure 27: Competitive performance on selected capital efficiency. Thus, it is expected that BMW’s profitability and working capital performance indicators Source: Bloomberg, Analyst computations efficiency will remain at a high level.
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Intrinsic valuation
We applied a sum of the parts of BMW. The group has been divided into Industrial (automotive & motorcycles), JV BMW Brilliance and financial services. For the industrial segment, a DCF model was applied given its stable capital structure over the years. Due to the special nature of financial services, the FTE method was used to the financial services segment. In order to value the BMW equity stake of its JV, we also applied the FTE method for BMW Brilliance Automotive.
Automotive segment
Revenue evolution
Total automotive revenues in BMW has currently one of its youngest car portfolios in place due to more than 40 €bn newly introduced models over the last two years as part of its strategy “NUMBER 96 95 92 93 ONE > NEXT” (BMW, 2019b). As we estimate this trend to continue, we forecast 91 91 88 89 86 each model separately based on announced or expected releases considering historical adaption rates and a shorter model renewal cycle. Moreover, the forecasted group sales are validated with the previously described market '18 '19E '20F '21F '22F '23F '24F '25F '26F forecasts. Although we expect BMW to introduce three new EV models (i4, iNEXT ICE/PHEV EV Connectivity Other Total Figure 28: Historical and forecasted total automotive and iX3) to enlarge its EV portfolio in 2021, ceased subsidies in China and ending revenues by income type (in €bn) Source: Company data, Analyst estimation subsidies in Germany will cause sales growth to converge towards normalization by 2026. Additionally, the overall slowdown of growth in China is expected to cause Automotive revenue by brand BMW sales growth to remain in a modest range (between 1.2% and 1.6%). 90.3 91.4 92.5 93.7 86.8 84.2 86.8 87.8 88.8 89.5 BMW forecasted model mix 2018 2019E 2020F 2021F 2022F 2023F 2024F 2025F 2026F BMW 1er/2er 352,195 332,863 324,775 317,822 320,812 321,077 321,349 321,360 321,919 BMW 3er/4er 476,362 448,885 454,983 457,545 461,719 453,012 452,566 452,123 451,682 BMW 5er 382,753 336,823 325,034 326,659 330,579 335,538 340,571 345,679 350,864 BMW 6er/8er 27,529 36,136 36,914 37,752 38,122 38,456 38,765 39,032 39,302 BMW 7er 56,037 49,649 48,060 47,483 47,198 47,198 47,434 47,672 47,910 BMW X1/X2 354,403 349,575 340,535 337,218 334,110 331,928 329,880 327,964 326,180 '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F BMW X3/X4 247,587 332,868 364,083 378,646 390,006 397,218 401,866 406,568 411,326 BMW X5/X6/X7 190,615 212,555 215,367 217,856 219,857 221,598 222,949 224,310 225,681 BMW Z4 0 15,951 17,068 16,214 0 0 0 0 0 BMW Mini Rolls-Royce Total Revenue BMW i series 37,545 50,686 66,905 85,973 107,466 131,109 157,331 185,650 217,211 Figure 29: Automotive revenue by brand (in €bn) BMW Subtotal 2,125,026 2,165,988 2,193,724 2,222,988 2,249,870 2,277,134 2,312,710 2,350,628 2,392,075 Source: Company data, Analyst estimation MINI 361,531 354,300 361,386 368,614 374,143 377,885 379,774 381,673 383,581 Rolls-Royce 4,107 4,805 4,901 4,950 4,975 4,990 5,005 5,015 5,025 BMW Total 2,490,664 2,525,094 2,560,012 2,596,552 2,628,989 2,660,009 2,697,489 2,737,316 2,780,682 Growth 1.1% 1.4% 1.4% 1.4% 1.2% 1.2% 1.4% 1.5% 1.6% BEV/PHEV share 5.2% 5.5% 6.4% 7.4% 8.6% 9.9% 11.3% 12.7% 14.2% Comparison of BMW SUV and sedan gross Figure 30: Forecasted BMW unit sales mix margins Source: Company data, Analyst estimates 2019E – 2026F Gross margin (in %) Sedans vehicles BMW 1er/2er Series 18.0% In order to differentiate its products, we expect OEMs to be obliged to include BMW 3er Series 20.5% BMW 4er Series 22.0% innovative equipment in their standard packages. Thus, a competitive environment BMW 5er Series 27.0% BMW 6er Series 29.0% BMW 7er/8er Series 30.0% prevents BMW to charge higher prices for new equipment and as a result the SUVs vehicles BMW X1 Series 22.5% average price per model is forecasted to slightly decrease (between 0.9% and BMW X2 Series 23.0% BMW X3 Series 25.0% BMW X4 Series 25.5% 0.7% until 2026). However, this trend is mitigated as more luxury sedan (BMW BMW X5/X6 Series 30.0% BMW X7 Series 32.0% 6er/7er/8er/Rolls-Royce) and SUV sales result in an overall increasing average Figure 31: BMW SUVs gross margin is higher than for sedans price. In total, we expect car sale revenues to only slightly improve from €84.2bn Source: Company data, Analyst estimates
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(2018) to €93.7bn in 2026 (CAGR of 1.4%). Service-related contract revenues are projected to decrease alongside the forecast period from €914m (2018) to €642m in 2026. The increasing share of EVs requires lower maintenance, hence the revenue per sold car drops between 2018 to 2026 from €367 to €231, respectively.
Connectivity revenues are expected to gain higher importance in order to fulfill BMW ConnectedDrive Users (in m) customer desires in the premium segment and also to comply with BMW’s intention 11.2 10.0 9.0 to exploit the entire lifecycle of the car. As such, BMW ConnectedDrive’s users are 8.2 6.9 7.4 6.0 6.2 6.4 5.2 forecasted to increase from 6m to 11.2m users in 2026 (Figure 32). This increase implies an estimated 10% of new drivers buy their annual subscription for an annual fee of €121.7 (price of 2019, growing at inflation rate until 2026). As a result, '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F Figure 32: Evolution of BMW ConnectedDrive users (in m) we project BMW connectivity revenues to move along market momentum from Source: Company data, Analyst estimations €751m in 2019 to €1,544m in 2026, which represents a CAGR of 9.4%.
R&D expenses
Due to the CASE trends described above, the automotive industry faces Forecasted R&D expenses
5.8% 5.8% 5.5% 5.7% 5.5% 5.5% 5.5% 5.5% 5.4% tremendous efforts to drive innovation. The major driver for innovation is research 10 5.0% 6%
8 and development and is essential for future revenue generation. Therefore, BMW 6.0 5.9 5.9 6.0 6.0 6.1 6.2 5.3 5.8 4% 6 4.9 currently employs over 15,000 employees in 16 R&D locations worldwide. The 4 2% majority of its facilities are located in Germany, United States and China (BMW, 2 0 0% 2018b), where it can attract qualified personnel to comply with a transforming '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F automotive industry. With a focus on individual mobility, BMW aligns its research R&D expenses
As a % of Group revenues activities towards design, autonomous driving, connected services and electrified
Figure 33: Forecasted R&D development (in €bn) and as % of Group revenues vehicles. In spite of the announced partnership with Daimler on developing Source: Company data, Analyst estimation autonomous driving, which might positively impact R&D expenses, we estimate
R&D costs to remain at a high level. Strict CO2 emission targets in BMW’s major markets (EU, US and China) in combination with the required transition from ICEs to AFVs will cause the company’s R&D expenses to remain at a high level for the upcoming years before slightly stabilizing towards the end of our forecasting period. Research for fuel efficiency, battery capacity as well as the electrification
of its drivetrains are expected to primarily drive R&D investments (Figure 33).
Operating profitability
BMW’s gross profitability is mainly affected by the model and material mix. Increasing competition driving down prices in conjunction with lighter, more expensive materials are projected to adversely impact BMW’s profitability. In order to improve fuel efficiency, we expect BMW to decrease the weight of its cars by replacing heavy-weight materials, like steel, towards light-weight materials, such as aluminum or carbon fiber reinforced plastic (CRP) (Modi & Vadhavkar, 2019). These incremental production costs are estimated to be partially offset by a €12bn
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efficiency program by 2022 (Tagesspiegel, 2019). A streamline of product variation and a less complex assembly of BEVs are estimated to further support cost reductions. However, high material costs for Cobalt and Nickel combined with a lack of willingness to pay more for a BEV than an ICE are estimated to result in a negative gross margin of 2% in 2018. For the forecasting period, we estimate this margin to improve as higher efficiency and cost savings will materialize due to the introduction of new BEVs. Nevertheless, the forecasted gross margin of 16% by 2026 will remain below BMW 1er/2er series’ gross margin of 18%. For PHEVs, additional costs of €4,000 per vehicle were recognized compared to ICEs in 2018, since BMW is not able to transfer the costs to the customer (Fasse, 2019a). We estimate these additional costs to constantly diminish to €2,600 by 2026, mainly due to cost improvements from R&D investments. Overall, this results in a deterioration of car sales gross margin from 23.6% in 2018 to 22.6% by 2026.
Connectivity services are projected to positively contribute to the group’s profitability. The business model imposes a lock-in system as there are not expected to be any substitutes since the system is attached to the BMW car. As such we estimate a conversion rate for new BMW’s connected cars around 10% (see Appendix 3). After the projected ramp-up phase, the gross margin is expected to rise from 45% in 2018 to 85% in 2022 until 2026. A higher customer base is expected to lead to a higher profitability (economies of scale). Partnerships, like the Android system adoption, will further support a convergence towards the gross margin of software providers (at around 85%), like Adobe and SAP.
In addition to increasing production costs, we expect BMW to also face fines due
to failing compliance with EU CO2 fleet emission target. Historically, BMW’s CO2 fleet emission stagnated around 124-130g/km, which is mainly attributable to three sources: (i) increasing SUV sales caused a rise in emissions; (ii) the plunge in demand for diesel vehicles due to the diesel emission scandal and announced city bans; and, (iii) lagging demand for EVs due to customer withholdings. As a result, and according to our estimations, we expect BMW to pay €1.7bn between 2021-
2024 for missing the CO2 fleet emission target in the EU. In total, this results in BMW’s operating profitability (EBIT-margin) to plunge from 7.2% in 2018 to 6.0% in 2020 before slightly recovering to 6.4% by 2026.
Capital expenditure
The transition from ICE towards alternative drivetrains has caused increases in capital expenditures for European car manufacturers, especially BMW (IMF, 2019b). Over the past years, slight increases have been noticed and are expected to remain high in the future. Due to the unforeseeable direction of the transition to
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either BEVs or PHEVs, BMW follows a strategy with flexible assembly lines. This Capital Expenditures of BMW 5.7% 5.7% 5.7% 5.7% 5.6% 5.5% 5.5% 5.5% 5.5% “one platform fits all drivetrains” will enable BMW to produce cars of different 8 6% 4.5% drivetrains on the same assembly line at any plant location. Following this, BMW 5.4 5.4 6 5.0 5.2 5.2 5.3 5.3 5.2 5.3 4% 4.1 will be able to adjust to local market drivetrain preferences. However, this strategic 4 decision yields in higher capital expenditures as all production facilities need to be 2% 2 updated and adjusted. For this reason, we estimate the investment level to remain 0 0% '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F high (5.7%) until 2021 before slightly decreasing to 5.5% by 2023 until 2026. CAPEX Chinese Joint Ventures: BMW Brilliance and Spotlight Capex as a % of industrial revenue Figure 34: CAPEX development of industrial segment (in €bn) and as a % of industrial revenue The Chinese market growth has outpaced the growth in all other regions and has Source: Company data, Analyst estimates become the largest single market for car sales. Hence, BMW formed a JV with Brilliance Automotive Ltd. in 2003 in order to benefit even more from the strong local growth. The JV allows BMW to respond specifically to local preferences, to benefit from lower production costs and to remain immune to import duties. Thus, BMW entered into an additional JV, Spotlight Automotive, with Great Wall Motors for the production of electrified MINI in order to benefit from the world largest EV market in China. Initially planned to start manufacturing in 2021, we expect a postponed start to 2020 due to a delayed governmental permission.
After years of strong expansion, growth has started to normalize, and car market JV BBA unit sales and revenue
692 sale figures have fallen for the first time. Despite this challenging environment, 60 644 660 676 800 586 620 50 505 547 460 600 BMW and JV BMW Brilliance Automotive Ltd. (BBA), were able to increase car 40 26 30 22 23 24 25 25 400 18 19 21 sales by 19.3% in the first three quarters of 2019 (BMW, 2019a). Overall, we 20 200 10 estimate that the JV will rise car sales from 459,581 units in 2018 to 504,620 in 0 0 '18 '19E '20F '21F '22F '23F '24F '25F '26F 2019. Currently, BMW produces its SUVs for the Chinese market mostly in the US, Revenues Unit Sales which are subject to import duties. Nevertheless, SUV sales have remained robust
Figure 35: JV BMW Brilliance unit sales (in '000 units) despite the influence of tariffs on cars. As a response to this, BMW already and revenue (in €bn) Source: Company data, Analyst estimation communicated to produce the BMW iX3, a fully electric SUV, solely in China. Therefore, management announced its intention to increase capacity to 650,000 units per year by 2020 (BMW Brilliance, 2018), which we believe BMW will exploit because of the cost advantage. Thus, we expect the JV to increase its sales to reach 692,137 units by 2026. However, a combination of increasing production costs due to changes in material mix as well as unfavorable market conditions are projected to result in a slight decrease of the operating margin from 10.8% in 2018 towards 8.6% in 2026, which is still above BMW’s automotive profitability (6.4%).
In late 2018, BMW management announced its intention to increase its stake in BBA from 50% to 75%, becoming the first foreign investor taking control over a Chinese JV (BMW, 2018a). Though still awaiting approval from the government, we do not expect any change in the shareholder structure in our forecasts. As a
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Comparables of JV BMW Brilliance result, the estimated fair value of BMW’s equity stake in BMW Brilliance amounts Name Dongfeng Motor Group to €7,941m (or €13.19 per share). An additionally performed price-to-book multiple Brilliance China Auto. Great Wall valuation with comparables, mainly focusing on the Chinse market (Figure 36), resulted BYD Geely Automobiles Guangzhou Automobile in a valuation of €7,990m, which is in line with our intrinsic valuation. Figure 36: List of comparable companies considered in the multiple valuation exercise Source: Company data, Analyst estimates Motorcycles segment
In 2018, the global motorcycle market totaled 38,089m units sold, being BMW responsible for only 165,566 units. According to management expectations for BMW Motorrad strong 2020, which targets about 200,000 units sold (BMW, 2019c), we estimate BMW to statement to gain market share in the premium segment almost achieve it (197,640 units). BMW Motorrad conquered the premium motorcycle market with a robust historical performance (CAGR of 6% from 2014 to 2018), highlighting BMW Motorrad strong statement to gain market share in the premium segment. Further, we expect KTM and BMW Motorrad to compete for a BMW Motorrad unit sales and revenues leadership position in the premium segment by taking advantage of Harley-
4.0 3.5 500 3.3 3.4 Davidson’s declining sales figures (MotorCyclesData, 2019). In our forecasting 3.0 3.1 2.8 2.6 400 3.0 2.4 period, we expect BMW Motorrad to expand its market share and grow at a CAGR 2.3 2.2 268 240 250 259 300 213 228 2.0 180 198 of 5.1% until 2026, which translates into expected unit sales of 267,558. 164 166 200 1.0 100 Regarding the income statement, the group’s motorcycle revenues will increase
0.0 0 from €2.2bn in 2018 to €3.5bn in 2026 (Figure 37). Historically, the motorcycle segment '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F
Unit sales Revenues remained at a constant profitability level, hence the gross margin is expected to Figure 37: BMW Motorrad unit sales (in '000 units) and revenues (in €bn) remain at around 20%. Source: Company data, Analyst estimates Industrial ROIC and FCFF evolution
In previous years, return on invested capital (ROIC) had been around 20%. For FCFF and ROIC evolution our forecasting period, we expect it to continuously decline to 12% by 2026. Since 8 6.8 20% BMW’s brand is recognized among the Top 60 most valuable brands (Winter, 6 15% 4.5 4 10% 2019) and R&D expenses will enable BMW to differentiate its products from 2.6 2.7 2.8 2.8 2.0 2.4 1.6 1.6 2 5% competitors, the ROIC is estimated to remain above the WACC. In line with this,
0 0% also the return on new invested capital (RONIC) is projected to stabilize around '17 '18 '19E'20F '21F '22F '23F '24F '25F '26F 5.01% and hence above the industrial cost of capital (4.85%). Therefore, investors FCFF ROIC Figure 38: FCFF (in €bn) and ROIC (in %) evolution will still receive a slightly higher return with new investments than their opportunity Source: Company data, Analyst estimates costs. In terms of free cash flows to the firm (FCFF), it is forecasted a decline from historical €4-6bn to around €1.6bn in 2019 as a consequence of higher CAPEX and R&D expenses. According to our estimations and throughout the forecast period, the FCFF is estimated to slightly recover and converge towards €2.8bn by 2026.
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BAYERISCHE MOTOREN WERKE AG COMPANY REPORT
Financial Services segment
Development of leasing and BMW Financial Services (BMW FS) serves the purpose of supporting sales growth finance volume and penetration of the automotive segment through financing or leasing offers and is tightly linked 80 50.5% 51.4% 52.5% 53.1% 50.0% 52.1% 52.8% 53.4% 60% 46.8% 50.9% 60 to automotive unit sales. As a result, sales financing and leasing are the main 47 48 49 44 45 46 47 40 42 43 sources of income for BMW FS. In past years, the share of new cars being financed 40 30% or leased through BMW FS has increased from 41.7% (2014) to 50.0% in 2018. 20 For the forecast period, this penetration rate is expected to increase to 53.4% by 0 0% '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F 2026. Aggressive finance offers in the past are expected to impede future growth Leasing volume Financing volume FS new credit opportunities. Overall, this increase results in a financing and leasing volume of Penetration rate Figure 39: Development of leasing and financing volume €49.3bn by 2026 (Figure 39). In line with this, sales financing and leasing are the main (in €bn) and penetration rate (in %) Source: Company data, Analyst estimates sources of income. As observed in Figure 40, the loans and advances to customers amounted to €133.3bn in 2018 or 137% of the groups revenues (the highest industry value), with €86.8bn in sales financing and €46.4bn in leased products. In Development of loans and advances to customers 2026, this caption will evolve to €173.9bn (CAGR of 3.0%), attributable to 174 162 166 170 penetration rate and automotive sales. Apart from customer financing activities, 147 152 157 133 140 125 additional income is generated through sales of previously leased products.
In order to fund those activities, customer deposits, asset backed transactions and other financial instruments, such as bonds, commercial papers, and liabilities to '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F Factoring Leased products banks, form the major sources of refinancing. Hence, financial liabilities amounted Sales financing Figure 40: Loans and advances to customers (in €bn) to €44.9bn in 2018, mainly comprised by €14.4bn of customer deposits and Source: Company data, Analyst estimates €17.3bn in asset-backed transactions. This amount is projected to increase to €64.2bn in order to finance its activities.
Looking at the income statement, throughout the forecast period it is estimated a Net interest margin of BMW FS
6% net interest margin around 1.3-1.4% (Figure 41), as the average loan financing rate is 4% projected to be around 4.4% and 4.7% in 2026. Besides this, the cost of funding 2%
0% (3-month EURIBOR) is expected to remain negative for the medium term -2% according to the ECB (Morris et al., 2019). '17 '18 '19E '20F '21F '22F '23F '24F '25F '26F Net-interest margin Average loan financing rate Overall, financial services are heavily reliant on the quality of their borrowers, as EURIBOR 3-month Figure 41: Net interest margin, average loan financing defaults represent a credit risk. Although the credit-loss ratio has experienced a rate and EURIBOR 3-month (in %) Source: Company data, Analyst estimates continuous decline since the peak during the financial crisis (0.84%) to 0.17% in 2018, we estimate this ratio to modestly increase to 0.23% for our forecasting period, reflecting previous unit sales boosting through BMW FS. Our estimations are based on stable macroeconomic data per region, which do not foresee a further worsening of the economy, which might cause headwinds for credit loss provisions. For the leasing business, we do not expect further (larger) write-offs of the residual value of leasing vehicles as ICE drivetrain market share will remain high in the near future.
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Cost of Capital by segment According to the overall profitability of BMW FS, the return on equity (ROE) is Risk-free rate, MRP, group beta 10y German gov. bond (0.33%) Market Risk Premium (MRP) 5.75%) projected to weaken from 11.2% in 2018 to 9.2% in 2026. Hence, the equity ratio Group weighted beta 1.39) Discount rate – Industrial (WACC) was reinforced from 10.2% in 2018 to 13.2% in 2026, but also to a slower growth. Cost of Debt (Rd) – bond approach BMW Credit Rating (Moody’s) A1) Yield-to-Maturity (7y bond) 0.29%) Probability of default (PD) 1.47%) Other Entities and Eliminations segments Loss Given Default (LGD) 53.90%) Rd – bond approach 0.19%) Cost of Debt (Rd) – CDS approach The segment “Other Entities” comprises holding companies and subsidiaries 7y credit default spread BMW 0.74%) Rd – CDS approach 0.41%) related to group financing (BMW, 2018b). Additionally, the “Elimination” segment Cost of Debt (Rd) – Industrial 0.30%) Cost of Equity (Re) – Industrial Betaunlevered (peers median) 1.03) balances intra-group transactions to group figures based on accounting Betalevered (BMW industrial) 1.59) Target net debt/equity ratio 0.86) requirements. Mainly of “eliminations” are related to the Automotive and FS Cost of Equity (Re) – Industrial 8.83%) Tax rate 30.8%) segments. According to the annual report, centralized functions are incorporated WACC – Industrial segment 4.85%) Discount rate – FS (Re) in the respective segments and thus have been consider in our forecasting. Betalevered (peers median) 1.36) Cost of Equity (Re) – FS 7.49%) Discount rate – JV China (Re) Betaunlevered (peers median) 1.15) Betalevered (JV China) 1.06) Cost of capital Target net debt/equity ratio (0.10) Country risk premium 0.98%) Statutory tax rate 25%) Cost of Equity (Re) – JV China 6.83%) For discounting each segment’s core cashflows, the respective costs of capital Figure 42: Cost of capital by segment Source: Bloomberg, Analyst computation have been computed. Due to the focus on premium individual mobility, we assume
Comparables Industrial an identical discount rate for the automotive and motorcycle business segments. Name Unlevered Beta Volkswagen 1.46 Given the different characteristics of the financial services segment and the Daimler 1.57 BMW 0.73 Chinese JV, we calculated different discount rates, derived from comparable Nissan 1.03 Honda 0.65 financial institutions and Chinese auto manufacturers, respectively. The costs of Median 1.03 CI (95% probability) 0.88 – 1.19 equity are computed by applying the CAPM. German 10-year government bond Figure 43: Comparable automotive and motorcycle companies for BMW industrial segment was used as risk-free rate due to its AAA rating from Moody’s, currently yielding Source: Bloomberg, Analyst computation -0.33%. Since, around 58% of BMW’s shareholders are located within the Comparables Financial Services Name Unlevered Beta Eurozone, the STOXX Europe 600 has been selected as the market portfolio. ING Group 1.26 RBS 1.31 Regarding Market Risk Premium, it was used KPMG recommendation for the Standard Chartered 1.41 Deutsche Bank 1.58 Equity Risk Premium of 5.75% (KPMG, 2019). For the beta computation, five years Raiffeisen Bank 1.14 Commerzbank 1.41 Median 1.36 of weekly returns are regressed against the market portfolio for BMW and its CI (95% probability) 1.15 – 1.58 Figure 44: Comparable financial institutions for segment peers. To compute the beta for the industrial unit, it was calculated the BMW Financial Services Source: Bloomberg, Analyst computation median of its comparable companies with similar operations and credit rating and relevered to BMW’s target capital structure. Thus, it yields a beta of 1.59 and cost Comparables JV BMW Brilliance (China) Name Unlevered Beta of equity of 8.83%. For the FS segment, European financial institutions with similar Dongfeng Motor Group 0.69 Brilliance China Auto. 1.22 market capitalizations and focus on consumer finance are considered. With a Great Wall 1.24 BYD 0.83 median beta of 1.36, the discount rate for FS is 7.49%. The comparables for the Geely Automobiles 1.32 Guangzhou Automobile 1.08 Chinese JV, operating mainly on the Chinese market, yield a median unlevered Median 1.15 CI (95% probability) 0.83 – 1.46 beta of 1.15, which corresponds to a levered beta of 1.06 and cost of equity of Figure 45: Comparables JV BMW Brilliance Automotive Ltd. Source: Bloomberg, Analyst computations 6.83%, incorporating a country risk premium of 0.98% for China as an emerging market (KPMG, 2019). For the cost of debt, we used the average of the bond
approach (푟! = 푌푇푀 − 푃퐷 × 퐿퐺퐷) and the credit default spread approach (푟! =
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푟" + 퐶퐷푆). Thus, the cost of debt for the industrial unit corresponds to 0.30%. Furthermore, we computed a WACC of 4.85% for the industrial unit. Scenario analysis
In addition to the above described base case, which yields a target price of €77.80, we developed a bullish and bearish scenario and have attributed weights to each share price according to our expected probability of occurrence. In each scenario,
the main drivers, such as the impact on prices for BMW cars, CO2 emission fines, working capital, BMW FS refinancing rate (3-month EURIBOR) and credit loss ratio, are stressed. Since we expect our base case to reflect the current economic
Scenario Analysis climate, we attributed a weight of 70% to it. Due to the fact that there is little Scenario Share Price Weight (in %) Base €77.80 70% evidence of a significant easing of the economic situation, we attributed 10% to the Bear €59.85 20% Bull €90.91 10% bullish scenario. Lastly, the bearish scenario obtained a probability of 20%. Thus,
Target Price €75.52 the scenario analysis yields a share price of €75.52. Figure 46: Scenario analysis and target price (in €/share). Source: Analyst computations The bullish scenario implies working capital improvements due to BMW’s bargaining power on its suppliers. Furthermore, we assume a modest improvement on BMW’s average price of 0.3% due to an improved trade stability with disappearing trade tariffs on steel and automotive products. Moreover, it is
assumed no CO2 emissions fines for BMW due to its fuel efficiency R&D success and increasing EV sales. For the refinancing rate, it is forecasted a slight improvement of +0.5b.p. from 2020 onwards. This results in a positive EURIBOR in accordance with executives (Morris et al., 2019) and positively impacts the net interest margin spread from 2022 onwards. Lastly, for credit loss ratio, it is assumed a slight improvement of 0.1b.p. which corresponds to a lower probability of default on loans granted by BMW FS. In total, the bullish scenario yields a valuation to BMW of €90.91 per share.
The bearish scenario implies a worsen capacity of BMW to negotiate its terms on working capital due to supplier’s limit to grant better terms. Moreover, we anticipate BMW’s average car price to diminish by -0.5% as a result of higher competition in the premium segment and higher incentives to buy a BEV. However, low EV
adoption rates are expected to lead to higher CO2 emission fines for BMW. In relation to BMW FS cost of funding, we estimate a decrease of -0.5b.p. from 2020 onwards, which would imply a further QEs by the ECB and negatively impact BMW FS net interest margin. Additionally, the credit loss ratio is expected to rise by 0.2b.p. due to higher default rates of its clients. Thus, the bear scenario provides a valuation to BMW of €59.85 per share.
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Sensitivity analysis
Cost of capital and terminal growth per segment A sensitivity analysis is applied to the respective implied terminal growth rate and Business Terminal Cost of Segment growth rate capital cost of capital for each segment (Figure 47). In times with low interest rates, the Industrial 1.84% 4.85% Financial Services 1.99% 7.49% discounted share price becomes more sensitive to changes in cost of capital and BMW Brilliance JV 2.07% 6.83% Figure 47: Cost of capital and terminal growth rate per business segment in the terminal growth rate. For each segment, a delta of 0.2p.p. is assumed for its Source: Analyst computations cost of capital and terminal growth rate to test its sensitivity. The latter one being Sensitivity Analysis of BMW Share Price Cost of Capital the result of changes only in RONIC, since the BMW group committed to a target (0.40%) (0.20%) 0.00% 0.20% 0.40% (0.40%) 80.82 71.03 62.33 54.55 47.53 payout ratio and given its dividend history, we expect no changes. The lion’s share (0.20%) 90.29 79.30 69.61 60.99 53.28 0.00% 101.15 88.69 77.80 68.20 59.67 of the sensitivity is attributable to the industrial segment, which represents about Growth 0.20% 113.72 99.44 87.10 76.32 66.81 0.40% 128.44 111.89 97.76 85.54 74.86 56% of the share price. The sensitivity of each segment to the terminal growth rate Figure 48: Sensitivity analysis of BMW's share price (in €/share), under base case scenario Source: Analyst computations and the cost of capital to the group level share price can be seen in Figure 48.
Multiples valuation
Relative Valuation In addition to the intrinsic valuation, a relative valuation through multiples is BEst Forward Historic Name P/B P/E P/E P/E VW AG 0.78x n.av. 5.85x 7.52x considered. For the peer group, comparables of BMW with overlapping business Daimler AG 0.82x 7.34x 8.10x 7.45x BMW AG 0.83x 6.35x 5.63x 6.80x units (automotive, motorcycle and financial services) and a market capitalization GM 1.28x 7.59x 7.40x 7.02x Honda 0.70x 7.27x 7.39x 8.46x 25%-Quartile 0.78x 7.04x 5.85x 7.02x of more than €45bn have been included. The companies selected are VW, Median 0.82x 7.30x 7.39x 7.45x 75%-Quartile 0.83x 7.40x 7.40x 7.52x Daimler, GM and Honda. For the relative valuation, four different equity ratio Figure 49: Multiples for relative valuation Source: Bloomberg, Analyst computations multiples are applied: Price-to-Book, a Bloomberg estimated Price-to-Earnings, a
Implied share price of BMW forward-looking Price-to-Earnings and a historic Price-to-Earnings ratio, which
Historic P/E 72.43 € 77.53 € reflects past, present and future insights regarding market players and analysts’
Forward P/E 60.30 € 76.33 € expectations on performance and success. The use of EV multiples was dispensed BEst P/E 72.63 € 76.34 € as it resulted in distorted values due to the different capital structure employed by P/B ratio 83.98 € 89.45 € BMW in comparison to its competitors. To derive a share price from the multiples 40 € 60 € 80 € 100 € 120 € Figure 50: Implied share price of BMW (in € per share) approach, the median of the different multiples implies a share price of €76.55 for Source: Bloomberg, Analyst computations BMW, which is close to our derived intrinsic value of €75.52. Final recommendation
A strong forecasted sales record in luxury segment for the upcoming years provides good prospects for the company. However, consumers withholding on EVs purchases due to lacking tax incentives will trigger fines for BMW from 2021 onwards. High CAPEX investments to master the transition from ICEs to AFV paired with high R&D expenses to drive innovation negatively impact BMW’s FCFF. Hence, our analysis yields a target price of €75.52 for December 2020, which results in a 7.4% shareholder return (accounting for a dividend of €3.00) when compared to current stock price of €73.14 and a “HOLD” recommendation.
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Perkowski, J. (2018). What The BMW Deal Means For The Future Of Auto Joint Ventures In China. Forbes. www.forbes.com/sites/jackperkowski/2018/11/02/what-the-bmw-deal-means-for-the-future-of-auto- joint-ventures-in-china/ Reuters. (2018). BMW says electric car mass production not viable until 2020. Reuters. www.reuters.com/article/us-bmw-results-electrification-idUSKBN1GY1BQ ShareNow. (2019a). Interview with Olivier Reppert | SHARE NOW | Carsharing | Sustainability | Daimler Mobility > Our Company > News > Interview Olivier Reppert. https://www.daimler- mobility.com/en/company/news/interview-olivier-reppert/ ShareNow. (2019b). SHARE NOW expande frota eléctrica europeia. Em Portugal já são 40 BMW i3—Fleet Magazine. https://fleetmagazine.pt/2019/04/02/share-now-frota-electrica/ Singh, F. (2018). Your Next Car Could Be A Flexible Subscription Model. https://www.forbes.com/sites/sarwantsingh/2018/07/30/your-next-car-could-be-a-flexible-subscription- model/ Statista. (2019). Revenue of platform providers in the sharing economy worldwide in 2017 and 2022 (in billion U.S. dollars). www.statista.com/statistics/878844/global-sharing-economy-revenue-platform- providers/ Statista Global Consumer Survey. (2019). Statista Global Consumer Survey | Statista. https://fesrvsd.fe.unl.pt:2099/customercloud/global-consumer-survey strategy&. (2018). 2018 Global Innovation 1000 – What the Top Innovators Get Right (p. 37). Tagesspiegel. (2019). BMW will bis Ende 2022 zwölf Milliarden einsparen. www.tagesspiegel.de/wirtschaft/deutlicher-gewinnrueckgang-bmw-will-bis-ende-2022-zwoelf- milliarden-einsparen/24123954.html Toyota. (2018). Toyota and Uber Extend Collaboration to Automated Vehicle Technologies. https://global.toyota/en/newsroom/corporate/24330817.html Transport&Environment. (2017). Does sharing cars really reduce car use? Uber. (2019). SEC Form S-1: IPO Prospectus. www.sec.gov/Archives/edgar/data/1543151/000119312519103850/d647752ds1.htm UCUSA. (2018). Electric Vehicle Batteries: Materials, Cost, Lifespan. www.ucsusa.org/resources/ev-batteries United Nations. (2018a). Annual Rural Population at Mid-Year by region, subregion and country, 1950-2050 (thousands). World Urbanization Prospects 2018. https://population.un.org/wup/Download/ United Nations. (2018b). Annual Urban Population at Mid-Year by region, subregion and country, 1950-2050 (thousands). World Urbanization Prospects 2018. https://population.un.org/wup/Download/ Winter, D. (2019). Top 100 global brands 2019: The full ranking. Financial Times. www.ft.com/content/3a3419f4-78b1-11e9-be7d-6d846537acab World Economic Forum. (2016). World Economic Forum White Paper Digital Transformation of Industries: Automotive Industry. http://reports.weforum.org/digital-transformation/wp- content/blogs.dir/94/mp/files/pages/files/wef-dti-automotivewhitepaper-final-january-2016.v1.pdf
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Appendix 1 Income Statement
(in € million) 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F 2026F Consolidated Income Statement Revenues 98,678) 97,480) 100,009) 102,304) 104,647) 106,567) 108,203) 109,954) 111,948) 114,148) Cost of Sales (78,774) (78,924) (81,956) (84,052) (85,796) (87,319) (88,670) (90,104) (91,753) (93,587) Gross Profit 19,934) 18,556) 18,053) 18,252) 18,851) 19,248 19,533) 19,850) 20,195) 20,560)
SG&A (9,560) (9,558) (9,844) (10,031) (10,217) (10,351) (10,484) (10,626) (10,782) (10,954) Other operating income 720) 774) 801) 825) 849) 872) 896) 922) 949) 979) Other operating expense (1,214) (651) (2,123) (713) (1,681) (1,140) (920) (810) (701) (707) EBIT 9,880 9,121 6,886) 8,332) 7,801) 8,629) 9,026) 9,336) 9,661) 9,878)
Result from equity investments 738) 632) 677) 643) 661) 676) 700) 716) 737) 758) Interest income 201) 397) 169) 170) 174) 183) 187) 193) 199) 206) Interest expense (412) (386) (548) (531) (548) (569) (575) (576) (570) (576) Other financial result 248) 51) 44) 150) 150) 150) 150) 150) 150) 150) EBT 10,665) 9,815) 7,229) 8,763) 8,238 9,069) 9,487) 9,819) 10,176) 10,431)
Income tax (1,949) (2,575) (2,085) (2,553) (2,385) (2.638) (2,761) (2,860) (2,967) (3,042) Profit/(loss) continue 8,706) 7,240) 5,144) 6,210) 5,853 6,431) 6,725) 6,959) 7,209) 7,389)
Result discontinued Operations 0) (33) 44) 0) 0) 0) 0) 0) 0) 0) Net profit/(loss) 8,706) 7,207) 5,188) 6,210) 5,853) 6,431) 6,725) 6,959) 7,209) 7,389)
Minority interest 86) 90) 109) 113) 121) 127) 134) 142) 151) 160) Net income/(loss) BMW 8,620) 7,117) 5,079) 6,097) 5,733) 6,304) 6,591) 6,817) 7,058) 7,230)
Balance Sheet
(in € million) 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F 2026F Consolidated Balance Sheet Cash and Equivalents 9,038 10,979 4,032 4,137 4,246 4,351 4,463 4,582 4,706 4,836 Trade receivables 2,667 2,546 2,641 2,701 2,767 2,824 2,882 2,925 2,971 3,021 Inventories 12,707 13,047 13,594 13,804 13,953 14,082 14,262 14,456 14,662 14,892 Assets held for sale 0 461 0 0 0 0 0 0 0 0 PP&E 18,471 19,801 21,029 22,082 22,997 23,688 24,206 24,690 25,152 25,604 Leased Products 36,257 38,572 40,403 42,141 43,550 44,375 45,161 46,266 47,517 49,054 Intangible Assets 9,464 10,971 12,329 13,740 15,144 16,534 17,940 19,365 20,810 22,276 Investments equity method 2,767 2,624 2,700 2,952 3,205 3,471 3,736 4,011 4,293 4,582 Receivables sales financing 80,434 86,783 91,640 95,667 99,443 103,479 107,125 110,056 112,557 114,571 Financial assets 10,334 7,685 8,113 8,307 8,507 8,712 8,923 9,139 9,360 9,587 Deferred tax 3,493 2,956 3,376 3,431 3,485 3,519 3,559 3,608 3,660 3,720 Other assets 7,160 11,816 12,181 12,395 12,622 12,814 13,035 13,281 13,542 13,823 Other investments 690 739 788 840 895 955 1,018 1,085 1,157 1,233 Total Assets 193,443 208,980 212,826 222,198 230,813 238,803 246,311 253,465 260,387 267,200
Trade payables 9,731 9,669 10,340 10,452 10,598 10,713 10,853 11,002 11,165 11,348 Liabilities held for sale 0 62 0 0 0 0 0 0 0 0 Financial liabilities 94,648 103,597 103,825 107,903 111,782 114,687 116,922 118,660 120,010 121,193 Pension provisions 3,252 2,330 3,487 3,540 3,586 3,624 3,668 3,715 3,766 3,823 Deferred tax 3,365 2,964 3,464 3,693 3,901 4,073 4,245 4,437 4,639 4,861 Other provisions 11,750 11,854 12,062 12,251 12,442 12,573 12,715 12,875 13,050 13,244 Other liabilities 16,189 20,416 18,765 19,315 19,739 20,066 20,317 20,497 20,615 20,686 Total Liabilities 138,935 150,892 151,943 157,155 162,048 165,736 168,719 171,187 173,245 175,154
Shareholder’s Equity 54,112 57,559 60,335 64,458 68,151 72,416 76,901 81,547 86,368 91,229 Minority interests 436 529 548 584 614 651 690 731 774 816 Total Equity 54,548 58,088 60,883 65,042 68,765 73,067 77,592 82,278 87,142 92,046
Total Equity and Liabilities 193,433 208,980 212,826 222,198 230,813 238,803 246,311 253,465 260,387 267,200
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Cashflow Statement and JV BMW Brilliance Automotive
(in € million) 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F 2026F Automotive & Motorcycles: Free Cashflow EBIT 8,070) 6,357) 5,620) 5,538) 5,870) 6,062) 6,105) 6,208) 6,326) 6,443) Taxes (3,710) (1,700) (1,737) (1,712) (1,815) (1,874) (1,887) (1,919) (1,956) (1,992) NOPLAT 4,360) 4,658) 3,882) 3,826) 4,055) 4,188) 4,217) 4,288) 4,370) 4,451) Depreciation 4,787) 5,079) 5,500) 5,805) 6,006) 6,172) 6,328) 6,453) 6,572) 6,689) Operating Cashflow 9,147) 9,736) 9,382) 9,631) 10,061) 10,361) 10,545) 10,741) 10,942) 11,140)
Change in Net Working Capital 329) (393) 29) (139) (108) (96) (116) (126) (133) (148) Change in Operating Cash (47) 57) (57) (24) (25) (18) (22) (25) (27) (30) Change in Trade Receivables 132) 60) (79) (37) (43) (33) (36) (39) (41) (45) Change in Inventories (847) (347) (550) (210) (148) (129) (180) (194) (205) (229) Change in Trade Payables 1,085) (163) 715) 132) 107) 85) 121) 132) 140) 157) Capital Expenditures (4,058) (4,998) (5,158) (5,227) (5,299) (5,255) (5,221) (5,290) (5,364) (5,446) Investments in Intangible assets (2,523) (2,943) (2,928) (3,042) (3,026) (2,997) (3,032) (3,072) (3,115) (3,163) Change in Deferred tax assets 1,517) 132) (190) (48) (51) (34) (41) (49) (52) (57) Change in Other assets (1,198) (304) (837) (314) (341) (224) (295) (361) (391) (436) Change in Other provisions 886) 134) 101) 139) 145) 97) 119) 140) 149) 164) Change in Deferred tax liabilities 810) (371) 267) 262) 261) 258) 261) 265) 269) 273) Change in Other liabilities 1,869) 3,504) 946) 369) 401) 262) 347) 427) 462) 516) Investing Cashflow (2,374) (5,239) (7,769) (8,000) (8,017) (7,989) (7,977) (8,066) (8,176) (8,297)
Free Cashflow 6,773) 4,496) 1,613) 1,632) 2,044) 2,372) 2,568) 2,675) 2,767) 2,843)
(in € million) 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F 2026F Financial Services: Free Cashflow to Equity EBT 2,207) 2,161) 2,422) 2,493) 2,603) 2,661) 2,745) 2,805) 2,863) 2,920) Taxes 1,840) (508) (597) (615) (642) (656) (677) (692) (706) (720) Net Income 4,407) 1,653) 1,825) 1,878) 1,961) 2,005) 2,068) 2,113) 2,157) 2,200) Depreciation 9,992) 9,962) 10,354) 10,866) 11,329) 11,705) 11,924) 12,134) 12,429) 12,762) Gross Cashflow 14,039) 11,615) 12,179) 12,744) 13,290) 13,709) 13,992) 14,247) 14,586) 14,962)
Change in Net Working Capital 1,344) 40) (286) (125) (70) (81) (94) (80) (79) (80) Capex (PP&E, Intangibles, Leasing) (9,167) (12,079) (12,668) (12,962) (13,029) (12,700) (12,873) (13,467) (13,938) (14,616) Change in Receivables sales financing (2,174) (6,349) (4,857) (4,027) (3,776) (4,036) (3,646) (2,931) (2,500) (2,014) Change in Financial assets 18) 244) (300) (64) (67) (69) (72) (74) (77) (80) Change in Deferred tax assets (64) (65) 27) (23) (19) (11) (10) (15) (17) (20) Change in Other assets 97) (633) (280) (341) (354) (367) (380) (394) (408) (423) Change in Other investments 1) 1) 0) 0) 0) 0) 0) 0) 0) 0) Change in Financial liabilities (2,414) 2,203) 1,980) 2,088) 2,203) 2,325) 2,454) 2,593) 2,740) 2,897) Change in Pension provisions (5) (23) 28) 4) 4) 3) 2) 2) 2) 2) Change in Deferred tax liabilities (2,475) 284) 240) 218) 176) 103) 98) 138) 157) 192) Change in Other provisions (47) (30) 103) 50) 45) 35) 22) 20) 27) 30) Change in Other liabilities 1,203) 6,266) 4,436) 3,104) 2,280) 1,803) 1,236) 715) 277) (64) Free Cashflow to Equity 356) 1,474) 602) 665) 684) 714) 730) 753) 770) 786)
(in € million) 2017A 2018A 2019E 2020F 2021F 2022F 2023F 2024F 2025F 2026F Joint Venture: BMW Brilliance Automotive Ltd. Revenues 14,628) 17,766) 19,308 20,750 22,115 23,299 24,107 24,631 25,141 25,662 Unit sales (in ‘000 units) 384,124) 459,581) 504,620 547,344 586,388 620,399 643,974 660,073 675,915 692,137 EBIT 1,619) 1,922) 1 931 1 971 1 990 2 050 2 073 2 113 2 157 2 202 EBIT-margin (in %) 11.1%) 10.8%) 10.0% 9.5% 9.0% 8.8% 8.6% 8.6% 8.6% 8.6% Net Income 1,216) 1,311) 1,393 1,423 1,436 1,480 1,496 1,525 1,557 1,589
Total Assets 11,122) 13,284) 14,300 15,558 16,782 16,926 17,918 18,828 19,748 20,688 Equity 5,377) 5,926) 6,480 7,154 7,826 8,533 9,234 9,955 10,692 11,445 ROE (in %) 26.0% 24.4% 23.5% 22.0% 20.1% 18.9% 17.5% 16.5% 15.6% 14.9% Free Cashflow to Equity 517) 762) 839 749 765 772 795 804 820 837
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Appendix 2: Disclosures and Disclaimers
Report Recommendations
Buy Expected total return (including expected capital gains and expected dividend yield) of more than 10% over a 12-month period.
Hold Expected total return (including expected capital gains and expected dividend yield) between 0% and 10% over a 12-month period.
Sell Expected negative total return (including expected capital gains and expected dividend yield) over a 12-month period.
This report was prepared by Bruno Alexandre Mota Azevedo and Marcel Philipp Olschewski, Master’s in Finance students of Nova School of Business and Economics (“Nova SBE”), within the context of the Field Lab – Equity Research.
This report is issued and published exclusively for academic purposes, namely for academic evaluation and master graduation purposes, within the context of said Field Lab – Equity Research. It is not to be construed as an offer or a solicitation of an offer to buy or sell any security or financial instrument.
This report was supervised by a Nova SBE faculty member, acting merely in an academic capacity, who revised the valuation methodology and the financial model.
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owned state university and there is no relation between the student’s equity reports and any fund raising programme.
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A Work Project, presented as part of the requirements for the Award of a Master Degree in Finance from the NOVA – School of Business and Economics.
THE IMPACT OF CONNECTIVITY SERVICES AND SHARED MOBILITY ON THE VALUATION OF BMW
BRUNO ALEXANDRE MOTA AZEVEDO, 24245
A Project carried out on the Master in Finance Program, under the supervision of:
Nuno Quartin Bastos de Vasconcelos e Sá
January 3, 2020
Abstract
In a world constantly in communication, connectivity services are increasing their importance as a OEMs’ revenue source, since customers have required a data-driven mobility experience. As forecasted, BMW’s ConnectedDrive would account for 11.2m users in 2026 and revenues of €1,544m in revenues. BMW, under ShareNow, offers the possibility for customers to drive EVs in European cities. Hence, BWM benefits: (i) as a marketing strategy, through an increased consumers’ appetite for EVs (“pay-per-use” business model), which leads to higher EV’s sales; and, (ii) through regulatory compliance, a higher share of EVs in BMW’s fleet could avoid fines, regarding CO2 emissions targets.
Keywords Automotive Industry, BMW, Connectivity Services, Shared Mobility
This work used infrastructure and resources funded by Fundação para a Ciência e a Tecnologia (UID/ECO/00124/2013, UID/ECO/00124/2019 and Social Sciences DataLab, Project 22209), POR Lisboa (LISBOA-01-0145-FEDER-007722 and Social Sciences DataLab, Project 22209) and POR Norte (Social Sciences DataLab, Project 22209)
Connectivity features, from a new customer experience to a source of revenue
The automotive market is bringing innovation towards a customer-centric driver experience, as such, data-enabled services are a new feature in cars, as required from customers.
Thus, connectivity services have increased its relevance as a car purchase criterion, since 40% of consumers consider to change a car brand for a better connectivity offer (McKinsey,
2018). According to a Statista survey conducted in 2019 (Statista Global Consumer Survey,
2019), in regards to the availability of good connectivity with smartphones and internet services as a purchase criteria for cars, which evidenced that 31% of Chinese car consumers valued connectivity features in the vehicles’ acquisition process. However, only 16% of German consumers considered this criteria important in the decision of buy a new car (Figure 1).
Therefore, OEMs need to exploit this customers’ desire. Hence, customers’ perceived added value in connectivity features, monetization of car data and online-based services access are the next step for OEMs to ensure a stream of revenues throughout the entire lifecycle of the car, besides the usual one-sale contact and aftermarket services (i.e. maintenance and repair).
As a result, OEMs build a new relationship with its customers, due to its daily basis frequency that could be associated to GAFA’s consumer relationship (Google, Apple, Facebook and
Amazon), as OEMs’ customer interactions would occur more frequently, in opposition to the standardized communication channels through dealers (during sales stage) and aftermarket contact. As observed in Figure 2, connectivity and shared mobility revenues represents an important new source of revenues from $35bn in 2016 to $1,575bn in 2030.
Connectivity services – a valuable feature for customers as a purchase Estimated global automotive revenue in 2016 and 2030, by segment criteria for cars (2019) (in $bn)
Question: "Which of these characteristics are especially important to you Weight Weight 2016 2030 when you decide on a new car?" (in %) (in %) One-time vehicle sales 2,600 74,8% 3,800 57,2% China US UK Germany Aftermarket 840 24,2% 1,270 19,1% Good connectivity Connectivity & shared 35 1,0% 1,575 23,7% with smartphones and 31% 27% 22% 16% mobility internet services Total 3,475 100% 6,645 100% Figure 1 – Connectivity – a valuable feature for customers across different countries (China, Figure 2 – Worldwide estimation of automotive revenue based on consumer spending United States, United Kingdom and Germany) when purchasing a car (in %) in 2016 and 2030, by segment and weight on total automotive revenue (in $bn) Source: Statista Global Consumer Survey 2019 Source: Mckinsey
Page 1/5 By unlocking these value propositions, OEMs ensure that customers will be more loyal to their brands, since they appreciate the availability of these value-added features (previously mentioned), which are divided in four main areas: (i) safety; (ii) cost; (iii) convenience; and,
(iv) time. (McKinsey, 2016).
In terms of safety, it comprises real-time emergency calls option or information sending for rescue services. Also, safety is related to driving assistance features, like advanced driver assistance systems (ADAS), which are the enabler and the first step to a fully autonomous vehicles development, as they provide assistance to drivers in order to avoid collisions with corrective actions. As a result of this, in 2025 it is forecast a potential reduction of 9% of car accidents. Regarding cost benefits, ADAS system would represent less 5% premiums paid by customers, due to their vehicles being more secure (World Economic Forum, 2016). In savings terms, customers would also enjoy sharing car data to insurance companies for a tailored based insurance prices. Due to connected cars, a new business model of car-usage vehicle scheme could be implemented with “pay-how-you-drive” model to determine the premiums paid, which would award better driving behavior and yield a potential 90% cost savings transfer from insurers to customers (World Economic Forum, 2016). For convenience features, predictive maintenance enables on-time alerts regarding any issue of the vehicle, anticipating the need to a recall or the repairment of a failure. Besides, convenience relates to connected infotainment services that allows for leisure time inside the car. Regarding time savings enablement, it is associated to navigation systems with optimizing routes and parking network systems.
In terms of monetization for predictive maintenance, 78% of consumers in China would pay for the service while only 71% in US, hence, there is 73% willingness from customers worldwide to pay for the service. Even though, in relation to connected navigation service, there is a lower willingness to pay (43%), since there is already available a wide variety of free used options in the market (McKinsey, 2016).
Page 2/5 Connectivity services will positively impact BMW forecasted revenues
In 2020, 1 out of 5 cars are connected to internet, while in premium segment this ratio is
expected to be 1 in 2 (McKinsey, 2013). Thus, from 2020 we estimated that all new BMW cars
produced will have the connectivity systems implemented, which represents around 2.6-2.8bn
new BMW’s connected cars each year until 2026. As such, BMW to take advantage of these
features needs to convince customers to pay the annual subscription of BMW ConnectedDrive.
However, we anticipated that willingness to pay for connectivity services do not reflect the paid
subscribers’ ratio. As a result, we estimated a 10% conversion rate from the new connected
cars sales to a subscription of BMW ConnectedDrive, in line with industry analysts’ estimations
for 2025-2026 (Singh, 2018). Despite that, we forecasted since 2019 due to the BMW’s
premium segment, where customers valued subscription to guarantee full access of services.
Thus, BMW ConnectedDrive users evolved from 6.0m in 2018 to 11.2m in 2026. Besides this,
the subscription price was estimated to grow at inflation rate (average price of €120 in 2018
(BMW ConnectedDrive, 2019) and €138 in 2026). Regarding BMW revenues on connected
services in 2018 was €726m, which via subscription users increased yields €1,544m in 2026,
which supports their higher share on overall BMW’s automotive revenue. Sensitivity Analysis – Sensitivity Analysis – Evolution of BMW ConnectedDrive revenue Evolution of Connectivity Revenues and Users Impact on BMW NOPLAT and users 11.2 9.0 10.0 Conversion ratio 5% 10% 20% Conversion ratio 5% 10% 20% 7.4 8.2 6.0 6.2 6.4 6.9 BMW ConnectedDrive revenues (in €m) BMW ConnectedDrive costs (in €m) 1,361 1,544 726 751 797 864 953 1,066 1,201 2020F 772 797 846 2020F (260) (263) (268)
0 0 2026F 1,153 1,545 2,330 2026F (173) (232) (349) '18 '19E '20F '21F '22F '23F '24F '25F '26F BMW ConnectedDrive users (in m) BMW ConnectedDrive NOPLAT (in €m) 2020F 6.2 6.4 6.8 2020F 334 338 344 Revenue (in €m) Users (in m) 2026F 8.3 11.2 16.9 2026F 678 908 1,369 Figure 5 Sensitivity analysis on BMW ConnectedDrive costs and Figure 4 – Sensitivity analysis on BMW ConnectedDrive revenues – Figure 3 – BMW ConnectedDrive revenues (in €m) and (in €m) and users (in m) NOPLAT (in €m) users (in m), under base case (10% conversion ratio) Note: NOPLAT = Gross margin * (1-tax rate) Source: Analyst computations Source: Analyst computations Source: Analyst computations
As before mentioned, there is a gap between the importance that customers attribute to
connected services and their willingness to pay that connected features. As seen in Figure 4 and
5, a conversion ratio of 5% (more conservative approach than our forecasted rate) would imply
less 2.8m users in 2026 and €392m on revenues. Furthermore, on a more optimistic approach,
a conversion rate of 20% would result in more 5.7m users in 2026 and €784 on revenues.
Page 3/5 As such, BMW’s ability to convert passive/free BMW ConnectedDrive users to an annual subscription fee is relevant for our forecasts and for BMW’s valuation, as NOPLAT in 2026 would differs from €908m (our base forecast) to either €678m (5% rate) or €1,369m (20% rate).
Shared mobility – shared vehicles’ idle time, a sustainable driver of car sales growth
As reported in Cars 2025 study (Goldman Sachs, 2019), the vehicles mainly commute for short trips daily, which lead to a 5% utilization rate and implying an idle time considerable for the burden of car ownership. A “pay-per-use” model could be a new business standard for the near future, since ride-hailing and shared-hailing are already solutions implemented.
However, an worldwide analysis of annual costs for the ownership of a car yields a cost of
$8,649 in 2017 versus $13,859 for ride-sharing (CBInsights, 2019). As such, worldwide car ownership is forecasted to be stable from 1.1bn in 2017 to 1.2bn in 2030, as the disposable income is increasing in emergent markets and the willingness from customers to have an option/security to its own car plays a role to the survivorship of private vehicles mindset.
Besides this, the decision of private car is not related only with the usage frequency, moreover
BMW’s customers (premium segment) value convenience and privacy in favor ownership.
Despite this, it is forecasted that car ownership will be more expensive in 2027 ($7,598 car ownership vs $6,311 ride-sharing) (CBInsights, 2019). Thus, we expected higher acceptance from customers, since in 2019, car-sharing only represents 6% of commuting mode of transportation in China (1% in Germany and UK 1%, while 2% in US) (Statista Global
Consumer Survey, 2019). At the same time, the higher utilization rate of shared vehicles, would also entails a good prospect for OEMs, despite of being mentioned that each shared vehicle could replace 5-15 private vehicles (Transport&Environment, 2017). In addition, a shared vehicle has a 3.5 times higher replacement rate comparing with a private vehicle, being estimated only a 4 years life cycle for a shared vehicle (Goldman Sachs, 2017).
Page 4/5 To sum up, BMW could see shared mobility as a new revenue stream through increased volumes of sales. As such, shared mobility reduction on private vehicles would be offset by a higher replacement rate of shared vehicles (McKinsey et al., 2017).
BMW Shared Mobility – a fleet operator positioning and/or a marketing strategy
BMW investment in urban mobility area is associated with Daimler, a joint venture for a mobility services provider, with the purpose to develop an inclusive platform for car-sharing, ride-hailing, charging, parking and multimodal transport services. The success of this partnership relies on leveraging the know-how and past experience inside automotive industry, alongside a strong customer base, which accounts as of September 2019 with over 83m active users being present in more than 1,300 cities worldwide. Despite this shared investment,
ShareNow (car-sharing JV) announced the cease of operations in North America and 3 cities in
Europe (London, Brussels and Florence). As a result of low adoption rates and a required restructuring strategy from both companies, in order to focus resources on core activities, in regards the high R&D expenses needed for the shift from ICE to ACE vehicles production.
However, ShareNow will continue to operate in European cities, where BMW foresees a way to become a profitable business. Furthermore, during 2019, BMW Automotive segment benefited from the expansion of ShareNow’s EV fleet to 4,000 cars, which represents 25% of
ShareNow’s fleet (ShareNow, 2019b). Besides, an environmental and marketing strategy towards EV sales aims to avoid BMW to pay our forecasted €1.7bn in CO2 emissions fines.
Additionally, as a “pay-per-use” business model this could generate new BMW’s buyers (being the first contact with an EV through ShareNow platform, similar to the concept of “test-drive”), which were triggered to buy a BMW EV. Alongside BMW’s rationale of customers discovering
EV through ShareNow (ShareNow, 2019a), we forecasted BMW EV sales to benefit from the increase customer base scale, while also it would yields positive returns to the JV.
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