Bayerische Motoren Werke AG
XETRA:BMW
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So ladies and gentlemen, good morning. We are on time. Welcome to our Analyst and Investor Conference. We are delighted that you could join us today. Today, we will focus on 2017 as well as on our progress with Strategy NUMBER ONE > NEXT. Today's speech will be a bit shorter than yesterday at the annual press conference. Therefore, we will have more time afterwards for our Q&A. The full speech from yesterday can be found in the press kit along with the annual report, our yearbook and the sustainability factbook. As always, the annual report is also online. With me today are Harald Krüger, Chairman of the Board of Management; and Nicolas Peter, our CFO. About today's agenda, we will start with Harald Krüger. He will give you an update on our Strategy NUMBER ONE > NEXT. Then Nicolas Peter will inform you about our financial performance in 2017 and, very important, the outlook for 2018. This will be followed by the Q&A. Before we start, please note that this conference is subject to the disclaimer regarding forward-looking statements. You will find this in the investor presentation material referred to this conference. Please also refer to the report on risks and opportunities, which you will find in our most recent annual report. The BMW Group does not assume any obligation to update these forward-looking statements or the information. Thank you very much. And now I would like to hand over to Harald.
Ladies and gentlemen, good morning, and welcome from my side. We achieved all of our targets in the year 2017. The BMW Group is the clear near #1 in the premium segment and has been for the past 14 years. We intend to make 2018 our ninth record year. For deliveries and revenues in the Automotive segment, we are again striving for new all-time highs. Strategy NUMBER ONE > NEXT is the path to the BMW Group's success over the long term. It provides a road map for our transformation towards sustainable and digital mobility. We are making good progress with our strategy. We can see this in the decisions we have made, on the market side, in our products and in our services. Let's take a look at the first point. The BMW Group has a decisive advantage in an ever more connected world. We are a global company through and through and extremely flexible. We have 30 production sites in 14 countries. We are already producing electrified models at 10 locations worldwide. Next year, we will also begin producing the all-electric MINI at Oxford. Also in 2019, our plant in Mexico will start production. Our new plant will produce for the global market.We want to remain in a good position to take advantage of opportunities in individual markets. To achieve this, we are increasing our footprint in all major market regions. In the U.S., we delivered more than 350,000 vehicles to customers last year. In 2018, we expect to see slight growth. Spartanburg is the biggest plant in our global network. We have invested almost EUR 9 billion in the site so far, with another EUR 600 million to follow between 2018 and 2021. Over 70% of the vehicles produced in Spartanburg last year were exported. According to the U.S. Department of Commerce, BMW plant Spartanburg is the leading U.S. automotive exporter by value. We are proud to be responsible for around 70,000 jobs in the U.S., including dealer network and suppliers. The U.S. is our second-largest purchasing market with a volume of EUR 4.7 billion. None of this would be possible without free trade.China remains our largest single market with more than 595,000 vehicles sold last year. In China, we operate 2 car production plants and 1 engine plant. In 2018, we are targeting solid growth there. Here are 2 examples of how we are positioning ourselves in China. We are stepping up our partnership with Brilliance as part of our joint venture and have decided to build the new X3 in China, starting mid-2018. This high-volume vehicle will be the sixth localized model. The long-wheelbase version of the BMW 5 Series is now also available as a plug-in hybrid. Chinese customers, therefore, have 6 different electrified models to choose from. This gives us an excellent foundation for the years ahead. We recently signed a letter of intent for a further joint venture with Chinese manufacturer, Great Wall Motor. In the future, we also have a plan to produce pure electric MINI vehicles in China. In Europe, we sell more cars than anywhere else. The total number for 2017 was over 1.1 million. This year, we expect another slight gross increase in sales. The U.K. will remain an important production location for us, even after it leaves the European Union. And now to the second topic, products. The BMW Group leads the premium segment worldwide, and we are striving to lead in all segments where we are present. In Phase 2 of our model offensive, we will be making a huge push, focusing on 2 aspects: Luxury and X. Over the next 18 months alone, we will be launching 8 new models in the highly profitable Luxury segment. This summer, the new BMW 8 Series Coupé marks the start of a completely new model series: with the Coupé, the lovely Convertible and the Gran Coupé as well as the corresponding M models. The new X7 is extremely spacious and has a magnificent presence. Customers in the U.S., Asia and Russia have been waiting for a long time for a vehicle like this. We will begin producing the X7 in late 2018. Rolls-Royce is the pinnacle of luxury and elegance. The same applies to the new Phantom and the new Cullinan, the first ultra-luxury SUV. 2018 will also be our X year. Customers love the new X3. This year, we will begin building it in South Africa and in China, in addition to Spartanburg. The cool-looking X2 has been scoring up top marks in the fast-growing compact class since March. The new X4 is athletic from top to bottom. It will be available in summer.Our model offensive is also a drivetrain offensive. We are using scalable modular kits for electrification. From 2020, we will be able to fit all model series with any type of drivetrain. This shows our future is electric and sustainable. With our electric cars and plug-in hybrid models, we are already #1 in Europe. As you know, I have set some clear targets for sustainable mobility: more than 140,000 electrified vehicles sold this year; a total of 0.5 million electrified vehicles and plug-in hybrids on the roads by the end of 2019; 25 electrified models, 12 of them pure electric by 2025. Over the course of this year, we will present a number of pure-electric concept vehicles that will all go into series production, like our new technology flagship, the BMW iNEXT and the captivating BMW i Vision Dynamics, which I announced as the BMW i4, the car here on my left side. We will produce both in Germany. In 2020, we will launch the first all-electric BMW. More on the iX3 soon at the auto show in Beijing. 2019 will see the first pure electric MINI. The first MINI plug-in hybrid, the Countryman, is already proving very popular. The new BMW i8 Roadster and i8 Coupé will be available as of May this year. Both models come with the fourth-generation BMW eDrive technology. With the fifth generation of eDrive, our vehicles will be able to drive 550 to 700 kilometers on electric power, depending on the model. We will all achieve this with the BMW i4 and the iNEXT. But the BMW iNEXT is far more than just a car. It will enable the entire company and all our brands in terms of technology, design and new approaches. The iNEXT combines autonomous driving, connectivity, electrification and services. Sustainable mobility and autonomous driving go hand-in-hand for us.Soon, we will be opening our campus for autonomous driving outside Munich. We will be launching autonomous driving and the iNEXT in 2021. This means we will technically master levels 3 to 5. The system will be fully integrated and safe. Our test fleet for level 4 and level 5 will take to the roads at the same time as the iNEXT. When it comes to autonomous driving, safety is our top priority. This year, we will double the size of our autonomous test fleet to around 80 vehicles. And now to my third point, mobility services. At the start of the year, we took full ownership of DriveNow. We also acquired Parkmobile LLC, making the BMW Group the largest international provider of digital parking solutions. We now have all the options we need for continued strategic development of our mobility services. We want to be customers' first stop for individual mobility. We will build a customer base of 100 million active customers by 2025. Our goal is to create a complete all-inclusive ecosystem for customers. The potential is huge, both for customers and for our business success. Ladies and gentlemen, despite the challenges and the headwinds, we remain optimistic, determined and fully focused. We intend to make 2018 our ninth record year. And as you know, we always deliver on our promises. In all areas of our business, we are pushing forward at top speed. Our future is electric and fully connected. And the customers will be always at the heart of everything we do. Thank you.
Thank you very much, Harald, and now, Nicolas.
Thank you, Max. Good morning, ladies and gentlemen, and a warm welcome. Despite a volatile environment, the BMW Group achieved another record year in 2017. We may not be participating in the space race, but once again, we do deliver on our down-to-earth targets. For the eighth consecutive year, the EBIT margin for our core business was within our target range of 8% to 10% at 8.9%. We achieved this despite spending more money on research and development in 2017 than ever before. A company that delivers such a consistently high level of performance like the BMW Group can continue to achieve many great things in the future.Now let's take a look at the business figures for last year. The group EBT margin for 2017 was 10.8%. This also underlines our continuity. In each of the past 7 years, we have consistently met or exceeded our target of 10%. Group revenues climbed to EUR 98.68 billion.Pretax earnings topped the EUR 10 billion mark for the first time, reaching nearly EUR 10.7 billion. This also reflects our strong operating performance at group level. This 10.2% increase is slightly higher than we forecast at the start of the year due also to high positive effects in the financial result, most notably: the strong performance of our Chinese joint venture, BBA Brilliance; and a tailwind of EUR 183 million from new investors acquiring a stake in the mapping service HERE. The lower tax rate of 18.3% was mainly due to remeasurement of deferred taxes as a result of the U.S. tax reform. Without this effect, the effective tax rate would have been around the same level as last year. As a result, net profit for the financial year 2017 reached over EUR 8.7 billion. For the coming years, we continue to expect a tax rate of around 30%. The BMW Group posted a very strong fourth quarter, despite high-cost pressure from future-oriented products. Group earnings before tax increased significantly to EUR 2.17 billion. This increase resulted from the positive development in our operating business, solid earnings of our Chinese joint venture and negative valuation effects in the previous year in the other financial result. Despite high upfront investments, the EBIT margin for the fourth quarter was slightly above last year's level at 8.4%.Ladies and gentlemen, if we want to be at the forefront of future developments, we need to invest today. At EUR 4.69 billion, group capital expenditure for 2017 was almost EUR 1 billion higher than the previous year. We are investing heavily in our production network and our development locations worldwide. Flexible architectures and the integration of electrified vehicles into our existing production network will enable us to respond quickly to changes in customer demand. The CapEx ratio for 2017 increased to 4.8%, reflecting the high upfront investments. In 2018, we will continue to make major investments to secure our future competitiveness. We are, therefore, assuming a CapEx ratio of up to 5% for this year. Research and development expenditure also rose significantly in 2017 to EUR 6.11 billion. This is almost EUR 1 billion higher than the previous year. We will continue to focus our efforts on further development of our electric drivetrains and autonomous driving. The R&D ratio for 2017 rose to 6.2% and, as previously announced, was therefore above our target range of 5% to 5.5%. Due to the high upfront investments, we expect the ratio for 2018 to be between 6.5% and 7%. In the following 2 years, it is likely to remain above our target range, but lower than in 2018.Ladies and gentlemen, our shareholders will benefit from our strong results in 2017. The Board of Management and Supervisory Board will propose a dividend of EUR 4 per share of common stock and EUR 4.02 per share of preferred stock for 2017. This will be the highest dividend the BMW Group has ever paid in its history, with a total dividend payout of EUR 2.63 billion. As a result, 30.2% of our net profit for the year will be paid out to the shareholders. Ladies and gentlemen, let's now turn to the individual segments, starting with the Automotive segment. Our core business continued on its successful course in 2017. The segment EBIT reflects our operating strength. In 2017, EBIT for the segment reached a new all-time high of more than EUR 7.86 billion. The EBIT margin of 8.9% remained on a par with last year and within our target range as planned.Unlike other manufacturers, our margin encompasses only a portion of our very profitable operating business in China. In the operating income bridge, you can see the main effects that contributed to the positive EBIT development for the year. Volume and mix effects, including the launch of the new 5 Series, had a positive impact. Other operating income and expenses reduced earnings by EUR 373 million. This item mainly covers additions to provisions for legal disputes and other litigation risks, which are not related to cartel allegations. Our forward-looking hedging strategy for currencies and commodities is paying off. As expected, these effects produced a tailwind in the low 3-digit million euro range compared to 2016. Other cost changes resulted in a negative effect of minus EUR 370 million, mainly due to the high research and development costs already referred to and higher personnel costs. Significant improvements from ongoing efficiency measures are partly compensating this. In this way, we are able to compensate overall for the high level of spending on future-oriented projects in 2017. Let us turn to the cash flow statement. Free cash flow in the Automotive segment remained strong in 2017 at EUR 4.46 billion despite significantly higher investments. The level of investment will increase again in 2018. However, due to the positive business outlook, we expect to maintain a healthy free cash flow of more than EUR 3 billion for the current year.Ladies and gentlemen, financial strength and flexibility are the hallmarks of the BMW Group. These are the success factors that enable us to keep independently charting our own course. The BMW Group's liquidity position remains very solid. At the end of the year, group liquidity totaled EUR 14.5 billion. As a result, we are well prepared for volatility in the financial markets as well as political and economic challenges. We continue to have the second-highest rating of any car company worldwide. Let's take a look at the Financial Services segment, which performed well in a highly competitive environment in 2017. New leasing business, which declined slightly, accounts for about 1/3 of our total new Financial Services business. The penetration rate of 46.8% was lower than the previous year, largely due to regulatory limits on financing volumes in China.Pretax earnings posted a slight year-on-year increase to EUR 2.21 billion, partly as a result of higher business volumes. The risk situation for the entire segment portfolio remained stable overall in 2017. The net credit loss ratio of 0.34% is still very low. Residual value losses increased last year as expected. This also reflects the situation in the used car markets in North America and parts of Europe. As usual, we adjusted our residual value expectations accordingly. These residual value risks are therefore fully covered through our risk provisions.Ladies and gentlemen, let's move on to the Motorcycles segment, which performed very well in 2017. The large number of new models boosted growth. The EBIT margin of 9.1% was within our target range of 8% to 10%. Pretax segment earnings climbed 10.8% compared to the previous year. Intersegment eliminations reduced group profit by EUR 528 million. This improvement over the previous year is partly due to the lower volume of new leasing business in 2017.Ladies and gentlemen, in 2018, we expect the positive business development to continue in all segments. The introduction of the new IFRS 15 accounting standard, which is valid from 1st January 2018, will require a slight adjustment of the comparative figures for the previous year for a number of our KPIs. Our outlook for 2018 is, therefore, based on the adjusted figures for 2017. In 2018, we will set the course of continued growth. Despite substantial upfront investments in future technologies and high positive valuation effects in 2017, we are targeting group earnings before tax at least on par with the high level of the previous year.In the Automotive segment, we expect to achieve new all-time highs in 2018. As long as conditions remain stable, we should see a slight increase in deliveries from growth in China and the U.S., in particular. Automotive segment revenues should also increase slightly, in line with sales volume development. Despite strong headwinds, we remain committed to keep the EBIT margin within our target range of 8% to 10% in the Automotive segment. This shows that we can combine a clear focus on the future, while having a high level of profitability. In the Motorcycles segment, thanks to its recently updated model lineup, we anticipate a solid increase in deliveries in 2018. Here, we also continue to target an EBIT margin of between 8% and 10%. We expect another strong performance from the Financial Services segment this year. With growing capital requirements worldwide, return on equity is likely to decrease slightly in 2018. Due to regulatory requirements, we must continue to expand our equity base over the next few years. We will, therefore, be targeting a return on equity of at least 14% going forward. Our guidance assumes that economic and political conditions will not deteriorate significantly.Ladies and gentlemen, the figures for 2017 confirm once again the BMW Group has the right foundation. Achieving the high level of profitability for 8 years in a row is no coincidence. It is a result of a strict orientation towards performance and a clear strategic focus. We are investing our profits in the future and sending a clear message to our customers. Our sustained high margins, financial strength and consistency are also a signal for our current and future investors. The BMW Group continues to follow its own path: focused, determined and with a clear strategy. Thank you.
Thank you very much, Nicolas. We start our Q&A session with Arndt Ellinghorst.
I've got 2 questions over here. Arndt Ellinghorst from Evercore. One for Harald Krüger and one for Nicolas Peter, please. Harald Krüger, you're in charge of one of the most overcapitalized businesses, thanks to really a fantastic performance of the last 8 years, as Nicolas just mentioned. So strategically for the next 5, 6, 7 years, what opportunities does that create? And should we look at BMW as a business that will grow organically in the regions? Or shouldn't you consider some M&A, whether it's in technology areas, competitors, to use that strength to build out the company even further? And the second question for Nicolas Peter, please. On free cash flow, EUR 5.8 billion about 1 year ago, EUR 4.5 billion now, EUR 100 billion revenues, more than EUR 14 billion EBITDA. You're sticking to your more than EUR 3 billion free cash flow target. When you look out 2019, '20, is more than EUR 3 billion really what we should be expecting given the challenges? Is that an expression of caution of the headwinds that you're expecting? Or shouldn't you be more confident to target a range closer to EUR 4 billion to EUR 5 billion, given your product rollout and the performance that you're expecting?
So we start with Harald and then Nicolas.
Okay. Thank you. First of all, I think there are 2 sides. The one is we would definitely, on the one side, would like to grow organically, and we would like to have the financial performance that we can do everything on our own as a strategic path, in general. But there's 2 or 3 things where there might be opportunities in the future for M&As, take one which we did like Parkmobile, like LLCs, so in the mobility services areas or others. Secondly, we also will work with corporations, strategic corporations like in China with Great Wall, where you can't do your business on your own. You have a partner, you have a joint venture. So strategically, with the NUMBER ONE > NEXT, we will grow organically. We see good opportunities in expanding the export product portfolio and working in other segments as well, doing more on the Luxury side and to have the financial performance that we can do everything if we wish on our own. Secondly, strategically, more cooperations in the future because we need to be fast, and then sometimes you need to have the economies of scale or the regional footprint is important that you have a partner. And thirdly, if there's something like Parkmobile, for example, and opportunities might come in the future, we will tackle them.
And regarding your question related to free cash flow, 2 or 3 comments. Number one, I definitely think that the free cash flow in 2017 was a very strong achievement. We've guided EUR 3 billion and we've ended up at EUR 4.5 billion, despite an additional investment of more than EUR 1 billion in 2017. Second -- secondly, if we look forward into the next year, and particularly into 2018, I think the guidance of EUR 3 billion is exactly the right one. Why? Because on one hand side, we are very optimistic that we will generate cash, thanks to our very positive business development start into the year. You've probably seen the sales number was definitely on track. We are on track to achieve our 2018 targets. We are coming with many new very profitable models into the market. On the other hand side, we have to continue our investment level also in the years moving forward. And maybe it's a reflection. If we compare our free cash flow to free cash flow in the industry, I think it's an outstanding result also from this benchmarking perspective.
Thank you, Nicolas. The next question comes from Patrick Hummel and then [ Martin Schickler ]. Patrick, please.
Over here. Patrick Hummel, UBS. Two questions, please. First one, mobility as a service and thinking a few years ahead with the iNEXT coming in 2021, a vehicle that's level 3 to level 5 capable. Other players have become much more vocal and also more aggressive in terms of their strategies on mobility services, selling the mile rather than the car. As you will be amongst the early OEMs to have a level 3 to level 5 car in the market, can you talk a bit more how you see BMW as a brand or BMW as a group in that world of mobility services? Because, for example, your competitor 200 kilometers west of Munich is getting much more vocal about that business and has very clear ambitions here. And my second question is related to the i4. Can you give us an understanding how much of a meaningful volume and then also CO2 contributor this car is going to be in 2020? I'm asking that question against the backdrop of competitors of BMW now having a very busy launch pipeline of dedicated BEV models over the next 18 months. Your North America chief saying he would like to have that car ASAP rather than in 2020. So is -- and the X3, you said it in your speech, is going to be a China-produced vehicle, so it sounds like that's not going to come at big volumes to Europe or North America. Is this really a car that will have significant volume from the very beginning?
Harald?
Okay, I'll start with the i4. With the i4, I think we will attack in a segment which definitely has opportunities for volume growth, which is in the KKL Plus segment, so the 3, 4 series segment, i4. That is a huge segment worldwide, so I believe they are good chances. But from the experience we have, definitely, product offer and this car will have a range between 550 and 700 kilometers. It will be very fast, it's very dynamic. It's, what I would call, a blown-away car, yes? Why is it not too easy to judge what volume we would expect? Because for e-mobility and that's why we are pushing it, you need, first of all, a charging infrastructure. That is not in every country perfect. You will find that in big cities like Amsterdam, like Norway, like Los Angeles, there's a good network. But in some countries of Europe, it's difficult. So that's why -- I'll come back to the flexibility strategy in a moment, but that's why I see good volume chances, but it's depending also on infrastructure and the offer. That will be attractive product. It will have a reasonable price, and it will be definitely -- it's in a segment which has potential for growth, definitely. And the CO2 contribution, let's put it that way, we stated yesterday clearly that BMW was the only one company which met the voluntary target in 2008. We have reduced our CO2 emission fleets this last year by 2 gram, from 124 to 122, yes. Because we are successful in electrification, we sold 100,000 vehicles last year. And other competitors have increased their CO2 emission average. So we will further continue with the electrification. And it's just the MINI electric, it will be the iX3, it will be more products to come. There will be, out of the 25, 12 pure electric vehicles in the next years to come. So we will ramp up significantly. And definitely, we need to be in segments where there's big volume opportunities, yes. That's the first question. The other one was on mobility as a service. Clearly, a strategic target. Thinking ahead with iNEXT, level 3 to level 5. First of all, for us, safety comes first and we believe the technology is not ready before '21, yes, because you need perfect radar systems, sensor systems and whatever. And we were always cautious about that safety comes first, that's why we prepare for level 3. We will have a test fleet with level 4 and 5. And you need to be careful going just step-by-step forward. And mobility services as part of the brand, take an example with the mobility services in Norway, for example, or in other cities like Hamburg, we are pushing e-mobility with the i3s and the DriveNow program. So mobility service is also for us an opportunity that customers get into an electric car. And it's a strategic opportunity to learn and get more customers, like digital parking, like digital charging, yes. We have the clear target that we want to have 100 million customers' data well-known individually by the year 2025. And then you need to push mobility services.
And if I can just follow up, do you think that you can grow into that business organically predominantly? Or will you, because others have already built a portfolio, do you think it's still enough time to grow that business yourself? Or will you rely on partners?
I think, quite simply, as I said yesterday, we bought DriveNow. We have Parkmobile. And we have all jokers in our hands. And let's see.
Patrick, maybe one comment regarding the U.S. market. Of course, the markets always loves to have the new products immediately. Having said this, the American market, the U.S. market will have plenty great models to sell in '18 and '19 as the market is trending clearly towards SUVs, SAVs. And we are launching after the X3, the X2, the X4, the X5, the X7. So I'm pretty optimistic that, that will show good results in the months to come.
Yes. And to add to this one, there's lots of cities in America which loves the MINI electric. In a city like Boston, we see good potential for a MINI electric as one example. And there are other cities. MINI is perfect as an urban brand for electrification.
So next is [ Martin ] and then Tim Rokossa. Martin. Where is [ Martin Schickler ]? He's not here? No. Okay. Then we take Tim Rokossa.
Tim from Deutsche Bank. Two questions, please. The first one is on CO2 and the electric cars, also a bit into Patrick's direction. VW has now given us a BEV target for 2020 that they require in order to meet the CO2 targets. Are you happy to share with us at least a number for your electrified vehicles, as you call them, so PHEVs and BEVs that you require in order to meet the targets? And following on to that, you're not going to give us the profitability, obviously, of these vehicles, but you are now in a number of generations already. Is it fair to assume that they are at least no longer as margin dilutive as they were at the beginning? And as a second question, probably to Nicolas, a lot of people are saying that your margin corridor may be at risk eventually in the next 2 or 3 years with the electric cars being margin dilutive somewhat and the additional costs coming up to stream. You've done a very impressive job at keeping the target corridor despite high R&D. Can you give us a couple of examples how you are taking out costs, and where you think you can still take out costs in the next 2 years?
Okay. We start with Harald and then Nicolas. Harald?
I start with the question about the CO2 target 2021. To achieve this, you need definitely a mixture of combustion engines, petrol and diesels, plug-in hybrids and battery electric vehicles. Without electrification or without diesel engines, no chance to meet it. And we will see all 3 for the 2021 target. Our internal targets for '21, I will not communicate here, but let's give you an idea what will happen. We had a target of 100,000 electrified vehicles last year. This year, we have a target of above 140,000 units next -- this year. I communicated that by the end of 2019, we would like to have 0.5 million cars on the road in total as a sum. And if you do some mathematics, you can calculate what this means, yes? And then you can see the further ramp-up was additional battery electric cars. Why is it difficult? Because we will meet the target because we anyway would have the combination of that one, but we will ramp up with the MINI. How many MINI electric we will sell in 2020? How many BMW X -- iX3s will we sell in 2020? That's a little bit difficult to forecast. But we are clear on the way that we will achieve the target. And the second question was on the cost side, on the margin side for the EVs?
Yes.
Yes. And for sure at the beginning, the costs for the electrification are much higher, but we are now coming to the fifth generation, from generation 3 to 4. The i8 Coupé and the i8 Roadster will already have the fourth generation in place. Then the iX3 will have the fifth generation. So from generation to generation, we have reduced costs. And on the other side, we will see economies of scale. And the third one, where we are working very hard, we have a lot of depth of in-house production and knowledge. We had opened up and will open up for EUR 200 million a batteries center. So we have a lot of knowledge on the R&D side about batteries and cells. We have a lot now on the -- know-how on the production side. We're doing this one, and we have a higher depth of in-house production and knowledge compared to our competitors. They have outsourced many of those things. We're doing it internally to control the costs of the new technology, because if it ramps up, you must be #1 on the cost side to deliver your margins. That's why we put a lot of efforts into to control and be very cost-sensitive and getting the knowledge, and we have very good examples from generation to -- 4 to generation 5 how we reduce cost, for example, for expensive materials.
And Tim, a few reflections on the margin corridor. Of course, BMW Group is a very ambitious company. We are an ambitious organization, and we are setting ourselves ambitious targets. Is 8% to 10% a walk in the park? Definitely not. Are we optimistic that we are going to achieve those 8% to 10%? Yes, for a couple of reasons, 2 headlines. On the one hand side, focus, and on the other hand side, performance. A few examples. Big data, for example, will help us to drive contribution per unit on an even higher level. We are increasing the mix in our portfolio with all the new model launches coming up. Efficiency, reduction of complexity is something we are doing in a system -- really systematic way. Will you have the same number of combustion engines in the different series as we have today? Most likely not. Most likely not. And this will give us some room to maneuver into those new technologies and to balance the 8% to 10% margin.
Thank you, Nicolas. The next question comes from [ Josh Chang ] and then José Asumendi. [ Josh ]?
Two questions. First of all, on China, if we look at the Chinese EV market for the time being, it's mainly -- well, it's a big market, but it's mainly made of cheap, affordable EVs made by local producers. I'm just wondering, what's your thinking behind the premium EV market? Is there a real business case for that market? And how will you address the tough issue of NEV credit quotas coming in 2019? That's the first question. Second question on Financial Services. Dr. Nicolas Peter, you mentioned the new long-term target of 14% ROE. Is this just a reflection of higher regulatory constraints regarding the equity base? Or have you factored in other factors such as residual value risk in that one? And if this is related to equity base, how much additional cash injection are you planning for either this year or coming years?
To answer your first question on China. First of all, as you can see and I would like to line on the bigger picture. We will have in the future 2 joint ventures, one for the brand BMW where we will localize electric vehicles and one for the MINI brand for electric MINIs, yes. So with these 2 joint ventures in the future, we are able to offer the Chinese customers in all segments, if it's small urban cars or big cars, electrification, yes. And we will -- will this strategy meet also definitely then the NEV quota in terms of what is required. By today, we already have the X1 plug-in hybrid, the 5 Series, new 5 Series long-wheelbase plug-in hybrid in the market. And let's see in Beijing Motor Show, we will show some more. And we have already a local partner called CATL for cell production in China, which is required as well. And we opened up in our Shenyang operation, in our Shenyang plant, a battery cell manufacturing center. That's the first OEM in the premium segment. So we are well prepared for the localization of electrified vehicles in China. And if you see with MINI as a growth potential being localized as an electric vehicle in China, there is a growth opportunity, definitely, together also on the BMW side with our great partner, Brilliance.
[ Josh ], regarding the 14% ROE target for the Financial Services business, that's a pure reflection of regulatory changes. Just to give you one example, we have increased equity between -- in our Financial Services business between end of '16 and end of '17 from 8% to 10.7%. So this is already a significant increase in 2017. This will continue. We have injected in the last couple of months in our Chinese Financial Services company between EUR 300 million and EUR 400 million. We have to invest -- inject in some other companies, due to regulatory changes, a significant amount of money. So this is purely driven by regulatory changes.
Sorry, just to follow up on that one. If we -- I mean, you moved from 18% to 4% to 14% ROE. The implied additional equity, what does it mean in terms of what you will have to inject this year or next? I mean, should we assume something like EUR 800 million, EUR 1 billion additional cash being injected in the Financial Services bid in China or as well?
Well, this is -- it's difficult to name -- to phrase one amount for FY '18, '19 and so on because we see this developing step-by-step in the different markets. But our forecast is that from a profit level, the Financial Service business will continue to develop as planned and this is purely driven by regulatory changes in the various markets.
Thank you. Next is José Asumendi and then Adam Hull. José?
José, JP Morgan. Two items, Nicolas. Can you speak about the other cost changes, the incremental headwinds you have in that category, the incremental cost savings that you're booking in that category a little bit? I guess, the R&D element, the higher wage expenses you're placing there but also the, I think, encouraging cost savings that you book in there every year. Any thoughts as how this category could progress in 2018? And second question for Harald. When I look at your German premium competitors, I'm struggling a little bit to understand why are they launching medium-sized electric SUV in the next 12 to -- 6 to 12 months at a very rich entry price point, I think. And I'm trying to understand why you're not following this strategy. Why you're not coming earlier to the market with an X3, X4 electric? And where would you expect to launch this vehicle to the market? Because I think it's a vehicle that will be very successful and will allow you also to cover the incremental costs of the battery and the content you need to put into that car. So I'm just trying to understand a little bit your strategy versus the others. And then the second topic would be 2020, 2021 meeting the emission targets in Europe. What are your thoughts in terms of the mix on diesel? Is 14 volt going across all the range? And do you need to have like, let's say, I don't know, more than 10% of pure EVs in your portfolio?
Thanks, José. We start with Nicolas and then [indiscernible].
Let's start with the other cost changes. And you're absolutely right, they are mainly driven by research and development, a couple of hundred million euros, and HR costs because we had -- and likely to increase our headcount, and we had some wage increase, in particular in Germany from 1st of April, 2017, in the magnitude of 2%. This was offset and this was compensated by efficiency and cost reduction. Maybe to give you some more ideas in which direction we are moving forward, one example is -- for example that we are aiming to reduce the development period of a product in a significant way. This is also supported by digitalization, AI technology. So this will give us the opportunity to reduce the time we need to develop a car, an engine, new technologies in a significant way.
So the answer is quite simple, coming from 2 sides. We wanted to wait for the fifth generation to be much more cost competitive, yes, the jump from the fourth to the fifth generation. And the fifth generation is available first in 2020 of electric drivetrains. And this relates to what Patrick and Tim asked in terms of as we do a major step in cost advantages from fourth to fifth, and we would like to scale up the volume with the fifth generation and not the fourth, yes? That's the main reason for 2020. The second one is we were developing, compared to other companies. And I see this one as a strategic advantage to be crystal clear. What do the others if it's not ramping up like hell? And what do the others, they have factories in the world with maybe 50% capacity usage? We are fully flexible, more than 100% capacity usage [ above ]. We build 50% of this car, 20%, 40% or 60%. I can build on one assembly line the petrol, the diesel, the plug-in hybrid and the battery electric vehicle. And for the transition time being, it's my way and my personal view, the best assumption and the best strategy. Then who in the room could guess how many electric vehicles we will sell i4 in Romania in the year 2023? How many will we sell in Russia? How many will I sell in Paris? We don't know. And who else says, I've got the answer, is probably not honest. But if you have a strategy, which is based on flexibility, I can ramp up with a very cost-competitive product if it's 50%, it's 30% or 20%. Target for 2025 is 20% to 25% battery electric vehicles electrified, yes?
And maybe commenting further on the CO2 targets, José. Exactly based on what Harald just said, I believe we are in a very strong position to achieve our targets in Europe. Who else has this portfolio of plug-in hybrids already in the markets? We have EVs in the market. We continue to invest in diesel technology, and we have, more or less next to every single diesel, a petrol variant where customers really have the choice between all 4 alternatives. So...
And let's see what the margins are when it comes to the race.
So that was a clear statement from our Chairman, we can close our session today. No, it was a joke. It was a joke. Oh, yes? Yes. Next one is Professor Adam Hull. Is that right? Professor? No? Okay. Good.
Adam Hull from MainFirst. I have 3 questions. On the Chinese JV cash dividend, I think you received EUR 258 million last year, doubling or a near doubling on the previous year. Just help us a little bit. I'm assuming that's for fiscal 2016. And is there any reason why the dividend payout ratio from China should say fall in the coming 2, 3 years? I know you may not give us the exact numbers there, but just to give a feel in terms of the investment. Secondly, on cash flow going back. I mean, if you delivered, say, EUR 3 billion and EUR 1 cash flow, would you be happy this year? And just confirm to us that there's no dividends coming in from the Financial Services and that Automotive cash flow. And then finally on the dividend, you've got a pretty high net cash position. You're telling us that particularly, R&D ratio will fall in '19 and '20. What's stopping you from having a dividend payout ratio, say, in the upper 30s or so if you're that confident in the midterm margins and in terms of the R&D ratio coming down?
Adam, a couple of questions. First of all, dividend payout of our joint venture moving forward, very likely to increase slightly in 2018. But we still have enough cash, definitely enough cash in our Chinese joint venture in order to finance further investments in China. Free cash flow target is EUR 3 billion for 2018. But as I said, we are optimistic that with a good product momentum, good sales outlook, start into the year was very supportive on one hand side. On the other hand side, we might have to digest even -- as I said, we have to digest high investments. We have to digest additional costs going up in our R&D ratio to 7%. So I think this is the right guidance at this point in time. And payout ratio is definitely we stick to our 30% to 40%. We are at 30.4% for the year 2017. But this has, of course, to do with a very significant tax effect coming from the U.S. tax reform. And let's see for the years to come. But the target, the aim is clearly between 30% and 40%.
Okay. The next question come from Horst Schneider and then Stefan Burgstaller. Horst, please?
Two, please. First of all, related to the WLTP changes. We read in the press that you will not deliver the M3 for round about 1.5 years, also other vehicles were mentioned. I lost a little bit the overview. Could you please give us an overview which cars you're going to stop producing or selling in Europe temporarily? And what is the financial impact? Then the second question is we discuss at the moment a lot the potential tariffs from the U.S.A, but we don't discuss the potential impact from the Brexit, which might happen in 1 year's time. And especially since you have put the production in the U.K., you could be affected the most. Could you maybe give us an update what is your contingency planning on Brexit? I mean, you said already you are committed to the production there but nevertheless, I would be interested in more details.
Yes, yes. We start with Brexit and the Chairman?
First of all, if you look at the Brexit discussion, we see an -- latest agreement was that there's an amendment until the end of the year 2020, in a period where there will be a transition. Having a manufacturing location in the U.K. can be a -- can be an advantage. If you look at this one, if there will be customs or other things, which I don't hope for, having a local production is -- could be of help. If you just have imported cars and there will be tariffs and customs, it could be more expensive for you. If you look at the currency car, the manufacturing in the U.K. is less expensive than before due to the weakness of the pound. What it means for us, the U.K. is definitely the fourth biggest market in the world, still and will remain in the future. So I do hope definitely that in Brussels there and in London, there's pragmatism on both sides. If it will be a hard Brexit, it will be a lose-lose on both sides. So with a transition agreement, you can see that there's a certain pragmatism coming onto the table. But I do hope definitely that there's something coming afterwards as well. Otherwise, business is -- and I'm very clear about this one, business is relying on free trade. And this creates wealth and win-win. And if we see something which is not pragmatic after the transition period, we will see impacts on the business. But so far, I'm still optimistic. And having a manufacturing location in the U.K. must not be a disadvantage. Don't underestimate that.
So impact of WLTP. Number one, we have a planned interruption on certain model variance. This is, by the way, a challenge for the whole industry because this WLTP changes came in pretty, pretty late and therefore -- well, we have some supplier issues. Having said this, there's a strategy in place to minimize the impact of those WLTP changes. And we do not forecast, we do not forecast any negative impact on our sales nor on our profit. On our financial results, we will relocate models between various markets and shift between engines. And maybe just to add on one thing, the M3 is a different topic because the M3 is anyhow in run-out phase and there will be a new model on the market.
Let's put it that way.
Should we then expect some seasonality on free cash flow maybe? I don't know that you increase inventory on those models, but you don't plan to produce or send any more in Europe?
No, no, no.
No.
Because we -- when we made our budget, this is nothing which happened surprisingly in our planning. So this was integrated in our planning.
And to add one more, it looks like that we are at the forefront going through. And it's always better to be in the #1 position going through there than waiting for #2 or 3. And let's see what happens in the second half of 2018 and the beginning of 2019.
Thank you, gentlemen. Next is Stefan Burgstaller and then Michael Tyndall. Stefan?
Stefan Burgstaller from Goldman Sachs. I would like to ask or share with you my sort of strategic concerns for the group. And I'm interested in how you'd respond. So you're talking about being #1, your second-best credit rating, financially well-capitalized. Life is good. And you're dealing with these challenges well. We're seeing the cars, we're seeing the responses on autonomous driving. You talk about mobility services. So if I take it back to first principles and think about the next decade, I see sort of a rather pedestrian growth in the end markets. When I look at your product portfolio sliced and diced, as you've been excellent at this, but it seems that you've positioned yourself well to extract the growth which the product portfolio can give you. Maybe there's a mix uplift, but still, when I look forward in the electrification, we don't know when it comes. But when it comes, it's likely coming top down from the premium segment into the volume segment. So there is a substitution for it, early for you as well. And then when we talk about mobility services, I really struggle to form a sentence which kind of is credible to me, which says, BMW automated driving machine and autonomous driving. So my point is, the growth potential for the group over the next decade could be constrained. At the same time, you have to substantially step up the investment as you've shown and as you sort of predict in the future. The result is falling returns. And that's kind of what the share price is dealing with in the moment. Is this not the time to be really bold and think how you can grow the portfolio, the brand portfolio to leverage the investments you have made, which comes back to Arndt's questions at the beginning of the session?
We will split the answer. First of all, if I look at our strategy and if I look into the business, there's definitely further growth opportunity, yes? If you look at China by today and how many people are having a premium car and how the society is growing and what is in the interest or even if you look at the U.S. markets, there is definitely more opportunity for premium growth and the premium segment. If you look back to what happened in the last years, maybe the last 10 years is one example. The premium segment was always outperforming the mass segment. Last year, for example, 1.5% in the mass segment, much more than 5% in the premium segment. So premium is still growing across the globe, which gives opportunities for our business. If you think about last year, we had in China, as one example, 15% growth on BMW. We are localizing now the X3 in China, yes, as one example. There's more opportunities with a localized product. So premium is still growing. Secondly, on -- we will see from the experience we have with our data in DriveNow and mobility service, we see more kilometers being driven and less -- more cars on the road. So we will see chances there. If you are not in that business, for sure in mobility services, you might be subsidized, you might go down on your volume and sales, but if you're in the business, there's more chances definitely. Second part. Third one is, I totally believe in electrification. It will come and autonomous driving as well. But there's one philosophy: at BMW, the driver will decide. And even if you just drive 50% or 60%, 70% autonomous, there might be the perfect road like a sunny day like today where you just enjoy driving by yourself and we and the premium segment and selling emotions. We are not selling just go from A to B. If you just want to go from A to B, it might be different, yes? But so far, we see from the data, we have around about 6 to 7 years with mobility services. We have chances for growth. And there are still [ studies ] -- and especially growing with electrification. And definitely, the premium segment is still growing across the globe. We will hit maybe 10 million premium cars in the near time.
Stefan, I think we agree that the premium segment will grow. We agree that there will be a higher share of EVs on the market. We agree that X models or SUVs, SAVs will continue to grow around the globe. If you take all those megatrends, the BMW Group is not only today, 2017, in the #1 position, but also in the best position to tackle exactly those challenges. If you look at the EV portfolio, let's see who will be at what time in the right markets capable to sell, to market products. We have been the leader in EV mobility in 2017, start into 2018 was very convincing, so we are well on track in the premium segment. We have 12 full EVs scheduled by 2025, plug-in hybrids on top because plug-in hybrids will continue to play an important role in many areas of the world market. And furthermore, we are capable. We depend not on cheap money. We depend not on cheap money. We are capable, thanks to our financial strength, to fund all the necessary investments in R&D, in our global footprint from our own results. This is making us, in a certain way, more independent than any others. So this is why we are optimistic moving forward.
And Stefan, two more amendments. Why are other companies in China or in the U.S. moving into the automotive industry if it would be having no good future? First one. And second one, electrification. And we both agree on this one, is pure emotions. 4 seconds from 0 to 100 kilometers, this is highly emotional.
So next question, Michael Tyndall and then Christian Ludwig.
It's Mike Tyndall from Citi. Just a couple, if I may. The first for Nicolas. In regards to -- if I look at cost of the materials, it looks like cost of materials as a percentage of sales went down by a meaningful amount in 2017, roughly 170 basis points, which seems at odds with what's going on with raw materials and content levels. So I'm wondering if that's hedging or is there a program there where you are effectively dragging savings out that we might see ongoing. And then the second question for Harald Krüger. We spoke a little earlier outside about the political landscape and if it's diesel bans or it's tariffs or it's NAFTA or Brexit. It certainly feels like the volatility, the "we don't knows" is going up. How does that manifest itself in your planning? Do you just plot a course and keep going? Or do you have to introduce a level of conservatism because what the future holds is becoming increasingly uncertain?
Michael, very good question. First of all, I fully agree that the volatility will remain and will continue in the future and it is even getting bigger than less. What do we do? First of all, we are working with a lot of scenarios. There is not the one long-term strategic planning. And this time, you need to have a base, but you need to work with different scenarios, what will happen and what do you do in the company when this or this happens. So -- and we are clear on one thing. BMW, I stated it before sometimes, we have a set of KPIs where we would like to be #1. And one of these criteria is flexibility because flexibility is the best answer to volatility. If the battery electric vehicles ramp up like hell, flexibility helps. If they are struggling a little bit, it helps as well. So -- or if the market in China or in the U.S. ramps up quickly or this model is ramping up quickly, flexibility is a very good answer. So flexibility, lean cost structures, fast decision-making and scenario planning and a globalized -- and well-globalized company, which having footprints in every part of the world nearly in terms of global production network and global distribution network, balances then the chances and the risk in the overall system. You might not have every chance, but you may not have been hit by a severe risk if you have that globalized balance worldwide sales and production network. And these are the answers.
And Michael, regarding cost of material, you're absolutely right. We saw a slight decrease if you calculate by car of our material costs. And in this, on one hand side of course, we have a very consistent approach in our purchasing department. That's one element. But on the other hand side, this was supported by some FX effects as well.
So next is Christian Ludwig and then Mike Dean. Christian? Is he here?
Yes. Over here. Two questions. First, to follow up on WLTP. This year, you have to recertify essentially all your cars in Europe at least for WLTP and RDE. Could you give us an indication how much incremental costs that will mean for BMW this year? And the second question, a little bit more long term. On your R&D guidance, you said the ratio will come down in '19 and '20. Does it also mean that the absolute figure will come down? And how sure are you that by 2021, you will actually be back to your initial target range of below 5.5%?
Nicolas, the right question for you.
Let's start with the R&D. Our guidance is that the R&D ratio will go down from '19 onwards because we will continue to invest, of course, into new products and new technologies. It will not be in the corridor of 5% and 5% to 5.5% in '19 and '20, but will go down compared to the 2018 level. The WLTP effect is already calculated in our guidance. So we do not expect an additional negative impact on our 2018 guidance due to WLTP adjustments.
But just to be clear, you would expect that the R&D absolute cost will probably go up in '19 and '20?
We will guide '19 and '20 in '19, in exactly 1 year from now.
Thank you, Nicolas. Next, Mike Dean and then...
The feedback will be we love to see you again, you see.
So Mike, please, and then Harald Hendrikse. Mike?
Mike Dean from Bloomberg Intelligence. A couple of questions on diesel, please? Firstly, what was your market share of diesel in Europe in 2017? And where do you see this going in 2018 and beyond? And maybe you can comment on pricing as well. And then just following the court ruling last month, what are your thoughts on a potential banning of older diesels in Germany?
So diesel share in Europe in 2017 was exactly 66.5%. And we've seen an inconsistent development across Europe. We've seen markets, in particular Germany and U.K., where diesel share went down. And we had markets like Italy or Spain where diesel share remained very stable on a very high level. Italy is still above 90%. And by the way, outside Europe, we have seen markets where diesel went even up, markets like Korea. On the pricing side, we have seen some pressure, in particular in Germany and the U.K. Having said this, this is in particular, if you look at our leasing portfolio, very well under control, and we have taken the necessary steps. So we do not expect negative impacts in 2018. And of course, we will most likely see the diesel share slightly going down in Europe in 2018 as well. But in order to offset this, we have invested some money in our engine production plant in Steyr in order to increase flexibility between petrol and diesel.
Yes. And this is again an answer, a little bit to compare, to amend this one. We have decided already years ago that we build a 3, 4 and 6 cylinder petrol and diesel flexible engine family because we were seeing that there could be volatility on this one. So with that petrol and diesel flexibility, because we have 1 engine family, we can swap volumes.
Okay. Next one is Harald Hendrikse and then Stephen Reitman. Harald, you are there -- over there.
Mike got in there with the diesel one before me, but let me expand on that a little bit as well. Firstly, on the i4, it looks like a great product. I'm sure you'll do a great job with that product in the market. But can I maybe ask it slightly a different way around question? If you were the salesman in the dealership and your American guys are obviously looking forward to getting this car into the dealerships, you put that car in there, it gets incredibly exciting, the public comes in, you get a great response. How does the salesman then try and sell the current 3 and the 5 Series, which anyway are already quite difficult in the U.S.? Can you just try and explain to me how -- what is the sales pitch on those products going to be once you've got these brand-new type products with much lower running costs in the dealerships? And then second on diesel. Rather than the short-term question, I'm confused why the industry is so incredibly fixated on this CO2 target for 2020 and diesel seems to be the only answer that you have. Now I fully understand that the target has completely changed from when the target came in years ago in terms of the consumer buying intentions and stuff. But it doesn't seem to me that it's the best thing for the customer to continue to sell diesels, especially more expensive ones where the residuals are going to go down and where -- at some stage, that you are losing money on the equity for the consumer. So I'm just wondering why is the industry so fixated. And what do you think is going to happen to diesel once you sell enough electric vehicles post 2020?
Thank you. Your first part of your question about the i4 was very good because Nicolas was a salesman before.
So -- and Harald, I'm very optimistic that we will continue in the years to come to sell many combustion engines next to EVs. Why? The change to EV will not materialize in a digital way. So depending on customer needs, you will have on one hand side, many customers saying, "Well, I'm opting for the new technology for an electric-powered cars." And you have many other customers taking into account their personal lifestyle will say, "Well, we will continue to need latest technology on diesel or petrol side." And by the way, if we look at the development of -- because you mentioned 3 and 5, of course, 3 Series is in run-out, but 5 Series is doing extremely well in the U.S. market. And we were leading the 5 Series segment since we've launched the new 5 Series in the U.S. So it's -- again, it's always the same: part of our strategy, flexibility. We have to be in line with the different customer requests. And we will see -- and this will not be only in the U.S., but in many other parts of the world where people next to an EV, there will be other customers asking for an -- a combustion engine because they have very long distance to travel. And so it's not the one, it's the one and the other. Second part of your question, 2020 target. 2020 is an interim target. And we definitely will need a certain level of diesel share in order to achieve the 2020 target. And by the way, as I've just mentioned, despite all the discussions we have, I just gave you the figures for 2017, we have still more than -- in 2017, we still had more than 66% of our customers buying diesel. So this is not an technology which now is starting to disappear. In contrary, we will continue, next to our EVs, also invest in diesel and petrol in combustion engine technology.
Okay. Next one is Stephen Reitman and then I have [ James Irvin ]. Stephen, please.
Stephen Reitman, Societe Generale in London. A question also about electrification. And you made a point about the flexibility you've built into your planning and your platform strategy. You've also mentioned that the big bet is on the fifth generation because you've been waiting for the technology to evolve. So I'm just wondering if you might just give us some idea of the quantum advance that the generation 5 delivers in terms of battery efficiency and cost over the previous generations. And then also a second question maybe on the X3, the electric version of the X3 that you'll be launching at a point. What do you think is the acceptable price premium you can charge over an equivalent diesel X3 high-end version of that? Or can you even charge a premium at all?
I'll start with the second question. The decision on the pricing for the iX3 is not done so far. So you need to look into the markets and different global regions of what -- across the globe what is premium for electrification, what is the competitive situation. So that is an open question and that will be somewhere a decision in the next year maybe, end of next year. And the other one is what is the advantage from the fourth to the fifth generation. It's a 2-digit number. I don't give you any -- which scale but it's not 5%. It's something which we believe is a major step forwards and we are not stopping that. Now you see, even in the fifth generation, we will have then later on sometimes a sixth generation. We are on a continuous path. If you would like to win the race and electrification is the future, you must be the most cost competitive in that segment. Otherwise, you can't scale up the volume. And that's why we are doing so much intensive research on these things. There is a lot of material [ costs, cell ] production in all these things because you need to understand it in detail to take all the costs.
And Stephen, maybe one comment more from a CFO's perspective. Next to better range, next to higher-energy density, we will have cost reduction on generation 5 which is very, very important. Because Harald rightly said, the one who will be leading in this technology is the one who has cost under control. Number two, you are absolutely right. Let's take away the X3-specific topic. We will have to coach. We will have to explain to our customers that this technology is not for free. This technology has an add-on cost against today's combustion engine. And this is something which we, as a frontrunner, take the pricing of the i3, by the way, a very successful car in its segment despite, despite a higher price.
So ladies and gentlemen, it's 11:30. I have only 2 more questions. First is [ James Irvin ] and then Tim Schuldt. Is that right? Okay. Okay, we start with [ James Irvin ].
I'll try and be quick. I love the flexible approach you're taking on the powertrains. And I guess my question is from a competitive landscape. Of the 3 German luxury car players, 8% to 10% margins, it's been pretty, pretty good discipline against a backdrop of pretty good global growth. But I wanted to get your sense of -- we had a chance to meet with Audi the other day and they're talking about a product margin range that was from 5% to 15% across the portfolio, with the SUVs being above average and the pass cars being below. And I just wondered if you could help us kind of how tight your range is as you think about your product portfolio margins. And it really ties into Harald's question of when you have this powertrain uncertainty coming into the industry, I'm just curious how disciplined you think the luxury purchasers will be, especially if the solutions to meet the regulatory mandates aren't really what consumers want to pay for yet and might not until 2025 when the cost structures are more competitive. So simply put, as you move into the SUVs over the next 2 years, do you see that being a significant tailwind? Or in fact, coming into that segment late, is it basically at risk of coming into a segment that's coming under margin pressure in terms of the smaller SUV categories? So a couple of questions in there; I'll take whatever what you are willing to share.
First of all, I think as we mentioned in my speech, we see this year as the year of the X year. And BMW has been the frontrunner on this segment, the X5. And we now have already the third generation of the X5. The X5 was the first product really in the market of the sports activity vehicle. And if you see what happened with the X3 expansion, which we did as the first company and the competitors were following us 2 or 3 years later, we were the first ones with the X1, yes? We will be the first ones with an X2 Coupé. So the only one where we -- and when we started the X6 on the market, there was some people saying, how do you need this product while the X6 by itself was selling more than the Q7 worldwide at that time when the car was launched. So you can see -- and the only product where we are heading now into the segment we haven't been in is -- and where we are quite optimistic is the X7. There's a big market also for these cars. And our U.S. dealers, our Russian dealers are very, very positive about it. So you can see even in the U.S., as one example, but also in China, but also in other countries, there is still a continuous trend into the SUV segments. And as you assume, electrification for the future, that will be also a stable trend for the future. And are we disciplined when it comes to pricing? I have a clear view on this one. Nicolas and myself are at least manufacturing one product that's before we kill the pricing. So you need to be very rigorous on pricing definitely then when you're in the premium segment.
Pricing is really key. And just to underline what Harald said, we accepted a loss and a reduction in segment share in the U.S. in the last 2 years. And we've reduced in a significant way inventories. Why? Because we knew that we will come up with -- on the new X models which will fit perfectly to the U.S. market. And this is why now with the -- with an -- really very strong good pricing discipline in the organization, we will see segment share going up in the aspect on -- disciplined in the sales team on one hand side and a great product momentum. And regarding, let's say, the 8% to 10% margin and -- well, which model is contributing in which way to this 8% to 10% margin, you, in a certain way, already gave the answer of course. Of course, in a model like an X5 is contributing in a different way compared to a 1 Series. That's absolutely correct.
And to amend this one, we are also attacking on this super luxury segments. As I mentioned in my speech before that we are having a model offensive, especially like the 8 Series Coupé, the 8 Series Convertible, the 8 Series Gran Coupe, yes, the X7, the Cullinan. We are going into the higher-premium segment as well with much more models than in the past.
I guess to be specific, though, I understand the SUV opportunity. I guess, I'm curious how did the industry and how did BMW manage the pressures in passenger car? If you tell me your margins range from 7% to 10%, and pass cars are actually doing outstanding margins, and you've managed this [ faith ] in the segment, that's fantastic industry discipline and you've managed it well. But that [ faith ] to -- in pass cars and the move into SUVs, that's been years in the making. This issue on powertrain is much more dynamic and potentially risky. So I'm just curious, can you give us some dynamic on the passenger car profitability versus SUV? Is it plus or minus a couple of hundred basis points? Or is it 400 or 500 basis points?
Yes. [ James ], not to have a misunderstanding, the passenger cars are extremely profitable in our portfolio. So let's -- we've launched last year the new 5 Series. The 5 Series definitely is a profit champion in our product portfolio. We will launch a new 3 Series. I'm very optimistic that this car will contribute in a significant way, in a significant way to our overall profitability, or take in a car like the 4 Series Gran Coupe, which is selling extremely well, extremely well. And this car is generating far above-average contribution margin per car. So passenger cars are still not only growing in volume worldwide but they are also from a profit perspective, very important and strongly contributing to our results.
One decision on this was with the 8 Series Gran Coupé, which we showed in Geneva. That shows that we believe in those segments, in the sedan segments.
Okay. The last 2 questions. Tim Schuldt and then Lucas Engelman. We start with -- Tim is over there.
Tim Schuldt from equinet Bank. I have 2 questions left. First one is on your R&D ratio. You're guiding that it's going up to 7% this year. Now this is not the R&D ratio you see in the P&L. Is the ratio in the P&L going up by the same magnitude? That would be my first question. And then the second question is related to the U.S. and flexibility and the whole topic of tariffs. I understand that we all don't know what will happen and you mentioned that flexibility is in any case key. How flexible would you -- you've taken a decision in the past to use the U.S. plant as an export hub and to produce the X models there. How flexible would you be in case that there would be significant tariffs to change the structure and to bring different models to this plant as well?
Harald?
Yes. We would be quite flexible because we have all products, we have 2 main architectures at BMW: the front-wheel-drive architecture; and the rear-wheel-drive architecture. And as long as you are within that architecture, you can be flexibly manufacturing, assembling other cars as well. So for example, the 5 Series Sedan is in the same architecture structure like the X5. So you would be flexible in these architectures. So we could -- but for the U.S., I mean, we are in the best position because we have the main -- for the U.S., the biggest portion of cars you are selling are the light vehicle trucks. So we have the X5, the X6, the X3, the X4 and the X7 in the future in the market. And this is the biggest portion of the market still growing. So we, compared to other competitors, have already the biggest portion of vehicles in the U.S. being localized.
Tim, of course, the up to 7% is [ HTB ] ratio. If we look at IFRS, the increase will be in the magnitude of a high 3-digit million euro amount. And this will translate into plus/minus 60 basis points.
Thank you, Nicolas. Really, the last two question. [ Lucas ] first, and then Tom -- [ Tim Schuldts Milanda ]. Yes. Okay. We start with [ Lucas ].
Lucas [ Anchorman ] from [indiscernible]. My question is a higher number of cars are produced in Spartanburg, and a higher number of them are going to be exported; I think it's 70%. As a result of Trump's possibly import tax raise, is it a possible problem for you that there are counter action, for example, in China and an American product, for example, also on import tax? And what would be the impact on Spartanburg?
First of all, we had 350,000 vehicles last year. Plant Spartanburg is able to do 450,000 units. The 70% figure is right; round about 70% of it is exported to worldwide locations. The main countries are China and Germany, yes? The question was on the speculation on terms of China and U.S. trade. We are already in a different position by this year because we will ramp up the X3 in China for local production already in the second quarter of 2018. So we will already have the X1 in China, and we will have the X3 in China quite soon. So that balances our U.S. and China operations. But the X4, the X6, for example, will remain in the United States only.
If you look from a global perspective, I really believe the BMW Group has probably the best footprint of all manufacturers if you take all those political discussions into account. The biggest factory is in the U.S. market. We have a strong footprint in the U.K.; of course, in Europe. And we have sufficient capacity, and we will discuss further capacity development in China. So we are really in all 3 geopolitical areas extremely well positioned.
Thank you, Nicolas. And now the final question from JP Morgan U.K., [ Tim Schuldts Milanda ]. Please, [ Tim ].
It's [ Tim Schuldts ], from out of the [ spec sales ] at JPMorgan. Quite the introduction. Just a very simple question actually in EVs, and that's just on the end of battery life. Can you just share with us what you think might be the case in terms of OEM responsibility as some of these batteries come to end of life? And what you've been planning around that?
Important, important question. We have a couple of pilots already running in order to set with those end-of-life batteries battery farms, which we operate with other electric power supplier companies. We have one example in our plant in Leipzig, which we've recently inaugurated a couple of months ago. And this is a concept we are going to develop further.
So I have a strict order from my boss. Thank you very much for the excellent questions.