By Andreas Cremer
BERLIN (Reuters) - Rising costs for new models and technology will weigh on profits at BMW <BMWG.DE> for the rest of the year, it said on Tuesday, as the German carmaker battles to recapture ground lost to rival Mercedes-Benz <DAIGn.DE>.
BMW, the top seller of luxury cars for more than a decade, was overtaken by Mercedes last year, and its third quarter operating profit fell 3 percent as it invests in catching up.
The company, which is spending money on electric and self-driving technologies while also upgrading its line-up of conventional models, said upfront costs for the redesigned X3 sport-utility vehicle, due to hit showrooms this month, and the all-new X2 and X7 models would weigh on fourth-quarter results.
"Significant advance payments on R&D (research and development) will be necessary at present and in the coming years," finance chief Nicolas Peter said during a results call.
He predicted a "challenging" fourth quarter, echoing Volkswagen's <VOWG_p.DE> Audi brand which is also refreshing its line-up of high-end and compact models.
BMW shares were down 2.7 percent to 87.53 euros at 1340 GMT, the biggest drop on Germany's benchmark DAX <.GDAXI> index.
"BMW used to be in a league of its own but these days it faces a totally different level of competition from Mercedes, Audi and Land Rover <TAMO.NS>, plus a load of other rebooted smaller players and of course Tesla <TSLA.O>," said Bernstein analyst Max Warburton.
Spending on R&D at the BMW group, which includes the Mini and Rolls Royce brands as well as its namesake cars, jumped over a fifth in the first nine months of this year to 4.1 billion euros ($4.7 billion), Peter said.
Third-quarter operating group profit fell to 2.3 billion euros, near the lowest 2.28-billion-euro forecast in a Reuters poll of analysts.
As a result, BMW's operating margin slipped to 8.3 percent in the July-to-September quarter from 8.5 percent a year earlier, within its 8-10 percent target range but below Audi's 8.9 percent and 9.2 percent at Mercedes.
"BMW's competitive environment has changed and that's evident in these Q3 numbers," Warburton said.
Despite a 5.9 percent drop in quarterly pre-tax profit, BMW nudged up its full-year outlook to a 5-10 percent rise from 1-5 percent previously, thanks to a strong first-half performance.
Helped by strong demand for the redesigned 5 Series, BMW's second best-selling model, and an upgraded 4 Series, it forecast a "slight" increase in deliveries to a new record this year.
But it pared back revenue expectations, forecasting sales at its core automotive operations to grow by 1-5 percent amid exchange rate headwinds and political volatility, down from 5-10 percent previously.
($1 = 0.8651 euros)
(Reporting by Andreas Cremer; Editing by Maria Sheahan and Mark Potter)