BMW says worsening China could put outlook at risk

FRANKFURT (Reuters) - BMW , the world's biggest luxury carmaker, warned on Tuesday that its outlook could be at risk from any further deterioration in the Chinese market, where its sales have begun to fall for the first time in a decade.

The German company, which had already said in May that growth in China would be "less dynamic", said it still expected record global sales and pretax profit for the year, but added the caveat that challenges in China could affect its targets.

It reported a 3 percent slide in second-quarter operating profit as it sold a higher proportion of low-margin cars and invested in new models.

 

Its sales in China, the world's biggest car market, fell in May and June after a decade of growth and the group said it was facing fierce competition in the Chinese market and elsewhere.

"If conditions on the Chinese market become more challenging, we cannot rule out a possible effect on the

BMW Group's outlook," the Munich-based carmaker said in its quarterly report.

Shares in BMW dropped 2 percent in early trading and were the second-biggest decliners on Germany's DAX index, which was flat.

"The scale of the increase during the forecast period is likely to be held down by fierce competition on automobile markets, rising personnel costs, continued high levels of upfront expenditure to safeguard business viability going forward and upcoming challenges relating to the normalisation of the Chinese market," BMW said.

Rival Audi cut its global sales forecast last week because of slumping demand in China, where economic growth is slowing.

However, Mercedes maker Daimler , starting from a lower base and with attractive new models in the pipeline, expects its sales momentum in China to continue.

BMW said higher personnel costs, increased expenditure on new products and a shift in sales toward lower-margin compact vehicles were the main reason for its quarterly profit dip.

Earnings before interest and tax, at 2.52 billion euros, ($2.76 billion), matched the average forecast in a Reuters poll.

While global sales of BMW, Mini and Rolls-Royce cars increased 7.5 percent during the quarter, profits were hurt by an ageing product range in China.

In May, sales of BMW and Mini cars in China fell 4.2 percent from a year earlier, the first monthly decline in a decade. While BMW's China sales dropped 0.1 percent in June, sales of rival Mercedes-Benz passenger cars jumped 38.5 percent.

BMW is now working to refresh its model range to keep up with rival products like the Mercedes C-Class.

It is upgrading its 3-series model and working on brand new versions of its 5-series and 7-series limousines, as well as its X1 compact offroader.

BMW said the return on sales in its automotive division fell to 8.4 percent, from 11.7 percent a year earlier and below the 10.7 percent margin reported by rival Mercedes-Benz Cars and the 9.9 percent earned by Audi.

It said it still expected an automotive profit margin of 8-10 percent this year.

($1 = 0.9128 euros)

(Reporting by Edward Taylor; Editing by Georgina Prodhan and Susan Fenton)