The expensive BMW road can handle a bumpy road

BMW AG travels to China at full speed on a bumpy road. Do not worry, it will guide you.

While the luxury crackdown is taking hold and the auto market is slowing down, the German automaker has agreed to spend $ 4.1 billion to increase its stake in a company with Brilliance China Automotive Holdings Ltd. at 75%. The additional 25% purchase expands its presence in the world's largest automobile market until 2040. The transaction will only be completed in 2022 with the introduction of new foreign ownership rules.

Despite widespread fears, sales of luxury cars are doing rather well in China. While mass sales dropped sharply, BMW Brilliance and Beijing Benz managed to increase the industry's average pre-tax margin to 10%. Exclude these two and margins fell to 8.7% in the first half. In the first three weeks of September, beemers sales jumped 22%.

For BMW, Chinese coverage will be crucial in an increasingly difficult global environment. The group issued its first earnings warning for the past decade at the end of last month. It now expects EBIT margins for the entire year to be close to 7%, compared with 8% to 10% previously. The profit warning does not mention China, where BMW has sold more than 400,000 units, a quarter of its global total, until August. It is the fastest growing market for the company, with a 16% increase in retail sales.

So far, BMW has understood the Chinese market by resisting the fall of the herd in SUVs producing mass. Luxury sedans accounted for 72% of sales volume last year, compared to 24% for SUVs. Locating more production means that trade tensions between the United States and China will not resolve. Under this agreement, BMW could now manufacture the popular X5 model in its Chinese factories.

Admittedly, it will have to deal with the fluctuating effects of customs duties on consumer purchasing decisions. But luxury cars are not likely to lose their appeal in China. The cost of registration plates in upper tier cities and the car replacement cycle should ensure that they are maintained.

BMW pays the price of its implementation. The $ 4.1 billion label represents $ 16.4 billion for Brilliance China, more than double the Chinese automaker's $ 6.9 billion market value at Wednesday's closing in Hong Kong . An additional 25% would represent $ 1.7 billion at the current price (shares were suspended on Thursday).

BMW is sailing on difficult terrain that has already claimed many lives, while car sales in China are slowing down. But locking it on a relatively inelastic segment of demand should give it a lot of grip.

Anjani Trivedi is an editorialist of Bloomberg Opinion which covers industrial companies in Asia. She previously worked for the Wall Street Journal.

© 2018 Bloomberg L.P.