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The Luxury Car Industry's New-Old Bosses -- Heard on the Street

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07/19/2019 | 09:05am EDT

By Stephen Wilmot

The German luxury car industry has stalled. Getting the engine running again may require fresher thinking than the insiders appointed to run both BMW and Daimler can supply.

Late Thursday, BMW said production chief Oliver Zipse, a "decisive strategic and analytical leader," would next month take ove r as head of the management board -- the equivalent of chief executive under Germany's two-board system.

The current CEO and former production chief, Harald Krüger, decided not to seek a second five-year term in office, perhaps because his contract was at risk of not being renewed anyway after a marked deterioration in the company's financial results and stock price.

Mr. Zipse is still a largely unknown quantity, but he embodies continuity. He has spent his entire career at BMW, including more than four years on the management board. He is portrayed in the local press as calm and consensus-seeking -- qualities previously associated with Mr. Krüger.

The CEO-elect doesn't seem the man to make a U-turn, which is what BMW arguably needs. Traumatized by the losses it made on its pioneering i3 electric vehicle project, the company hasn't invested in a dedicated EV platform, unlike its German rivals Daimler and Volkswagen. Instead, BMW has made much of the flexibility afforded by simply adding electric and hybrid options onto its existing platform.

The result could be underwhelming products that get outcompeted by more tailored designs. EVs built on a dedicated platform will be roomier than conventional cars as the batteries can be packed flat on the car's floor. Moreover, as Michael Muders, a portfolio manager at Frankfurt-based Union Investment, points out: "If you're a consumer and you pay up for an EV, you probably want people to see you have an EV."

Daimler's problems are more operational than strategic. This makes them even harder to square with the company's choice of an internal candidate, Ola Källenius, to replace longtime CEO Dieter Zetsche two months ago.

The new boss already has been forced to issue two major profit warnings. One problem, almost four years after the Environmental Protection Agency served its epochal notice of violation to Volkswagen, has been the question of diesel fraud. Regulatory investigations into and recalls of Mercedes-Benz diesel cars aren't going away, however long Daimler appeals against them. The company is due to set aside roughly EUR2.5 billion ($2.8 billion) in extra provisions for diesel issues when it reports second-quarter results next week.

Daimler is also provisioning a further EUR1 billion for an industrywide air bag problem that first emerged in 2013. The overall impression is that management has been sweeping problems under the carpet. Mr. Källenius needs to tackle this even though he has spent his entire career at the company and has been on the management board since 2015.

He should also follow VW's lead with an initial public offering of Daimler's underperforming heavy-truck division and get out of the costly and unnecessary business of Formula One car racing. It won't help if Mr. Zetsche returns to Daimler as supervisory-board chairman in 2021 -- a proposed move that some investors, including Mr. Muders, are now fighting.

Executive life is a much cozier affair in Germany than in the U.S. The preference for continuity can be good for building expertise and brands. It may prove a hindrance when the established industry order is being disrupted, though, and problems can also fester.

It speaks volumes that investors' preferred German car maker these days tends to be the old laggard, VW. For the past 16 months it has been run not by a VW-lifer but by Herbert Diess -- a former BMW executive. In Germany, that counts as change.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
BAYERISCHE MOTOREN WERKE AG (PREFERENCE) 0.79% 48.32 Delayed Quote.-22.19%
BMW AG 1.26% 59.56 Delayed Quote.-15.76%
DAIMLER AG 1.76% 41.245 Delayed Quote.-10.16%
PORSCHE HOLDING 0.95% 55.1 Delayed Quote.6.70%
VOLKSWAGEN AG 1.23% 139.86 Delayed Quote.0.68%
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Financials (EUR)
Sales 2019 98 863 M
EBIT 2019 7 393 M
Net income 2019 5 198 M
Finance 2019 15 553 M
Yield 2019 5,05%
P/E ratio 2019 7,55x
P/E ratio 2020 6,20x
EV / Sales2019 0,23x
EV / Sales2020 0,22x
Capitalization 38 615 M
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Mean consensus HOLD
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Average target price 73,86  €
Last Close Price 59,64  €
Spread / Highest target 97,9%
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Harald Krüger Chairman-Management Board
Norbert Reithofer Chairman-Supervisory Board
Nicolas Peter Chief Financial Officer
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