BMW CFO remains bullish despite chip shortage, other challenges

BMW Group finance chief Nicolas Peter expects the automaker's full-year operating margin to be "in the area of about 9 percent" despite major challenges such as the chip shortage and volatile raw materials prices. He explained how BMW plans to overcome these obstacles and more in an interview with Automotive News Europe Associate Publisher and Editor Luca Ciferri.

Do you think the second half of the year will be as strong as the first half in terms of profitability for the auto industry?

The midterm outlook very much depends on the development of the semiconductor issue, which we have managed better than most of our peers. But from my perspective it will probably take until the end of the second quarter of 2022 before the situation normalizes.

Do you expect a good second half despite the chip shortage?

Yes, but it really depends, because we lack a little bit of visibility. If I knew how many chips we would get, I could be more precise because from a customer perspective, we clearly have sufficient demand and sufficient orders in the pipeline.

How much are rising prices for raw materials and foreign exchange rates going to affect your second-half results?

For the full year, I expect an impact in the area of plus or minus half a billion euros for both, with currency being slightly positive in terms of full-year impact. I expect raw materials to be a little bit more negative. But this remains in line with what we announced at the beginning of the year.

Could raw materials price increases force BMW to revise its full-year guidance?

We have some coverage in place, but the farther out you go, the less coverage you have. In the first half we had a slightly smaller impact, about 250 million euros. A slightly bigger impact will come in the second half. Therefore, there is no need for us to adjust our full-year guidance, that is an operating margin between 7 percent and 9 percent. I think we will be in the upper part of the corridor, in the area of about 9 percent.

Do you hedge prices on raw materials or just currencies?

You cannot hedge on all raw materials and all currencies, but those that you can hedge, we do as far as possible. If we can't hedge them on the financial markets, we make medium- and long-term agreements with our suppliers. On the foreign exchanges, we follow a macroeconomic model where we study a currency. Is it overvalued, significantly overvalued, undervalued, significantly undervalued? Depending on where we are, we have shorter or longer hedges and sometimes even zero hedges for a currency.

In terms of financial services, how are delinquency rates evolving?

We look at delinquencies from two angles: financial services and with regard to our suppliers. In both areas we have probably the lowest level ever -- and we were already very low before because we have a very good tool to manage this. If I look at suppliers, we have seen no negative shift at all.

From the pricing point of view, automakers have been benefiting since June 2020 because of strong demand and low inventories. The chip crunch accelerated this already favorable trend. Do you think this could become the new normal?

We have set up a project for how to protect and optimize our supply chain in the future to maintain those low inventory levels, because at the end of the day it's not only us but also our dealers that benefit from this situation. If you look at their margins, they have improved as well. This is something I believe fits to the product and what people expect from a premium brand. So, that is something we will definitely maintain in the future as well.

What is your current inventory level?

Every single market is asking for more cars, which is good news because it means we have managed the supply chain in a way that we have the lowest inventory levels in years. This isn't just the case in one market but across our sales regions. The task is to structure this process in a way that we maintain low inventory levels without losing sales once the semiconductor shortage is resolved.

Long waiting times can push an automaker to offer discounts. How is BMW avoiding this?

In every single market there is a lower discount level. That's the case in Germany, the U.S. and China. A key element in maintaining this is to fine tune the supply chain. I was discussing this with our four biggest U.S. dealer groups earlier this month. In the past the U.S. approach was always to say, "The customer is entering the showroom on Saturday morning at 10:00 a.m. and he wants to leave with a car at 1:00 p.m." Now the same dealers tell me they believe our customers are ready to wait six weeks and are ready to pay a slightly higher price, even if they have to wait. That's something we will implement in a smart way. Of course, the waiting time can't be too long because you will lose sales. But the ordering process mean can make the experience better because the customer creates his own car. This increases customer satisfaction and helps us sell innovative options.

Do the profit margins from your plug-in hybrids already match those of internal combustion engine models?

Margin depends on the market because you have markets where the customer wants or needs a plug-in hybrid. In those cases, the margins are very close. In other markets, it's different. From a financial perspective, this is the No.1 challenge we face as an industry. How to get to a sustainable level where margins for EVs and cars with combustion engines are on par. Part of it will be achieved by improving the margin on the product itself. BMW for the last three years has been running a companywide program to improve our cost level, to improve efficiencies.

Could you give us an example?

Take an X5, which is offered with a choice of two diesels and three gasoline engines in Europe and four gasoline engines in the U.S. Every engine has to be homologated in different ways, country by country. The iX full-electric product does not need to go through this process. That is one of the positive effects of shifting to EVs. There is a significant reduction in complexity. It's also shortening our development time because it's simpler to develop and engineer an electric car compared with a car with a combustion engine. That is why we are very optimistic that we will maintain our 8 percent to 10 percent strategic profit corridor even though by 2030 half of our total sales will be full-electric cars.

How will the EU Green Deal impact your finances?

The EU will probably have the highest level of full-electric cars. That means we have a strong focus on Europe from a product perspective. We are not nervous because by 2023 or 2024 we will have a full-electric offer in all relevant segments. From a management perspective, a couple of months ago we kicked off what we call internally the Neue Klasse (new class in German), an all-electric drivetrain architecture that furthers bring down costs in the product. Not only will we be able to meet the targets set by the EU from a CO2 perspective, but we will also maintain our profitability, which will be extremely important.

Volkswagen Group CEO Herbert Diess drove from Germany to Italy this summer and he complained on social media about the quality of the Ionity charging stations he found in Italy. Where you surprised by this considering that VW owns a stake in Ionity?

BMW is also a stakeholder in Ionity, and many colleagues have also driven to Italy this year for the first time with the pre-series iX and i4. Some traveled all the way to Sicily, and it was no problem. Meanwhile, some colleagues who started their trips in small towns had trouble finding charging stations. What this tells us is that it's already possible to find the infrastructure, but the way we organize and plan our trips will be a completely different.

Are you worried this problem will get worse if EV sales grow at a faster rate than the infrastructure is being developed?

Range is a factor but how fast can you recharge your battery is becoming more important. We offer ranges of about 600 kilometers (about 370 miles) on the iX and the i4. How often have you driven more than 500 km or 600 km a day in the last 12 months? I do this once a year, driving somewhere for summer holidays. The next step will probably be 700 to 800 km and then you have what you need. But how fast you can recharge the batteries is what I think the whole industry is focused on right now as well.

How do you encourage individual countries to build the required infrastructure?

I'm optimistic there will be more investment going into infrastructure. We see it in every single country. If you look at Norway, it's a small and very rich country, but more than 90 percent of the cars we sell there have a plug. I was talking to the mayor of Oslo, and he thought the electric infrastructure would collapse. It didn't. And we have had a very similar experience in the Netherlands. It's more challenging for big countries such as Italy, Germany and Spain. In Belgium, our allocation of the iX and i4 for next year is already sold out because in those geographically smaller countries, a range of 600 km is ticking the box. I think we must continue to put pressure on those countries that are lagging.

What about solid-state battery technology?  

Solid state is a promising technology that will probably come in the second half of the decade, most likely not covering the whole product portfolio.

Nathan Eddy contributed