BMW’s key automotive unit held back by China struggles

BMW’s key automotive unit reported slightly lower-than-forecast profitability in the second quarter as revenue was weighed by heightened competition and weaker consumer sentiment in China.

The German luxury-car maker’s operating margin was 8.4% in the division, short of a company-compiled consensus of 8.7% and at the lower-end of the company’s 8% to 10% full-year target range.

“Under the challenging conditions in the first half of the year, we are leading within our direct competitive environment with our electric growth—and at the same time, we have delivered high profitability within the full-year target corridor for 10 consecutive quarters,” Chairman Oliver Zipse said.

Competition in China has intensified with a flood of local manufacturers ramping up production of new, cheaper models, sparking a price war as carmakers try and gain market share. However, BMW said Thursday that it expects the economic situation in China to begin to stabilize in the third quarter.

Sales in China remains tough because of intense competition from local manufacturers who have faster software development cycles, while Chinese consumers lack brand loyalty and quickly switch brands for better prices and new features, Third Bridge analyst Orwa Mohamad said in a note.

Chinese manufacturers are also gaining traction in the west, but Mohamad thinks Chinese competition poses little threat to BMW in Europe for the next two years.

“Chinese carmakers are focused on budget EVs, not the premium market where BMW excels.”

In the first-half overall, BMW said revenue held up due to demand for its fully-electric vehicles as well as higher-priced BMW and BMW M models, which both saw double-digit growth.

Overall deliveries of its BMW, Rolls-Royce, and Mini brands slipped 0.1% in the first six months of the year, but deliveries of its fully-electric vehicles rose 24.6%.

The company had previously outlined expectations for its fully-electric vehicles and upper-premium range to drive growth this year as it invests heavily in its manufacturing plants, premium cars and technology to speed up electrification plans.

Research and development costs rose sharply in the quarter as it continued to spend on the electrification and digitalization of its vehicle fleet in addition to the continued development its a new Neue Klasse EV line-up.

“We remain clearly on course for our largest future project, the Neue Klasse, with which we will raise BMW to a completely new technological level as of next year,” Zipse said.

The company’s second-quarter group earnings before interest and tax margin fell to 10.5% from 11.3%, with consensus looking for 10.6%.

Group EBIT fell to 3.88 billion euros ($4.2 billion) in the quarter from €4.34 billion a year earlier, as revenue slipped 0.7% to €36.94 billion.

A company-compiled consensus had seen EBIT at €3.95 billion on revenue of €37.36 billion.

Given sustained demand for its premium cars and expected positive momentum in the second half from its new BMW 5 Series and the current ramp-up of new Minis, the company said it still expects to see slight growth in worldwide customer deliveries in 2024.

The automotive EBIT margin is still expected to finish the year at between 8% and 10% with group pretax earnings falling slightly.

Write to Dominic Chopping at dominic.chopping@wsj.com