BMW Pays $820 Million Subsidy To Its Chinese Dealers

|
About: Bayerische Motoren Werke AG ADR (BMWYY)
by: Daniel Gilcher
This article is now exclusive for PRO subscribers.

Summary

The automaker pays its Chinese dealers roughly $820 million in compensation.

This step became necessary as the national association of BMW dealers in China sought protection by state authorities.

These expenses should be regarded as non-recurring costs.

The whole industry will face more self-confident Chinese dealers in the future.

Earlier this week, several media outlets reported that BMW (BAMXY) agreed to pay roughly $820 million to its Chinese dealers. This money functions as compensation for overstated obligations to take vehicle deliveries. These problematic obligations are based on agreements made during times of strong demand in the Chinese market. As this demand has cooled down during the last year, the Chinese dealers have experienced difficulties turning profits. As a result, the dealers reported their problems to Chinese authorities and threatened BMW to halt further orders. The approved compensation covers sales in 2014. The negotiations about the guidance for unit sales and therefore order obligations for 2015 are still ongoing.

Consequences

Both BMW and its Chinese dealers will experience the consequences of this agreement. With 420 branches in the People's Republic of China (PRC), BMW will pay each branch approximately $2 million. It is important to keep in mind here that these costs should not be overstated. They are non-recurring by their nature.

The overall effects of this decision for the Chinese auto market will probably have a larger scale impact. It is likely that this payment and the dealers' self-confident behavior will act as a role model for other brands in the PRC. Over the long run, we should expect that Chinese dealers will achieve more powerful positions in future negotiations. This could lead to lower profits for the manufacturers, if costs are not saved elsewhere.

Investors with positions in automakers such as BMW should carefully follow this development and adapt accordingly. If one is considering to enter a long position in BAMXY in the next few weeks, the recent dip on these news could present a good entry point. BMW's overall fundamental situation should not be overly affected by this development. We should keep in mind that these payments are now probably priced into the stock. Additional downturns on the same news (e.g. when the payments are made in February 2015) would be clearly double counting the event.


BAMXY Price Chart

Please note that investment decisions always require a thorough analysis of detailed and global information about a security. This article only discusses one new and relevant point.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.