Analysis of the Current State of the BMW Company

Introduction

For the last two consecutive years i.e. 2007and 2008, BMW Group has experienced a declining sales growth (Annual Report 2008). The report on the automobile industry predicts that the market for luxury cars is expected to decline further due to the recession (Rauwald). The US is the largest market for BMW has been affected the most, as the US economy is worst hit by the recession and declining automobile demand in the country. The performance of BMW has been affected mostly due to the economic downturn (Annual Report 2008).

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Company Background

The company has three business divisions: automotive, motorcycle, and financial services. BMW Group caters to the premium segment of the global automotive and motorcycle market. The company also provides financial services. The products are sold globally through company-owned showrooms, dealers, subsidiaries, and importers (Company Spotlight: BMW). BMW has 23 production units spread across 13 countries and sells in more than 140 countries around the world.

BMW manufactures three brands of automobiles i.e. BMW, Mini, and Rolls-Royce. According to the Annual Report 2008, the total sales of BMW Group in 2008 was 1,435,876 BMW, MINI, and Rolls-Royce cars which is a decline of 4.3 percent in sales in 2008 compared to an increase by 9.2 percent in 2007. The motorcycle segment manufactures and sells BMW branded motorcycles and spare parts. In 2008, the company sold 101,685 motorcycles facing a sales decline of 0.8 percent as compared to an increase in sales by 2.4 percent in 2007. The financial services division aims to provide automobile leases, provide loan finance, etc. This division experienced a business volume increase of 12 percent.

Financial Condition

The group was hit a slump in revenue in 2008 which fell by 5 percent in 2008 (Annual Report 2008). The gross profit margin of the company fell from 21.8 percent in 2007 to 16.7 percent in 2008. The effect of the downturn is most visible on the import earnings of the company. The company gave out lower dividends and capital expenditure also declined.

The reasons, which affected the decline in car demand, are varied. First, low consumer confidence, as well as a weak second-hand car market, led to the decline in sales of luxury cars in the US. BMW’s production cost increased due to the extremely volatile average cost of raw material and negative external conditions. A third reason is the appreciation of the US dollar against the Euro. The oil prices also affected the sales. Another reason is model life cycle factors, which contributed to the reduction of sales.

Competitors

The car competes in the luxury automobile industry. The automobile industry is 95 percent of the total auto industry and motorcycle comprises 4.8 percent of the total (Global Automobiles). The competitors too faced as the global car market faced a slump in sales growth in 2008. The global auto industry faced a slump in sales by 19 percent in 2008 (Global Automobile Industry). US automakers like GM, Ford, and Chrysler have filed for bankruptcy in the wake of the current economic recession. The competitors have seen a declining growth rate, as well as dwindling profits.

The main competitors of the company are Daimler and Volkswagen. Daimler faced a revenue decline of 3 percent in 2008 (Daimler Annual Report) while Volkswagen experienced an increase of sales revenue by 2 percent (Volkswagen Annual Report). Daimler has three brands: Mercedes Benz, Maybach, and Smart. Volkswagen has 9 brands in its group: Volkswagen, Audi, Skoda, SEAT, Scania, Bugatti, Bentley, Volkswagen Commercial Vehicles, and Lamborghini. Volkswagen has a global market share of 10.3 percent. Daimler experienced a 61 percent decline in its EBIT while Volkswagen Therefore, Volkswagen is experiencing growth even when the other two competitors have experienced a declining growth rate.

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SWOT Analysis

BMW is one of the leading luxury carmakers in the world. The company has very strong brands like BMW, Mini, and Rolls-Royce, which provides the company with an added competitive advantage against competitors. However, the economic recession has made business for the company tough as markets for luxury cars seem to have declined due to the present crisis. This SWOT analysis will provide an understanding as to where the problems mainly lie due to the declining growth of the company.

Strengths Weakness
Strong brand image
Operations are diversified
Strong performance in Emerging markets
Focused strategy – sale of IT segment
Adaptable production network
Adverse performance
Weak turnover ratio
Opportunities Threats
Emerging markets like Asia
Increased demand for hybrid and dual-fuel vehicles
Global economic recession
Prices of raw materials are volatile
Reduced automobile demand in the US
Depreciation of EURO

Strengths

Strong brand image: Strong brand image: BMW brand is globally recognized as an established brand. It is one of the 10 largest automobile manufacturers in the world, with well-known brands like BMW, Mini, and Roll-Royce. These are the three most well-known premium brands in the automobile industry. BMW’s motorcycle brand is equally well known and it operates successfully in financial services.

BMW’s corporate planning division decided that the company would focus more on its core brands i.e. BMW, Mini, and Rolls-Royce in order to maintain a strong brand image in the market (Marketing Week). BMW has been awarded the “Coolest Brand”, “Best Performance Brand”, and “Best Exterior Design Brand – Luxury” in the 2009 Kelly Blue Book Brand Image Awards (William). Therefore, to maintain a strong brand position, BMW will deter from buying any competitor and will not introduce any fourth brand in their company offerings.

BMW enjoys the leading position in the premium automobile manufacturing market. The company is well known for its technological and innovative automobile design and engineering (Barkholz). BMW innovated Efficient Dynamics, a fuel-saving technology standard feature across all its models that has helped reduce CO2 emissions (Bongard). It received the “International Engine of the Year” in 2007 for its BMW 3.0 liter twin-turbo in-line 6-cylinder petrol engine, which is used in their 3-series model variant. The clearly strong, well-placed, and distinctive brand provides a competitive edge to the company.

Diversified operations: BMW is a well-diversified business organization both geographically and well in terms of the target market. The company operates in more than 140 countries. The reportable geographic regions through which the company operates the market are Germany, the United Kingdom, the Rest of Europe (excluding Germany and the UK), North America, Asia/Oceania, and Other markets. Europe is the company’s largest market with a share of 59 percent of the total revenue. The second-largest market in North America with 23 percent share in 2008 and the Asian market has a share of 14 percent of the total revenue.

The company has a diversified revenue stream from different businesses. The revenue stream of the BMW group comes from three primary operating markets i.e. automobile, motorcycle, and financial. In 2008, the majority share of its revenue is from the automobile division, which is 91.7 percent. The motorcycle and financial segment each had a share of 2.3 percent and 29.5 percent respectively. A diversified market strategy helps to dissipate market risks and protects the company from unfavorable market conditions.

Strong Performance in Emerging Market: The Emerging economies of Asia and Latin America have registered the fastest growth. These markets have registered a more than 1 percent change in revenue growth. The credit markets in these regions have remained relatively immune to the recession as compared to the industrialized countries. In Asia BMW, sales reached 165,745 units an increase of 3.9 percent since 2007. Even for the contract portfolio market, Asia has a share of 13 percent of the segment. Thus, the emerging markets have shown good growth for the company.

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Focused strategy: The Company has maintained its focus on its current brands and segment. This was seen through the 72.9 percent sale of its IT consultancy company Cirquent (earlier known as SoftLab) to NTT Data, a Japanese company. BMW group holds 25 percent of the shares, and the rest 2 percent is held by Cirquent itself. BMW’s focus on its current brands was seen when it decided not to acquire any more new brands to its current fleet (Marketing Week).

Adaptable production network: The Company is responsive to its external environmental conditions, which demonstrates its adaptability. Due to the recession and expected decline in demand, BMW’s production network manufactured fewer vehicles than what was planned in 2008. Flexible working hours and shift models helped in the reduction of a production schedule. The company adopts a continuous value-added approach, which helped in further process optimization during 2008. This helped in reducing costs by 7 to 8 percent. This shows that responsiveness and flexibility in a production line are beneficial to the company.

Weaknesses

Adverse performance: Adverse performance: The performance of the company has been weak with a decline, in total revenue by 5 percent in 2008. Various reasons attributed to this including the recession and weakening of the EURO. If the exchange rate had stabilized, the automobile business revenue would have fallen only by 5.4 percent reducing the group revenue by 0.8 percent. The revenue generated by the automobile segment fell by 9.4 percent to € 48,782 million. The segment profit in 2008 fell by 90 percent. The motorcycle segment increased its revenue by 0.2 percent. The business section profit (EBIT) fell by 25 percent and segment profit before taxes fell by 28 percent. The financial segment faced an increase in revenue by 12.8 percent in 2008. This shows that the overall performance of the company weakened in 2008 as the automobile segment of the company, which dominates 91 percent of the revenue, faced declining growth.

Weak turnover ratio: The asset turnover ratio is calculated as a ratio of revenue to a total asset. The asset turnover ratio of BMW is 0.5, which is higher than its competitors Volkswagen (0.22) and Daimler (0.42). A higher asset turnover ratio indicates that the company is unable to deploy assets profitably, which affects growth. This indicates that the profit margin of BMW is lower as its asset turnover ratio is low and that of Volkswagen and Daimler is higher.

The inventory turnover ratio of BMW is higher than that of its competitors, which indicates that the cost of holding the inventory is higher for BMW. The inventory turnover ratio of BMW is 5.3, that of Daimler is 5.7, and Volkswagens is 6.3. The lower the inventory turnover ratio, the higher is the cost of retaining the inventory. Therefore, here it can be said that BMW incurred a higher cost to retain the inventory.

Opportunities

Emerging markets like Asia: Emerging markets like Asia: Opportunity in the Asian market is ample. Countries like China and India are expected to be the impetus of global demand through 2010. According to forecasts, the production of new cars in China is expected to increase by 6.3 percent forecasts and is expected to drive the growth for car markets through 2010. Even the Central and East European countries will account for approximately 5.5 million cars market by 2012 (Global Round-up).

The company has targeted the Asian market and has significantly increased its investments in the region. The first of these steps was the opening of a subsidiary in Delhi and a plant in Chennai, India. The plants produce BMW 3 and 5 Series vehicles and cater to the Indian market. In India, the company experienced an increased market by 2 percent. BMW also expanded its dealer network in India and China in 2008. China itself is one of the key automobile markets of BMW with a share in sales volume of 5.3 percent. In the East and Central European countries too, BMW has a strong presence. This region is expected to account for 5.5 million automobile units by 2012.

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Increased demand for hybrid and dual-fuel vehicles: According to the forecast, the demand for light hybrid electronic vehicles will reach 4.5 million units globally. This trend may be attributable to the increasing energy and fuel cost. The market for such hybrid cars is expected to rise in countries like the US.

Threats

Global economic recession: Financial crisis worldwide emerged in 2008, which was an effect of the slump in the US property market. The downturn of the US economy marred the confidence of the global financial market, which in turn affected other core industries. The growth rate in GDP was seen as a declining trend in many countries like the US, Europe, and Japan. Even the emerging economies were affected due to the recession, which declined their export volumes thus increasing their trade deficit.

Prices of raw materials are volatile: The price of raw materials like steel and oil and gas has been highly volatile in 2008. The global downturn declined the demand for raw materials worldwide, and the price of oil reached a maximum of $150 per barrel in the summer of 2008 and then fell by the end of the year to $40. However, Brent Crude was costing 97 percent higher than that in 2007.

Reduced automobile demand in the US: The demand for BMW vehicles reduced considerably in the US. Since the US is the largest market for cars for BMW, the company is apprehensive of the reduced consumer trust.

Depreciation of EURO: US dollar appreciated against the Euro in the second half of 2008. The exchange rate was at 1.23 in November and 1.60 in April 2008. By February 2009, the rate was at 1.40. Therefore, US dollar had appreciated by 4.3 percent in 2008 as compared to 2007. Similarly, there was an appreciation of the Japanese yen as compared to the euro. Depreciating the euro is a concern for BMW for future dealings.

Favorable Conditions and Issues

The market conditions as exemplified from the SWOT analysis are not very favorable due to the present economic recession worldwide. The automobile market is undergoing a declining growth phase. The volatility in the raw material market and exchange rate may also affect the functioning of BMW. The global automobile market too is experiencing a slump.

In this situation, BMW has taken the right strategy by marinating its focus towards luxury automobiles without aiming for an expansion I product or brand offerings. They are involving in research and development, which will provide new technology. The key at this point is to maintain its operations and brand image. The company is also looking at =new and emerging market avenues. They are venturing more into the emerging economies to capture the potential in those markets. BMW is keen on capturing the new emerging market opportunity by capturing the maximum of the market. The company has developed a prototype for a hybrid vehicle called BMW Active Hybrid and has allied with GM and Chrysler to develop a hybrid car. The demand for dual fuel vehicles has increased globally. BMW is working towards developing a hydrogen-driven car to be introduced.

Conclusion

The company will hold its market as the brand image of the company is very strong. However, growth will be a low point. Therefore, BMW must aim to maintain sales and aim for entering into newer markets, which have not been saturated. The strategies suggested for BMW are:

  1. In the short run, BMW must increase the fuel economy of its vehicles through technological innovations. Maintain the brand image and increase the brand value of the vehicles.
  2. In the medium run, it must try to develop dual fuel and hybrid vehicles, which have experienced increasing demand. Marinating flexibility will be another strategy, which will help the company to cope with the external environment.
  3. In the long run, BMW will have to innovate an alternative fuel (hydrogen) and attain its mission of being Number One.

References

  1. “Annual Report 2008.” 2008. BMW Group.
  2. Barkholz, David. “Suppliers rank BMW as No. 1 auto innovator.” Automotive News Vol. 83 No 6364  2009: 8.
  3. Bongard, Arjen. “Low CO2 strategy helps BMW keep up residual values.” Automotive News Europe Vol. 14 No. 2. 2009: 7.
  4. “Company Spotlight: BMW.” Market Report. 2008.
  5. “Daimler Annual Report.” Annual Report. 2008.
  6. Global Automobile Industry. Industry Profile. NeW York: Datamonitor, 2009.
  7. Global Automobiles. Industry Profile. New York: Data Monitor, 2009.
  8. “Global Round-up.” Market Forecast. 2009.
  9. Marketing Week. “BMW establishes brand division.” Marketing Week, 2007: 5.
  10. Rauwald, Christoph. “2nd UPDATE: BMW Sees Growth In Premium Segment Despite Slump.” 2009. Wall Street Journal.
  11. “Volkswagen Annual Report.” Annual Report. 2008.
  12. William, G. Chambers. “Toyota, BMW, Cadillac are honored for brand image.” 2009. The Columbus Despatch.
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