Aug 3, 2017
Executives
Nicolas Peter - CFO Harald Krüger - CEO
Analysts
Patrick Hummel - UBS Investment Bank Harald Hendrikse - Morgan Stanley Tim Rokossa - Deutsche Bank Arndt Ellinghorst - Evercore ISI Charles Winston - Redburn Max Warburton - Sanford C. Bernstein Fraser Hill - Bank of America Merrill Lynch José Asumendi - JPMorgan Chase & Co.
Operator
Good afternoon, ladies and gentlemen. I would like to welcome you all to our Telephone Conference for the Second Quarter Results.
With us today is Harald Krüger, Chairman of the Board of management; and Nicolas Peter, our CFO. First, Harald Krüger will give you an update on the business performance during the second quarter of 2017.
Dr. Peter will then take you through our financial results.
Afterwards, we will have time for our Q&A session. Harold Krüger, please go ahead.
Harald Krüger
Good afternoon, ladies and gentlemen. I would like to begin by saying a few words about yesterday's forum in Berlin between Federal and State Government officials and the automobile industry.
The meeting was an important step. We support the initiative and are investing in the Sustainable Urban Mobility Fund.
State-of-the-art diesels will definitely play an important role in future mobility, as well. Yesterday, this was clearly acknowledged.
Modern efficient diesel engines ensure lower CO2 emissions. On average, BMW Group diesel vehicles emit 40% less NOX than the German average, as reported by the Germany Federal Environmental Agency in April 2017.
This is also true both for our Euro 5 and Euro 6 vehicles. We are driving the transition to sustainable mobility as hard and as fast as possible.
That's why we will grant vehicle owners across the European Union environmental bonus of up to €2,000, depending upon the model. This applies to owners of diesel vehicles that meet Euro 4 standards or less, when they trade in their vehicle and purchase a new BMW or MINI.
The replacement must be either a BMW i3, a plug-in hybrid or a Euro 6-standard vehicle with CO2 emissions of up to 130 grams per kilometer. In addition, we are offering an optimization of the exhaust-treatment system for 300,000 of the Euro 5 models currently on the road in Germany, at no extra cost to the customer, of course.
As I emphasized, again, yesterday, BMW Group vehicles are not rigged for testing purposes. This has been confirmed by the results of relevant official investigations at the national and international level.
And our customers can continue to rely on this. The BMW Group initiated the change to sustainable mobility at an early stage.
Currently, we have more than 150,000 electrified vehicles on the road. But it's also clear that sustainable mobility requires cooperation, within our industry and with partners from other areas.
The automotive industry will continue to play a key role for growth, innovation and jobs in our country. And I can assure you, the BMW Group will also continue to drive innovation in a sustainable mobility.
It's simply part of our DNA. And now, I would like to move on to our daily businesses and the strategic challenges and opportunities that remain the focus of our efforts and innovations, regardless of current developments.
There are 2 topics I would like to address in more detail. What did we achieve in the first half of 2017?
Which steps have we already taken on the Strategy NUMBER ONE > NEXT? In the first 6 months, we continued the successful business development of recent years.
Our sales figures and group earnings once again reached new all-time highs. We delivered more vehicles than ever before in a 6-month period.
Total delivers of BMW, MINI and Rolls-Royce vehicles exceeded 1.2 million. This underlines the strong appeal of our brands and our models.
The BMW brand alone delivered more than 1 million vehicles. The main growth drivers were the 7 Series and the X models.
We expect the new BMW 5 Series, including the Touring and plug-in hybrids as well as the long wheelbase version in China, to provide further momentum. In autumn, these will be followed by the third generation of the very popular BMW X3, which will also be available for the first time as an M Performance model.
MINI sales also reached a new half-year high. The new Countryman has been well received by the markets.
Rolls-Royce sales were lower than last year. In the ultra-luxury segment, political and economic uncertainties in a number of regions have dampened consumer spending.
We presented the new Phantom, and the Pinnacle of Luxury to the world just a few days ago in London. Reactions have been very positive.
BMW Motorrad remains on track for growth, with record deliveries. As previously announced, BMW Motorrad aims to deliver more than 200,000 motorcycles and scooters by 2020.
This year alone, BMW Motorrad fans will be able to choose between 14 new and revised models, including the new R NineT Pure and Racer models. Group pretax earnings climbed to a new all-time high of more than €6 billion, due to the positive business development as well as valuation effects from the first quarter.
For the 29th consecutive quarter, our EBIT margin in the Automotive segment remains with our target range of 8% to 10%. The global automotive market reported only one slight growth in the first half of the year.
Individual markets are developing unevenly. In this case, we benefit from our balanced distribution of sales across Europe, Asia and the Americas.
We have established a strong sales network and production base in all these regions. We are a reliable local partner and understand our customer needs.
Our sales figures for the first half year produced the following picture. In Europe, sales were slightly higher.
China posted double-digit growth. In the U.S., our sales decreased slightly in a declining overall market.
As a global company, the BMW Group is confronted with many risks on the international auto markets. Examples include the impact of Brexit and the political situation in the Middle East.
Nevertheless, we have set ourselves ambitious goals for the financial year 2017. We are targeting a slight increase in deliveries and group earnings before tax both of which should reach new all-time highs.
At the end of the first 6 months, we are well on our way to achieving our goals for the year. The BMW Group intends to remain the leader in the premium segment and grow profitability.
For us, however, it is important to be in our target corridor than to grow strongly in volume. We are making further strategic decisions to strengthen our innovative capabilities and our core business.
That brings me to the second topic. Which steps have we taken under Strategy NUMBER ONE > NEXT?
I have always emphasized that electro-mobility is currently our clear priority. The mood is becoming increasingly positive.
In the first half of the year, we sold more than 42,500 electrified cars. That is around 80% more than in the same period last year.
This includes models from our BMW i family, our BMW iPerformance vehicles and the new Countryman Plug-in Hybrid. We are the market leader in plug-in hybrids in this premium segment.
The sales curve for the pure electric BMW i3 shows a clear upward trend. Sales increased by more than 50% year-on-year.
There are plenty of announcements being made in our industry at the moment. We are creating facts.
We have more electrified vehicles on the roads than any of our established competitors. Our customers can currently choose from 9 electrified models.
Thanks to the growing desirability and our broad range of electrified drivetrains. I am very confident that, we will deliver 100,000 electrified vehicles this year.
We are expanding our offering to all brands and segments. In this way, we're already embarking on the second wave of electrification.
Many customers have already reserved the BMW i8 Roadster, which launches next year. I'm sure the all-electric BMW X3 will also be a hit with many customers from 2020.
Production of the first fully-electric MINI will get underway in 2019 at our British plant on Oxford, where most of our MINI 3-door cars are built. MINI customers will then be able to choose between 3 drivetrain variants; Combustion engine, plug-in hybrid in the Countryman, electric drivetrain in the MINI Hatch.
In Germany, Lower Bavaria is home to our Dingolfing and Landshut plants. It is the center of competence for e-mobility.
Dingolfing will also build our new technology flagship, the BMW i NEXT. At the IAA in Frankfurt, we present a very exciting surprise.
We are strengthening Germany's status as a manufacturing location for e-mobility. We aim to provide our customers worldwide with emotional and comprehensive sustainable mobility solutions, and we are enabling our locations to achieve this.
We currently produce electrified models at 10 international locations. Going forward, nearly all of our plants will be able to build vehicles with combustion engines, plug-in hybrids and all-electric models on a single production line.
This makes us extremely flexible in how we respond to demand. Autonomous driving is our second major area of activity, and we're making rapid progress in this area as well.
We have been working with Intel and Mobileye for the past year. We have also been able to recruit a new and renowned partners for our platform, like Delphi and Continental.
This year, the first engineers from the BMW Group, Intel and Mobileye will move into our development campus outside of Munich. We want to offer all our customers the right options for their own individual mobility needs.
This year and next, we will launch around 40 new and revised models. This will be the biggest model offensive in our history.
The BMW 8 Series Concept vehicle provides a glimpse of the near future. This is highly emotional vehicle underlies our claim to leadership in the luxury segment.
Ladies and gentlemen, modern societies need mobility. The car is, for many people, an essential element of their everyday lives.
It makes our lives easier and more flexible. Digitalization opens up new possibilities to take individual mobility to a new dimension; electric, connected and autonomous.
We are pushing ahead with all these topics as part of our Strategy NUMBER ONE > NEXT. We are combining operational excellence in our core business with profitability and fresh thinking.
This is our road map for our future success. Thank you.
Unidentified Company Representative
Thank you very much. Now Nicolas, please go ahead.
Nicolas Peter
Ladies and gentlemen, good afternoon, from me as well. The long-term liability of the BMW Group is our top priority.
We are now entering the next phase in the implementation of our Strategy NUMBER ONE > NEXT. This year marks the launch of the largest product offensive in our company's history, including many new electrified models.
The BMW Group is clearly focusing on the future. But, first, let's take a look at the latest financial figures.
After a good a start to the year, the BMW Group demonstrated its financial strengths once again in the second quarter of 2017. The EBIT margin of 9.7% for our Automotive business was higher than the same quarter last year.
Based on the strong performance in the first half of the year, we are able to confirm our guidance for 2017. We will continue to systematically strengthen our performance side and to leverage efficiencies across all areas of the company.
This enables us to finance from our operating business the substantial investments needed for electrification and autonomous driving. This remains our goal, even in the face of increasing global economic volatility.
In the second quarter, group revenues rose by 3.1% to €25.80 billion. Revenues for the first 6 months climbed to €49.25 billion.
Group earnings before tax for the second quarter totaled €3.06 billion and were therefore 9.2% higher than the previous year. Pretax earnings for the first 6 months reached €6.06 billion, partly due to onetime effects in the financial result.
This tailwind mainly resulted from new investors acquiring stake in the mapping service here in the first quarter, valuation effects in the other financial results and a healthy earnings contribution from our Chinese joint venture, BBA. The EBIT margin for the second quarter was 11.8%.
In the first 6 months of 2017, we continued to invest in expanding our production network. Our focus is currently on the expansion of our Spartanburg plant and construction of the new plant in San Luis Potosi.
Investments in equipment and products totaled €1.46 billion in the first half of the year. Following the launch of the new 5 Series Sedan, the popular long wheelbase version for China was released in June.
The new 5 Series Touring is now also available. The CapEx ratio remains relatively low at 3.0%.
This is typical for the first half year in line with seasonal factors. However, it is distinctly higher than last year.
For the full year, we expect the ratio to be above last year's figure, but still below our target of 5%. Research and development expenditure for the first half year rose to €2.65 billion.
This already reflects spending for the model offensive over the next 2 years. We are also continuing to work on electrification of vehicle architectures and investing in technologies for autonomous driving.
The R&D ratio for the first 6 months therefore increased to 5.4%. As previously announced, we expect the R&D ratio for 2017 and the next 2 years to be slightly above our target range of 5% to 5.5%.
I would now like to take a look at performance in the individual segments. Deliveries in the Automotive segment climbed 4.6% to around 634,000 vehicles in the second quarter.
In the first 6 months, a total of 1.22 million BMW Group vehicles were delivered to customers, an increase of 5% over the previous year. Segment revenues for the first 6 months rose by 4.8% to €43.67 billion.
Revenues for the quarter totaled €22.98 billion. Segment EBIT for the second quarter was 2.8% higher, at €2.24 billion.
The EBIT margin for the same period was 9.7%. Pricing remains challenging.
In highly competitive markets, profitable growth is our clear priority. Efficiency improvements were largely able to offset high R&D costs and the corresponding rising upfront investments for personnel costs.
The financial results for the second quarter climbed to €147 million. The BBA joint venture contributed €154 million to the at-equity result, an increase of 10% over previous year.
A few words about the segment's financial position. In terms of free cash flow, we are on course to achieve our target of €3 billion for the full year.
Free cash flow for the first half year totaled €2.04 billion, partly due to the impact of the major investments I just refer to. Let's continue with the Financial Services segment.
In the second quarter of 2017, we concluded nearly 469,000 new financing and leasing contracts with retail customers. This represents a slight increase of 1.7% over the same period of last year.
We saw a moderate decrease in the number of new leasing contracts, while the number of new financing contracts increased. At the end of June 2017, the Financial Services segment managed a total of €4.88 million contracts with retail customers, 3.8% more than at the start of the year.
47.6% of new BMW Group vehicles released or financed by the Financial Services segment in the first half year. In the first 6 months of 2017, pretax earnings for the segment climbed 10.3% to €1.18 billion.
The risk situation remains stable overall. The net credit loss ratio of 0.31% remains very low.
On the whole, used car prices worldwide stabilized in the second quarter of 2017. We are continuing to monitor trends very closely, also for vehicles with diesel engines.
From today's perspective, we have made adequate provisions for business risks from loans and the residual values. Let's move on to the Motorcycles segment.
In the first 6 months, we delivered almost 88,400 motorcycles customers, 9.5% more than the previous year. This was BMW's Motorrad's best-ever fast half year, with double-digit growth in Europe, South America and China.
The segment's second quarter revenues rose by 12.8% to €696 million, mainly due to higher volumes. Revenues for the first 6 months reached €1.32 billion.
Segment EBIT for the first half year increased to €229 million. EBIT for the second quarter totaled €104 million.
The EBIT margin for the same period was 14.9%. The figure for the year to the end of June stood at 17.4%.
So those were the figures for the Motorcycles segment. Ladies and gentlemen, I would now like to talk about the outlook for the group for the second half of the year.
The first half of 2017 was positive for the BMW Group. However, with the uncertainty surrounding political and economic developments worldwide, the rest of the year will remain challenging.
As usual, we also expect to face higher expenses in the second half of the year than at the beginning. Nevertheless, on the basis of these strong figures, the BMW Group remains confident about the second half of 2017, and we are able to confirm our guidance for the full year.
Provided conditions do not deteriorate significantly, we expect to achieve a slight increase in group earnings before tax. We also forecast a slight increase in automotive deliveries, assuming conditions remain stable.
Due to positive translation effects, we expect the increase in the Automotive segment revenues for this year to be solid. Also, high upfront investment in future projects will dampen earnings, we are still targeting an EBIT margin of between 8% and 10% in the Automotive segment for the full year.
Deliveries in the Motorcycles segment are expected to increase significantly this year. As in the Automotive segment, we will be targeting an EBIT margin within the 8% to 10% range for the Motorcycles segment.
The positive business development in the Financial Services segment should continue in 2017. Faced with growing capital adequacy requirement and normalization in the risk situation, return on equity is expected to decrease slightly.
However, it is expected to remain above our minimum level of 18%. Ladies and gentlemen, global economic and political conditions remain highly volatile and therefore, difficult to predict.
As previously announced, we also anticipate higher cost for new model launches and upfront investments for strategic projects in the second half of the year. We are accounting this with ongoing measures on both the cost and the income side and systematically tailoring our product and service structure our customers' wishes.
At the same time, we are setting priorities and reducing complexities, both in our vehicle lineup and our internal structures and processes. Our strategic focus is firmly on the long-term.
There is no doubt in my mind that we have the right the strategy and the financial strength we need to shape our future. Thank you.
Unidentified Company Representative
Thank you very much, Nicolas. Ladies and gentlemen, the line will shortly be open for questions.
Please wait for some technical advice.
Operator
[Operator Instructions]. Our first question is from the line of Patrick Hummel at UBS.
Patrick Hummel
I would have two questions, please . The first one to Harald Krüger.
In terms of the powertrain strategy, it feels that the German car makers are spending a lot of time and a lot of resources on citing for technology from the past and into the diesel, while less than right other competitors also in the premium segment are accelerating the switch to battery electric. I appreciate that the BMW is a leader in plug-in hybrids.
But what about the implementation of 48 volt on gasoline to mitigate the negative impacts, potential negative impacts from a declining diesel share in the mix? And why don't you just go for a more aggressive battery electric vehicle strategy?
And in that context, is the surprise that you alluded to that we might -- that we'll see at the Frankfurt Auto Show going to begin the sales of battery electric product? And the second question to Nicolas Peter is related to the cash generation in the second quarter.
Isolated Q2 cash flow was just about €400 million for the industry [indiscernible]. It seems there were some negative items in the operating cash flow in the second quarter.
Is that related to provisions of the past that has become cash outflow in the quarter? What's behind there, any explanation would be much appreciated?
Harald Krüger
Hello, Patrick. The first question is on the i3e and the EVs and plug-in hybrids and 48 volt.
As you know, we have already, which I mentioned in my speech, 150,000 electrified cars on the road. We will target this year 100,000 electrified vehicles as being sold this year.
We are well on target with 42,500 for the first half of the year. So as we mentioned as well, we are clearly the #1 in plug-in hybrids in our segments.
The i3 sales have increased in the first half of 2017 as well significantly by 45%. And as we are putting a lot of emphasis on the electrification of all our products and brands, there will be MINI electric in the year 2019, there will be a BMW X3 electric in 2020.
The i NEXT will come in 2021. And we will show a surprise in Frankfurt, but it's too early to talk about.
Nicolas Peter
Patrick, maybe to start with, I would say that free cash flow in the first half, and we should look at the first half and not quarter-by-quarter, was strong in 2017. We are definitely aiming to exceed slightly our target of €3 billion for the full year.
If we go a little bit more into the details of the operating cash flow and why there has been change in the other items in Q2, those items are related to various items in our business, amongst those payout of dealer bonuses, payout of personnel-related accrued liabilities, such for example, as we are just ahead of the vacation period -- vacation pay. So it's a combination of many different items, but I want to confirm, we will achieve our guidance of more than €3 billion for the full year.
Operator
Our next question is over to the line of Harald Hendrikse at Morgan Stanley.
Harald Hendrikse
Can I just start to the FinCo, one of my favorite topics, obviously. You've made some comments this morning regarding the cost of goods and the rise of the costs of goods sold in the FinCo regarding changes in the lease portfolio and the lease terminations.
Obviously, the concern we have already on some of the residuals in the U.S. You made some comments this morning about the residuals in the U.K.
and that you're may be a lit bit cautious, more cautious in the U.K. And then obviously our concern, or certainly my concern on diesel residuals.
Can you talk about all of that in particularly what you were talking about this morning? And how you see that developing going forward?
And then related to that, what kind of FinCo do protect itself as much as possible from those future pause in residuals?
Nicolas Peter
Harald, you are referring to the 2 very relevant markets to the U.S. and to the U.K.
We have seen, as I stated already this morning that the used car prices have stabilized. And definitely the slight downward trend we have experienced and we were discussing it in the Q1 conference, has definitely has slowed.
We, as you might have seen, looking at our U.S. numbers, we balance in a smart way allocation of production to the U.S.
market in order not to over push the U.S. market.
And I would not be surprised if in the U.K., we would implement similar strategy as we see definitely a trend in the U.K. market, which is shifting a little bit in the wrong direction.
Harald Hendrikse
[Indiscernible] see any trends at all? Or b, do you see what can you do of as a FinCo to protect yourself again?
Can you anything on the allocations on diesel specifically?
Nicolas Peter
On diesel, we see for the time being, with European phenomenon diesel a stable situation, despite all media discussion. And we believe with our very focused retail value setting, we are on track not to expect negative surprises in the months to come.
Operator
The next question is from the line of Tim Rokossa at Deutsche Bank.
Tim Rokossa
Two questions on diesel, and one on something else, fortunately. Dr.
Peter, when you talk about residual values, can you perhaps help us understand what your sensitivity would be say to a 5% decline if it was to happen, I understand residual values are so far stable, but let's say, they do decrease by 5%, what would that mean for you? And then probably, Harald to you also, when we think about diesel impact in Germany where this debate is probably the most prominent, you're guiding for a small decrease in CO2 emissions this year, you gave us interesting numbers for the diesel penetration this morning in the media call.
You have to build to order in Germany. And do you see any impact on the take rates and penetration levels of diesel vehicles in Germany specifically?
Those would be first 2 questions. And then just really on something else, when you think about your volume price mix bridge in the EBIT line, which we don't disclose on a quarterly basis.
Are you happy to share a few details on how that developed in the quarter?
Harald Krüger
One question was on the diesel side, what does it mean in terms of impact for the decrease of CO2 in 2017, which we have clearly stated in our quarter and half year report that we are seeing a decrease in 2017 in our CO2 emissions. And that is still valid.
Even there is a change on -- may be more change on diesel take-up, changes to take rates or order intake, the figures I mentioned this morning was that we saw in 2016 for the German market an average of the diesel mix of 65%. And we currently have in the first half of 2017, 61%.
So on the worldwide global basis, it's is only a decrease of 1%, so pretty stable.
Nicolas Peter
Well, I -- and as you probably expect, I will not make sensitivity of a 5% decline. However, what I would like to state that we have a very proactive way of setting residual values and even more very cautious approach at our RV.
Harald has stated this morning and that the diesel market is just slightly down in terms of penetration in Europe, and I'm repeating myself, we do, at this point in time, not see any major negative impact on diesel residual values in Europe. Coming to your third question, regarding the EBIT bridge, of course, we have a slight positive impact from volume and mix, as you can imagine from looking at our sales numbers on the negative side we have increased expenses as a result of provisions related to legal, to some legal risk, and I would like to state that those risks are in no connection with the media coverage of the last 10 days.
They are related to patent topics.
Operator
We are now over the line of Arndt Ellinghorst at Evercore ISI.
Arndt Ellinghorst
Krüger, can you help me to understand why the press and certainly the stock market might be right to believe that the end of diesel. Is this also triggering the end of BMW, more broadly the German auto industry as a stock prices falling every day and following the German press.
Firstly, is customers switch from the diesel to a gasoline vehicle is more likely a good thing for your profitability? As I assume, you have the at same or even better margin from petrol engines than on diesels.
And do you have the flexibility as you've always stated in your car engine plant. And secondly, if you have to sell more mild hybrids to replace diesel and still meet your CO2 targets, that's not necessarily a bad thing either as 48-volt gasoline hybrids already today have a cost advantage over diesel.
And thirdly, if you are forced, and probably Harald was suggesting on your own, you have to write down some of your capitalized development costs or your operating leased assets. So let it be, just get it done.
These are noncash items and it's -- it won't kill you either. So I just don't really understand why there is this notion that everyone's talking about that the end of diesel, it's the end of the German auto industry, maybe you can share some of your thoughts?
Harald Krüger
Thank you for the questions. I think, I could answer say a couple of yes to you on what you just mentioned.
I mean, first of all, if you think about our worldwide diesel mix of 35%, so 65% of our business by today is still petrol engines. And I don't think that we see the end of the diesel family.
It will be an important engine still for 2020 and 2025 and the Euro 6 diesel is a good one, definitely. And we will update the Euro 5, 3 for the customers with a software update.
Mild hybrid and cost advantage and things like this one, I don't want to go into the details of margins, but what you clearly mentioned is also true, we have a high flexibility with our engine plants between to mix and to switch between diesel and petrol engines. And that flexibility, in my view, is for the future very important.
Combined with the flexibility in the car plants as well, because nobody knows the demand definitely on battery electric vehicles and plug-in hybrids and combustion engines and we took the strategy that we have flexibalizing the plants and we can build each of those derivatives, engine derivatives in the plants and I think that's a good advantage for the future.
Operator
We will now go over to the next question, which is Charles Winston at Redburn
Charles Winston
Focusing on electrification, I hear what you say about not really wanting to discuss profitability of powertrain. But just looking at your German website, literally about half an hour ago, if I were to look at the 530e, it is priced on there at around about €2,000 less than 530d in terms of retail price, base price.
X540e is priced around about €1,000 less than the X540d. Your pricing retail, your [indiscernible] product less than you're pricing your diesel products.
Yet clearly, they have relatively expensive batteries and they have got 2 powertrains in an effective way. Could you at least give us some guidance as to the profitability of the PHEV product given that you're pricing it in line with or less than equivalent diesel power and then so you have to have a higher cost of production?
That's question 1. Question 2 is just relating to, Tesla, I have to mention and the new Model 3.
In theory, and where Tesla seem today, but if the Model 3 does well, how quickly can BMW react in terms of an equivalent price, equivalent range product? If we did start seeing the famous 500,000 units of volume that they're targeting clearly that will start taking product and demand away from you and some of your competitors.
Would you be able to react and how quickly could you do so?
Harald Krüger
Charles, as I mentioned in my speech, we will show a surprise in Frankfurt, and it's too early to say a word. But today, BMW is quite flexible, as you know, in product development and on the production side.
And on the Tesla Model 3, I think, it's too early days to really say how successful this product is in the market and know the ramp-up will look like.
Nicolas Peter
Charles, thanks a lot for the hint. I will pass this to the colleagues from our sales division in Germany to may be raise the price on the iPerformance.
But joking aside, what you're asking is a very important question. And as a background of the question is, will BMW with a growing share of e-mobility of electric powered cars stay in the range of 8% to 10%?
And definitely, this is our commitment. And why am I optimistic that we are going to achieve this target, because our strategy on one hand side is based on improving the performance side by launching new models with high margins, just a couple of examples, we have discussed the 5 Series and very important model from world perspective, we launch in a couple of months from now the new X3 even the runout version of the X3 is performing well -- performed very well in the first 6 months and a couple of months later the 8 Series saw a new top model in our range.
On the other hand side, we are reducing complexity in our product offer which will contribute in a significant way to the increase in profitability. And of course, we continue to optimize our company quarter-by-quarter in terms of efficiency and cost.
And this is why I'm optimistic that we will stay in the 8% to 10% range.
Operator
We are now over to the line of Max Warburton of Bernstein.
Max Warburton
I'd like -- I should a follow-on from Charles Winston's question about again Tesla Model 3. Mr.
Krüger, you said we're going to have wait and see how successful the ramp up is on that product. I absolutely agree that's a big issue for Tesla.
But in terms of the market demand, the market demand seems to be confirmed if we're willing to believe what Tesla says about preorders. So a question for you.
Your market research organization, when you go out and look for customers and to new customers, do you see any indication that there could be demand on that sort of level for BMW EV?
Harald Krüger
I think that's a very good question, Max, definitely on the one side. I think we need to differentiate it across the globe for FAS and if I look into the market data we have, the one is, China is probably different than United States, than Europe.
In China, you probably have only a chance for bigger volumes if you have localized the product, and that is probably maybe going to happen with Tesla Model 3 or not, I don't know. But without localization, I think it will be difficult in the Chinese market.
In the European market, you definitely normally need European manufacturing location as well, in some parts, it could be possible. The European customers on the change in terms of looking for more electric vehicles.
But you can see it's still a slow market and the reason why that there the infrastructure is not everywhere available. So from our experience, Max, the infrastructure goes hand-in-hand with the market demand, and the customers are concerned in the infrastructure.
And if you look at Europe, it's completely different, now 27 different countries with different infrastructure. And in the United States, as you know, as good as I do, you need to look at the different regions, California is definitely very keen on those products.
If you go into the Midwest, it's different. And you need also in our view a little bit of a flexible architecture for the future to rely just only on electric vehicle might be difficult because maybe in the Midwest in the United States, you will not find as quickly as needed the infrastructure available.
So we have different data across the globe.
Max Warburton
A quick follow-up on that. The flexibility is only about flexible platform and you were saying earlier BMW is a flexible company.
With a flexible architecture, can you put the battery in such a vehicle that's big enough to be competitive, e.g., can a flexible architecture take an 80 or 90-kilowatt hour battery?
Harald Krüger
Yes, we believe we can, definitely. And in terms of having a competitive offer on the market.
Operator
We're now over to Fraser Hill of Bank of America Merrill Lynch.
Fraser Hill
I've just got three quick questions, actually. I'll just start with EVs and batteries, just to follow on from the theme.
Could you talk a little bit about your technology choice, I think you've gone with the Samsung and prismatic cells, which I believe are probably far safer, and the density, I think they're much more expensive. So is that a technology choice there to perhaps holding you back from competing at these price points in EV market, is a technology you're still happy with today?
Just an update there. And very quickly on diesel, you gave us those percentage of diesel mix numbers for BMW last year, and this year.
What diesel mix do you need to have for 2021 in your mind to comply with the European regulation? And then third question, could you give us an update on mobility services offer?
I mean there's not been much discussion of that at all today? And obviously, you've made some big efforts at DriveNow and right now in the U.S.
Is it proving to be even slower progress in that market? We've obviously seen some big losses from Uber and I think [indiscernible] some U.S.
cities. Just interested in your thoughts on the market in general of mobility services in your place at the moment?
Nicolas Peter
And Fraser, as you know, mobility services play an important role in our Strategy NUMBER ONE > NEXT, our Strategy NUMBER ONE > NEXT is build on 4 pillars. The ACES, autonomous, connected, electrified and shared.
And we continue to develop on one hand side our DriveNow activities. We are in talks with new cities in those states.
We have recently started a new approach in the U.S. in Seattle with ReachNow.
And we are well on track to gain additional users for our BMW Connected app. So it continues to play an important role within our strategy.
And may be to -- sorry, Fraser, to add, a very, very important clause we were discussing Harald was referring to the diesel summit yesterday in Berlin. And if you look what we have developed in Hamburg, together with the city -- with the Mayor of Hamburg, we've committed to replace our fleet of DriveNow combustion car by electrified cars.
So we will have 550 electrified cars into the Carsharing scheme in Hamburg, plus-minus 400 fully electrified, 150 plug-in hybrid, and on the other hand side, the city permitted to set up modern 1,000 charging points in the next year, so this is what I would call really very modern state-of-the-art mobility concept for in city locations.
Fraser Hill
Are you still convinced you're stable? And I believe, because we are seeing in perhaps [indiscernible] or focused developing in the -- for the mobility services area in the Carsharing [indiscernible] space we're certainly seeing some big losses.
And obviously car2go is found in some in U.S. cities, but it's not a model that they can apply to some of those areas.
Are you finding that as well? Is it going to be much slower in certain areas, and could you perhaps sort of flesh out your thoughts on that?
Harald Krüger
And you already made the point, it's really a city-by-city approach and with every city we learn what is working and where do we have to adjust and to improve. And in particular talking about electrification of those Carsharing fleet, I think it's important to mention that on the one hand side, the OEM has the new responsibility and we and electrified cars.
But we need also the commitment from administration in order to set up the infrastructure related to those Carsharing schemes with electrified cars.
Harald Krüger
And building on this one, Fraser, so that's why we have a cooperation with other companies on building high-voltage infrastructure network for Europe for example, to improve the electrification and having an consumer by an electric car. Coming to your question for the 2021, which is difficult to answer by today, but keep on the following.
First of all, the petrol engines are also getting more efficient. We are also investing into the petrol side for the petrol side engines for 2021 are more efficient than the ones by today.
So that will help in achieving the 2021 Q2 targets as well. The second one is we definitely will increase the portion of electrified vehicles and then we will have a significant number in Europe of diesel engine as well.
But if you look at Euro 6 diesel engines, I hope with the agreement on the Berlin Summit from yesterday that there will be more trust from the customer side into the diesel engine technology. Okay.
And then one more finally, which I forgot to answer is definitely concerning the battery cells, on the batteries, on the technology side. BMW Group currently obtains battery cells from leading cell manufacturers in Asia.
As you rightly mentioned, they are also having factories in Europe one or the other one. So there is a good competitive market so far.
But on the other side, we do a lot of research work on battery cells to have the knowledge about the technology and the costs.
Operator
The final question for today is off the line of José Asumendi at JPMorgan.
José Asumendi
A couple of items. José, JPMorgan.
Harald, can you speak a little bit about how many gigawatt hour capacity are you putting in China? The last time we were there this year, my understanding is that you started doing [indiscernible] there?
And how that's -- how is this going to help you meet the credit target in China you need to meet over the coming 18 months or so? And then second for Nicolas, please.
Can you talk a bit also about China, the current production of leasing and financing? And then do you have any capital restrictions currently that basically limit the potential of growth across leasing and financing?
And how the series evolving over the coming 12 months?
Nicolas Peter
José, your first question was related to leasing penetration, finance penetration in China. We have hardly any operational lease in China.
So most of the business is financial leases without residual value risks and we have penetration of retail financing of slightly above 45% in China but without any residual value risks. Second topic, any restriction on capital transfers or limitation in our -- developing our Financial Services business?
No, not at this point in time. We are operating with 2 companies in China to develop our retail financing business.
One is Financial Services and the other one is a company called Herald Leasing. And we are definitely in a position to support our strong, I have to say, strong business development in China.
We expect low double-digit growth in China 2017.
Harald Krüger
And José, the other part of the question was gigawatt capacity in China and EV targets. I would like to answer that with 3 points.
The first one is, as you know, there is a proposal on the table, which requires 8% in 2018, 10% 2019%, and 12% in 2020 are so-called credit point for 0 emission vehicles. The lower is expected to be finalized in autumn in 2017.
So it's not fixed. That's currently on the table.
But which means that you need to have local vehicles. The second one is on -- the China law also requires that you have to have battery and fuel cell production and the batteries from China for local NEV, new energy vehicles.
So we have suppliers in China who do so. And we have also a high voltage battery center at our plant in Tiexi, in the province in Liaoning.
So we have the knowledge in our joint venture. And if you look at the current product portfolio, which we have, there is definitely, for example, the BMW X1 extended with plug-in hybrid coming and delivered to the Chinese market from our joint venture.
We have the 7 Series plug-in hybrid as an imported car on the market, we have the i3 and the i8 and the X5 plug-in hybrid. And as you know, there is local plug-in hybrid coming more and so that's how we will meet the Chinese legalization in the future.
Unidentified Company Representative
Okay. Thank you very much, José.
Ladies and gentlemen, I think we are on time. Thank you for joining us today.
All the best. And bye-bye.