In a recent development, luxury German car manufacturer BMW has announced a reduction in its sales and earnings targets for the 2024 fiscal year. This decision comes as a result of substantial expenses incurred in addressing a braking system recall that affects over 1.5 million vehicles worldwide.

The Munich-based BMW Group revealed on Tuesday that the costs associated with rectifying a faulty integrated braking system, manufactured by a supplier, are expected to amount to "a high three-digit million (euro) figure" for the third quarter. The company also anticipates a negative impact on sales due to halted deliveries of affected vehicles that have not yet reached customers.

A spokesperson for the BMW Group confirmed that the issue was initially discovered during an internal quality check, which led to a safety recall in February. However, further cases were identified subsequent to the original recall. As of now, BMW estimates that approximately 1.53 million vehicles in five countries are affected, including 370,000 units in China, 270,000 in the U.S., 150,000 in Germany, 70,000 in Korea, and 60,000 in France. The recall encompasses various models, such as select BMW X models, the 5 and 7 Series, Rolls-Royce Spectre, MINI Cooper, and Countryman.

Out of the total affected vehicles, 1.2 million are already in the possession of customers, leaving around 320,000 with BMW or in dealer stock. The company has implemented individual market delivery stops for one-third of these vehicles. To address the brake fault, BMW has developed a diagnostic software that aims to detect the issue proactively. If a potential fault is detected, drivers will be alerted with a warning, and they are advised to visit a dealership for a free system replacement. In the unlikely event of a malfunction, the system is designed to revert to "safe mode," ensuring that the brakes function according to legal standards, albeit requiring additional force from the driver.

German auto supplier Continental AG has confirmed its role in manufacturing the integrated brake system for BMW and has highlighted the availability of diagnostic software to detect the potential issue beforehand. Continental also stated that only a small proportion of the delivered brake systems would require replacement. The company has set aside accruals in the "mid-double-digit million euro area" to cover warranty costs.

Aside from the expenses related to the braking system recall, BMW's updated financial outlook also cites "ongoing muted demand" in China as a contributing factor to reduced sales volumes. Despite government stimulus measures, consumer sentiment remains weak in the country. Consequently, BMW has revised its automotive segment's 2024 earnings before interest and taxes margin to 6% to 7%, down from the previously projected range of 8% to 10%. The company now expects its annual return on capital employed to be between 11% and 13%, compared to the initial forecast of 15% to 20%. Furthermore, BMW now predicts a slight decrease in global vehicle deliveries for 2024, as opposed to the slight increase previously anticipated.

Following the announcement, shares for BMW witnessed a significant decline of over 11% by Tuesday afternoon, while Continental saw a decline of more than 10%. These developments reflect the challenges faced by the automaker amidst the braking system recall expenses and dwindling demand in the Chinese market.