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Luxury Cars on the Run

“The premium business model as we have seen it, of model proliferation and people paying more because of the social status of those cars, is probably reaching a peak.” —Philippe Houchois, Analyst, Jefferies Group

Premium auto sales are stumbling. Is this just a bump in the road or the canary in the coal mine? BMW reported a loss during the first quarter of 2019. Audi, Mercedes, and Jaguar Land Rover reported mixed results, but indications are that premium auto sales are plateauing and in some cases slowing significantly. (Featured image courtesy of Looney Tunes and Merrie Melodies)

In the following article by Automotive News, Nick Gibbs reports that premium auto sales may be facing long term structural headwinds. These industry challenges are being caused by a number of complex factors including competition from Tesla and growing shareholder pressure on CEO’s to increase margins and overall profitability in the face of massive spending on electrification and advanced autonomous initiatives.

Automotive News

May 24th, 2019

By Nick Gibbs

GOTHENBURG, Sweden — Sales of premium cars probably have peaked globally, threatening the business model of Germany’s luxury automakers, according to analyst Philippe Houchois, managing director of Jefferies Group.

Houchois said he was “neutral” on all three German automakers, meaning he doesn’t recommend investors buy shares. It was unusual, he said, for the bank not to recommend a “buy” on any of the automakers.

“The premium business model as we have seen it, of model proliferation and people paying more because of the social status of those cars, is probably reaching a peak,” Houchois told the Automotive News Europe Congress here on Wednesday.

“We think the German premium business model is at risk” of no longer continuing to grow, Houchois said.

In the first quarter, BMW Group reported its first loss in a decade in the main automotive division after booking a 1.4 billion euro ($1.6 billion) provision for potential European Union fines over collusion. Even excluding this charge, the unit’s return on sales dropped to its lowest point in 10 years.

The problems at BMW, which has been beaten to the top premium spot by Mercedes-Benz for the past three years, threaten to unseat CEO Harold Kreuger.

Mercedes increased sales last year by 0.9 percent to 2.3 million cars globally, while BMW sales grew 1.8 percent to 2.1 million. Audi sales fell 3.5 percent to 1.8 million.

Behind the top three from Germany, the UK’s Jaguar Land Rover sales slipped 4.6 percent to 592,708 in 2018 as the brand struggled in China. Jaguar Land Rover suffered a 3.6 billion pound ($4.5 billion) loss for the full financial year ending in March after a large write-down in the third quarter.

Premium automakers need to rethink their strategy, Houchois said. “If I’m right [that] premium demand has reached a peak, then there must be a reinvention of the premium business model,” he said.

Houchois praised Volvo for moving in that direction with an early push into electrification through plug-in hybrids, along with new subscription models. However, Houchois said, a stock market listing didn’t make sense for the Swedish automaker.

“There was an attempt to list Volvo last year, but the price didn’t make sense to investors, and conditions haven’t changed today,” he said.

The investment community has long feted premium automakers for successfully expanding their reach into segments traditionally dominated by mainstream automakers, such as small cars, and delivering big profits in the process. But the challenges of electrification and the additional cost of delivering vehicles that reduce carbon dioxide have damaged their business model.

The premium automakers also have been threatened by the growth of Tesla. At BMW’s recent annual shareholders meeting, CEO Kreuger was criticized for his caution when expanding BMW’s electric-car range.

“Where is this model offensive?” German shareholder association Vice President Daniela Bergdolt said in a speech that generated loud applause from shareholders. “Sure, you’ve got the iNEXT, but I was expecting something that blows Tesla out of the water.”

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4 Responses to Luxury Cars on the Run

  1. Bob Kahrl June 5, 2019 at 6:05 pm #

    I agree with Jerry, but would go further. The push for publicly owned auto companies to show growth seems inevitably to push them toward pushing their products down-market. Cadillac did that with the Cimarron, and that step pushed the brand down to a point from which it never has recovered. Before that, Cadillac was so associated with top-end luxury that people would compare any other top-end product by saying “This is the Cadillac of {name your product line}!” That cliché disappeared with the coming of the Cimarron. But now the same thing is happening to all the luxury European brands. Ford did it to Jaguar, coming out with a the X-type, a rebooked Ford Mondeo. 4-cylinder engine, front wheel drive. They punted away Jaguar’s brand distinction to try to boost sales. Now we see BMW kicking away its reputation in order to build soccer-mom cars, and M-B is doing it too. So their unit sales go up, but the premiums that such brands used to command are disappearing. Now we come to Bentley and then Ferrari. These super-premium brands are now headed down the same road. Right now Ferrari can generate a waiting list for a new model, but the pressure of being a public company will eventually do to Ferrari as to every other luxury brand in the public market — increase sales by going down market. It looks as if only the Rolls Royce brand is being held steady at around 4000 units per year (kudos to owner BMW), which Lamborghini is being pushed to heavily increase output by owner Audi.
    Meanwhile newer brands are catering to the luxury crowd. Koenigsegg, Bugatti, and others are building limited-series cars. But the problem with this segment is that the battle to top the last guy’s new model has resulted in ridiculous cars with stupendous performance statistics that no street driver can exercise. This cannot continue.
    I have children reaching their 40’s in age. They are just as aware of luxury cars as my generation. They will drive what they can afford. I don’t see any any fall-off in the younger generation’s interest in having good looking and well-appointed cars. But I am not sure that the younger generation will want to pay huge premiums for cars that go 0-60 in 1.8 seconds and sport 1200-hp motors. I think that luxury cars in the future will develop in a different direction. Personally, I would like to see more cut-glass decanters residing in built-in cabinets, and removable burled walnut picnic tables. There can be much innovation in luxury cars, when we get away from the idea that a luxury car has to be less than 42 inches high and more than 1000 horsepower.

  2. Doc Jewell May 27, 2019 at 4:39 pm #

    I am very surprised that Phil would pick one or two bullish analysts as hyperbole as to the magic investment in electric cars. It’s just not true.

    The manufacturers of automobiles have always been companies with high cost and low profit margins. And that is in good times. I stay away from them on the long side.

    I’ve been short Tesla and have made a lot of the money. It’s the worst stock in the Nasdaq in the last year (down 42%).

    The bonds have also lost billions for investors. The 5.30% notes issued to mature in 2025 are now selling for $0.805 to a dollar with a 9% yield.

    The CEO is shown smoking pot and admitted to doing Ambien. I would say this stock may be worth $50 (that is over the $10 and $36 on The Street).

    I used my short profits to buy my new Porsche 911 (this week).. I have owned 12 Porsche 911’s. They are just great cars and worth every dollar of the cost.

    Buy Porsche cars and not Porsche stock (it’s VW).

  3. arthur einstein May 27, 2019 at 10:19 am #

    In the beginning, all cars were luxury cars. The advent of mass production began eroding the luxury market in about 1910. The crash of 1929 drove a stake through the heart of the segment. Only Packard and Cadillac survived. With WWII under our belt the market for exotic stuff began to change. Ferrari’s, Porsches, and other enthusiast iron, became message cars. The message is ‘if you’ve got it flaunt it’. The message will sustain some level of ‘luxury’ cars. But Tesla will survive in some form based on better technology.

  4. Jerry May 27, 2019 at 8:40 am #

    BMW is a victim of their own success. Sitting on their laurels while quality eroded, they lost touch with their benchmark “Ultimate Driving Machine “. Tesla sent a message but Tesla will fail for lack of efficient systems and a huge ego. Expect to see Tesla sell within 18 months.