‘BMW
profits hit by higher cost’
Analysis 2
Introduction
If a company is highly
valued and it achieves one of the highest revenues, does it always mean that
the company is doing well? This article looks at BMW, a company that produces
luxury goods that is highly valued by demands around the world and thus sales
are high. However, even though the company is doing well in terms of satisfying
demands and achieving high revenues how come its profits are falling? Referring
to the article, BMW Company lists the factors that have been causing the
decline in profits which includes, increased staff costs, higher spending on
research and development and stiff competition. The quantity of BMW sold also
varies in Europe, US and Asia and this directs us towards countries economic health.
The main aim for firms is to make profits. However, BMW
has performed to the extent where it has attained consumers’ loyalty,
recognition and value and the Company’s aim is not just in making profits but
being the Company that achieves one of the highest profits. According to the article
net profit dropped 28% compared to its previous year despite revenue rising up
to 7% to 19.2bn Euros. With the given figures of 2012, it can be estimated that
the previous year’s revenue could be about 17.9 Euros. 28% drop in net profit shows
that this year’s total cost is much higher than the previous years.
Stiff competition was one of the
reasons BMW’s profits declined. Based on a factual account, BMW beats Mercedes
Benz and Toyota in increasing sales of its luxury models in US in the fifth
month of 2011. This evidence show that BMW’s revenues were higher than its
competitors a year earlier and that might have lead them to producing higher
quality products for the coming year to remain at that level and thus the
Company inserted much more cost into producing higher standard good and that
led to a drop in profit.
.BMW increasing the price of goods to overcome
high cost can however lead to significant impact. They might not lead in sales
since the consumers may substitute to BMW’s competitor’s goods such as Mercedes
Benz and Lexus which also has great brand loyalty. Based on a factual account, Mercedes U.S. sales rose 7% and
extended its lead over BMW in US in September 2012. High cost of production led
to BMW charging higher price and even though BMW achieved higher sales compared
to its previous year it was defeated by Mercedes Benz. This could indicate that
BMW revenues were higher than the previous year because of the higher price but
Mercedes achieved more sales in terms of quantity because this luxurious good
had a slightly fairer price. However, it can be argued that preference on the type
of cars also influences demand because each the car brands has its unique characteristics
and if consumers have had good experience with a particular car brand, they would
prefer buying the same brand rather than substituting to another. This shows that the demand for BMW is relatively
elastic.
Increased
staff cost and higher spending on research and development are the other
factors that led to a fall in BMW’s profits fell. Staff cost rose 5% to
102,007. I believe that BMW recruited more high skilled workers and engineers to produce higher
quality goods and that means paying higher and more salary and increasing expenditure
on development and new technologies. Referring to the graph below, BMW still
generates profit because its total revenue still exceeds the total cost but in this
case, since its total cost is increasing, the profit is not at its maximum level
(indicated by the arrow), but the points would be above the arrow showing the decline
in profit because the total cost is increasing.
Looking
in terms of country’s economy, was it a good idea for BMW to increase their
cost of production in order to produce higher quality products and increase its
price? The first half of the year, sales in Europe were flat. They sold 437,338
units. On the other hand, sales in US boosted by 10% and in Asia by 25%. The
company was warned the previous year that Europe’s economic and debt crisis
could affect sales of cars but the company overlooked this issue and continued
with their development plan. The flat
sales in Europe this year indicates that the company was affected by the crisis.
Since most consumers in Europe could not afford to purchase the good at the
price BMW was charging, it could be argued that BMW should not have carried on
with their development plan and increase price of goods but however, BMW’s revenues
were higher than the previous year which means that its development plan did
benefit greatly from US and Asia. So BMW succeeded in terms of revenues but to
overcome the drop in profit, they could charge higher but this could decrease
demands and considering the economic crisis in Europe, they shouldn’t take
further risk. A good suggestion for BMW to boost profit would be to lower their
cost of production to some extent. This would still increase sales since BMW is
already a highly valued company without them having to increase development.
However, if the increase in development has great future benefits, they should
proceed with it when Europe’s economy has improved since more people will be
able to afford this luxury good.
Conclusion
Since BMW is a highly
valued company, it has been performing greatly in terms of revenues. Although
their revenues rose 7% from its previous year, their profit dropped by 28%. The
fall in profit was due to high cost of production. BMW wanted to increase the
standards of their good and charge higher price. The company’s high confidence
emerged as a result of its outstanding performance in terms of sales and profit
during the second quarter of its previous year. They were leading in terms of
sales and to remain at that level they inserted much more cost into research
and development and hiring more experts. The defeated Mercedes Benz in terms of
sales in 2012 but was taken over by them in 2012. BMW however did achieve
higher sales compared to its previous year but because of their high cost of
production they charged higher and consumers substituted to Mercedes and thus
more quantities were sold. BWM sales were also hit by European economic crises
but they however still benefited highly from sales in US and Asia. To increase
profit, they should decrease their cost of production for the time being and precede
their development plan when Europe’s economy improves and people can purchase
more of the good.
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