Bayerische Motoren Werke AG

XETRA:BMW

Earnings Call Transcript 2020-Q3

[Maximilian Schöberl]

Good afternoon, ladies and gentlemen. I would like to welcome you all to our telephone conference for the third quarter results. With us today are Oliver Zipse, Chairman of the Board of Management; and Nicolas Peter, our CFO.For today's telephone conference, we slightly changed the usual procedure. First, Nicolas Peter will take you through our financial results. Oliver Zipse will then give you a general business update for the BMW Group. Afterwards, we will have time for our Q&A session.And now we start with Nicolas. Please go ahead.

[Nicolas Peter, CFO & Member of Management Board]

Thanks, Max. Good afternoon, ladies and gentlemen. I hope you are all staying safe and healthy. Over the past several months, the BMW Group has again proven its ability to act flexibly in high volatile market environments and to adapt quickly to new circumstances. After experiencing the full force of the coronavirus pandemic, initially in the second quarter, we delivered a strong performance in the third quarter. We were able to increase sales and group earnings. This earnings quality is also reflected in our free cash flow. Currently, however, the situation is worsening again particularly in Europe and again, requires a great degree of flexibility.The measures we introduced in the first half of the year to lower costs, together with our investments are now paying off. This shows that we are safely steering the company and are making the right decisions, enabling us to limit the effects of the pandemic. Our strict cost discipline is having a positive impact on earnings supported by additional measures such as focused management of our working capital.One of the main drivers for this strong performance in the third quarter was the recovery in customer demand in many countries, including China and Korea, but also in major European markets, like Germany, the Benelux countries and Italy.Electromobility has proven to be a substantial growth driver. Our sales of electrified vehicles increased significantly from the previous year, both in the third quarter and in the year-to-date. Performance was also bolstered by pent-up demand in many markets.Ladies and gentlemen, as mentioned, the business environment has remained extremely volatile as underlined by sales development in the past 2 quarters. The BMW Group delivered 675,000 vehicles to customers in the third quarter, the highest quarterly sales in the company's history. But just before that, in the second quarter, we posted our largest ever decrease in sales. Now the situation in Europe is worsening again. We have never recorded swings like this within such a short space of time.Setting the life course has therefore been especially important in the recent months. The market development and performance measures I just referred to are having a positive impact across the company and in our individual segments. Let me go into detail, beginning with the financial figures for the group.Group revenues for the third quarter totaled around EUR 26.3 billion. Due to the suspension of sales and coronavirus restrictions, however, revenues for the first 9 months were moderately lower year-on-year at EUR 69.5 billion. Group earnings before tax for the third quarter reached almost EUR 2.5 billion, up 9.6% on the previous year. The figure for the first 9 months was just under EUR 3 billion. And therefore, significantly under the previous year. The Group reported an EBIT margin of 9.4% for the third quarter and 4.3% for the first 9 months. I would like to point out that we achieved this in an extremely volatile and challenging environment.Ladies and gentlemen, the BMW Group remains well on course as the automotive industry undergoes a transformation. We are investing in the future and continuing to forge ahead, particularly with electrification and digitization. A good example of this is the iNEXT, which will celebrate its world premiere in the next few days.Research and Development activities accounted for around EUR 4.4 billion in the first 9 months, with an R&D ratio of 6.3% as expected. A word about our capital expenditure, which was around EUR 2.4 billion. In the year-to-date, we have systematically prioritized and focused our efforts without deviating from our roadmap of future mobility and innovation. We were able to reduce capital expenditures significantly from the EUR 3.3 billion reported in the same period of 2019. This also had a positive effect on our free cash flow.The third quarter financial results stood at EUR 540 million. A key driver for this was the BMW Brilliance Automotive result of EUR 430 million. Thanks to effective pricing and high volumes, this figure was significantly higher than the previous year. Ladies and gentlemen, let's move on to the individual segments. I would like to start with the Automotive segment.The segment's EBIT margin for the third quarter was 6.7%. Its operating result was EUR 1.5 billion for the quarter and EUR 152 million for the first 9 months. This means that despite losses in the first half of 2020, earnings were back in the positive range, although still lower year-on-year. This stems from healthy third quarter sales, a strong model mix and better pricing from our young and attractive model lineup.Sales of our electrified vehicles are providing crucial contributions for complying with the European Union CO2 limits. In the first 9 months of 2020, we sold over 116,000 electrified BMW and MINI models. This is 20% more than in the same period of last year.Strict management of our fixed costs boosted earnings quality. Despite expenses incurred from provisions in the mid- to high 3-digit million euro range for restructuring measures, including for personnel costs.I would like to give a special mention to our Performance Program, which is making valuable contributions to BMW Group targets across the company. I'd like to highlight 3 initiatives briefly: First is more effective pricing due to optimized sales management; second is on the product side, specifically in reducing manufacturing costs and product complexity; and thirdly, we are also optimizing new initiatives such as future work structures. These will enhance the performance capabilities of the entire company. The decisions made so far are already having an impact as seen in our quarterly results. We are, therefore, on course to meet our EBIT margin guidance of between 0% and 3% in the Automotive segment as planned.Ladies and gentlemen, let's take a look at free cash flow in the automotive segment, which totaled almost EUR 3.1 billion in the third quarter and benefited from the positive effect of pretax earnings. It was also bolstered by focused working capital management as well as strict cost and investment management. At the end of September, free cash flow stood at EUR 552 million. Group liquidity at the end of September totaled EUR 21.8 billion. By the end of the year, Group liquidity will be back towards its pre-crisis level at about EUR 17 billion. We have the liquidity reserves we need to remain flexible and able to take action at all times if the situation should deteriorate.Let's turn now to the Financial Services segment. We also saw a recovery in new financing and leasing business with retail customers. Between July and September 2020, we reported a solid upward trend of 6.8% with a total of 538,000 new contracts. This is primarily due to demand in Europe and China. We also saw definite signs of recovery in new financing business for used cars in key sales markets in the third quarter. The segment's third quarter pretax earnings trended significantly lower year-on-year at EUR 458 million. As in the first 6 months, the main reason for this was higher risk provisioning compared with the previous year in a low 3-digit million euro range. This was necessary after adjusting expectations for credit risk specifically and to a lesser extent our residual value risks. The financial Services segment makes extensive provisions for its main business risks on an ongoing basis as is customary in this sector. Based on current assessment, we are appropriately hedged against residual value and credit risks. Let's move on to the Motorcycles segment. Here, we saw clear signs of recovery in many important markets in the third quarter. The segment achieved an EBIT of EUR 45 million in the third quarter, an increase of over 28% compared with the previous year. A total of more than 52,000 motorcycles were delivered to customers in the third quarter and over 129,000 per September. The EBIT margin for the first 9 months was 6.4%. Ladies and gentlemen, let's take a look at our guidance for the year. As of today, we are on track to meet our targets for the year and can confirm our guidance for 2020. However, the volatility of the environment means our forecast is clouded by considerable uncertainty. Our outlook does not factor in the possible impact of rising infection numbers and the measures to contain them. The situation is currently deteriorating. And if this continues over the coming months, it can have a significant impact on business development. Pending political diseases like unresolved Brexit issues are also contributing to these uncertainties. Although car markets recovered faster than predicted in the third quarter, we still expect to see a significant decrease in sales of just over 10% in the premium segment for the full year. We are, therefore, still assuming that the BMW Group's global sales will be significantly lower in 2020 than last year. We cannot expect the pent up demand seen in the third quarter to continue throughout the rest of the year. In the automotive segment, we still expect the EBIT margin to be within the range of 0% and 3%. Deliveries in the motorcycle segment are forecast to decrease moderately during the forecast period. Based on our assessments, the EBIT margin should be between 3% and 5%. On the financial services side, we anticipate a moderate decrease in return on equity, mainly due to an increased risk provisioning and a decline in new business. Group earnings before tax will remain well below last year's figure. As planned, our workforce size will be slightly lower in 2020 than last year. Ladies and gentlemen, we continue to focus our financial management on high profitability and consistent cost management, while at the same time, creating leeway to fund necessary future projects. We are benefiting today from our strategic focus on the high-end luxury segment. For example: Thanks to our attractive 8 Series models and the BMW X7, we have been able to grow sales of highly profitable models by more than 70% since 2018. Over the coming months, our main focus will be on safeguarding earnings and continuing to improve our free cash flow. We are now striving to achieve a free cash flow of at least EUR 1.5 billion for the full year. Any cash outflow in connection with the antitrust allegations by the European Commission as well as a significant intensification of the impact of the corona pandemic is not included in this assessment. Capitalizing on all business opportunities and absolute cost discipline will remain a clear focus of all areas of the company. We will continue to respond quickly and flexibly, if needed, to what remains an extremely volatile business environment. Our production, sales and purchasing networks have handled these challenges exceptionally well so far. Aligning our production closely with demand has proven successful, and we will continue to do so moving forward. Ladies and gentlemen, at the BMW Group, we think long-term. High profitability is a basis to achieve our strategic objectives, such as electrification and digitization. The same applies in this challenging and volatile time. We are making the right decisions and setting the right course today to secure the long-term success and profitability of the company into the future. Thank you.

[Maximilian Schöberl]

Thank you very much, Nicolas. And now our Chairman, Oliver Zipse. Oliver, please go ahead.

[Oliver Zipse, Chairman of the Board of Management & CEO]

Good afternoon, ladies and gentlemen, also from my side. As you know, 2020 has been dominated by the highly volatile coronavirus pandemic worldwide, which is now worsening again and its impact on the economy and our lines. At the BMW Group, we respond to unexpected challenges like this with flexibility and sound judgment. The long-term perspective is and will always remain decisive for us. We demonstrated all of this in the first 3 quarters. Firstly, we are determined to target and exploit potential for growth and steer the company calmly and consistently through the coronavirus pandemic. In the third quarter, we demonstrated our performance capacity and kept the company on track for success in a difficult environment, posting the highest quarterly sales in our history. We can, therefore, confirm our guidance for the financial year 2020, just like Nicolas Peter mentioned. We issued this guidance early in the pandemic and have only adjusted it once since. This means, despite all the uncertainties we assessed the situation correctly. And secondly, we are aligning the BMW Group for sustainable mobility through our strategic decisions. This applies to products, technologies and also to our organization. It is precisely at these so-called tipping points that BMW has often set the course for new beginnings in the past. We continue to do things the BMW way in times of upheaval and always remain an attractive and reliable partner of our investors. With our products and technologies, we're ideally positioned for the years ahead. And we want to be in a similar position from the middle of the decade on, when the conditions on markets will have further developed. This is why we are already working on solutions for after 2025 and 2030. Because in our industry, timing is crucial to leveraging opportunities as they arise and being able to make targeted investments in the future. Therefore, today, I would like to focus on 2 time frame related topics: First, our perspective up to 2025; and second, our perspective for the second half of the decade. Let's start with the first topic. We have a fresh, attractive and diverse model lineup in all segments that is winning over customers. That is how we were able to absorb the regional lockdowns and even improve at the same time on the previous year in some cases. For example, in the third quarter, we delivered 8.6% more cars and almost 21% more BMW motorcycles to customers than in the same period of last year. In the year to the end of September, our automotive sales decreased by only 12.5%. And at the same time, we even increased our global market share during the pandemic to 3.2%. A look at the market in the first 9 months shows how much the situation varies. In China, the recovery that began in the second quarter continued. By the end of September, our sales had risen 6.4% to reach a new all-time high. In Europe, on the other hand, deliveries were down almost 20%. And in the United States, sales decreased by about a quarter. Our models in the Luxury Class and especially our electrified vehicles, emerged as winners from these times of pandemic. You could say circumstances provided a boost, aided by government-initiated measures in a number of countries. We delivered more than 116,000 electric vehicles and plug-in hybrids to customers in the first 9 months, a new all-time high and a significant year-on-year increase of 20%. And this trend became even clearer during the month of October. We are already firmly established as one of the absolute leading manufacturers of electrified vehicles worldwide. And we already laid the foundation for this back in 2013 with the fully electric BMW i3. Our Project i was the beginning of Phase 1 of our transformation to sustainable mobility and has been a great success story. Since then, we have sold the i3 more than 200,000 times. And there is still no other vehicle on the market that has a comparable 360-degree approach and no vehicle with a longer life cycle. Overall, we have delivered well over 600,000 electrified vehicles to customers worldwide to date. And now, as demand for electric model starts to pick up, we are starting Phase 2 of our transformation with highly innovative vehicles, the MINI Cooper SE has delighted around 13,000 customers since March, and our current order book is just as full. The BMW i3 will be arriving in showrooms in the next few days. Employees at the BBA plant in Shenyang celebrated the start of production in late September. The iX3 brings e-mobility to the extremely popular X family and paves the way for the fifth generation of BMW's eDrive technology.In 2021, the BMW i4 will come out of Plant Munich, with an electric range of up to 600 kilometers. Followed in 2021 as well by the iNEXT, the Board of Management took the series version for test drive just last week. I'm sure this car will surprise and delight a lot of people. The driving feeling is unique for an e-drive; it sets a totally new benchmark for digitalization and connectivity. Its operating system is revolutionary. The interior is a minimalist and absolutely user-focused, and the exterior is progressive. You will hear more about this when our NEXTGEN kicks off next week. Other fully-electric BMW models will include the high-volume 5 Series and the X1 as well as the 7 Series. All of these will be available with 4 different drive technologies: petrol, diesel, plug-in hybrid and fully-electric. We call this, as you know, Power of Choice. Customers choose the drivetrain that best suits their needs. That is why we need and use flexible architectures for several drive technologies. This enables us to meet demand for different drivetrains efficiently across all model ranges and segments. This is not only an exceptional capability, but also a strong competitive advantage for us. Our electro-offensive encompasses all model ranges with much more to come. By 2023, we will offer 25 models with an electrified drivetrain. Our plug-in hybrids are also doing very well. This is a great opportunity to introduce people to electric drivetrains. We want our customers to choose e-mobility for themselves, because they recognize and appreciate the benefits. Later this month, we will be expanding our plug-in hybrid options for the 5 Series from 2 models to 5. That is more PHEV variants than in any other model range. With the right timing and right technologies, and despite the coronavirus pandemic, we will meet the European CO2 targets for both this year and next year. And this year alone, our fleet emissions will be around 20% lower than in 2019. We are preparing for future CO2 targets just as systematically and just as persistently. The key to success for our electro-offensive clearly lies in our plants. We are expanding our production network for e-mobility and the necessary components. Here, we are specifically strengthening Germany as a manufacturing location. Let me give you 3 examples. By 2022, each of our 4 automotive plants in Germany will be capable of manufacturing fully-electric vehicles. Secondly, also from 2022 on, Dingolfing, will be able to build e-drives for up to 500,000 electrified vehicles a year. Leipzig and Regensburg will also produce battery modules and high-voltage batteries, respectively. And thirdly, our new pilot plant for near-series-standard battery cell production will also begin operations in 2022. The BMW Group has more comprehensive battery cell expertise than any other car manufacturer in the world. Our aim is to have the most efficient and at the same time, most sustainable battery cell industry -- cell in the industry. Together with Northvolt and Umicore, we are creating a close material loop for battery cells. We're combining the reorganization of our production network with structural efficiency improvements and optimized utilization of capacity. By doing so, we aim to save a mid-triple-digit million-euro amount by the middle of the decade. At the same time, we are investing in research and development according to our commitment, more than EUR 30 billion by 2025. Here, also, we are continuing to focus on our locations in Germany. In September, the first FIZ Future sub-project was put into service. At the new FIZ Nord facility in Munich, a total of 4,800 employees are developing innovations for the mobility of the coming decades. This makes the FIZ Research and Innovation Centre one of Europe's largest R&D sites. It connects our 14 tech offices from California to Shanghai and Tokyo as a new digital R&D hub. Let's move now on as promised to the second topic. Our perspective for the second half of the decade of the 2020. We expect demand for fully-electric vehicles to continue to increase significantly from 2025 onwards. Exactly then, just at the right time, we will launch Phase 3 of our transformation. Here in addition to electrification, the focus will be on extended digital connectivity and also volume capability. In 10 years, we aim to have more than 7 million electrified BMW Group vehicles on the roads, 2/3 of them fully-electric. The company is already scaling up for this both strategically and technologically.Therefore, we have established 2 new cross-functional areas internally to coordinate, shape and take company-wide responsibility for key areas of transformation: First, in-car digitalization. Over 20 years ago, we began focusing on digitalization in our vehicles. And to this very day, we have brought 14 million connected vehicles to roads worldwide. They collect 25 million bits of traffic information daily. Now we are strengthening digital across the company and creating a new central decision-making function. All key software functions have been pooled into the new Digital Car unit since October and reports directly to the Board member for development, Frank Weber. Our vehicles are managed devices, they are always up-to-date with the latest services and features. We're continuing to expand our very successful Operating System 7 to support this. And it goes without saying that our user interface is easy to operate because technology should serve the user and digital technologies are at the heart of BMW, hardware and software, are equally important to our customers. And secondly, underlying product development and its implications for our vehicle architecture from the middle of the decade. Our new cluster architecture is geared mainly, but not only towards electric drivetrains. This area reports directly to me. It is organizationally connected to all divisions, from markets, finance, procurement, development and production, all the way to sales and marketing. This gives us greater leverage and makes us much faster, also in our cooperation with partners. The objective is for the new architecture to create an overall optimum. Our new plant in Hungary, among other plants, will play a key role in this, ramping up the new architecture from the middle of the decade. But there is another aspect of -- to our transformation phase in Phase 3. In the midst of the coronavirus, we geared our company towards a circular economy. We aim to reduce our carbon footprint per vehicle by at least 1/3 from 2019 levels by 2030. No other manufacturer in our industry is making its business model as holistically sustainable. Throughout the supply chain, production, use phase and all the way to recycling. We cannot achieve this through offsets, we are using renewable energies and even more importantly, efficiency measures. This is impactful progress through technology. Ladies and gentlemen, the coronavirus pandemic is far from over. The current rate of infection, especially in Europe, makes this abundantly clear. The virus will remain the biggest of many risks for the global economy in the foreseeable future. New lockdowns could severely impact our business development in the fourth quarter and in early 2021. However, the same rule applies in this situation. We will continue to respond flexibly to short-term challenges. And we will systematically and proactively set the course for the long-term development of the company. The BMW Group is in a strong position and exactly where it needs to be for the second phase of the transformation up to 2025 with an ever-growing share of e-mobility and maximum production flexibility. And now we are starting to concentrate on the third phase of the transformation from 2025 and beyond.Thank you very much. I look forward to your questions.

[Maximilian Schöberl]

Thank you very much, Oliver Zipse. And now the line will shortly be open for questions. Please wait for some technical advice.

[Operator]

[Operator Instructions] And the first question is from Dorothee Cresswell from Exane.

[Hanna Dorothee Hellmuth Cresswell, Research Analyst]

It's Dorothee Cresswell from Exane. I have 2, if I may. The first is around this new vehicle architecture that you're planning from 2025. I'm sure we'll hear more about it in the coming months. But I wondered if you could confirm that your targeted CapEx and R&D ratios remain in place so the under 5% of sales for CapEx and the 5% to 5.5% of sales for R&D. Will you hang onto those despite the costs associated with this new architecture? And then if that is the case, perhaps you could also tell us how quickly you expect to achieve those targets in the wake of this year's coronavirus disruption or either of these targets already realistic for 2021?My second question is around the earnings dynamics in the autos division for Q4. Could you give us some idea of the disruption to sales from dealerships closing? How much can you keep the business going, given you have digital distribution? And I'm guessing that where dealers are closed, you can still deliver the orders that were placed with lockdown. And then perhaps you could give us some visibility over Q4's mix dynamics, I'm guessing that the proportion of X Series will rise even further into year-end?

[Maximilian Schöberl]

Thank you very much. Dorothee, the opening for the first question will come from Oliver and then Nicola. Oliver, please.

[Oliver Zipse, Chairman of the Board of Management & CEO]

Dorothee, thank you for your questions. Let me give you some perspective of how we think about architectures. They are renewed every 5 to 7 years. And our current architectures we have, they are twofold. It's a front-wheel architecture and the rear-wheel architecture. And especially in the second renew phase where we are now going into we flexibilized these architectures quite successfully, by the way, because we were able to introduce it with the current setup.Now we go almost biologically into the next phase after 2025. And the question is, what kind of character do these successor platforms have? And I think due to the very high-volume of electric vehicles, they will be more aligned towards electric demand. They will not be electric-only. They must start electric-only. And so it's very much a successor architecture, but under new boundary conditions. And we call that Phase 3 because, for us, is a continue. And that also leads to my answer to your questions. Of course, in our plant, there were always a successor architecture put into our figures. And as we say, we will stick very much to the figures we communicated. And that is our setup that we will do with the current R&D information you have so far.

[Maximilian Schöberl]

Thank you, Oliver. Nicola?

[Nicolas Peter, CFO & Member of Management Board]

And Dorothee maybe to follow-up on what Oliver just said, our strategic target remains unchanged, meaning EBIT margin 8% to 10%, CapEx below 5% and R&D between 5% and 5.5%. If we briefly focus on full year 2020, we expect CapEx to be in the area of slightly below EUR 4 billion, and R&D ratio plus/minus on the same level as 2019.Now very important topic you raised with your second question, Q4 dynamics, and particularly, if we think about the business development, in particular, in some of the very relevant European markets. We believe the situation is slightly different compared to the situation we were facing in spring when we had really more like 100% lockdown, showrooms closed, workshops closed, delivery is not possible. We expect that the showrooms will be closed in some markets. However, deliveries and workshop services will still be possible. And we have 2 different type of lockdowns. We have on one hand side more severe lockdowns in markets like most parts of the U.K. Belgium, France, parts of Slovenia, parts of Greece. And on the other hand side, markets where even the showroom is open, service, delivery is possible, markets like Germany, Italy, which, by the way, developed in a quite impressive way after the very difficult period in Spring, Netherlands, Austria and Spain. So it will be different from Spring. We expect an impact, but not as severe as the one we had between Q1 and Q2. On the mix side, we've seen a positive effect in terms of mix and pricing in 2020, in particular, based on 8 Series, 7 still very strong performance across the world of X5 and X3. And looking at incoming orders, I see no reason why this trend should not continue. However, if we look at, of course at that profit impact, we have to state that with the growing share of SUV that we have on the other hand side, a negative impact on our profitability.

[Maximilian Schöberl]

Thank you very much. Next question, please.

[Operator]

The next question is from Arndt Ellinghorst from Sanford C. Bernstein.

[Arndt Alexander Ellinghorst, Research Analyst]

I have 2 actually. The first one for Oliver Zipse, please. Oliver, in your discussions with regulators these days, do you believe there's a reasonable chance to assume that government incentives in future will be linked to well to real emissions and also to actual driving or charging behavior? And if that's the case, how will that impact the most suitable EV architecture moving forward? And the second question, please, for Nicola Peter. Nicola, shouldn't you be a bit more progressive with your ambition to generate free cash flow? The annual target of more than EUR 3 billion has now been set about 8 years ago. So it's just quite outdated. And also looking at your peers, Daimler has demanding cash conversion targets; Volkswagen is aiming of more than EUR 10 billion. BMW just looks a little bit outdated concerning its ambition to generate cash.

[Maximilian Schöberl]

Thank you very much, and I think we start with Oliver and then Nicola to the free cash flow. Yes.

[Oliver Zipse, Chairman of the Board of Management & CEO]

Yes. Arndt, thank you. Thank you very much for your questions. I think that's a very important one. I understood your question as is hybrid charging behavior and the regulator, maybe regulating the charging behavior is influencing our strategy. I think the most important thing for hybrid drivers is that they charge the car. Of course, it is because only then, they will reach their communicated emissions. And what we are very much after and working very tightly with the regulator to make sure that people charge their cars. And that starts with our own fleet. We want to give only hybrid cars to people who can prove that they can charge the car. And we work highly closely with all regulators in Europe how to make that possible, that we also have proof of charging behavior. And we actually open -- we are open for that discussion because we have no interest in people driving cars, which should be charged and are not charged. So we are very aligned with the target of the regulator.On the other hand, we believe that plug-in hybrids play worldwide a very important part in moving towards more electrification and also to contribute to CO2 emissions targets. And in Europe, 3/4 of our cars are currently plug-in hybrids. They've great market demand, overwhelmingly though, also because of the high subsidy levels we have in Europe. But we believe firmly that independent of what the regulator actually will decide, the plug-in hybrids have a great future, at least in our product portfolio.

[Maximilian Schöberl]

Okay. Nicola?

[Nicolas Peter, CFO & Member of Management Board]

As you know, first, welcome back. BMW is very long-term oriented company, and we spend a lot of time thinking about our strategies and our key KPIs. And not only our free cash flow ambition is a couple of years old, also, our 8% to 10% EBIT margin target was fixed back on the basis of the strategy number one, and I was part of this working group. And if you reflect on how the company -- and this is the second element, so long-term oriented and a very reliable company. If you look at our free cash flow performance over the last 10 years, I think, it's quite impressive. And in particular, in such type of environment, we are in as the one I've described on one hand side with short-term impacts coming from the virus and the mid- and long-term impact related to the transition of the industry. The most important thing is to deliver. And we have fixed ourselves clear targets. We are highly motivated to deliver against those targets. For 2020, the target is on the free cash flow side, minimum EUR 1.5 billion.

[Maximilian Schöberl]

Thank you very much, Nicola. So ladies and gentlemen, I know we have a lot of questions today. So I can guarantee a longer time for our Q&A session today. So next question, please.

[Operator]

Next question is from Tim Rokossa, Deutsche Bank.

[Tim Rokossa, Research Analyst]

It's Tim Rokossa from Deutsche Bank. I would have 2 questions as well, please. The first one is, we're very close to now getting Gen 5 into the market from you guys. Can you remind us on the current cost advantage or disadvantage versus Generation 4 and also versus ICE? And then secondly, you sound still very confident that you're going to make your CO2 target by now, a lot of other major manufacturers are feeling quite confident as well, but primarily because of pooling. How close are you to make this target? Or would you be able and willing to share some of what you are achieving there with others too also will.

[Maximilian Schöberl]

So we start with your second part of the questions, the CO2 targets with Oliver and then Nicola.

[Oliver Zipse, Chairman of the Board of Management & CEO]

Yes. Tim, also welcome to you. Thank you for your questions. Of the CO2 targets, I'm sometimes surprised that it seems to surprise that these targets are there because they have been around for many, many years. And it all depends on your product strategy, whether you are fulfilling these targets, and also your ability to read the market in its entirety. So we will reduce our CO2 footprint of the complete fleet in Europe by more than 20% this year, which leads us into a fairly, I wouldn't say comfortable, but we have even a little flexibility in there. So that is why we trust ourselves to state that we will reach the target. And it's not a surprise for us because the whole setup on how our best strategy is allocated, our peer strategy, but also not to forget what is the contribution of our normal combustion engines because the combustion engine, at least, in 2021 and 2022 is the majority of the drivetrains. And if they don't contribute, it will always be extremely difficult to reach these CO2 targets. And that was the main characteristics of our Power of Choice strategy that we will with not too many market pressure, we can reach this target. A wrong strategy would be, if you are so close that you can only do it by reducing your cost of retail. It's not -- it does not help the climate, and it definitely does not hit your margins. So that is not our strategy, very clearly not.And yes, there was a second question.

[Nicolas Peter, CFO & Member of Management Board]

Yes. The first question -- Tim, of course, this is one of the most relevant topics you're raising, we are addressing with our budget. We are allocating to research and development because the question behind your question is, are we at cost parity between electrified drivetrains? And I see we are not, we are not at this point in time. However, we made a significant improvement with Generation 5. If you can look at from 48 volt angle, energy density is approximately 20% better versus Generation 4, and from a cost perspective, Generation 5 is even more impressive, is approximately 30% more competitive compared to Generation 3.And furthermore, we are less dependent with Generation 5 on wheelhouse because there are no wheelhouse in the cell, which is an additional advantage. So -- still we have a cost disadvantage, which you probably know pretty well in the mid 4-digit area between electrified and in ICE, part of it is offset by pricing. Why? Because we see, in particular, in the European environment, there is really very, very strong demand for plug-in hybrids and electric cars, and we are very confident as we are launching the iX3, as we speak in China, and in a couple of months in Europe, followed by the i4 and the iNEXT in '21, MINI very high demand, i3 as well. So we are confident that step-by-step, we will make progress in this area as well.

[Tim Rokossa, Research Analyst]

I think my first question was misunderstood. Oliver, I meant, are you happy to help others since you can achieve the target and some others might not?

[Maximilian Schöberl]

That is your point.

[Oliver Zipse, Chairman of the Board of Management & CEO]

Tim, I tried with my answer to answer your question.

[Tim Rokossa, Research Analyst]

Okay. Then I understood.

[Oliver Zipse, Chairman of the Board of Management & CEO]

We are not pooling in either direction.

[Maximilian Schöberl]

Next question, please.

[Operator]

Next question is from Gautam Narayan, RBC.

[Gautam Narayan, Assistant Vice President]

I'm Gautam Narayan, RBC. So you've sold quite a lot of plug-in hybrids thus far. I know you talk a lot about them in your prepared commentary. You sold far more than your full electrics. This is contrasting with some other European OEMs thus far.Curious as to what you're seeing on the demand for these plug-in hybrids? Like who are these customers? Are these ICE people that you've converted to EVs in general? Are they folks who are actively selecting plug-in hybrids over BEVs? Asking because it seems like there is a strong demand developing for full-electrics. And the concern would be this transition happens to full-electric quicker maybe than you anticipate, what happens to the residual value of all these plug-in hybrids that you have on the roads? Would those not decline significantly?

[Maximilian Schöberl]

Yes. Thank you very much. Oliver, please?

[Oliver Zipse, Chairman of the Board of Management & CEO]

Tom, that is the fundamental question. What kind of customers do we have? And there is no such thing as the battery electric customer or the PH customer or the combustion engine customer, every customer is quite different. So it's a matter, and that is the topic of Power of Choice that we let the consumer decide what is best for his needs. The customer in Oslo, due to the very good charging infrastructure is much more likely to drive a battery electric vehicle than a customer in Naples because there's no charging structure at all. So it's both in Europe and what we try to do that for every customer, for every customer need and taste, we have something to offer him. And that strategy is working excellently for us. All the BEVs we are offering, they are more or less sold out currently, even an underestimated product like the MINI BEV, it's going extremely well in the market, and we expect the same thing for the BEVs to follow.The same is even more true for the PH, because a lot of customers whether they're on the business fleet side or on the private customer side, they feel interested. They would like to try out what is actually electromobility. They want to -- they don't take the risk of making a big bet on charging infrastructure, they want to blend into. And that has proven very successful to also because BMW plug-in hybrids are excellent to drive. From all customer tests we get, BMW PHs are one of the best in the market around. So we would like to convince our customers. And not to forget, this line of the equation is always forgotten that there is still a combustion engine market, which is extremely efficient towards CO2 reduction. That's always forgotten. And it's in Europe and United States. And also in China, today, the majority of the market. And at least for 2021 and 2022 and 2023, that will be the case. And the rest we will see. And I allow myself to say we will see because our company is structured in a way that we can follow the market. If it's more, you do more. If it's less, we do less. And that is, I think, the big hidden trick in how we see our business. And up to now and every day, we look forward, it's proven to be the right strategy for us.

[Maximilian Schöberl]

Okay. Thank you very much, Tom. Next question, please.

[Operator]

The next question is from José Asumendi from JPMorgan.

[José Maria Asumendi, Head of the European Automotive Team]

José Asumendi from JPMorgan. A couple of questions, please. Oliver, maybe the first one for you. I mean, you are taking the firm into a different direction versus other companies in terms of the vertical integration of components in the electric car. You make a very, I think, big statement where you are saying that you have comprehensive batteries or expertise and, in fact, larger than many other car manufacturers in the world, so I'm just trying to think about this. And can you give us a bit more details about your battery cell expertise? What have you been preparing for the past 3, 4, 5 years? And can you put this also into context with the new pilot plant you're launching in 2022? That would be question one, please. Also, if you could put this a little bit into context with the iX3, maybe provide some numbers in terms of the order backlog, if possible? Nicola, for you, please, the second question would be -- I'm getting a lot of questions on your Chinese joint venture partner. And the question is simple, basically, the health situation of your Chinese joint venture partner seems to be in a tricky spot at the moment. So is this impacting your strategy to increase the stake in your Chinese joint venture operations? Is this impacting at all your strategy in China?

[Maximilian Schöberl]

Okay. Thank you very much, José. We start with Oliver.

[Oliver Zipse, Chairman of the Board of Management & CEO]

Yes. José, I think what -- how we develop and how we structure our electric drivetrain is, in a sense, the accumulation of all our experience with the i3, but also with the development of the fifth generation of our battery electric drivetrains. And what we learned is, you must be extremely precise what you do and not do. And it's far more complex than to say, well, we either do it everything by ourselves or we buy everything. It's right in between. And I think we have an extremely high competence on the engine side, we just launched the highly integrated electric drivetrain. And we built that in-house, completely in-house. And we are very -- we're extremely happy about the development because the physical properties of the car and the functional properties of this engine is fantastic.On the battery cell, we have an approach where we build up all the competencies to know how to develop, research and produce the battery cell and leave the decision whether we to do that to a later point in time when we would need to do it. Until now, we restrain ourselves in development that developing, planning and prototyping battery cells and then go to the supplier markets. And the supplier market is big. There are more than 25 battery cell suppliers in the world. So there is no monopoly coming up. It's quite different. There are European suppliers coming up, Chinese suppliers, as you know, with CATL. So we currently don't see the necessity to go into. But if a day comes where -- in this -- for example, the sixth generation of battery cells, which we already start researching about, we just launched the fifth generation, but we always think about the sixth generation. We, of course, question everything, whether it's better to produce it ourselves, and we will make our own conclusions. And I think the characteristic of BMW is, we like to draw our own conclusions and do not depend on a so-called mainstream, what other people do.

[Maximilian Schöberl]

Okay. Thank you very much, Oliver. Nicola?

[Nicolas Peter, CFO & Member of Management Board]

José, on one hand side, and you probably understand, I can't comment the situation of other companies. However, I can state the following. On one hand side, the BMW Group and our joint venture, BMW Brilliance, we are not affected by any difficulties of the Chinese Brilliance group. And as a second point, there is, from our perspective, no indication at all, which is, regarding the validity of the contracts regarding the increase in our joint venture from 50% to 75%. So we see no impact from this perspective, neither.

[Maximilian Schöberl]

Ladies and gentlemen, it's 3 p.m., but we have time for 2, 3 -- yes, more questions. So we start the next question and then we will see.

[Operator]

The next question is from Patrick Hummel, UBS.

[Patrick Hummel]

Patrick from UBS. And well done on the quarter. Let me play a little bit devil's advocate regarding your EV platform strategy. BMW is known as a technology leader. And this time, it really feels like you're lagging competition because you're now announcing something that will happen 5 years from now, whilst basically most, if not all of your competitors are already in the race with a dedicated electric vehicle architecture. And I'd just like to understand, you presented a logical evolutionary step that you're doing now. But to me, it feels like something has changed in your thinking, and I'm trying to understand what that is. Have you come to the conclusion that the unit cost for a dedicated platform are lower? You take now more bullish view on EV adoption rates? Do you see sticker price parity of EVs now reach by 2025? What is it really that has changed your thinking? And another aspect to this whole debate, do you -- how do you think and do you care about the valuation aspect of it? Because then we talked about that before, the market seems to assign huge valuations to companies that are seen as structural EV winners. And undoubtedly, you have the technology in house. We just talked about Gen 5 powertrains, et cetera. But if it takes another 5 years for you to bring EVs to the market on a dedicated platform, and then only you are all-in and push the pedal to the metal to sell EVs, that's not helpful for the valuation in the next couple of years, if you're thinking about the multiples that people assign to legacy versus EV-centric businesses. So a lot of questions, but all in the same topic, just interested in your thoughts.

[Maximilian Schöberl]

So thank you very much. Patrick, we start with Oliver and then Nicola. Yes.

[Oliver Zipse, Chairman of the Board of Management & CEO]

Patrick, thank you for your question. Nothing changed in our growth. That is why I try to tell you the 3 phases. We started 2013, and then we said, well, this is becoming mainstream. That is why we have now 2021 and '22 with new cars coming up. And then I tried to make the connection into the third phase, which was always quite clear to us. For us, that was always quite clear that there is a third phase coming when the next architecture step is due. And we don't talk about platforms. I think there is a big mistake to think that there are platforms, which must always be distinct. And watch next week's NEXTGEN when we will tell you much more about the iNEXT that is neither a platform, this is part of bigger architecture. And always, technological progress, every year going on, you have new technological advances. And of course, every 5 years, you update your architecture. And the Phase 3, I was talking about, is a very natural next step in our architecture base because we would renew the architectures anyway. And as markets progress with more digital in the car, and at the same time, with more EV emphasis, this is quite natural that the next architecture will have the best technology at that time. So for us, it's quite a natural phase, and that is not anything new. And I don't -- we still don't think that the world is separating immediately and very quickly in 2 completely different phases, the combustion world and the EV world, it's about architectures, competence overall, and it's not only about EV, it's much more about user interface, digital competencies, connectivity and, of course, the right drivetrain for the right customers in the world. And our current market success tells you also a bit what can be successful. And with our approach, we don't have problems reaching the CO2 targets. And until 2030, we adapt very quickly. And I think, Peter, you wanted to say something also about the financial implications of the architecture.

[Nicolas Peter, CFO & Member of Management Board]

Yes. Patrick, maybe let me start with a more personal comment. I'm not an engineer. And I was driving 10 days ago, the i4 and the iNEXT, by the way, the iNEXT is on a dedicated platform. Both cars outstanding, outstanding. And with the i4, the iNEXT, the iX3, the MINI and the i3, we will be already in more or less all very relevant segments to our business. We will be in the KKL SAV segment, in the MKL SAV segment. We will have with the i4 high-performance sedan. So I think we are well positioned from this angle, and there's more to follow. And I think this is exactly the way the customer -- consumer is looking at the market.From a valuation perspective that we are not a start-up. So we are not a Greenfield organization. We sell between 2 million and 2.5 million cars. Every year we have to manage the transition in a successful way. And this is something we are -- I believe we're in an extremely strong position based on our high profitability. We can invest in the right technologies, and we will focus on one hand side on what Oliver just described, and on the other hand side, in particular, on the digital backbone of our products. So I believe we are definitely in a good position.

[Patrick Hummel]

And will that give you both sticker price and margin parity with the new platform in 2025 then versus ICE including all the development costs, so down to the EBIT level?

[Nicolas Peter, CFO & Member of Management Board]

Tim, this is -- I believe this is exactly the challenge for everyone, for everyone in the industry to bring down the cost level of electric drivetrain, has nothing to do with dedicated or not dedicated is the #1 challenge. And as we are already talking about Generation 5 level, I would assume we are more advanced than most of our competitors.

[Oliver Zipse, Chairman of the Board of Management & CEO]

Maybe one short comment on this one. More important than what you call a platform is that you have an architecture which spreads over all your cars, and dedicated when we talk about the Generation 5, these components are in all-electric vehicles, not only in one specific car segment. And I think that has to be understood. That is the real big leverage you have in the cars. If you are in one platform, you can only apply your components in that one platform, which might be a big disadvantage. Second of all, as Nicola said, we are not a Greenfield company. And as I said in my speech, in 2022, all factories can do purely electric vehicles already. So the transformation into electric architectures is almost behind us. We have already done it. And when another new architecture comes, we will simply blend it into our current structures. So we are almost through already.

[Maximilian Schöberl]

Okay. Thank you very much. So next question, and I think last question from...

[Operator]

The last question is from Angus Tweedie, Citigroup.

[Angus Vere Tweedie, Director]

First one, hopefully, quite quick. You've made some comments about credit risk rising in the finco. Could you provide some sort of gauge of what credit loss ratio you're assuming in that guidance? And then secondly, on the Chinese JV, you saw very strong performance in the quarter. Could you perhaps talk about how you're thinking about the volume trends into 2021 in that business? How you're thinking about the cost of emissions compliance?

[Maximilian Schöberl]

Thank you very much, Angus. Nicola?

[Nicolas Peter, CFO & Member of Management Board]

So Angus let's start with credit losses, in the area of 0.21%, 0.22%. So still extremely low. However, based on some of the indicators we see in some markets, we believe it's appropriate to build some provisions for credit losses. Performance of BBA, in fact, was throughout 2020, excellent, not only from a volume perspective, but also from a pricing perspective, we've seen strong improvements in pricing, while at the same time, in particular, in the third quarter double-digit growth in the area of nearly 30%.Too early for any expectations for '21. We will guide '21 in our press conference in March. However, looking at the indicators we have, we are confident that we will see a strong finish in China in 2020. We still have strong order income.

[Maximilian Schöberl]

Okay. Thank you very much, to Nicola and Oliver. Thank you very much. And ladies and gentlemen, thank you for joining us today. I think it was a pleasure for us and all the best from Munich, and please stay healthy. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.