By Edward Taylor
MUNICH (Reuters) - German carmaker BMW plans to increase output of profitable sport-utility vehicles (SUVs) to boost earnings this year and help fund the rollout of a mass production system for electric cars, it said on Tuesday.
BMW Group and rival Mercedes have both forecast that demand for electric and hybrid cars will rise to 15-25 percent of sales by 2025, forcing them to overhaul their production lines and vehicle platforms to accommodate mass production techniques.
"The fully electric drivetrain will be integrated into our core brands," CEO Harald Krueger told a news conference at BMW's headquarters in Munich to discuss the group's annual earnings.
Only 2.6 percent of the 2.37 million cars BMW Group sold last year equipped with a hybrid or electric motor. The group also includes Mini and Rolls-Royce brands.
Electric car production will now be integrated into BMW's main production system, rather than relying on a separate, low-volume electric car factory in the eastern German city of Leipzig, the carmaker said.
"To achieve this we are now gearing our architectures towards combustion engines and pure battery electric drivetrains," Krueger said.
Even local production in China is being prepared to make batteries and electric powertrains, BMW said, adding the level of production would be decided once China's electric cars policy has been clarified.
The cost of integrating electric cars into mass production as well as investments in self-driving cars, such as the building of a research centre near Munich, will cause investments to rise, the carmaker added.
"Due to necessary upfront investments, the research and development ratio for the next two years is likely to be slightly above our target range of 5 percent to 5.5 percent (of revenues)," Chief Financial Officer Nicolas Peter said.
Earlier this month, BMW reported preliminary 2016 financial results, with earnings before interest and tax (EBIT) down 2.2 percent at 9.39 billion euros ($9.9 billion) even as revenues rose to a record 94.16 billion euros.
Every third BMW car built last year was an SUV, a market that is growing so fast the company is increasing production capacity and adding an X2 and an X7 to its lineup in 2018.
BMW's core brand, long the world's top selling luxury automaker, sold fewer cars than German rival Mercedes-Benz last year.
The company said on Tuesday it would look to recapture that lead by launching more than 40 new or revised models in the next two years, but not by chasing Mercedes at all costs.
"The future competitiveness is reflected in a combination of several performance indicators: not just sales figures, but also profitability, capacity to innovate, flexibility and attractiveness as an employer," Krueger said.
The Munich-based carmaker is increasingly focussed on finding out how to stay relevant with an audience that does not want to own a car, Peter Schwarzenbauer, board member responsible for digital business, said.
BMW Group, which includes BMW car and motorbikes as well as the Mini and Rolls-Royce brands, has reached about 30 million customers through the sale of cars. By 2025 BMW wants to increase that customer base to more than 100 million with the help of digital services such as ride hailing.
BMW is targeting a slight rise in sales volume, revenues and group pretax profit this year, with a return on sales of 8-10 percent in the automotive business.
The fact that BMW is sticking to its profit targets despite facing a steep investment bill could make BMW shares a good investment, analysts at Evercore ISI said in a note on Tuesday.
"BMW shares have underperformed Daimler by around 10 percent since mid Feb this year. It looks like this can revert," Evercore said.
(Reporting by Edward Taylor; Editing by Mark Potter and Keith Weir)