Mar 7, 2019 in Coursework

BMW

Nowadays, studying and analysis of the performance of various companies is very important for the understanding of the effectiveness of their work. The current coursework will be directed at the study of BMW and its position in the automobile market. The emphasis will be made on such aspects as description of customers, the demand on the production, existing market trends and market structure, barriers to entry, and competition. By analyzing the BMW’s performance, this coursework will show the company’s position in the industry, its achievements, and issues.

Company Overview

Bayerische Motoren Werke Aktiengesellschaft is engaged in design, manufacturing, and sale of vehicles. This public company was founded in 1916 as an aircraft engine manufacturer (Worldwide Company Profile, n.d.). Managers bought the automobile factory and started car manufacturing only twelve years later (Worldwide Company Profile, n.d.). Motorcycle manufacturing was started only in 1967 (Worldwide Company Profile, n.d.). At the current moment, BMW is one of the largest car manufacturers in Western Europe.

Production of the company is presented in several segments: financial services, motorcycles, and automobiles. The segment of financial services contains the following operations: leasing of vehicles, fleet and multi-brand business, cooperation and financing of dealers and retailers, providing deposits to customers, and support in insurance (Yahoo. Finance, 2015). The segment of motorcycles provides development, manufacturing, assembling, and sale of a great variety of motorcycles. Besides, various spare parts to them are offered in this segment. All production is presented under the name of BMW Motorrad. Moreover, this segment offers motorcycling apparel (suits, gloves, boots, and leather) (Worldwide Company Profile, n.d.). The last and best recognized segment of this company is automobiles. The company performs design, manufacturing, and sale of cars and off-road vehicles and spare parts to them under the names of Rolls-Royce, BMW, and MINI (Yahoo. Finance, 2015). This German company offers a great variety of cars: coupers, sedans, and even sport wagons (Worldwide Company Profile, n.d.). The manufacturing facilities are located in 12 counties (Germany, the UK, Japan, China, the USA, Thailand, Austria, and etc.) on 4 continents (Worldwide Company Profile, n.d.). The headquarters is located in Munich (Worldwide Company Profile, n.d.).

The Industry Overview

The US SIC Code of this company is 3711 (Worldwide Company Profile, n.d.). This code is applicable to companies that develop and manufacture motor vehicles and passenger cars (Worldwide Company Profile, n.d.). It shows that BMW’s primary industry is automobile manufacturing, particularly in “manufacturing or assembling complete passenger automobiles, trucks, commercial cars and buses, and special purpose motor vehicles which are for highway use” (Worldwide Company Profile, n.d.). Besides, companies that work in this industry perform the establishment of bodies, which are engaged in the manufacturing of spare parts to vehicles (Worldwide Company Profile, n.d.).

At the current moment, the automobile industry faces considerable growth. It is estimated that the global sales of passenger vehicles would reach about 73 million of items this year (Statista, n.d.). The largest automobile markets in the world are the USA and China (Statista, n.d.).

The current work will focus on providing a short description of the manufacturing of premium automobiles due to the fact that the car production segment is rather wide. Nowadays, more than 4 million of vehicles are made in Germany (Germany Trade & Invest, 2015). This figure increases on about 3 % each year (Germany Trade & Invest, 2015). Main part of these vehicles (about 50 %) is exported into European countries and the USA. German producers are oriented at design and manufacturing of premium cars. At the current moment, their production represents the largest segment of these cars in the world because German producers have the following features: “world-class R&D, labor force, infrastructure, and automotive manufacturing” (Germany Trade & Invest, 2015).

It is expected that the segment of premium cars would increase in the nearest years even faster than the segment of passenger cars (Germany Trade & Invest, 2015). It would be associated with the rise of the international demand and German companies are ready for this growth. They are constantly developing new products and solutions for meeting the customers’ expectations and impressing them with some innovative solutions.

Description of the Customers

Customers of the company are represented by businesspeople and people from the upper class. Values of this audience are self-expression, status, and comfort. The owing of a BMW car for this people is support of their view through such car characteristics as quality, efficiency, and expertise. That is why, for a long time managers of this company proclaim the strategy of “sheer driving pleasure” (BMW, n.d.).

BMW company is greatly dependent on international customers. As per information taken from the official site of the company, in 2014 it sold 2,117,965 cars and showed the growth up to 7.9 % (for BMW production) and up to 20 % (for Rolls-Royce) (BMW Group, 2015). It is notable that more than the half of these vehicles was sold overseas. The European segment was the largest (913,803 BMWs were delivered to European customers, mainly from Germany and the UK) (BMW Group, 2015). That means that only 43 % of BMW’s production is sold in Europe and 67% is sold on the international market.

The company sold 656,395 vehicles in Asian countries (mainly in China and South Korea); 481,056 vehicles in America (395,850 in the USA and 38,188 in Canada); and 30,148 vehicles in the Middle East (BMW Group, 2015). The key local and international automobile markets of BMW group in 2014 are shown on Figure 2 (BMW Group, 2014).

Determinants of the Demand

The demand on automobiles is determined by a great variety of factors. One of the most notable factors is represented by cycles of sales.

The automobile manufacturing industry faces seasonal changes of demand. Generally, the demand is lower in the first and fourth quarters of the year and higher in the second and third quarters. The German company also suffers from these fluctuations. For example, only 25 % of innovative BMWs were sold in the first half of 2014 when the rest of them were handed to customers in the second part of the year (BMW Group, 2014). However, these fluctuations are lower for already recognized models. For example, the overall demand on BMW cars in the first quarter of 2014 was 6.9% lower than in the second quarter and 1.1 % lower than in the third quarter (BMW Group, 2014). Other factors are connected with the fact that automobiles are considered to be rather a large, costly, and durable purchase. Especially, this concerns the purchase of luxury cars. Hence, before spending a considerable sum of money, consumes should be confident about their current and future financial position and the overall economic situation (Plache, 2011). Consequently, the general economic downfall has a negative influence on the demand because people have lower confidence concerning their future. That is why, such factors as employment and income also determine the demand on vehicles.

As it has been stated above, customers of the company choose BMW vehicles because they support their social status. It means that much attention is paid to the appearance of the car. Moreover, it means that any changes of consumer preferences towards models presented by other companies could lead to the lowering of the demand. People’s preferences are among major determinants of demand on BMW.

The changes on the demand of these vehicles can be observed by the analysis of the following financial characteristics: sales volume, profits, and revenues. For example, in 2014 the company obtained total revenue of USD 80,401,000 that was 5.7 % higher than in 2013 (Yahoo. Finance, 2015). The sales volume in the automobile segment increased by 9.5 % (from 1,655,138 in 2013 to 1,811,719 in 2014) (BMW Group, 2014). As per personal understanding, the sales volume is the best indicator for tracking the consumers’ demand because it enables detection of changes in their activity.

Price Elasticity

Price elasticity shows the extent of change of demand after the change of price on the product. This figure reflects the overall percentage response to price changes. In the automobile industry, it can be represented in the lowering of the demand on automobiles after the rise of the cost of some particular model. For example, the price elasticity on BMW 735i is -9.376 (Cain, 2015). That means that the demand on this particular model is elastic, i.e. it is influenced greatly by changes on the price of the production.

The considerable price elasticity on this type of cars is facilitated by such factors as dependence of the demand on the customers’ budget, durability of the product, and availability of numerous substitutes represented by other car manufacturing companies.

The high elasticity is explained by the fact that automobiles are usually considered to be luxury objects, especially cars of the primary class like BMW. That means that people should have enough money and should be confident about their future prosperity when they make the decision to buy the car, but not because of the fact that luxury cars are essential commodities. Consumers purchase them not because of a great necessity, but for showing their social status. Consequently, after the rise of some kind of uncertainty concerning the future or some problems in the customers’ budgets, they would prefer to purchase some less expensive models.

Additional attention should be paid to such factor as durability of the product or in the case of automobiles – their reliability. BMW vehicles are developed and manufactured in a solid manner. They are considered to be well-engineered. However, they are less reliable than Japanese vehicles because of several deficiencies: the use of plastic instead of more durable materials and the amount of complex electronics (Testing Autos, n.d). These deficiencies form the background for the situation when an insignificant raise of the price on BMW car can lead to a significant lowering of the demand on it because customers may prefer to bye more reliable models at similar or even lower prices. This situation shows that BMW has rather low pricing power, i.e. increase in the cost of automobiles would lead to the lowering of the demand. However, the major contributor of the high elasticity of BMW vehicles is the availability of the great amount of competitors, which propose cars of the premium class.

The Market Structure of the Automobile Industry

One of the biggest issues of BMW is represented by rivals on the automobile market. Major competitors of BMW are Audi and Mercedes. All of these companies offer vehicles of the premium class and are recognized as reliable producers. The comparison of various characteristics of these companies will be provided in Table 1 (Yahoo. Finance, 2015).

Table 1. Comparison of BMW with Its Closest Competitors
Companies BMW Audi Mercedes Volkswagen
Characteristics
Luxury models M3/M4, X5/X6 M R8, TT AMG GT, C63 AMG GTI, Golf R
Revenues, USD 80,401,000 53,787,000 129,872,000 244,985,000
Profits, USD 15,905,000 9,377,000 27,264,000 44,196,000

This table shows that the BMW company faces harsh competition from the side of other European manufacturers of vehicles of the premium class. It should be noted that the position and the demand on automobiles of some particular brand is different in different locations and for different models. That is why, this particular paper will provide the comparison of the demand on luxury models in one country – Canada. 

Besides, this figure supports the idea that the market structure of the automobile industry (especially manufacturing of the premium class cars) represents the oligopoly. It has a relatively small number of big companies, which hold more than the half of the market share. In the case of the Canadian car market, these companies are Mercedes, BMW, Audi, Acura, and Infinity. These companies are mutually independent; however, they have low pricing power (i.e. prices on their production depend greatly on prices of production of their rivals). A considerable amount of similar products, which are present on the market at the current moment, supports the idea that manufacturing of these products is beneficial to their producers, notwithstanding the existence of high barriers to entry on the market.

One of the major barriers is the necessity to have a huge startup capital for the establishment of manufacturing facilities, research centers, etc. It should be noted that the production of automobiles is a highly specialized activity that requires much time, considerable knowledge, and equipment. Hence, in case of failure it would be hard to start again. Moreover, limited capacity of suppliers could slow down manufacturing of new models and existence of patents on some technological solutions may prevent from the use of certain innovations.

One more barrier is reflected in the necessity to propose some innovative solutions, which may attract customers. At the current moment, existing automobile manufacturers are constantly working on the development and realization of new ideas. That means that providing something new would be a rather hard task. A new company will be obliged to struggle against companies that have almost one-hundred-year history and billions of revenues. The necessity to withstand competition against well-established corporations represents one more barrier.

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Newcomers should also correspond to existing governmental regulations regarding fuel efficiency and emission standards. This would require additional expenses. It is notable that these regulations can be both national and international. Almost all automobile producers should correspond to both of these types as they have manufacturing facilities and provide their products to customers all over the world. Consequently, the automobile market can be characterized as international.

New companies, which intend to enter the automobile industry, will face both price and non-price competition. At the current moment, car manufacturers focus on extensive promotions for attracting new customers and for saving the money as non-price competition is usually less expensive than price competition and minimizes the risk of price war. As it has been stated above, the market of automobiles of the premium class is rather elastic. It is represented by companies that have low pricing power. Hence, any price war can lead to negative fluctuations on the market and bring losses to companies. That is why, car manufacturers prefer to use such non-pricing strategy as highlighting of distinctive features of an automobile like design, including interior and exterior ones, innovative solutions in electronics, lowering of the emission of harmful substances, etc.

The last barrier to entry in the industry is represented by the economies of scale. Current car manufacturers use such feature like the lowering of the cost of one produced vehicle by the rise of the level of production. Additional attention should be paid to the existence of various types of economies of scales: promotion of commodities and their production. Both of them are lowered after the increase of manufacturing and amount of sales of vehicles. The new company cannot use this advantage because it does not have enough manufacturing facilities.

Sales and Profit Growth Rate

Determination of the BMW’s effectiveness in terms of its performance can be performed by the calculation of its sales, revenue, and profit growth rates. These characteristics would be compared with similar indicators of its nearest competitors for providing a more accurate understanding of the company’s position on the market and its performance relative to its rivals. The figures will be presented in Table 2 (Yahoo. Finance, 2015)

Table 2. Sales and Profits and Revenues of BMW and Its Rivals from 2011 to 2014
Years 2011 2012 2013 2014
Companies
Sales volume, units
BMW 1,668,982 1,845,186 1,963,798 2,117,965
Audi 1,277,665 1,451,892 1,558,284 1,741,100
Mercedes 1,381,416 1,451,569 1,565,563 1,722,561
Profits, USD
BMW 13,764,000 14,475,000 14,283,000 15,905,000
Audi 8,189,000 9,713,000 9,189,000 9,337,000
Mercedes 24,611,000 24,529,000 24,241,000 27,264,000
Revenues, USD
BMW 68,821,000 76,848,000 76,059,000 80,401,000
Audi 44,096,000 48,771,000 49,880,000 53,787,000
Mercedes 106,540,000 114,297,000 117,982,000 129,872,000

Calculation of the growth rates will be made by subtracting the financial indicator of the previous year from the financial indicator of the current year and dividing the difference on the financial indicator of the previous year. The results will be presented in Table 3

Table 3. Sales, Revenue and Profit Growth Rates from 2012 to 2014
Companies BMW Audi Mercedes
Financial indicator
2012
Sales growth rate, % 10.5 12 5.07
Profit growth rate, % 0.5 10.1 -3.3
Revenue growth rate, % 11.66 10.6 7.28
2013
Sales growth rate, % 6.42 7.32 7.85
Profit growth rate, % -1.32 -5.39 -1.17
Revenue growth rate, % -1.03 2.27 3.22
2014
Sales growth rate, % 7.85 11.7 10
Profit growth rate, % 11.36 1.61 12.47
Revenue growth rate, % 5.7 7.83 10.07

The above calculations show that the general trend reflected in the lowering of the growth rates in 2013 and their increasing in 2014 is similar in all three companies. However, the extent of decrease and increase is different. BMW has had relatively lower sales growth rates and revenue growth rates in the past two years, but the company shows a considerable rise of profits in 2014. These figures enable to build the economic forecast for the company, which shows that in the nearest future BMW will most probably improve its position on the market (due to the high profit growth rate). However, it is recommended for the management to pay more attention to the increase of sales.

Conclusion

It should be noted that BMW is one of the leading manufacturers of luxury cars. The company offers its products to middle and upper classes all over the world. However, it faces considerable challenges in the further improvement of its position in the automobile industry. The major challenge is represented by sharp competition. Several big rivals offer similar products. This causes the situation when the demand on luxury automobiles becomes elastic and the pricing power of producers is low. Besides, manufacturing of vehicles of the premium class is characterized by non-price competition and high barriers to entry. Nonetheless, these characteristics do not have a considerable influence on BMW as this company has been represented on the market for almost one hundred years. As to the current position, the company has a rather high profit growth rate, but a low sales growth rate as compared to its competitors. These figures show that BMW has a strong position on the market and needs to pay more attention to promotion of its products.

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