BMW to review practices once deemed 'untouchable' as profit slumps

By Rachel More

BERLIN, July 30 (Reuters) - BMW will review working practices once deemed "untouchable", the carmaker pledged on Thursday, after a 35% drop in second-quarter pretax profit underscored the pressures driving a shake-up across Germany's auto sector.

The premium carmaker blamed the earnings decline on a steep drop in sales in China and a hit to consumer confidence from conflict in the Middle East.

Pretax profit fell to €1.7 billion ($1.95 billion), while the operating margin in its core automotive business narrowed to 2.3% from 5.4% a year earlier, though that was just ahead of analysts' consensus forecast of 2.2%.

The results, described by new CEO Milan Nedeljkovic as "not satisfactory", cap a week of downbeat earnings reports and restructuring announcements from German automakers.

Porsche and parent Volkswagen are also cutting jobs and overhauling operations as the industry grapples with subdued demand and growing competition from Chinese rivals.

"The automotive industry is faced with rapidly escalating challenges — intense global competition, increasing regional regulatory requirements and the implications of geopolitical conflicts will shape our business model in the years ahead," Nedeljkovic said.

BMW hopes to become leaner and more competitive through a voluntary severance programme and a review of long-standing structures.

"We are taking a critical look at how we work, including re-visiting core processes and structures that previously were considered untouchable," Nedeljkovic said, without giving specific examples.

BMW reaffirmed its full-year guidance, targeting an automotive operating margin of 1% to 3%, after a profit warning in June that triggered talks with workers over cost cuts.

The company plans to axe 8,000 jobs under an agreed voluntary redundancy programme, a source said on Wednesday. Nedeljkovic declined to comment on the figure.

He said the restructuring push would include streamlining across sales, procurement, production and development.

The company will also trim its product portfolio, reviewing model variants in certain markets as electric vehicle adoption diverges between countries such as China, where EVs dominate, and the U.S., where combustion-engine vehicles remain popular.

After June's profit warning and the resulting share-price slide, Bernstein analysts said investors were focused on whether "management has a credible way of rebuilding conviction". BMW shares were up 1.3% at 0812 GMT.

BMW's global sales volume fell about 5% in the second quarter, dragged down by a 30% slump in China, where industry observers have warned the company's new range of EVs may arrive too late to gain traction in a fast-moving, tech-driven market.

A prolonged downturn in China's auto market, the world's biggest, has increased pressure on foreign carmakers, while Chinese manufacturers shut out of the U.S. market are increasingly targeting Europe for growth.

Nedeljkovic said the impact of Chinese rivals in Europe was not yet visible in BMW's sales figures, but said the company would work to keep its offering attractive to meet the challenge.

($1 = 0.8733 euros)

(Reporting by Rachel More. Editing by Tomasz Janowski and Mark Potter)