By Christiaan Hetzner
MUNICH (Reuters) - BMW <BMWG.DE> expects earnings to stagnate this year as costs for 11 model launches, the development of fuel-efficient technology and expanding production eat up higher profits from rising car sales.
German luxury brands like BMW, Volkswagen's <VOWG_p.DE> Audi and Mercedes <DAIGn.DE> have fared better in the economic downturn than their European mass-market peers, but BMW is ramping up its spending on research and development of fuel-efficient technologies to stay ahead of the game.
"We expect to report group profit before tax on a similar scale to 2012," Chief Executive Norbert Reithofer told reporters during the group's annual earnings conference, citing investments in new technologies and in the company's production capabilities.
In 2012, BMW posted earnings before tax of 7.82 billion euros (6.68 billion pounds).
Europe remains the single biggest headache for BMW, and not just because its market volume has plunged to levels not seen in nearly 20 years.
Brussels has imposed on BMW a limit of 99 grams of carbon dioxide emitted per kilometre for its new car fleet in Europe by 2020 - a goal that Reithofer argues is impossible to reach without rolling out hybrids and electric cars throughout BMW's model range.
"If we just used conventional powertrains, the sole way we could achieve this target is if we only sold Minis and 1 Series with three- and four-turbocharged cylinder engines in Europe," he said, noting the company would have to increase the use of battery power to meet the EU targets.
As a result, BMW is increasing its spending on fuel-efficient technologies, since hybrids and electric were "a must, not an option".
"We came originally from 210 grams per kilometre and currently have a European fleet average of 145 grams," Reithofer said. "We need to get to 99 grams by 2020 and ... this last bit is the most challenging, technologically speaking."
Shouldering the higher investment costs means BMW expects free cash flow at its core automotive business to fall below 3 billion euros in 2013 from 3.81 billion in 2012, while its EBIT margin will decline to between 8 and 10 percent from 10.9 percent.
The Munich-based company forecast volume globally would rise by a single-digit percentage rate from about 1.85 million vehicles sold last year, thanks to new models like the 4 Series Coupe due in September.
With euro zone economic jitters returning, executives are placing their hopes on rising demand in the United States and Chinese markets to offset weakness on this side of the Atlantic.
BMW and its Chinese partner Brilliance are investing roughly 500 million euros to expand their production capacity to about 300,000 cars annually in the medium term, with another 100,000 coming on top if required.
Given BMW's growth of 40 percent in China last year, that could be necessary, since its two local plants produce less than half of the cars it sold.
BMW expects its sales in China to rise by a high single-digit or low double-digit percentage rate, compared with the 8.5 percent growth it forecasts for the overall Chinese market. But executives acknowledged that they have underestimated how resilient luxury car demand there is.
China has become so important that BMW has begun producing engines in China - its first such powertrain plant outside Europe. And analysts say it is not just volume growth that makes China so crucial to BMW, but its profit margins as well.
"We firmly believe that China now accounts for significantly more than 50 percent of BMW's profits," wrote Bernstein's Max Warburton in a research note published last week, though the company said this is far too high.
BMW shares fell 1.6 percent to 69.07 euros, compared with a 0.8 percent drop in German blue chips as a whole <.GDAXI>.
(Editing by Maria Sheahan and David Holmes)