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Performance of 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 a description of customers, the demand on the production, existing market trends and market structure, barriers to entry, and competition. By analyzing 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 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 the 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: coupes, 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, 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 applies 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 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 because the car production segment is rather wide. Nowadays, more than 4 million vehicles are made in Germany (Germany Trade & Invest, 2015). This figure increases by about 3 % each year (Germany Trade & Invest, 2015). The main part of these vehicles (about 50 %) is exported into European countries and the USA. German producers are oriented at the 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 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 business people and people from the upper class. The values of this audience are self-expression, status, and comfort. The owing of a BMW car for these people is the support of their view through such car characteristics as quality, efficiency, and expertise. That is why, for a long time manager 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 growth up to 7.9 % (for BMW production) and up to 20 % (for Rolls-Royce) (BMW Group, 2015). Notably, more than half of these vehicles were 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 the BMW group in 2014 are shown in Figure 2 (BMW Group, 2014).
Determinants of the Demand
The demand for 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 in 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 for 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, consumers 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 for vehicles.
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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 in 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 for BMW.
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The changes in the demand for 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 the personal understanding, the sales volume is the best indicator for tracking the consumers’ demand because it enables the 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 for automobiles after the rise of the cost of some particular model. For example, the price elasticity of 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 in the price of the production.
The considerable price elasticity on this type of car is facilitated by such factors as the dependence of the demand on the customers’ budget, the durability of the product, and the 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 decide to buy a car, but not because 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 factors as durability of the product or in the case of automobiles – their reliability. BMW vehicles are developed and manufactured solidly. 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 number of complex electronics (Testing Autos, n.d). These deficiencies form the background for the situation when an insignificant rise in the price of the BMW car can lead to a significant lowering of the demand for it because customers may prefer to buy more reliable models at similar or even lower prices. This situation shows that BMW has rather a low pricing power, i.e. increase in the cost of automobiles would lead to the lowering of the demand. However, the major contributor to the high elasticity of BMW vehicles is the availability of a great number of competitors, which propose cars of the premium class.
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The Market Structure of the Automobile Industry
One of the biggest issues of BMW is represented by rivals in 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).
| 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 brands are different in different locations and for different models. That is why this particular paper will provide a comparison of the demand for luxury models in one country – Canada.
Besides, this figure supports the idea that the market structure of the automobile industry (especially manufacturing of premium class cars) represents the oligopoly. It has a relatively small number of big companies, which hold more than 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, the limited capacity of suppliers could slow down the manufacturing of new models, and the existence of patents on some technological solutions may prevent 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.
Newcomers should also correspond to existing governmental regulations regarding fuel efficiency and emission standards. This would require additional expenses. Notably, 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 money as non-price competition is usually less expensive than price competition and minimizes the risk of a 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 in the market and bring losses to companies. That is why, car manufacturers prefer to use such a non-pricing strategy as highlighting 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 features as 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 scale: 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 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)
| 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
| 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 increase 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 in 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 in sales.
Conclusion
It should be noted that BMW is one of the leading manufacturers of luxury cars. The company offers its products to the 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 for luxury automobiles becomes elastic and the pricing power of producers is low. Besides, the 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 in the market and needs to pay more attention to the promotion of its products.
