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      12-24-2007, 11:30 AM   #1
Voltigeur
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BMW to cut 8k jobs

The U.S. economy is slowing; and the W. European economies are also slowing. BMW is also getting more cost conscious: Der Spiegel came out w/ the news that that BMW AG plans to cut 8k jobs next year (albeit mainly temps).

http://www.reuters.com/article/tnBas...58453920071224

I suspect BMW wants to get ahead of the pressures on margins given the foregoing scenario - R&D is another area where the pencils can be sharpened.

Hey, BMW: it's hard to ask a premium price w/ a new product when the economic backdrop is getting tougher - globally (barring some searing growth in EM). I wonder if BMW is holding back because of nerves about this critical equation:
  • new M3
  • has tough competition (C63, GT-R ...)
  • EUR/USD too high
  • slowing macro environment
  • housing slowdown in US (but also UK, IRL ...) = less 'house ATM'
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      12-25-2007, 10:17 AM   #2
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      12-25-2007, 07:46 PM   #3
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Well said - I predict M3's sitting/rusting on dealer lots in 3 or 4 months time.
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      12-25-2007, 10:22 PM   #4
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Quote:
Originally Posted by aerisolphaln View Post
Well said - I predict M3's sitting/rusting on dealer lots in 3 or 4 months time.
I predict none of you know the first thing about micro economics.

...and as far as M's sitting on lots rusting...well...again you are freakin' clueless.
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      12-25-2007, 10:28 PM   #5
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Quote:
Originally Posted by Voltigeur View Post
The U.S. economy is slowing; and the W. European economies are also slowing. BMW is also getting more cost conscious: Der Spiegel came out w/ the news that that BMW AG plans to cut 8k jobs next year (albeit mainly temps).

http://www.reuters.com/article/tnBas...58453920071224

I suspect BMW wants to get ahead of the pressures on margins given the foregoing scenario - R&D is another area where the pencils can be sharpened.

Hey, BMW: it's hard to ask a premium price w/ a new product when the economic backdrop is getting tougher - globally (barring some searing growth in EM). I wonder if BMW is holding back because of nerves about this critical equation:
  • new M3
  • has tough competition (C63, GT-R ...)
  • EUR/USD too high
  • slowing macro environment
  • housing slowdown in US (but also UK, IRL ...) = less 'house ATM'
Dude...go back to school. Less than an 8% workforce reduction and what is your point exactly? Go back to school.

Better yet...shut the f**K up about the cost and go buy something you can afford and then get on THAT board.

SS
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      12-25-2007, 10:31 PM   #6
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I don't think M3's - especially in their release stage - with all that pent-up demand will sit idle. But, if I were a BMW 'beancounter' I'd consider carefully the total profits over the life of this car, ie, hit the 100k / unit target to ensure maximum bang for the R&D buck (part of which they saved by cutting 2 cylinders off of the V10 ...)

Accordingly, why try to be too greedy at the launch? I frankly blanched at the R&T test estimate (not unreasonable in my view) of ~ $70k, including GG tax.

BMW NA will likely have no problems selling them even at high 60s - low 70s. But with a 5-6 year product life-cycle, and a EUR/USD rate that has become too elevated, be smart BMW: and price for the product run and fair value of the EUR/USD.
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      12-25-2007, 10:37 PM   #7
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Quote:
Originally Posted by Sick Speed View Post
Dude...go back to school. Less than an 8% workforce reduction and what is your point exactly? Go back to school.

Better yet...shut the f**K up about the cost and go buy something you can afford and then get on THAT board.

SS
Huh? This isn't about my ability to afford this car. Not an issue. Did you get up on the wrong side of the bed today? It's Xmas for f**k's sake! At least your avatar is appropriate to your disposition

My premise is that the macro back-drop will, at the margin have an impact on the demand for cars like this. Maybe not in the early release period but over the next 12-18m. BMW sees the slowing and acted ahead of time to cut jobs, ie cost. Sounds a lot like Micro 101 to me (marginal cost to price) with some Macro thrown in for good measure. Also, in my world a cut of -8% to a company's workforce is meaningful, as labor is the largest cost for an auto manufacturer.

Here's some current 'Street research on the macro/micro issues (below); and this time Euro manufacturers have a HIGH EUR/USD to challenge their profitability (back in '01 slow the EUR/USD was 1.1 - 1.2 - it's 0.70 today, a whopping -36% to over -40% depreciation, which has an enormous impact on European exporters' profitability.
Quote:
Originally Posted by Morgan Stanley Equity Research - BMW, FX downgrades, 12/13/2007
BMW is highly exposed to the US consumer, with over 25% of unit sales on the US, and to the US exchange rate.."
My point on this is that it would be a mistake for BMW to charge too much to early adopters - then what once the hubbub dies down; discounts come (even 'hidden' like cheaper finance) and piss off keen early buyers (important for marketing as they are typically passionate and create good marketing buzz); and also better to sell as many units as possible to amortize the significant R&D expense (BMW is one of the largest spenders in the auto manufacturing world in R&D / Sales).


Source: Bloomberg, SCB

And last time I was at "school" (or university as I prefer to call it) a marketing case couldn't be better exemplified as phucked up as this one. I have read the views of many people on m3post who are frustrated aficionados with regard to this launch/pricing: not a good way to launch a product.

Last point: I do this sh*t for a living - no need to go back to school. For what it's worth, I expect the line below to trend up in 08 as the global economy slows -which will make it easier for BMW to keep prices down in the U.S.

USD/EUR, 2001 - 07 & US recessions


Source: FactSet
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Last edited by Voltigeur; 12-26-2007 at 12:36 AM. Reason: addendum
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      12-27-2007, 02:25 AM   #8
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So let the rest of the world pay a premium price since the US market will account for roughly 25% of M3 sales at 5% of the profit average of sales in other countries. With that being the case if I were the US sales manager for BMW USA who needed to forecast 2008 sales I would just slash production estimates and allocations by 50% keeping a higher profit margin on lower sales volume effectively decreasing my cost of sales.

As opposed to your scenario where you propose BMW should lower the cost to the US consumer because our dollar is weak meaning when it gets converted back into EUR they lose even MORE profit.

In a simple business model why do you think BMW would do this? I am being serious with this question.

I did some currency conversions off of a few of BMW's highest selling M markets and the rough estimates for base pricing in the US IF BMW kept it consistent with the rest of the world converts to an average of $93K.

If you are saying that the "premium" BMW owner will most likely be unwilling to pay this cost for the M then I would disagree. But there are not nearly as many "premium" BMW owners as their are standard BMW owners. And I would agree with you that the standard BMW owner who may have been considering upgrading to an M would not with a price of $93K staring at them.

BMW may not sell as many at that price but they CAN sell less at that price and make more profit at a lower cost of sales which translates to higher earnings on sales which translates to INCREASED share holder equity which means job security for the CEO. And the sole purpose for existence of any CEO in a publicly traded company is to do one thing and one thing only. INCREASE SHAREHOLDER EQUITY AND RETURN.

So your original argument is based on IF BMW were to maintain 50,000 unit sales in the US then I agree with you that they would need to lower the cost. However, they cannot lower the cost because they will lose a ton of profit. Not to mention how disjointed the rest of the planet will be that we Americans are getting the same car they shelled out a pretty penny for at 25% less cost.

The price will be higher than what most people on this board want and BMW will make less of them.
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      12-27-2007, 02:26 PM   #9
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Quote:
Originally Posted by Sick Speed View Post
So let the rest of the world pay a premium price since the US market will account for roughly 25% of M3 sales at 5% of the
This is an interesting question (and I don't know the answer): but what % / global sales of e46 M3s were sold in the U.S?
I expect that BMW may be thinking of allocating less of the e92 due to the oft-cited price asymmetries of this car's (likely) US selling price vis-a-vis other major markets. Indeed, in relation to the CEO's / mgmt objective, that would be a good strategy given the dollar.

Quote:
Originally Posted by Sick Speed View Post
As opposed to your scenario where you propose BMW should lower the cost to the US consumer because our dollar is weak meaning when it gets converted back into EUR they lose even MORE profit.
In a simple business model why do you think BMW would do this? I am being serious with this question.
Actually, that's not my scenario. If I were Herr Pischetsrieder I would send enough e92 M3's to the U.S. to keep up its usefulness as a "halo" car for the best-selling 3-series, and re-direct % / global production (at higher ASPs) to the newly emerging rich in NJA, BRICs etc. But I'd also want to hit that life-cycle production run 100k or so units so that I (1) maximize return on R&D/Sales on this car and (2) still be able to say it's the world's best selling high-performance car - this also helps sales in the aspirational set in the non-developed markets - BMW has massive cachet in CN, IN etc.

As far as US pricing goes: the issue is, will this be a good macro back-drop to extract the highest ASP arising from BMW NA's pricing model? (there has to be a cost + variable margin range, so how high to make that intitial margin?)

Quote:
Originally Posted by Sick Speed View Post
I did some currency conversions off of a few of BMW's highest selling M markets and the rough estimates for base pricing in the US IF BMW kept it consistent with the rest of the world converts to an average of $93K.
Doesn't sound unreasonable.

Quote:
Originally Posted by Sick Speed View Post
If you are saying that the "premium" BMW owner will most likely be unwilling to pay this cost for the M then I would disagree. And I would agree with you that the standard BMW owner who may have been considering upgrading to an M would not with a price of $93K staring at them.
We both know the aficionados will pay up - provided they didn't tank their finances in the real estate markets. But it would also be good to consider the comp and still snatch sales (at the margin) from Audi / MB. It's no secret that Audi is gunning for BMW (the R8 is a huge halo product), so BMW needs to keep it close enough so that the choice is not made easy to defect (-vs- stay w/ MB, Porsche & co.)

Quote:
Originally Posted by Sick Speed View Post
earnings on sales which translates to INCREASED share holder equity which means job security for the CEO. And the sole purpose for existence of any CEO in a publicly traded company is to do one thing and one thing only. INCREASE SHAREHOLDER EQUITY AND RETURN.
Absolutely. I'd also want the CEO to be up-to-date enough also to target higher ROI/RoTC and EVA. But then we're getting into a much larger case study on how BMW sees its global strategy / profitability. Even the delay in pricing / release is making me think the US is not as important as it was in the 1990s - and w/ EUR/USD at 1.40+, who can blame BMW?! With the M3's costs being primarily denominated in EUR. If I were senior mgmt I'd be thinking about getting more sales in RMB - likely going to go up in EUR terms over the long-run.

Quote:
Originally Posted by Sick Speed View Post
The price will be higher than what most people on this board want and BMW will make less of them.
Yes to first and possibly to second - but I would go back to a proposition that it's better to max Tot Revenue over the product's life-cycle - to amortize all that R&D and lower SG&A / unit. Also, one has to consider Y/Y% comps ... which may argue in favor of a HIGHER ASP up-front, then as USD strengthens and you raise prices a bit, then the car will be more profitable to BMW AG and the Y/Y comps would be easier for BMW AG to digest (and to pass on to US consumers as we get past this macro slowdown).

One thing that will likely be a tailwind for BMW AG (not talking about NA here) is that the EUR/USD is likely to come down in '08. If you want to discuss why then we can PM. These kinds of questions are critical to how I do my work.
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Last edited by Voltigeur; 12-27-2007 at 02:42 PM. Reason: erratum
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