Seven Global Car Makers KPI’s Part 3: Profitability
Click on an image or table to enlarge.
Because profit is accounted at different levels in the business some levels may be profitable while others might not. Car manufacturers usually define profit at three levels – Gross Profit, Operating Profit and Net Profit, so it’s important to be clear on the ‘profit’ level being evaluated. In published accounts the first level is ‘Gross Profit’ – is the difference between sales revenue and the cost of making the product. It includes the raw material and production costs. The second level is ‘Operating Profit’ which is the Gross Profit less normal operating expenses – overheads, rents, lease payments and depreciation. The final level is ‘Net Profit’ which is the Operating Profit less finance costs, tax payments, debt repayments and extraordinary items, such as income from the sale of assets. Most analysts only make a comparison between different businesses at Gross Profit and Operating Profit. Because of differences in financial structure and taxation, Net Profit is only used for comparing the same business at different points in time.
One point to keep in mind in reviewing this post: all of the carmakers, except for FIAT-Chrysler, have their own captive finance company. Figures referred to in this post are the conslidated results for both the automotive and finacial divisions of the company concerned.
So, how well did our 7 car makers compare at these profit levels?
Gross Profit Margin%
Gross profit margins range between 13% and 21% in the group of car makers in this survey and corellate closely with their brand positioning: premium brands enjoy higher average gross margins than mainstream and budget brands, with some notable exceptions. Daimler’s gross profit margin declined slowly from around 24% in 2007 down to 21% in 2016, although it still ended at a higher GP% than the rest of the group in the survey. BMW followed a similar pattern, albeit with more volatility, ending at the second highest GP% in the survey group and closer to Daimler at the end of the period than at the start. However, the GP% for both brands contracted during the last 5 years of the survey period.
In the same way that revenue per unit is evaluated (Sales Revenue $/sold units), so too is gross profit per unit (Gross Profit $/ sold units). In the case of Daimler, gross profit per unit fell over 10 years but, in the last 5 years until 2017, the decline was steeper. GP per unit fell 3.2% each year on average. BMW did better than their rival. Profit per unit fell slower than Daimler and ended at a higher absolute number. In part this may reflect Daimler’s current product offensive, with its expanded range of compact cars. But, for them, it must be ironic news that they overtook BMW on sales while falling behind on profit per unit.
Ford almost managed to recover its GP% to its pre-financial crisis levels with contributions from both its automotive and financial arms. By 2016 it reached 16.6%, just behind the premium brands – but only by enduring a period of volatility. Its GP% correlates with its sales volume, suggesting that they have a high break-even point and, as a result, overall market demand is a significant GP% influencing factor. Notwithstanding, Gross Profit for Ford grew by an
average of 4.2% a year in the last 5 years of the survey period. The data on Gross Profit per unit follows a similar pattern. Ford grew GP per unit by 3.3% annually – moving from $3,200 to $3,800 per unit. However, there are concerns from many analysts that Ford makes most of its profits on large SUV’s ($10,000 per unit) and the F-Series pick-up ($15,000) per unit) and breaks-even or loses money on smaller models. Another worry is their pattern of profit – they make disproportionate profits in the US compared to elsewhere in the world – see Ford’s FY 2016 Pre Tax Results chart. It’s understandable that some analysts describe Ford as a US business with a European and Asia-Pacific foothold.
General Motors is more accurately described nowadays as a US automotive and financial business with an important Asia Pacific presence. In 2016 it held 17% of the US market and 13.8% of the market in China. With sales of over 3MN units, it’s market share in China in 2016 was larger than Ford and Toyota combined. GM’s gross profit margins have followed a similar pattern to Ford since emerging from bankruptcy, but at a much lower level. Possibly the linkage between US market demand, GM’s sales and resulting gross profit margin is even more marked. Both Ford and GM seem to make money in a strongly growing market but have to drop prices or increase incentives if demand softens even a little. GM’s gross profit % and their GP per unit hardly grew in the last 5 years. In 2011 Gross Profit per unit was was $2,114 and by 2017 it was $2,128. In fact, with inflation taken into account, GM went backwards in GP per unit.
Toyota ended the 2007 – 2016 period with almost the same GP% as Ford – rising from 13% in 2011 to 16.6% by 2016 – but with much less linkage between sales and margin. On an annual basis Toyota’s Gross Profit grew by 4.2% a year since 2011. It seems that Toyota’s gross margins are much more stable, whatever the level of sales volume. The impact on GP per unit is even more striking. This grew by over 12% per year from $2,800 in 2011 to $5,100 by 2016. No other car maker in the survey grew their profit per unit at that rate.
Stable gross profit margins are also a feature of Volkswagen. Since 2009 their Gross Profit margin grew by an average of 5+% every year while their GP per unit grew by over 9% compound. It appears that the ability of VW to derive value from a common pool of parts across their premium, volume and budget brands and vehicles is simply a more profitable business model. Their 2016 GP% of 18.9% is the same as BMW (18.9%).
The data-set on Fiat-Chrysler is much shorter than the rest of the group – as they were only established in 2011 – and shows a similar unfortunate linkage between sales volume and GP% as Ford and GM – sales go up as margin falls. This suggests that, like the others, the company has significant challenges in making its products at acceptable prices which it resolves short-term using incentives. Financial data is not available on each sales region but, it could be that maintaining sales in the Latin American and Asia-Pacific markets or propping up loss-making brands is also a profit drain. It’s noteworthy that FCA have announced a raft of brand distribution changes since 2011 and also a plan to eliminate car production in the US – sending it to Mexico – and replace it with SUV and pick-ups. This move is part of their CEO’s pan to raise margins to the level of Ford and GM and underlines analyst’s opinion that larger margins are made on SUV’s and pick-ups n the US. Relocating car production to Mexico would also help by enabling FCA to take advantage of their lower labour costs.
Operating Profit Margin%
Operating profit margin (OP%) is the residue after operating expenses and overheads have been paid and, from this amount, finance costs and taxes have to be paid. Across the car makers in the survey group it ranged from 1% to 10%, depending on the year selected. Similar dynamic factors impact on each car makers OP% – input costs, utilities, land costs, social costs, etc – so its unsurprising that all of the car makers in our survey are following the same two strategies to tame costs. In the short term, their aim is to harmonize and simplify their product platform architecture and produce their products in the most cost-effective location. At the same time they are pursuing electric vehicles and, ultimately, autonomous vehicle development because these offer a long term reduction in production costs. Electric vehicles use fewer parts and are easier to assemble than conventional cars. So, how well are they doing?
BMW was one of only two carmakers who managed to remain profitable at the Operating Profit level throughout the survey period. More importantly, its operating profit margin surpassed Daimler, even though Daimler began with higher gross profit margins. BMW’s operating profit margin hovered around 10%; Daimler’s at 8%. BMW also achieved higher ‘profit efficiency’ than their rival. Proft efficiency is Operating Profit/Gross Profit. It shows how much of the gross profit the firm retained within the business. The higher the number, the better. Since 2011, BMW’s profit efficiency has been over 50%; Daimler’s has been at 40%. This difference, after taxes and interest, translates into cash flow which can be used for investment, new models or returned to shareolders. In the case of BMW it went into new models – turbocharged variants of existing models and the X5 and X6 – during the financial crisis.
Daimler was unable to respond until 4 years later. That being said, Daimler still achieved the next best OP% and was able to recover quickly from a small loss in 2009. However, the conclusion is that BMW can produce cars more cheaply, so, even if it cannot quite match Daimler’s level of premium pricing and gross profit margin, it ends up with more cash for each $ of sales revenue.
Ford was the second car maker to remain profitable throughout the period but has reported a significantly reducing OP% in the last 5 years – falling by an annual average rate of 13%. It appears that the company’s fixed operating costs leave it highly vulnerable to volume, as noted in earlier posts in this series. Sadly for Ford, their profit efficiency had fallen to less than 20% in 2016. Its main rivals, GM, achieved 45% profit efficiency in the same year and Toyota over 60%. Ford, of course are well aware of this and have developed two strategies to resolve it. First, is a ‘One Manufacturing’ approach, where all Ford plants use common procedures and systems. Second, is an evolution of its ‘One Ford’ strategy to include electric commercial vehicles. Taken together Ford believe they can increase flexibility across plants and achieve a premier position in EV’s, particularly in China. In turn, they should increase their operating profit margin.
In contrast, GM steadily improved its OP% – by an average of almost 9% in each of the last 5 years – and ended the period with an OP% almost double that of Ford. It appears that the brand restructuring and disposals post-bankruptcy left the company with a more flexible cost structure in the face of volatile demand. Similarly to the premium brands, Ford’s leadership over GM at the GP% level has been reversed at the operating profit level over the last 5 years. To cement its future operating profit GM launched in 2015 its ‘Global Vehicle Architecture’ strategy. This replaces the 30 platforms of 2010 with 4 by 2025. Better late than never.
However, two factors are on the horizon for allwho make or sell cars in the US – including Fiat-Chrysler. First, the UAW – United Auto Workers union has negotiated an agreement with US car-makers to raise entry-level wages for staff hired after 2007 from $19.28 per hour to $29.00 per hour. This new rate per hour may push carmakers to consider which products they manufacture in the US rather than outside. Second, the US president has signalled that he plans to re-negotiate the NAFTA treaty. Potentially, that could change the operating costs of automobiles coming into the US from Mexico or Canada. With 10 carmakers already shipping up to 70% of the 4MN units made in Mexico direct to the US, this would change future investment decisions for most of the global players. The twin effect of these changes could be that imported cars are at a significant price disadvantage that wipes out most of the labour cost advantage of Mexico. In 2015 a US worker earned in an hour the same as a worker in a Mexican plant earned in a day.
If a company can be forgiven for making a loss in the financial crisis, Toyota is a good candidate. Not only did its main export markets contract but its currency increased in value by 25% at the same time (It’s fallen since then). So, its annual operating profit growth rate of 32% for the last 5 years is remarkable – albeit from a very low base. The average for all of the carmakers in this survey – including Toyota – was a rise of 1% over the same period. More impressively, its 10% operating profit in 2016 matches that of BMW and its profit efficiency – 60% or above since 2014 – is unmatched over a sustained period in this survey. The reasons for Toyota’s success is often laid by outsiders at the door of the Toyota Production System (TPS). Not so by Toyota itself. They argue that its equally the result of highly experienced people looking for improvement. It’s counter-intuitive but Toyota report that it has replaced robots by people in over 100 workstations and reduced waste.
After a bumpy few years, Fiat-Chrysler closed 2016 with an Operating Profit margin of 4.4%. Half of Daimler yet an improvement on Ford (2,7%) and VW (3.3%), at least for that year. Coupled with that 2016 was the penultimate year of the ‘5 Year Plan’ launched by their CEO, Sergio Marchionne in 2013. In that plan FCA planned to achieve 7MN in global sales by 2018. By the close of 2016 they had sold 4.7MN units but, on the journey, they had learnt what might work in the long-term and have revised their brand strategy: Chrysler to focus on mainstream, not premium, and compete with Ford, GM and Hyundai. Dodge to become a ‘sports’ oriented US brand with Alfa Romeo as the ‘sports’ brand for Europe. FIAT to focus on Europe and Rest of World but offer ‘niche’ products in the US. Jeep to become a mid-market ‘global’ SUV brand to rival Land-Rover/Range Rover. RAM to focus on pick-ups and rival Ford’s F-Series. The money for all this? Utilize the proceeds from the sale of Ferrari – around $52BN. Will it improve profit efficiency? Fiat have 15 platforms to sell 5MN units. VW have 4 platforms to sell 10MN units. FCA have no significant investment yet in electric vehicles while governments are swinging policy behind EV’s. 85% of its GP comes from the US – via Jeep and RAM and its US plants are at capacity, so where will they build the extra units? 10% of its Operating Profit came from Ferrari alone. It’s now a separate entity – still controlled by the Agnelli family, but no longer a part of FCA.
VW‘s Operating Profit % had been trending over 5% since 2011 up to the ‘dieselgate’ emission scandal in 2015 when it moved into short-lived losses. It bounced back to 3.3% in 2016. By FY2017 it was trending at 6%. Profit efficiency was trending at 30% or above before the scandal and in FY2017 is trending at the same level. What is their strategy for improving it? It’s threefold: keep the number of platforms to a minimum; switch away from sedans to SUV’s; cross over from conventional to electric. The drive to reduce platforms has been discussed in earlier posts and above but the switch away from sedans to SUV’s and Cross-over’s has not. The trend for over a decade in Europe and longer in the US – 60% of the US market is SUV’s – has been away from traditional passenger cars towards more flexible vehicles. The VW brand alone plans to introduce 15+ new SUV’s into their line-up by 2020. They’re not alone. Ford’s CEO reported that the company will switch $7BN in development funds away from new cars towards SUV’s and Pick-Ups. Both BMW and Daimler are expandng their capacity to build SUV’s in the US. Volkswagen’s third strategic pillar is electric vehicles (EV’s). They aspire to build 1MN EV’s in Europe, China and the US by 2025 and sell most of them in China.
Keep in Mind
Profitability is at different levels. Making high gross profits which evaporate in excessive costs is not a winning formula. Keep in mind that tommorow’s profits are more important that yesterdays or todays. In the next decade the industry will experience an unprecedented wave of technological investment and change. Only the firms that can finance the capital expenditure required will survive.
Investors value firms on two factors: one, their proven ability to make profits in the past, and two, their potenial to make profits in the future. Of the two, the future carries more value than the past. With that in mind and based on the analysis, what ranking should be awarded for each car maker in terms of profitability? Rank 1 is the top and rank 7 is at the bottom. Here’s my selection.
Volkswagen #1. Volkswagen Group take first place because the Gross Profit margin they generate from a wide brand portfolio almost matches that of exclusively premium car makers and their profit efficiency has already recovered from the ‘dieselgate’ scandal. More importantly, with 12 brands they have the capacity to absorb the costs of new technology and still remain profitable. No other car maker can match that at this time.
BMW: #2. BMW have almost matched their main rival, Daimler, at the Gross Profit level and exceeded them at the Operating Profit level over the last 5 years. More worrying is the future – especially paying for low price/lowvolume/high investment/low profit electric models. BMW were early into EV and PHEV but their carbon-fibre frame i-cars simply did not sell in high enough volume. They ended 2016 with 100,000 units sold globally across all their offering and decided to adapt their strategy from special i-models to offerring EV/PHEV versions in both BMW and Mini series. The question is not can they be successful in electric but can they retain their profit leadership while they do it.
Daimler: # 3. Daimler achieved the highest Gross Profit margin but much was eaten up in operating and development costs. They were overtaken by BMW in profit per unit and on passenger car volumes. But, their time has not been wasted. Daimler’s product strategy is raising volumes and they are well positioned in the short term. Three or four years from now is more difficult to predict. They are targeting 100,000 EV units by 2020. BMW achieved that in 2016. However, they do have strength in vans and trucks – arguably a more profitable sector for electric and autonomous vehicles – which they plan to exploit. But, to bring these products to market, Daimler report that they requires savings of $4.5BN by 2025 due to the lower profit per unit of EV’s over conventional vehicles.
Toyota #4. Toyota is squarely in fourth place due to potential not actual profits. Its Gross Profit is just below BMW’s but its Profit Efficiency is higher so they match each other at the Operating Profit level. But, the future is not bright in China or EV’s. In 2016 Toyota sold 115,000 units and in 2017 117,000 in China. VW sold 258,000 in ’16 and 416,000 in ’17. Toyota’s president, Akio Toyoda, described his company as “a little bit late” in EV/PHEV when failing to respond to China’s plans to introduce a cap-and-trade policy linked to zero- and low-emission vehicles from 2019 and India’s target of all-electric by 2030.
GM: #5. GM is ranked ahead of FCA for two reasons: First, its Gross Profit has regained the ground it reached in 2012 and its profit efficiency is improving. Second, it is better positioned than its US rivals for a zero-emission future. Its affordable Chevrolet ‘Bolt’ with a range over 200 miles was the fifth-highest selling PHEV on the market in 2017, even if they lose an estimated $9,000 on each one. It is committed to bringing 20 EV/PHEV to market by 2023. Second, with 10MN unit sales GM has the capacity to profit from its $5BN spend on its breakthrough ‘Global Vehicle Architecture’. Fewer platforms coupled with EV technology could cement their position as a global, low-cost small car producer for the next decade. And, with developing markets outside China being volatile, GM’s 3MN unit sales in China give it a safety net.
Ford: #6. Ford takes the number 6 slot because its 16+% gross profit is frittered away in operating expense. If Ford could make cars as cost efficiently as Toyota, its operating profit would have quadrupled in 2016. None doubt Ford’s inherrent capailities but it does face headwinds. Its strategy has a number of profit pillars. The first is deepening involvement with SUV’s and Trucks which makes sense – they’re a leader in these segments in the US already. Another ‘pillar’, transforming its ‘small vehicle’ portfolio in Europe and elsewhere will likely be a much bigger hurdle. To achieve that Ford have to make breakthroughs in emerging markets that are much more volatile than China. So too, will gaining leadership in “Electrification, Autonomy and Mobility”. Someone will achieve this and Ford has earmarked $4.5BN…but other car makers are investing as much.
FCA: #7 FCA takes seventh place because, to begin with, its good -albeit volatile – gross profits have been eaten away in operating costs in four of the last 5 years up to 2016. Second of all, it has yet to meet its stated net profit targets in the period since 2013. The sale of Ferrari will dilute operating profits by 50% from 2016 onwards. The group plans to spend the proceeds on new models. However, there may be another reason for the Ferrari spin-off. It keeps the ‘crown jewel’ in the hands of the Agnelli family if Fiat-Chrysler were to merge with another car maker. The CEO made it clear that FCA would be interested in merger talks with GM in 2015 but were re-buffed. That was not a surprise – FCA owes more in debt than it has in cash.The CEO also made it clear that the company needs over 6MN units a year to be successful. In 2017 it achieved 4.7MN.
This post, the third in a series, shows how to analyze a car makers profit numbers from different viewpoints in a business and financial assessment. It uses recent data on seven global car manufacturers and evaluates the patterns, ratios and trends primarily from a dealer’s standpoint. It summarises each car makers relative strengths and weaknesses based on the information.
The seven car makers – Daimler and BMW, Ford and GM, Volkswagen, Toyota and Fiat-Chrysler Autos (FCA) – are reviewed for the period 2007 up to 2017. Morningstar and the car makers own published figures provided the financial data. OICA provided the global sales numbers to create the sales volume benchmark. Car Sales Base and the car makers published reports provided the data on carline sales in each ‘Triad’market.