Bayerische Motoren Werke AG

XETRA:BMW

Earnings Call Transcript 2018-Q3

[Unknown Executive]

Ladies and gentlemen, colleagues, good morning, and welcome to the conference call of BMW AG's Third Quarter 2018. We have here, as always, Harald Krüger, Chairman of the Board of Management of BMW AG; and Dr. Nicolas Peter, member of the Board of Management of BMW AG Finance. The gentlemen will start by giving you an overview of business development. After that, you have the opportunity to ask your questions. I give the floor to Mr. Krüger.

[Harald Krüger, Chairman of Management Board & CEO]

Good morning, ladies and gentlemen. BMW Group has 2 firm principles: we take a long-term approach and we chart our own course. That is what has made us strong. Securing our company's future is a top priority in all we do. This is especially true in volatile and challenging times like these our industry is currently experiencing. Thanks to our financial strength, we were able to invest in new technologies and services. This year alone, we will be channeling another EUR 1 billion into upfront investments in future mobility. At the same time, we are gearing the whole company to be future-orientated, efficient and flexible, in terms of our structures, processes and know-how. In recent weeks and months, our business environment has become a lot more difficult. But steering through headwinds, while maintaining our course is part of the BMW Group's success story. The current situation is clearly unique. We're seeing an accumulation of challenges on the geopolitical, trade and competition fronts, and all of them vary from one region to another. Let me give me a few examples. The planned CO2 targets for the EU from 2030; a trade dispute between the U.S. and China is straining the entire global economy; the possibility of a no-deal Brexit remains with all its implications for companies such as ours. We're also having to make higher provisions for goodwill and warranty activities. BMW Group has successfully completed the changeover to a new WLTP test procedure but, in the European market, we're now facing supply distortions and high pressure on prices. All of these challenges are affecting our business in parallel and at a very high intense level. As a result of these factors, we had to adjust our guidance for 2018, but our targets remain ambitious. Our Strategy, NUMBER ONE > NEXT, sets clear priorities for the coming years. We remain focused on the following key areas: first, systematic electrification of all brands and model series; second, development of autonomous driving; third, expansion of mobility services through the planned joint venture with the Daimler group; fourth, strategic development of our global production network. Today, the BMW Group is a much more global company than it was 10 years ago. Our customers in the 3 main economic regions have different wants and needs. We are, therefore, stepping up our commitment in Europe, Asia and the Americas. In Europe, we're offering solutions for sustainable mobility in cities. In Germany, we're supporting the federal government and municipalities with effective measures. 3 concrete examples: we've paid into the federal environmental fund, sustainable mobility for cities. However, the money is still not being used adequately in all cities. Here, the question must be asked, can cities also then ban their diesel drivers if they, themselves, are not exhausting their own direct possibilities from power plants to city buses to improve air quality? We quickly developed a voluntary software update for our customers for Euro 5 vehicles, just as agreed in August with the German federal government. With the new BMW environmental bonus plus, we have a special offer that is convincing. Customers in designated cities currently affected by specific government measures will receive EUR 10,000 if they trade in their old diesel for a BMW i3, for example, and customers who trade in their BMW or MINI diesel Euro 4 or 5 will also receive a credit of EUR 6,000. And these offers, ladies and gentlemen, are being well received by our customers. Ladies and gentlemen, these discussions regarding diesel vehicles focused on hardware updates are only taking place in Germany. Other countries are instead focusing on the systematic renewal of vehicle fleets or they're promoting e-mobility. We, as BMW Group, are also driving ahead with the rapid renewable of fleet. These measures are significantly more efficient and effective, more quickly than a hardware modification. Our diesel vehicles perform very well. They achieved some of the lowest real emissions within the fleet average of independent manufacture comparisons. In addition, there are good reasons why, for us, hardware upgrades for Euro diesel 5 are not, in any way, the right approach. The customer would have, despite careful vehicle development, an increased quality risk and less efficient vehicles. Moreover, hardware upgrades are not feasible before 2021. Furthermore, the technical progress of diesel technology cannot simply be retroactively implemented in vehicles that were developed about 10 years ago. These vehicles were duly approved in accordance with regulations and they met the technological standards at the time. Our position remains unchanged. We're focused on effective and efficient measures, and we're investing in the technologies of the future. In Germany and Europe, we're forging ahead with e-mobility and production of battery cells. Again, let me give you 3 examples. We will be building the all-electric BMW i4 and the iNEXT in Munich and Dingolfing, respectively, from 2021. On the World Flight of our Vision Vehicle, we demonstrated that the iNEXT is much more than just a car. We've signed a contract worth more than EUR 4 billion with CATL for delivery of battery cells. The plant will be built in Thüringen. We have presented our proposal for a technology consortium with Northvolt and Umicore to the European Commission. We want to produce battery cells in Europe and establish the entire value chain for cell manufacturing. Now our second region, Asia. BMW Group is widely respected in China. We're now taking our local footprint to the next level. We will be the first foreign carmaker allowed to expand its share in a Chinese joint venture. We plan to increase our stake with Brilliance to 75%. BBA will be investing more than EUR 3 billion in its plants in Shenyang over the next few years. In 2020, we will start building the first fully electric BMW in China. This iX3 will be exported from there. It will be the first model to come with the fifth generation electric drivetrain, one that does not use rare earth. And finally, the Americas. The United States, our second home, the BMW Group is not only the largest net exporter of vehicles from the U.S., we also create a total of almost 70,000 direct and indirect jobs in the U.S. In recent years, we have invested nearly EUR 9 billion in our largest plant and another EUR 600 million will follow up to 2021. At the end of this year, a completely new vehicle concept, the BMW X7, will start rolling off the production line in Spartanburg. Many customers in North America, China, Russia and the Middle East are eagerly waiting this, the biggest X model. The X7 is another building block in our initiative in the fast-growing luxury segment. It has received very positive reviews in the media, especially for its design. The X7 will have its world premiere in LA in 3 weeks' time. Ladies and gentlemen, no matter what region the BMW Group is active in, wherever we go, we are a public force of growth and prosperity. This will also be the case from June 2019 in Mexico and later also in Hungary. Thanks to our highly flexible production network, we are able to balance out many market fluctuations and customs barriers. We continue to target a long-term growth with our attractive and technologically diverse portfolio, because our products are more desirable than ever. From January to September this year, we sold more vehicles than ever before in this 9-month period. This applies both to the BMW Group and the BMW brand. The BMW Group is segment leader in September, Rolls-Royce also posted significant gains. BMW Motorrad remains on par with the previous year and MINI, slightly below. On the electrification side, we are right on track to sell more than 140,000 vehicles this year. There are now over 313,000 electrified BMW Group vehicles on the road. The BMW 3 series is our most successful model with more than 15 million vehicles sold. The new generation sets new standards for connectivity, especially with its range of digital services and drive-assistance options. This offers our customers a new level of Sheer Driving Pleasure. Production is currently ramping up at the Munich plant. Next year, the 3 Series will also be rolling off the production line at our new plant in Mexico and in China. Our model initiative continues at full speed. The almost completely renewed BMW X family will also play a significant part in this. The new X3 is a hit with customers with sales up more than 60% in the third quarter. The X4 has been available since July, the new X5 will be released this month. Next year, these will be joined by the M models of the X3 and X4 as well as the X3 and the X5 plug-in hybrids. All these models will strengthen our leading position in plug-in hybrids. The first 8 Series Coupés are being delivered to customers right now. Last week, we released the first pictures of the 8 Series convertible. We will be launching this model in spring of next year. In 2019, the 8 Series Gran Coupé and the corresponding M models will complete the new 8 Series range in the Luxury segment. As you can see, ladies and gentlemen, we will continue to generate strong product momentum over the next few years. Ladies and gentlemen, the global environment is likely to stay volatile for the foreseeable future and the level of complexity will remain just as challenging. The growth forecast for both the global economy and the Eurozone have been lowered for 2018. The BMW Group has more than 100 years of experience dealing with change. We don't shy away from any challenge. We work toward solutions and pave new roads to success. We're investing in our business in this direction and winning new customers for our premium brands. We're on track to meet our adjusted targets for the current year. And I would clearly like to emphasize, we remain a profitable, reliable company, and we will continue to lead our company into the future. Thank you.

[Unknown Executive]

Thank you, Dr. Kruger. Now Dr. Peter, please.

[Nicolas Peter, CFO & Member of Management Board]

Ladies and gentlemen, good morning. The increasingly difficult market environment in the third quarter has impacted earnings development across the entire automotive industry, including at the BMW Group. In September, we, therefore, adjusted our forecast for 2018. In line with this new guidance, earnings for the first 9 months are on track to reach our goals for the year. Group earnings before tax for the year to the end of September totaled EUR 7.88 billion. Although lower than the previous year, this is still our second best 9-month result ever. The EBIT margin of 7.6% in the Automotive segment is also on course to meet our adjusted guidance of at least 7% for the full year. We are tackling the current challenges and concentrating on our operating business as well as gearing up for the future. The latter remains absolute priority. As previously announced, we will, therefore, be investing a total of around EUR 1 billion more in research and development of new technologies this year. As communicated at the beginning of the year, the R&D ratio increased to 6.9% in the third quarter. Ladies and gentlemen, we knew from the start that 2018 was not going to be easy. In addition to high upfront investments in future projects, we're also facing, as expected, currency and commodity headwinds in the high 3-digit million range. These already challenging conditions intensified even further over the course of the summer. The WLTP transition has thrown the European market completely off balance. We had our vehicles certified early, ahead of the deadline, but have still not been able to isolate ourselves from the overall market's development. We made a conscious decision early not to follow every price war. The BMW Group responded immediately to these changes, and we adjusted our production volumes accordingly. Thanks to this careful planning, we were able to reduce our inventories by nearly 20,000 units in the third quarter. The trade dispute between the U.S. and China is straining the global economy with different production locations worldwide. Not all competitors are equally affected. The volatile trade situation also unsettled customers in the third quarter. As previously announced, we have increased our provisions for warranty costs and goodwill significantly to ensure that we have appropriately covered in this area. On the cost side, we began implementing countermeasures early on. In addition to prioritizing more strictly, we also decided on a number of short- and long-term measures in recent months. In light of the challenges I referred to, additional efforts will be needed to support our profitability targets. Let's take a look at the group financial statements for the first 9 months in more detail. Revenues for the year to the end of September totaled EUR 72.46 billion, which is slightly lower than the previous year due to currency translation. Adjusted for this effect, revenues rose by 1.5%. In view of the factors I just mentioned, pretax earnings were in line with our expectations, reaching EUR 7.88 billion at the end of September. The figure for the third quarter was EUR 1.85 billion. Regardless of these challenging external conditions, the BMW Group remains on course for the future. Upfront investments in continued development of e-mobility and autonomous driving will be essential for tomorrow's success. Research and development expenditure for the year to the end of September increased accordingly to around EUR 4.45 billion as planned. The R&D costs recognized in the income statement were nearly EUR 400 million higher year-on-year. The R&D ratio for the first 3 quarters rose to 6.1% accordingly. Capital expenditure for the same period reached EUR 2.89 billion, with a CapEx ratio of 4%. This mainly reflects product and structural investments for the new X3 as well as preparations for the launch of the X5 and the X7. As planned, capital expenditure will increase once again in the fourth quarter with the start of production of our new 3 Series and 8 Series models. At group level, the EBT margin currently stands at 10.9%. Ladies and gentlemen, let's take a brief look at the individual segments. The Automotive segment saw a slight increase in deliveries in the first 9 months of 2018 to more than 1.83 million vehicles. Adjusted for currency translation effects, segment revenues rose slightly by 2.9%. The unadjusted figure was on par with the previous year at around EUR 62.63 billion. Here, we're also feeling the effects of the difficult pricing situation in Europe due to the WLTP transition. Higher expenses for warranty and goodwill activities have raised our cost of sales. As previously mentioned, R&D costs will also be significantly higher than the previous year. Higher tariffs, resulting from the current trade tensions have put earnings under further pressure. The Automotive segment's operating earnings for the third quarter decreased to EUR 930 million. As a result, the figure for the year, to the end of September, was also lower at EUR 4.73 billion. I've already mentioned, the EBIT margin of 7.6% for the year to the end of September is in line with our new guidance. Ladies and gentlemen, allow me a personal remark at this point. As you know, we generally don't adjust our key figures. However, if it's about comparability, then individual effects in Q3, that you can also see in the quarter report, can be further considered in the Q&A round. The financial results benefited from our BBA joint venture business in China, which increased by 11.7% year-on-year. Pretax earnings in the Automotive segment totaled EUR 5.35 billion for the first 9 months of 2018. Let me say a few words about cash flow statement. Our free cash flow mainly reflects lower profits. For the year to the end of September, it's nevertheless amounted to around EUR 2.04 billion. In the third quarter, free cash flow amounted to almost EUR 100 million. Despite the difficult conditions, we are still targeting a free cash flow of EUR 3 billion for the full year. Here I must emphasize, in light of the current challenges, this will not be an easy task. In the Financial Services segment, our business with retail customers continues to perform well. At the end of the third quarter, we managed a total of 5.14 million contracts. This is 4.4% more than at the start of the year. China, in particular, posted significant growth of almost 17% in its total contract portfolio. The number of new financing contracts rose significantly in the third quarter with a slight increase on the leasing side. At EUR 1.7 billion, pretax earnings for January to September were slightly lower year-on-year, reflecting the negative impact of currency translation effects, among other factors. As expected, the risk situation remained stable overall. In Europe, as in the previous year, residual values trended slightly downwards in a number of markets. In North America, on the other hand, used car prices made a slight recovery. In Asia, we continue to see stable development. Let's move on briefly to the Motorcycles segment. Despite the model changeover in the midsize class, deliveries remained at the same high level as the previous year. Operating earnings were at EUR 208 million. The EBIT margin was 12.5%. Ladies and gentlemen, conditions remain challenging for the automotive industry. Trade barriers, the transition to WLTP, the debate over emissions and their respective levels, all these factors are hampering our business. The BMW Group responded promptly, of course, and has launched both short-term and long-term measures within the company. We are strengthening our sales side with targeted programs. At the same time, we are stepping up countermeasures on the cost side. Thanks to our flexible international production system and high level of capacity utilization, we are able to adapt quickly to new situations. We are watching trade developments, in particular, very closely. If conditions were to deteriorate significantly, effects on our guidance cannot be ruled out. Against this background, our outlook for the full year is as follows: group earnings before tax are expected to show a moderate decrease from the high level of the previous year. This adjusted outlook does not reflect any positive earnings effects that may result should the planned mobility services joint venture receive regulatory approval and close in 2018. In the Automotive segment, deliveries are expected to be slightly higher than the previous year with an EBIT margin of at least 7%. Revenues are now forecast to be slightly lower year-on-year. In the Motorcycles segment, we should see a slight increase in deliveries with an EBIT margin in the range of 8% to 10%. And in the Financial Services segment, we're aiming for a return on equity above our target figure of 14%. Ladies and gentlemen, you know that the BMW Group has always been a reliable and transparent company. We remain true to our values even in these challenging times. We openly acknowledge risks and take appropriate action. We're facing a highly volatile environment as we enter the final quarter of the year. We cannot rule out that several of the factors I mentioned may continue to impact our business beyond 2018. However, we will see positive impetus next year from our rejuvenated product lineup. There will be new generations of several key models. At the end of the year, our plants will be ramping up the successor to our successful 3 Series, further 8 Series models will also go into production before the end of the year. In recent months, the new X3 have also successfully ramped up at 3 separate plants. With the X5 and X7, we have 2 more vehicles with high contribution margins ready to go. We expect these to give us fresh momentum in the next year. The entire automotive industry is currently confronted with challenging conditions. The BMW Group is and will remain a high-performance company. Even in turbulent times, we never lose sight of our long-term goals and continue to stay on the course. Thank you.

[Unknown Executive]

Thank you, Dr. Peter. Colleagues, we now have time to take your questions. I'd like to ask the colleagues to provide the technical remarks for the conference.

[Operator]

[Operator Instructions] Here's the first question, [Max Hagler ].

[Unknown Analyst]

I have 3 questions. You mentioned provisions that were increased for goodwill and warranty, could you perhaps further specify what this is about? Is it the diesel or quality issues of another type? I mean airbags and things like that, perhaps you could elaborate. Second question, you talked about further efforts that would be required in order to maintain profitability. What is behind this statement? Does that also affect jobs and positions or will there be an austerity program that has a name? And then financial burden resulting from the diesel debate that's only taking place in Germany, can you now quantify or approximately tell us, which financial burden that will have on research and development or sales? Can you quantify?

[Unknown Executive]

Thank you, Mr. [ Hagler ]. Over to Mr. Peter.

[Nicolas Peter, CFO & Member of Management Board]

Well, Mr. [ Hagler ], I'll start with the provisions. You saw this in our quarterly report. We have an effect of EUR 679 million posted. And this is essentially related to 1 topic, which is the exhaust gas return module at the end of October. We had a worldwide technical campaign that we triggered mainly in order to protect our customers. And that, as I said, affects 1.6 million vehicles worldwide, in particular, in European and Asian markets. Then further burdens on our profitability. Well, these are issues that's part of our culture. These are things that we constantly work on, improvements and efficiency, then cost reduction and most importantly, also the mid- and long-term activities, such as the reduction of complexity in our product offer. These are measures that are necessary in order to fund our future and to meet our profitability claim. Now the burdens on the -- or financial burdens resulting from the diesel discussion in Germany. You cannot reduce the diesel debate to Germany alone, because if you look at the overall European market, we see effects on 2 markets mainly and that's the U.K. and Germany. In Germany, diesel penetration is now below 50%, while the overall markets development in Germany is quite favorable to us, the new products are very well received. In October, in the German markets, we had very nice growth with our 2 brands, BMW and MINI.

[Operator]

Oliver Sachgau, Bloomberg News.

[Oliver Sachgau]

I've also got 3 questions. I wanted to know about Brexit. The past few days, we've heard a few decisions, Kepler, for example, in relation to a possible hard Brexit. Do you have any measures that you're planning? Second question, there'll be another diesel summit and it seems as if hardware upgrades will not go away. And I'd be interested to know, on which conditions would you be ready to consider hardware upgrades? And my third question, how about 2019? We've received some indications from you saying that difficulties will not go away immediately, so will that also have effects right up to the end of 2019, for example?

[Unknown Executive]

Thank you. I'd say Brexit and diesel, I'll give that to Mr. Krüger. And then the outlook 2019, Mr. Peter. First, Mr. Krüger.

[Harald Krüger, Chairman of Management Board & CEO]

Well, on Brexit, of course, we are also preparing for a hard Brexit and beyond. We've already initiated first measures this year, and we're preparing things for next year. One example I can give you, for example, production interruptions that we had planned were -- are now taking place earlier, namely in April. So if there were to be a chaotic situation, then we have a control system. Then we have further developed our IT systems in terms of now tariff management because those processes could change. And in operative terms, we have been preparing for some time for this to happen, although politically, I hope that, that's not going to happen, because there will be losers on both sides. But operatively, we have a team that's preparing for a possible hard Brexit or even worse and to minimize the damage for BMW Group. Second topic, the hardware upgrades. I very clearly said that in my speech. I'm clearly against hardware upgrades. The reason being that we cannot guarantee quality or consumption to our customers. These are measures that will not take effect before 2021 because it takes some time to develop these, and we want a quick changeover in the fleet. The environmental bonus plus, I mean, that's doing pretty well as far as we can see from the orders coming in now. We can also see from the hotlines that we set up telephone offices and we've got ads, we've got more than 50,000 Facebook contacts about this, so there is a lot of interest in this environmental bonus. And that's something we'll have to see how it further develops, but that would lead to an immediate change and improvement. And then there's also quite likely interest. If you trade in a used car and you can take another young used car back, it's not just customers for new cars. So that's something that started taking effect at the 1st of October. That's doing well. And in terms of retrofitting upgrades, BMW Group has a clear position on this.

[Unknown Executive]

Okay, then the outlook on 2019 and possible burdens, Mr. Peter, please.

[Nicolas Peter, CFO & Member of Management Board]

Well, Mr. Sachgau, all in all, it's a little too early to quantify all this for 2019. But perhaps what are the assets? What are the liabilities? If we look at the challenges that the entire industry is facing in 2019, we're assuming that there will probably be trade conflicts between the U.S. and China. We probably have to expect cost of the Brexit in 2019. In addition to that, there's a couple of regulatory requirements we have to meet and these require the use of additional technology. So whether or not all of this can be passed on to the customer, we really don't know. We are also expecting, and that's based on the current prices, a burden in middle 3 digit range on the currency and commodity side, and we continue to be convinced that e-mobility and autonomous driving are things that we will have to invest in. On the other hand, though, and that's what I just mentioned, we will launch new important models. The 3 Series is a key model for us. In second half of the year, it will also be available in China. Then the 8 Series, we will continue to expand that. Then full availability of the X5 in 2019. And the X7, as of the middle of the second half of the year, it will go into the market. So these are the positive effects. In the first quarter, as usual, we will perform a quantification of these effects for you.

[Operator]

That's from Mr. Boston, Wall Street Journal.

[William Boston]

I've got a couple of questions. Firstly, to Mr. Krüger. I'd like to get an estimate from him of what does he think of the situation in the U.S. after the midterm elections. Looking at the results this morning, how will that affect BMW Group's business in the U.S.? And then, more specifically, if trade conflicts with China continue this year and next year, have you taken any specific decisions to continue producing X models in the U.S.? Or perhaps would you relocate that production to China? And my last question, your assessment of the business cycle, the situation in Germany. Economy seems to be weakening. Do you see that this is going to get worse in the future perhaps towards the -- I mean, are we seeing the end of the gold cycle in the next few months?

[Unknown Executive]

Thank you. I'll pass that to Mr. Krüger.

[Harald Krüger, Chairman of Management Board & CEO]

Well, Mr. Boston, let me start with the U.S. Well, generally, U.S. continues to be our second home. It's the largest production network of BMW Group. All of this is in the U.S. in South Carolina. And with the new X7, which will be ramped up end of the year, and second quarter 2019, it will be available in the market. And with that, we'll get more impetus and we will produce a product, which for the U.S. dealers and we already presented the product when I was in Las Vegas in April, and it will be very important for the dealers. They really loved that car, the X7. And in 2019, we're expecting further growth in the U.S. due to our model initiative in terms of X models. The X5 will then be fully available in 2019 as well. The X3 is available. The new X4 will be available next year. And I said before, from the X3 M model, these are also cars that are relevant in the U.S. I mean, this is a quite demanding market in the U.S., I must admit, but we also expect further growth there in 2019 with our model initiatives, so much on that. And we will continue to invest into the Spartanburg plant with the X7, for example. I mentioned, the EUR 600 million by the end of 2021, which means that we will also hire more people there. Now the midterm elections, I guess it's too early to comment. I guess I need to get a better overview first. From my point of view, it's too early to comment on it now. Now trade conflict U.S.-China, well, I hope that there will be a pragmatic settlement of that situation. The situation we're facing is -- well, sure, it is a burden because an X5 that we produce in Spartanburg or an X6 to be exported to China -- I mean, Spartanburg, we are the largest net exporter in China as it were, 70% of our Spartanburg production is exported. In terms of value, we are the largest net exporter and the largest customer for U.S. SUVs are China and Germany. So we do have a lot of SUVs coming from the U.S. going to China. That does not only concern the X3, which we have now localized in China. So on the one hand, we do have effects resulting from the trade conflict between U.S. and China, but with the local X3 production, these effects have been somewhat reduced. But I'm hoping for a pragmatic solution. And I guess there are talks now. Now my assessment of the German business cycle. Will there be a weakening? Well, this year, GDP growth is expected to be 2%, which is slightly below previous year's figure. The higher wages beginning of the year, they will probably support consumption, but they're burden on companies. The forecast for next year is slightly weaker, so I don't see a strong slump, but of course, we have to have a close look at the development.

[Operator]

[Jan Schreiber ].

[Unknown Attendee]

I've got 2 follow-up questions. Now in terms of profit, the profit warning, did that relate to the 1.6 million vehicle recalls? Or -- second question, the WLTP effect, will that continue in Q4 and will it also continue in 2019 while other manufacturers managed to overcome these effects? And then, how is the development with the consortium for battery cell production? When do you expect specific results in the European level here? What's your outlook?

[Unknown Executive]

Thank you, Mr. [ Schreiber ]. I guess the first 2 topics, the profit warning and the 1.6 million vehicles and WLTP, that will be answered by Mr. Peter, and the rest then by Mr. Krüger. First, Mr. Peter.

[Nicolas Peter, CFO & Member of Management Board]

Okay, Mr. [ Schreiber ]. Well, the profit warning end of September that related to the 1.6 million vehicles, which we then voluntarily called back end of October. The WLTP effect, that's really a very complex situation we have in Europe. If I look at the figures in Q4, in October, we had a quite reasonable performance, but then there's ups and downs among our competitors, going from minus 60 to plus 20 in the major markets. And I guess that's a pretty good indicator, saying that we still haven't overcome that phase of volatility. We expect these effects to still last way into the first half of 2019.

[Unknown Executive]

Thank you. Now the battery cell development. Mr. Krüger?

[Harald Krüger, Chairman of Management Board & CEO]

Well, for the battery cell for Europe, we're taking a dual approach. One is partnership with CATL, that's a partner we have from China and they supply us with battery cells locally in China for the local e-car production. And we have a contract of EUR 4 billion with them for the supply in Germany. A new plant is being produced in Thüringen. And 2021 we'll be the first customer receiving battery cells from that plant in Thüringen and that will be localized there. And the second branch is the technology consortium that we presented to the EU Commission with Northvolt and Umicore. Northvolt will start producing battery cells, and they are getting ready for it. They've got good people for the job, and we will accompany that. And then we'll have another manufacturer in Europe because we need competition here, and we also need a European battery cell production. And we're supporting that strategically with both approaches, and that means we are putting BMW Group in a very good position in Europe.

[Operator]

Edward Taylor from Reuters.

[Edward Taylor]

I wanted to ask, could you break down what are the costs of the new emission rules coming into force for 2030? That seems to be quite a burden to you. And then I wanted to know, Mr. Krüger, you said you're preparing for a hard Brexit or worse. Could you specify what would be worse than a hard Brexit? And Mr. Peter, question to you. How could you break down the investment or cost? Will you reduce investment or capital expenditure? Will the plant in Mexico or Hungary be affected? How -- I mean, what are these cost measures that you refer to?

[Unknown Executive]

Okay, we'll begin with a hard Brexit.

[Harald Krüger, Chairman of Management Board & CEO]

Well, Mr. Taylor, on Brexit, to start with, I hope that there'll be a political agreement, maybe define the line with the customs union or something. Talks are ongoing. Nonetheless, we have taken preparations for hard Brexit, but that's something we've always done. Now what you refer to, like what could be worse. That simply means that, possibly, we'd have a supply stop perhaps, but we're taking precautions for that. This is why, if there were any problems with that channel, that's why we're interrupting our production there. We also secured ourselves, A, supplies and order; B, parts logistics. We need to be ready for anything. But this is just an ordinary scenario. These are ordinary plans that we've got, and we will intensify those. We have not changed our position thinking that it could be worse than that, but these are measures that we would plan for anyway in order to be able to handle the Brexit. And our cost for new emission rules, Nicolas?

[Unknown Executive]

Yes, Mr. Peter.

[Nicolas Peter, CFO & Member of Management Board]

Well, Mr. Taylor, cost new emission rules, that's a little difficult to say because these rules are not in place yet, they've not been finalized yet. We don't quite know yet what will be applicable in Europe 2030. Well, I'd say we're probably the manufacturer who is best prepared of all with respect to new emission rules, simply because we already have a portfolio today of electrified vehicles. By 2025, we will significantly expand this portfolio with 12 fully electrified and 13 plug-in hybrids. Next year, we'll launch the electric MINI, 1 year later, the iX3 now and that's for technology reasons. With this technology, this also entails higher production costs. And that's why a reasonable transition in the next few years will be very decisive for this technology to become more widely used. And we also have to get customers accustomed to the fact that this technology has a price. Now over to your question of how can investment and cost be reduced. Well, as planned, we, in the second half of 2019, the plant in Mexico will go live. The 3 Series will be built there, which has strategic importance, the plant has. But as I already mentioned, we set up a program, and we are looking at all cost items within the company in order to introduce efficiency measures.

[Operator]

[indiscernible] are from Reuters.

[Unknown Attendee]

I'd like to get back to the cost. Mr. Peter, could you give us a few examples? Could you be a little bit more specific? Where exactly do you want to save costs? Because what you said was in pretty general terms. Perhaps, you could give us a few examples. And then I'd like to know the WLTP story, if that hasn't paid off for BMW at all, having introduced everything in such a tiny MINI. I mean, you're expecting chaos to continue for the next half of 2019. Well, are there any lessons learned for the future? And then having a look at the automobile markets and the general development in the industry, from your point of view, have we reached a turning point? And does that mean that what we're seeing in the industry as a whole that the margins are going down? Does that mean that the times are over in which you had a margin of 8% to 10% in your premium class?

[Unknown Executive]

Thank you. Mr. Peter, please.

[Nicolas Peter, CFO & Member of Management Board]

Well, I'd like to start with the WLTP issue. I mean, the motivation we have in the company is whenever there's a new rule, then we will implement that in a timely manner. And this is exactly what we did this year. And there's other WLTP transitions coming, and that's something we will also do in the future because we want to fulfill regulatory requirements. The second point, it's much too early to say whether that's paid off or not. I mean, it will pay off. Just look at one thing: we have a fairly even positive sales development. It's quite steady also in the affected markets, but we don't go along with every price war. Now cost reduction, that's mainly about the mid- and long-term issues. I mean, how many drive variance will we have for petrol and diesel cars in the future, given that plug-in hybrids and e-cars are added to the portfolio? How can we reduce variance inside the car? And there's a few interesting newcomers in the industry that take pretty radical approaches, and they appear to be quite interesting to us, and we're having a very close look at that. The truth is probably somewhere between -- I mean, we have a very large portfolio. And can we actually go towards the 3 million cars? And can we take a radical approach as others would? But given the complexity in our product range we have today, can we get away from that? And we definitely can. The third point you mentioned is there a turning point that we've reached in the business cycle in the industry, we assumed that's due to our good and strong product portfolio and the renewal of important cars that make an important contribution, we expect that we will continue to grow, and that's also our claim. And from my point of view, there is no reason to say that that's not going to happen. And as far as the 8% to 10% margin is concerned, well, we generally maintain that guidance. But that doesn't exclude -- and that's what happened in Q3 this year. There's a lot of exogenous factors, so that there may be a quarter where these goals are not reached.

[Unknown Executive]

Thank you. Mr. Krüger will start and then Mr. Peter. Mr. Krüger, please.

[Harald Krüger, Chairman of Management Board & CEO]

Well, let's start with USMCA, the successor agreement from NAFTA. There's increased localization requirements, which we are currently looking into, but it's too early for us to say what that would mean and whether that has any effects on our costs. This is something that's happening at the moment. We're also talking to the authorities, but it's a little too early to say anything about it and to make an assessment. Well, generally speaking, there is increased value addition in Spartanburg and the entire region, but you need to look at it specifically because there's individual rules that have changed. It's just too early to say anything.

[Unknown Executive]

Thank you. Mr. Peter, then?

[Nicolas Peter, CFO & Member of Management Board]

Well, the trade dispute and the cost for BMW in the second half of the year, these rules have been applicable since July 6, 2018. That's a little less than EUR 300 million. If that were to continue, then you can extrapolate what that would mean for the entire year -- for next year. However, we have taken countermeasures. For example, in China, we increased the prices for the affected models by about 7% to 8% immediately after the introduction of those punitive tariffs. Now commodity prices, that's actually not a topic relating to trade disputes. Since the beginning of the year, we had the guidance that there'd be a mid- to high 3-digit range for the repercussions in our income statement, and this is exactly what happened. That's -- yes, commodities and currency effects.

[Operator]

[ Max Hagler ] with Deutsche [indiscernible] .

[Unknown Analyst]

Hagler, we can't hear you. Okay. Stay in Berlin today and tomorrow. And the diesel summit, the small diesel summit, Mr. [indiscernible]. It's a debate nobody really likes. I mean, something -- there'll be something they'll have to talk about, the OEMs. There will have to be something new they will have to offer or will they be talking about things everybody already knows tomorrow? I mean, what's the position you have in that debate tomorrow? I mean, what you said before sounded pretty similar to what you said in the past, but...

[Harald Krüger, Chairman of Management Board & CEO]

Well, Mr. [ Hagler ] our position for BMW Group -- our position is the same that we've had for some time and it hasn't changed. We don't think that hardware upgrades make sense for the reasons that I've given earlier. I don't want to repeat them now. And that will also be our position. Second point, we are in constant dialogue with politicians, not only here in Germany, and that's also something that's not going to change.

[Unknown Executive]

Okay. As I've just been informed there's no further request for the floor, no further questions. So I'd like to say thank you for having joined us this morning, and I wish you all a nice day, and see you soon. Goodbye.