Financial Analysis Of The Automobile Companies Bmw And Daimler Finance Essay

Published: November 26, 2015 Words: 5388

The current assignment is based on the analysis of the performance of two leading German companies in the automobile Industry, namely Daimler Group and BMW Group, in the years of 2008-2009. The main objective of the current assignment is to evaluate financial positions of both companies in the context of the global car industry.

Consequently, an industry overview presenting recent changes and the current situation in the automaker industry was prepared. The industry overview will serve as introduction for financial position evaluation of these German companies. For this section, a short analysis of the global car industry was made and the situation with sales at the major car markets was described.

Principles of financial accounting were used for preparation of the given report and such ratios as Liquidity, Solvency and Efficiency were applied for interpretation of the financial statements. At the end of the analysis section, a conclusion and recommendations based on the resulting ratios are provided.

Chapter I. Introduction

1.1 Industry Overview

This short industry review is given for acquainting with the current situation in general only, since the current report's purpose is not industry itself, and this part is included only for introduction of the car sector.

The automobile market is one is the most competitive in the world and quite a limited list of companies are operating in this scene due to the complexity of technologies, and requirements for big capital investments. For instance if car producers were a country, it would be the 6th largest economy in the world (OICA, 2010).

Thus, breakthrough innovations based on R&D continual trend and significant capital are the key ingredients for success and that's the reason why the majority of world-wide known large companies originate from developed countries. For instance S&P report on automobile industry (S&P, 2010) is limited to 20 companies, which has the following ratings:

Table 1 Standards&Poors rating of automotive companies

#

Company

Corporate Credit Rating*

Country

BMW AG

A-/Stable/A

Germany

Daimler AG

BBB+/Stable/A-2

Germany

Fiat SpA

BB+/Watch Neg/B

Italy

Ford Motor Co.

B+/Positive/NR

U.S.

Honda Motor Co. Ltd.

A+/Stable/A-1

Japan

Hyundai Motor Co.

BBB-/Stable

Korea

Kia Motors Corp.

BBB-/Stable

Korea

Mitsubishi Motors Corp.

B+/Negative

Japan

Nissan Motor Co. Ltd.

BBB/Stable/A-2

Japan

Peugeot S.A.

BB+/Stable/B

France

Renault S.A.

BB/Stable/B

France

Tata Motors Ltd.

B+/Positive/--

India

Toyota Motor Corp.

AA/Negative/A-1+

Japan

Volkswagen AG

A-/Negative/A-2

Germany

MAN SE

BBB+/Stable/A-2

Germany

Navistar International Corp.

BB-/Stable/--

U.S.

PACCAR Inc.

A+/Stable/A-1

U.S.

Scania (publ.) AB

A-/Negative/A-2

Sweden

Volvo (publ), AB

BBB-/Negative/A-3

Sweden

GM

BB-/Stable/--

U.S.

* For ranking details see Appendix 1 or www.standardandpoors.com

Source: S&P, 2010 Industry Report Card: Busy Production Lines Are Fueling Global Automakers' Operating Profits And Credit Quality

Among the top 20 car makers included in S&P ratings, only Tata Motors is from developing countries cohort, furthermore its first car was produced jointly with Daimler-Benz AG. But the situation is changing fast and in the near future car making will be switched to developing countries with pursuit of economic trend. As a result, automobile producers in developing countries will strive for independence and subsequently new players will appear in the industry. As for Ratings interpretation, due to report volume limitations, the explanation span is within attached definitions of the ratings.

Chart 1

Source: International Organization of Motor Vehicle Manufacturers, WORLD RANKING OF MANUFACTURERS Year 2009

For the global production situation was used Annual Reports of International Organization of Motor Vehicle Manufacturers (OICA), which covers virtually the entire motor vehicle industry of the world (Chart 1). As it could be observed 90% of the production belongs to the largest car-makers, at the same time it is also clear that Chinese "Beijing Automotive" and "Ghana Automobile" has joined the list of large producers and probably will play a growing role in the near future. So, in 2008 China's share in world production was 13.6% (VDA, 2009), in 2007 it was 12.3% and in 2006 it was about 10.7% (VDA, 2007). Chinese vehicle industry progress will be discussed further in more detail.

1.2 Situation in car market in 2009

Global

Because of the economic crisis, quantity of sold vehicles (passenger cars and light commercial vehicles) in the world declined from 66.2 mln. units to 62.5 mln. in 2009 or in percentage fell by 5.7 %. (BMW, 2009).

Vehicle production in 2009 declined by 13% to 60 mln. units, which was influenced by serious reductions in inventory. (VDA, 2010)

USA and China

At such a big car market as the USA total sales volume fell by 20% from 13.2 mln. units to 10.5 mln. units in 2009. As for China, the quantity of cars sold grew from 12.6 mln. to 13.8 mln. As a result, China overtook the USA as the world's largest vehicle market for the first time ever. One of the crucial factors for the skyrocketing demand was double downgrade of the registration tax for small vehicles of 1.6 liters within fixed period of time. (VDA, 2010)

US manufacturers' market share contracted by a further 3% to around 45 % in 2009, due to failures of GM and Chrysler, having significant share in the market (BMW, 2009). This trend was actual continuation of 2008 when in the USA 13.2 mln. units were sold, resulting in 18% decrease, which is the worst performance since 1992. (VDA, 2010)

Europe

Light vehicles market also shrunk in the European Union, declining by 2 % to 14 mln units. Marketplace characteristics considerably varied from country to country, depending on the impact of different stimulus programs. For instance, Germany, which is the largest European car market, experienced a great upturn in demand from private customers, despite its big troubles in economy compared with the rest of Europe on the whole. And the number of new car registrations in Germany rose sharply by almost a quarter to 3.8 million units. But this trend had a varying impact on the performance of companies, for instance BMW got net profit, while Daimler incurred losses (BMW, 2009; Daimler, 2009).

French scrappage programme pushed forward domestic passenger car sales to 2.3 mln units or plus 11 % in 2009. However, in countries where the property and credit markets badly suffered from the global crisis, national scrappage bonus programmes disappointed hopes for boosting demand. For instance, in UK the quantity of new sold cars went down by 6 % to 2.0 mln, Spain, which was severely hit by the crisis, demonstrated in 2009 slump sales by quarter or in total sales were less than 1 million units, subsequently this market had shrunk by nearly 50% due to the crisis. New EU members in Eastern Europe cannot boast of growth either and show almost 25% decline in passenger vehicle sales, with total market amounting to just 0.9 mln. units. Exception in these countries are Czech Republic and Slovakia with 13% and 7% sales increases respectively, and EU non-member Turkey with encouraging 21% upturn in sales to 0.37 mln units. Turkey's achievement in car sales could be explained by short-term tax incentives for the purchase of small cars. (BMW, 2009)

Japan

The car market in Japan is not an exception in the general trend of the sales crisis and it contracted by a further 9 percent to just 4.5 mln vehicles despite government efforts like scrappage bonus programme and tax breaks. (BMW, 2009)

Emerging markets (Russia, India, Brazil)

The situation among the emerging markets differs significantly. The Russian market slumped by half to 1.4 mln. vehicles, while the Brazilian car market rose 9 percent to 3 mln. units bolstered by short-term tax incentives for small cars, but South American market varied greatly. (BMW, 2009)

The Indian car market kept on its climbing pace, with sales growing by 18 percent to 2.1 mln. vehicles. Along with the sales jump, production demonstrated sustainable development and reached 2.2 mln. of units, meaning 18% increase and further prominent progress as a car exporting country. (VDB, 2010)

1.3 Conclusion

In conclusion, it is vital to highlight that for the first time in automobile history, the triad of the biggest and traditional markets like USA, Europe and Japan accounted for just 47 % of sales, or less than a half of car sales worldwide. Such companies as BMW and Daimler demonstrated quite different performance results, despite occupying similar market niches and introduction of stimulus programmes by German government.

It can be implied from this review that car-makers in developing countries working under the umbrella of world-wide known top companies will gradually aspire for greater independence and there is a high possibility for the emergence of new players on the scene. In these circumstances, it is essential for BMW and Daimler to develop a consistent strategy to keep on their competitiveness and sustain growth tendency in order to fend off onslaught on the part of Chinese automakers.

All this looks like the watershed for the automotive industry and further prevailing tendency of developing markets, future redivision of the car-makers world and particularly Chinese inevitable and sustainable development.

Chapter II . BMW Group and Daimler Group Analysis

2.1 Preface

The current part of the report will use not only analysis of key Liquidity, Solvency, Profitability, Efficiency and Investment Ratios, but rather trying to review and evaluate factors affecting collected data on the above discussed ratios of Daimler Group and BMW. Such thorough revision of deeper factors affecting ratios composition will give a "Big Picture" for the actual and correct interpretation of the results. Thus, considering the situation with the current market demand in the automotive industry both in Germany and in the world, it is imperative to place greater emphasis on Leverage analysis in times of financial crisis and Liquidity, Solvency and Efficiency Ratios (revealing to us how both Daimler and BMW are prepared to withstand current Sales/Demand oriented difficulties and what are the actual figures of their Asset, Accounts Receivables and Inventory Turnovers) along with the actual composition and market deviation of Enterprise Value and EV/EBITDA figures to reveal valid composition of equity values to cash flow those two companies generate. Such analysis could give further overview to the decisions/alternatives implemented and adopted by those two higher class automotive market rivals.

ALL GRAPHS, CHARTS AND TABLES REPRESENT RESEARCHERS' CALCULATIONS BASED ON ANNUAL REPORTS OF APPROPRIATE COMPANIES, EXCEPT NOTED OTHERWISE.

2.2 Investment and profitability

Chart 2Years 08 and 09 were quiet dramatic for both Daimler Group and BMW Group and the Automobile industry in Germany and the world. Even though BWM Group reported declining income in both 2008 and 2009, its main automobiles division had to face a 439 million Euro loss in 2009, which was mainly covered by Financial Services and Eliminations sectors. Daimler Group has reported a progressing (Loss) of -2 644 mln Euros, which in turn resulted in negative earnings per share ratios (EPS), calculated upon net income (loss) figures of Daimler Group in respect to the common outstanding shares number. Meanwhile, BMW Group has actually managed to maintain its EPS positive in both 08 and 09, due to the abovementioned net income reported. However, EPS reported by BMW Group's annual 2009 report are low, even considering the fact that the actual number or outstanding shares of BMW group is much less (653 879 133 shares) compared to emission conducted by Daimler Group of 1 024 066 951 outstanding shares.

Table 2

Daimler Group Investment Ratios

BMW Group Investment Ratios

2008

2009

2008

2009

EPS

(Net Income Ratio)

1.71

-2.63

0.49

0.31

P/E

15.6

-14.1

60

124,5

EV/EBITDA

11.7

39.6

25.9

26.8

EV (million EUR)

67 545

69 485

93 478

98 606

MCAP

(million EUR)

25 754

38 126

17 699

23 237

EBITDA

(EUR)

18 030

15 782

3 954

4 107

Chart 4

Chart 3EV/EBITDA ratios for both Daimler and BMW Groups are within the actual market averages for the year 2009, yet still representative of actual policies conducted by those two companies in terms of resisting the current market downturn. In this light, such a deviation within the figures of EV/EBITDA should be subjected to root analysis to have a clear structure of both Enterprise Value and EBITDA. BMW Group has a greater Enterprise Value; however its composition of EV is more debt based and thus is less liquid and more risky. (Chart 5) Such debt based Enterprise Value structure, with less than 7% cash and equivalents and 22% MCAP composition, had actually yielded factor growth stagnation, probably caused by the investor's uncertainty toward BMW Groups growth rates. In contrast, Daimler Group, which has reported a net loss of (2 664 million Euro) in 2009 safely enhanced its EV/EBITDA above the market average of the corresponding year. Enterprise Value composition has a somewhat more liquid and less risky structure combining only 46% of Debt in it (Chart 4). Assumption can be made that such differences in figures are derived not only from the EV composition of the companies, but rather from managerial approaches toward withstanding sales / demand drops in Automotive markets all over the world. Thus, it might be inferred that BMW, like most of the key automotive industry companies was encouraged to take a more "Defensive" debt accumulating strategy, whereas Daimler Group tried to overcome its difficulties via additional ordinary share emissions, reserves based Loss reimbursement and a long run-oriented debt policy, probably affected by Chinese and Indian +47% and +17% two digits Automotive market expansions in 2009 (Daimler Group annual Report, ABC news portal)

Chart 5

Noticeably, a positive sign could be traced by potential investors in the P/E ratios, within Daimler Group. Even though reporting drop to -14.1 P/E ratio in 2009, market price for the shares of Daimler Group had a full 39% growth in price for 08 and 09 years, while Investor release of Daimler Group (Feb, 2010) states an expected positive change from -1.5 billion EUR EBIT in 2009 to 2.3 billion EUR EBIT in 2010. Thus, negative financial signs were perceived by investors of Daimler Group as market grounded, who gave more attention to the company's Liquidity and Solvency, brand credibility and low market deviation in sales reduction compared to the competitors, who had to face vast sales drop 3 quarters earlier (VW and BMW in the 1st Quarter 2008). Profitability Ratios of Daimler Group are within standard market averages, even in respect to the negative signs of 2009, whereas BMW Group has reported a positive, growing ROSF and Net Profit margin. However, as was earlier discussed, approaches toward the sales decline solutions of Daimler and BMW teams were seemingly different, which eventually had its expression in EV structure and EV/EBITDA reported values.

2.3 Solvency and Liquidity

Leverage analysis in times of financial crisis and Liquidity, Solvency and Efficiency Ratios provide the most up to date data on a company's ability to withstand challenges and not to default on its obligations. This is of extreme importance in the case of the automotive industry and especially luxury cars sector. As cars are not essential commodities, a fall of the market demand for light passenger vehicles is not an issue to be resolved in the short run and thus, to reach previous sales rates. Two consequent approaches were conducted in terms of stratifying profits by Daimler Group and BMW Group. It is thus imperative to understand that BMW Group has shifted its sales priorities toward Financial Services division. While Daimler's strategy implied stratification of modular chain of creation Busses, Vans, Trucks etc. Evaluation analysis toward these company policies will be provided in Chapter III of the present research, trying to identify all possible consequences of such decision implications.

Contrastingly to the abovementioned investment ratios, basic liquidity and solvency ratios of Daimler Group are reported as less than those of BMW Group. Such aberration in Current Ratio and Quick Ratio (Acid Test) of Daimler Group shows an above 10% growth in ability to withstand default on its short-term obligations; both including and excluding inventory in calculations respectively by the ratio tests. Results are proving positive balance of assets toward the liabilities both in 2008 and 2009. This report bases its decision on "Healthy Liquidity" of Daimler Group due to a standard "rule of thumb" frequently applied by Wall Str.

Chart 7

Chart 6

analysts. Figures above 20% QR and Acid Test and Cash Flow from operations (OCF) ratios are to be perceived as a healthy balance on companies' ability to pay its obligations via Cash Flows, Quick or Current Assets. The general assumption is that in accordance with the annual 2009 report of Daimler Group, main basis for the Liquidity growth was caused by amplification of Trade and Affiliated companies' receivables, Securities emission (96.4 million new registered no par value shares at an issue price of € 20.27 per share) (Daimler Group 2009) BMW Group on the other hand reported less figures in all of the abovementioned ratios, considering their 71% of debt within EV structure and much lower MCAP as pretty stable figures to withstand the current market sales slump and risk free rates on obligations downfall. In the meantime, Daimler Group reported Gearing Ratio (LEVERAGE) which measures actual funding of Daimler Group from own funds vs. creditor's funds, which actually states a realistic above 3.5% increase in the borrowed (creditor's funds) for financing and was set at the point of 77,7% as of 2009 results.

Table 3

Daimler Group Index

BMW Group Index

2008

2009

2008

2009

Current Ratio

106%

114.2%

98.4%

108.2%

Quick Ratio

73.9%

87.2%

77.7%

88.0%

Cash flow from operations ratio

64.8%%

66.3%

27.7%

27.8%

Solvency

Gearing Ratio

25 754

38 126

17 699

23 237

Current Ratio

73.5%

77.7%

67%

69%

Creditor's funds share of 77.7% is partially based on the fact that Daimler Group was not a governmental tax and benefits assistance program participant. On the other hand, the main part of this leverage growth is set forth from the Daimler financial department of Daimler Group, whereas Daimler Group (automobiles) annual report 2009 gives enough data to calculate leverage (gearing ratio) on the level of around 5.1%, which is 37% less compared to BMW figures of respective year. Arguably, BMW Group, which reported only around 69% at 2009, can be considered more successful in terms of its leverage level "success". Thus, as previously reported, EV structure of BMW Group is comprised of 71% of debt, compared to 46% reported by Daimler. Consequently, net loss reported by the major Automobiles department of BMW Group as its main field of activity was at -439 million Euro level (BMW 2009), which represents an actual drop of net profit from the 226 million Euro (both cases much lower level than Daimler Cars, trucks and Busses) in the year 2008. Such deviations within Gearing Ratios identifying actual leverage rate and EV structure composition in both 2008 and 2009 of BMW Group is mainly caused by a couple of major factors:

Dividends were paid by BMW on both privileged and ordinary shares in both 2008 and 2009. On the other hand, Mercedes (Daimler group), having no privileged share, at the 2008 shareholder meeting made a decision to withhold dividends payment for both 2008 and 2009 years.

BMW was a member of the German government tax aid and benefits program, which it joined in the 1st quarter of 2008 (Daimler Group had to face crisis constraints in 4th quarter of 2008).

BMW Group has a less stratified production line, ranging in only two main automotive products, namely motorcycles and cars (both reporting loss). On the other hand Daimler group has an ability to cover its losses in sales of one type of automotives by other. (e.g. loss in cars sales was covered by busses and vans sales in 2009)

(Source: Annual Reports 2009 BMW Group and Daimler Group)

Hence, leverage is probably the best measure for a company's credit health. Liquidity is a good measure during times of crisis, where it is important to have a flexible capital structure and be able to react immediately to market forces. However, in times of recovery and more stable market growth, which is predicted for the coming years, the long-term prospects of leverage might be a better measure.

All of abovementioned approaches employed by BMW in handling consequences of the financial crisis and sales drop in 2008 and 2009 most probably had a government aid program as a major variable impact on positive net profit reports in 2009, despite the German automotive industry situation, financial markets downfall (BMW financial group numbers), sales level fall, payment of dividends and around (100%) loss in net income of major Automobiles department. This report tends to view such approach of management as low yielding and highly risky in terms of long term financial benefit effects. A short term "overcoming crisis" policy of BMW group certainly afforded BMW to report minor declining profit for the Group in 2009 and resulted in a debt based EV structure, which was tolerated due to management expectations on liquidity, solvency and market situation changes.

In contrast, Daimler Group decided to cope with losses in a different way, which eventually resulted in less debt (46%) based EV structure. Specifically, Daimler Group's management actions consisted of ancillary common shares emission, share buyout program, loss coverage via transfers from capital reserves, and initial non-participation in governmental tax reduction and benefits program. All of these factors added risk reduction and debt stability, presenting Daimler Group with key advantages to withstand long-term consequences of sales and financial crisis for such automotive industry giant.

Latest 2010 reports indicate that overall demand, sales and market growth picked up in such Asian countries as China due to the tax reductions, and Russia (same reasons as discussed above). Net gearing ratio might have a further increase within Daimler Group, however it will most probably be caused by an increase in production and sales and have gradually justified characteristics. (Source: ABC news, Daimler Group Annual Report 2009, Researcher's personal experience in financial analysis).

2.4 Efficiency & Profitability

Efficiency ratios within this research will provide additional insights in analyzing risk frames faced by BMW group and Daimler Group. Ranking assets of companies is meaningless; however, meaning is attained when assets are placed to operate for investors. ROA takes priority within this analysis for the reason that it provides better debt excess view.

Table 4

DAIMLER GROUP

Profitability Ratios

BMW GROUP

Profitability Ratios

2008

2009

2008

2009

ROE

4.5%

-8.6%

1,6%

1,04%

ROA

1.1%

-2.0%

0,32%

0,1%

ROSF

10.9%

-17.9%

2%

1%

Net Profit Margin

2.8%

-1.9%

2,4%

2,82%

A widely used concept of ROE does not express the actual picture if a company generates its returns via excessive debt usage. Such deficiency is especially important while analyzing companies in financial crisis. Thus, importance is shifted to ROA instead.

Table 5

2009

Debt

Equity

Debt/Equity

Debt/Value

BMW

61.325

21.281

288,17%

74,24%

Daimler

58.294

38.670

150,75%

60,12% Main downfall of financial ratios for Daimler Group was caused by negative profit values reported in 2008 and 2009 only. Moreover, ROA reported by Daimler and BMW revealed not only negative reports of Daimler and positive BMW ROA, but it is also imperative to understand that pre-crisis levels of ROA in cope with analysis for Efficiency ratios is more important and provides realistic vision to whether or not Daimler and BMW operate up to par. Thus, Daimler Group's management implemented a share buyback program worth 6.197 million EUR (Daimler Group Annual Report, 2009), which increased the relative ownership stake of each investor in the earnings of the company. This way Daimler proposed that the market has gone too far in

Chart 8discounting its shares, which is a positive market sign. In addition to relatively good Accounts receivables and Inventory turnover rates, which have a logically increasing tendency after sales decline, all signs are industry typical for low-margin high-volume producer. At this point BMW has a bit lower numbers within discussed ratios of efficiency, and some other key figures provided in the table below. Table 6, presents VW company's key indexes to further enhance vision on actual stance of BMW and Daimler, where noticeably in terms of R&D and number of cars sold Daimler prevails.

Table 6

in mio. € 2009

BMW

Daimler

VW

Revenue

50.681

78.924

105.187

R&D

2.448

4.181

3.000

COGS

-42.908

-65.567

-91.608

Net profit

210

-2.644

911

cars sold

1.286.310

1 551 291

6.309.743

R&D/revenue

4,83%

5,30%

2,85%

COGS/Revenue

-84,66%

-83,08%

-87,09%

Operating Cash / Revenue

15.33%

12.42%

18.12%

Brands

BMW, Mini, Rolls Royce

Daimler-Benz Mercedes, Smart, Maybach

VW, Audi, Seat, Skoda, Lamborghini, Bentley, Bugatti

(BOTH Table sources: Researchers via annual reports of consecutive companies)

On the other hand Accounts receivables and Inventory turnover rates are progressively turning to a risky area where there is a possibility to weaken the actual cash flows for Daimler Group, and such arguments would most probably be put forward by anyone who would use standard financial analytical logics. However, Inventory turnover period for one of the main rivals on the German market, namely BMW, is 56 day turnover rate, compared to 44 days of Daimler Group.

Chapter III: Recommendations

3.1 Market Positioning

The automotive industry is not a producer of one of the essential commodities. Thus, a decision to buy a new car could be logically postponed in times of financial crisis. This approach is especially relevant to the luxury cars segment of the market, representatives of which are both BMW and Daimler. It is thus imperative to cover sales deficit by any means to maintain a viable market position. Daimler took this approach long ago, by stratifying its production line and increasing R&D expenditures in order to penetrate into other social-class need based sectors of the automotive industry. Apparently, such a strategy resulted in ability to cover main losses of Daimler in (Daimler Group) Mercedes luxury passenger vehicles by other segments of sales, like trucks, busses, vans etc. BMW Group, on the other hand, has only a small segment of production, mainly luxury-based passenger vehicles as well as Mini, Rolls Royce acquisition, which are mainly oriented to the same automotive industry sector. In this regard, production line stratification and R&D expenditure increase, which was reported twice less than Daimler (main market competitor), is vital for BMW as an automobile top producer. Moreover, used raw materials like steel and aluminum fluctuate a lot in price, which means that BMW has difficulties in predicting the future prices and therefore has the risk of under-pricing their products thus, incurring losses (BMW 2008).

3.2 Financial Positioning

BMW excelled in its financial services department development compared to total revenue share. On the other hand Daimler Group's financial department still represents a minor share within profit indexes. Daimler and BMW Annual reports (2009) believe that government bailouts provided in 2008 and 2009 were the last is not relevant. December 2008 saw the largest assignation of 17.4 billion USD awarded to Chrysler and GM, which resulted for instance in further 16.6 USD billion requests from GM, while Chrysler additionally requested 5 billion to prop up their overseas operations. Consequently, hasty actions and comments were taken by German and French ministries of finance, stating that it is vital to support European automotive producers, especially considering the fact that overseas competitors are highly subsidized with billions.

This research states that periodic governmental bail-outs highly used by BMW Group do not provide relevant grounds for continued improvements in sustainable development. A further logically justified solution is to provide a policy and regulations which will prevent the current situation from repeating again. Thus, this research proposes the following set of measures to be conducted in order to alleviate bail-out dependency and higher management efficiency:

Market Concentration. This recommendation correlates with advice provided to BMW management concerning production line stratification. One of the lessons learned from 2008 and 2009 downfalls in the financial sector and car sales is that oligopoly management can be traded off and broken up toward creation of more manageable and efficient structures.

Support of domestic production value creation instead of letting it shift outside Germany. German bail-out packages contained such provisions on maintaining work in Germany, whereas WTO and European Union have viewed it as protectionism and market distortion warnings.

Expenditure transparency toward government assigned bail-out programs should be provided by both BMW and Daimler Groups in order to evade corrupted decision making. Moreover, companies should provide full accounts of support amounts provided and appropriate metrics in both receipts and expenditure to have a clear cost-effectiveness evaluation.

German economy is highly dependent on its automotive industry, virtually 1 out of 7 workers are employed in this industry. Thus, there is a certain level of industry overestimation. Consequently, BMW and Daimler Groups should avoid financing investment which would take place even in the absence of incentives.

Chapter III: Conclusion

Investment, profitability, liquidity, solvency ratios and revenue growth were determined in this research and their implications toward BMW and Daimler groups' future were assessed. Despite the negative development in the above mentioned ratios, the fact that BMW has been able to generate a positive net profit throughout the crisis, and Daimler's basic indicators compared to market averages, yield a positive outlook for the forecast period.

External analysis was essentially based on evaluation of market frenzy present at the current moment. Estimation was made that market became more predictable yet still changing. Relevant changes were reported in areas of cultural and economic factors. Cultural factors such as expected growth of demand for environment-friendly products in Europe are assessed to have a more positive impact in the future. Inversely, economic factors such as raw material prices elevation have a noticeably negative impact on both BMW and Daimler in the long run.

Porter's five forces model was used to draw conclusions upon premium car sales market. The conclusion was that BMW would face a bigger threat from factors, directly related to the premium segment, in the future, whereas Daimler Group has a more solid ground due to its key production divisions' performance. However, challenges in premium segment sales would be eminent. The increased threat is derived from the assumption that car producers from emerging markets, particularly from China might enter the premium segment in the future and due to their large economies of scale they will have an advantage in terms of costs compared to both BMW and Daimler. The strong brand and R&D experience might provide an edge for both BMW and Daimler to maintain competitive market position.

References

BMW Group, 2010 Annual Report 2009-2008. [Online]

Available at: http://www.bmwgroup.com/ir/

[Accessed Oct 22, 2010 22:30]

Daimler Group, 2010 Annual Report 2009-2008. [Online]

Available at: http://www.daimler.com/ir

[Accessed Oct 22, 2010 22:35]

International Organization of Motor Vehicle Manufacturers (OICA), 2010 World motor vehicle production in 2009 [Online]

Available at: http://oica.net/wp-content/uploads/ranking-2009.pdf

[Accessed Oct 23, 2010 21:45]

S&P, 2010, Industry Report Card: Busy Production Lines Are Fueling Global Automakers' Operating Profits And Credit Quality [Online]

Available at: http://www.standardandpoors.com/prot/ratings/articles/en/us/?assetID=1245227871494

[Accessed Oct 25, 2010, 12:01]

VDA (Verband der Automobilindustrie: German Association of the Automotive Industry), 2008 Auto Annual Report [Online]

Available at: http://www.vda.de/en/downloads/489/

[Accessed Oct 23, 2010 22:45]

VDA (Verband der Automobilindustrie: German Association of the Automotive Industry), 2009 Auto Annual Report [Online]

Available at: http://www.vda.de/en/downloads/636/

[Accessed Oct 23, 2010 22:55]

VDA (Verband der Automobilindustrie: German Association of the Automotive Industry), 2010 Auto Annual Report [Online]

Available at: http://www.vda.de/en/downloads/746/?PHPSESSID=1bq4niiimhnmsu6o0l50vdb1a7

[Accessed Oct 23, 2010 22:35]

Appendix 1 Ratings Definitions of S&P

(official interpretation)

The general meaning of our credit rating opinions is summarized below.

Investment Grade

'AAA'

Extremely strong capacity to meet financial commitments.

Highest Rating.

'AA'

Very strong capacity to meet financial commitments.

'A'

Strong capacity to meet financial commitments but somewhat

susceptible to adverse economic conditions and changes in

circumstances.

'BBB'

Adequate capacity to meet financial commitments, but more

subject to adverse economic conditions.

'BBB-'

Considered lowest investment grade by market participants.

Speculative Grade

'BB+'

Considered highest speculative grade by market participants.

'BB'

Less vulnerable in the near-term but faces major ongoing

uncertainties to adverse business, financial and economic conditions.

'B'

More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.

'CCC'

Currently vulnerable and dependent on favorable business,

financial and economic conditions to meet financial commitments.

'CC'

Currently highly vulnerable.

'C'

A bankruptcy petition has been filed or similar action taken, but payments of financial commitments are continued.

'D'

Payment default on financial commitments.

Note: Ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or

minus (-) sign to show relative standing within the major rating categories.

Source: www.standardandpoors.com