BMW Group Chairman Oliver Zipse toured this year's Beijing Auto Show extensively. His impression of the event was one of uniformity: electric powertrains, large SUVs, and autonomous driving technology dominated nearly every exhibit. "It's almost monotonous," he observed.
During a conference call on May 6, Zipse acknowledged that global automotive markets are highly fragmented across powertrain preferences, vehicle sizes, and price segments. Yet, he noted, much of the industry has operated under the assumption of a single, homogenous market. "What's concerning is that the entire industry seems to believe it only needs to bet on one specific market segment," he stated.
This call coincided with the release of BMW's Q1 2026 financial results, which vividly illustrated the fragmented nature of the global automotive landscape, with distinctly different situations unfolding across various regions.
This was Zipse's final quarterly earnings call after seven years at the helm of BMW. The outgoing European auto CEO used the occasion to voice his concerns about current market dynamics.
BMW's Q1 report itself serves as a mirror. Over the past seven years, BMW's commitment to "technology openness" rather than a "full electrification" strategy has endowed the company with resilience in this divided market. The trade-off, however, is reflected in financial figures that don't tell an exceptionally exciting story.
With his final quarterly report, Zipse demonstrated that the strategic direction was correct. Yet, a gap remains between having the right strategy and realizing its full profit potential.
**A Fragmented Market** The divergence in the global automotive market in the first quarter was arguably the most extreme witnessed in the past five years.
Aggregating regional industry data, the EU27 market grew by 3.8% in Q1 2026, while the US market declined by 6.6%, and China's overall market contracted by 17.5%. These three markets not only moved in different directions but were also driven by entirely different forces. Europe benefited from a moderate economic recovery, the US was hampered by base effects following the cancellation of BEV subsidies, and China experienced a dual contraction from subsidy phase-outs coupled with weak consumer sentiment.
Zipse highlighted a frequently overlooked structural reality during the call: in China, only about 30% of the market is pure electric, with the remainder consisting of plug-in hybrids, extended-range electric vehicles, and internal combustion engine vehicles. While BEV sales in China fell sharply in Q1, demand for ICE and PHEV vehicles actually increased. This structure is the inverse of Europe's, where pure electric orders surged by over 60% in the first quarter.
An automaker betting solely on pure electric vehicles would face headwinds simultaneously in both China and the US. Conversely, a bet solely on internal combustion engines would mean missing the boom in Europe. BMW is one of the few manufacturers that prepared for both scenarios.
Europe's growth came from the Neue Klasse. The iX3, since its debut last September, has garnered over 50,000 orders, with deliveries commencing in March. Currently, over half of the X3 orders in Europe are for the pure electric version. Zipse noted that one out of every three new orders for a pure electric BMW in Europe is for an iX3, and these are firm orders with down payments, not mere expressions of interest.
Growth in the US came from ICE vehicles. Following the removal of BEV subsidies and the subsequent sales decline, BMW's Spartanburg plant increased production of the ICE X5 by nearly 10,000 units in the short term, almost entirely offsetting the BEV shortfall. Zipse's exact words were: "We don't need to build something new from scratch; we can switch immediately."
The story in China was not about volume growth, but quality. While BMW's deliveries in China fell by 10% in Q1, this performance outpaced the overall market decline of 17.5%.
BMW's CFO, Walter Mertl, revealed that sales of the X5 in China during Q1 were higher than the previous year, and achieved at higher transaction prices. Over the past year and a half, BMW undertook significant adjustments to its dealer network in China while also reducing official guide prices. The result was that despite lower guide prices, final transaction prices saw a slight increase.
The responses across these three markets were entirely different, yet they shared a common prerequisite: BMW maintains a complete product portfolio of BEV, PHEV, and ICE vehicles in each market, and its production lines can be switched rapidly. This operationalizes Zipse's repeatedly emphasized "technology openness"—it's not just a conceptual slogan but a tangible capability to hedge across multiple global markets simultaneously.
Globally, BMW's BEV deliveries fell 20.1% year-on-year in Q1 2026, with their share of total deliveries dropping from 18.7% in Q1 2025 to 15.5% in Q1 2026. However, the volume lost from BEVs was absorbed by ICE and PHEV vehicles. Ultimately, BMW's global total deliveries declined by only 3.5% in Q1 2026, outperforming the broader market.
Zipse concluded that surviving companies need three key attributes: the systems integration capability to incorporate all technologies into a single vehicle, long-term quality ensuring the vehicle remains reliable years later, and the judgment to distinguish between fleeting trends and a sustainable business model. "Frankly, there are too many bets being placed in this industry right now," he remarked.
He wasn't simply touting BMW's strengths. He was underscoring that the risk of betting on a single path is greater than most realize.
**The Battle for Profitability** While the strategy is proving sound, the income statement has yet to fully reflect this. The automotive segment's EBIT margin of 5.0% is not a comfortable figure for a premium brand like BMW.
However, the composition of this 5% warrants closer examination.
Tariffs reduced the EBIT margin by approximately 1.25 percentage points in Q1 2026. Last year, only the EU's anti-subsidy tariffs on Chinese-made EVs were in effect; now, with the addition of US tariffs, the burden has increased significantly. The Purchase Price Allocation (PPA) amortization related to the full consolidation of BMW Brilliance continued to erode margins by about 1.2 percentage points.
Combined, these two factors account for nearly 2.5 percentage points. Excluding these non-operational burdens, the automotive segment's operating margin would be around 7.4%.
This is not an excuse for the 5% margin. Tariffs represent a long-term challenge, and PPA amortization will continue until mid-2028. However, it illustrates a key point: the primary pressure on BMW's current profitability does not stem from poor product sales or uncontrolled costs, but rather from external burdens.
Another area on the income statement requires attention. The Group EBIT margin of 7.6% appears largely stable compared to the full year 2025. However, financial results swung from a loss of €29 million in the prior-year period to a gain of €344 million. Rising long-term interest rates, influenced by Middle East tensions, generated valuation gains on interest rate hedging derivatives. This source of income is not sustainable.
CFO Mertl reaffirmed the long-term target margin range of 8-10%. When asked if this goal remains realistic, he cited three supporting factors: the Neue Klasse platform is expected to deliver significantly higher profit contribution per vehicle than current models, costs are being continuously reduced across materials, manufacturing, and warranty lines, and fixed costs are projected to decline gradually between 2026 and 2028.
Furthermore, a significant inflexion point is on the horizon. PPA amortization is scheduled to conclude in mid-2028. At that time, the 1.1 to 1.2 percentage points currently deducted each quarter will be fully released. This single factor alone is expected to contribute over 1 percentage point of margin improvement in 2029.
Until that point, BMW is navigating a period of peak amortization. While research and development spending and capital expenditures are being cut, the R&D expense line—which includes amortization—is actually increasing. This is due to the concentrated release of previously capitalized development costs for the Neue Klasse. This marks a typical transition from an "investment peak" to an "amortization peak," a phase expected to persist through at least 2026 and 2027.
On the tariff front, there is an underappreciated potential upside. When asked if potential export hedging mechanisms were included in the tariff impact assumptions, Mertl was clear: "Export hedging is not included in the 1.25 percentage points, not at all." Should such mechanisms be successfully implemented, the actual drag from tariffs could be lower than current guidance suggests.
The performance of the Neue Klasse in China during the second half of the year will be a critical test for profit improvement. Regarding pricing for the New Class models in China, Mertl stated that final decisions would be made closer to the sales launch. "But believe me, we know exactly what we need to do," he added. The next-generation X5, incorporating Neue Klasse technology, is scheduled to enter the Chinese market in 2027. Mertl indicated that dealer feedback suggests the technological level of Neue Klasse is on par with leading local Chinese brands.
The pathway for BMW's profit recovery appears well-defined. Headwinds from foreign exchange and raw material costs are concentrated in the first half of the year and are expected to gradually ease in the second half. Ramp-up of Neue Klasse production will accelerate from the second half, with European iX3 orders converting to deliveries and the Munich plant commencing production of the i3 in August.
Sources close to BMW indicated that the first quarter is expected to be the low point for the year, with a gradual recovery following.
On May 30, Zipse will chair his final BMW Annual General Meeting before formally handing over to his successor, Milan Nedeljković. The situation he leaves behind is not overly complex: the strategic direction has been validated by the first quarter's performance, a roadmap for margin recovery has been outlined—driven by improved per-vehicle contribution from Neue Klasse and ongoing cost discipline.
However, a roadmap is one thing; the actual income statement is another. Bridging the gap from 5% to 8% depends on the pricing success of Neue Klasse in China, the pace of production ramp-up, and an unpredictable tariff environment.
In his final earnings call, Zipse quoted Karl Popper: "Optimism is a duty for the entrepreneur."
He has fulfilled that duty. The task now falls to his successor to prove that optimism is not just a duty, but also correct.
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