BMW slashes profit forecast amid parts problems

German car manufacturer BMW lowered its sales and profit expectations for the current year on Tuesday, citing supplier parts issues and weak sales in China.

Profits before tax are likely to fall by at least 10% compared to the previous year, the company said.

According to BMW, the problems with a brake system produced by a supplier affect a total of more than 1.5 million cars and caused warranty costs of hundreds of millions of dollars in the current quarter.

BMW also suspended deliveries for 320,000 cars that have not yet been handed over to customers because of the issue, which will lead to negative sales effects worldwide in the second half of the year, the company said.

In addition, demand in China remains subdued. BMW had previously been much more optimistic about short-term prospects in the Chinese markets than the competition.

But "despite the government's support measures, the reluctance to buy continues," the company announced on Tuesday.

Sales forecasts were also lowered on Tuesday, with BMW's board predicting that sales will fall compared to 2023 instead of the growth anticipated earlier in the year.

The EBIT margin, or how much income from sales remain as operating profit, is now only expected to be between 6% and 7% in the car segment. BMW had previously targeted 8% to 10% margins.

Profit before tax is also likely to be significantly lower than in the previous year.

Last year, BMW sold 2.55 million cars, achieved an EBIT margin of 9.8% in its core business and generated a pre-tax profit of €17.1 billion.

BMW did not name the brake supplier, but announced that it would seek recourse. Between 3% and 5% of the components supplied were faulty, but BMW said all of them would have to be checked.

German auto supplier Continental, however, announced that it produces the integrated brake system for BMW at issue, which will be partially replaced. The company said the function of an electronic component may be impaired.

However, the braking performance is always above the legally required standards despite any issues, according to Continental.

"We have formed provisions in the mid double-digit million euro range and assume that this will be sufficient for the warranty claim," Continental announced.

BMW shares fell by almost 8% in the afternoon following the profit warning, while shares of supplier Continental fell by 7% and other automotive stocks also plummeted.

The profit warnings from BMW comes as the broader German car industry faces a crisis. The sector, long a major force in the German economy, has faced issues with higher costs, shrinking sales in China, challenges of shifting toward electric motors and weak demand for electric vehicles in Europe, where companies had invested heavily.

German industry leader Volkswagen has warned that plant closures are possible, while Continental has announced plans to slash thousands of jobs.