BMW Board Member Says the Automaker Intends to Cut Production Costs 25% by 2025
【Summary】German automaker BMW intends to slash production costs per vehicle by 25% over the next four years in order to become more competitive with Tesla, Daimler and Volkswagen. Automakers like BMW are finding themselves in a tough spot of maintaining their profit margins producing gas-powered vehicles while simultaneously investing billions to develop new electric models.
German automaker BMW intends to slash production costs per vehicle by 25% over the next four years in order to become more competitive with Tesla, Daimler and Volkswagen, Reuters reports.
"We will lower the production costs per vehicle by 25% by 2025 compared with the level in 2019," said Milan Nedeljkovic, BMW's board member in charge of production to German newspaper Handelsblatt.
Automakers like BMW are finding themselves in a tough spot of maintaining profit margins producing gas-powered vehicles while simultaneously investing billions to develop new electric models.
As automakers around the world ramp up their electrification plans, they are looking for ways to reduce production costs, especially for electric vehicle batteries. Currently, battery-powered models cost much more to produce than gasoline-powered vehicles, leading to higher prices compared with internal combustion engine vehicles.
The most expensive part of an electric vehicle is the battery pack, which is measured in dollars per kilowatt hour (kWh) to produce. Although the cost of battery cells is falling, the average cost per kWh is roughly $137 according to BloombergNEF, which tracks the industry. For an EV equipped with an average-sized 75 kWh battery pack, that translates into $10,275.
A decade ago, lithium-ion battery pack prices were above $1,100 per. BloombergNEF predicts that by 2023, average prices will be close to $100/kWh, which is considered to be the point at which electric vehicles cost the same to produce as gas-powered models.
The higher production costs of battery-powered vehicles directly affects an automaker's profit. However, BMW's plan to lower production costs by 25% could lead to higher profits over the long term. Selling more affordable EVs will also help BMW maintain its competitiveness with rival Volkswagen, which is also investing billions to electrify its model lineup.
BMW expects to have 2 million fully-electric cars on the road by 2025.
Last month, BMW said it remained on course to meet its profit targets for 2021, despite the higher cost of raw materials such as rhodium, palladium and steel, as well as an industry-wide chip shortage that's focing automakers to curb production.
"We cannot assume that we will emerge from the second quarter unscathed," BMW CEO Oliver Zipse said in early May.
In March, BMW projected earnings this year before interest and taxes margin for the automotive segment between 6% and 8%.
Despite the decline, BMW managed to post a profit last year thanks to a strong rebound in the second half of 2020. The automaker posted a full-year 2020 pre-tax profit of 5.2 billion euros. However, BMW's EBIT margin fell to 2.7% in 2020 from 4.9% in 2019.
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