By Edward Taylor
FRANKFURT (Reuters) - BMW (DE:BMWG), the world's biggest luxury carmaker, warned on Tuesday that its financial forecasts for this year could be at risk from any further deterioration in the Chinese market, where its sales have begun to fall for the first time in a decade.
BMW has been hit by a slowing Chinese economy where cut-throat competition leaves its ageing product range increasingly exposed.
The German company, which had already said in May that growth in China would be "less dynamic", said it still expected to break records again on group sales and pretax profit this year but the challenges in China could affect "the scale of the increase" on last year's pretax profit of 8.707 billion euros.
On Tuesday it also reported a 3 percent slide in its second-quarter operating profit as it sold a higher proportion of low-margin cars and invested in new models.
Second-quarter sales of BMW, Mini and Rolls-Royce (LONDON:RR) vehicles actually rose 2.3 percent in China, the world's biggest car market, but fell in May and June after a decade of growth and the group said it was facing fierce competition in the Chinese market and elsewhere.
BMW said it had already throttled back production of its locally made 3-series cars. Last month Brilliance China Automotive (HK:1114), which assembles BMWs in China, issued a profit warning, citing slowing sales in the world's biggest car market.
"If conditions on the Chinese market become more challenging we cannot rule out a possible effect on the BMW Group's outlook," the Munich-based carmaker said in its quarterly report.
"It is difficult to make an estimation about how the market will develop. We expect continued growth," Finance Chief Friedrich Eichiner said in a call with reporters to discuss second-quarter results.
"It will definitely not be double-digit growth," Eichiner added.
Although BMW had warned that any further deterioration in demand in China could put its forecast at risk, this was not the expectation for now.
"This is not the basis of our prognosis," Eichiner said.
Shares in BMW dropped 2 percent in early trading and were down 2.2 percent at 10.25 GMT (0625 EDT), the second-biggest decliner on Germany's DAX index (GDAXI), which was flat.
"The scale of the increase during the forecast period is likely to be held down by fierce competition on automobile markets, rising personnel costs, continued high levels of upfront expenditure to safeguard business viability going forward and upcoming challenges relating to the normalization of the Chinese market," BMW said.
Rival Audi (DE:VOWG_p) cut its global sales forecast last week because of slumping demand in China, where economic growth is slowing.
However, Mercedes maker Daimler (DE:DAIGn), starting from a lower base and with attractive new models in the pipeline, expects its sales momentum in China to continue.
BMW said higher personnel costs, increased expenditure on new products and a shift in sales toward lower-margin compact vehicles were the main reason for its quarterly profit dip.
Earnings before interest and tax, at 2.52 billion euros, ($2.76 billion), matched the average forecast in a Reuters poll.
In May sales of BMW and Mini cars in China fell 4.2 percent from a year earlier, the first monthly decline in a decade. While BMW's China sales dropped 0.1 percent in June, sales of rival Mercedes-Benz passenger cars jumped 38.5 percent.
BMW is now working to refresh its model range to keep up with rival products like the Mercedes C-Class, upgrading its 3-Series model and working on all-new versions of its 5-Series and 7-Series cars, as well as its X1 compact offroader.
BMW said the return on sales in its automotive division in the second quarter fell to 8.4 percent, from 11.7 percent a year earlier and below the 10.7 percent margin reported by rival Mercedes-Benz Cars and the 9.9 percent earned by Audi.
It said it still expected a profit margin in the automotive division of 8-10 percent this year, compared with 9.6 percent last year and, as a result of changes in exchange rates, a "significant increase" in revenues from last year's 75.173 billion euros.