Falling Dollar Threatens German Car Manufacturers

[Brookside]

Falling dollar threatens German car manufacturers in the U.S.
*

German car manufacturers are caught between the rock of stagnating markets at home, and the hard place of a falling dollar which threatens to destroy profits in the lucrative American market.
After reporting a general improvement in 2006 first quarter profits and sales, European manufacturers could have been forgiven a smug interlude.
But unfortunately for them, and particularly the German luxury manufacturers, latest sales data for April shows feeble markets, and the accelerating strength of the euro against the dollar threatens to unravel the financial position of luxury car manufacturers BMW, Mercedes, Porsche, and VW's Audi subsidiary in the U.S.
The dollar began slipping against the euro late in 2005, and has gathered speed since April, with some commentators expecting the euro to hit $1.30 soon. (On May 16, the euro closed at $1.28 in New York).
Italy's Fiat, and Peugeot of France have no presence in the U.S. market, while Peugeot's compatriot Renault is exposed to the U.S. only through its alliance with Nissan of Japan.
European car manufacturers' first quarter results were generally impressive. Renault surprised many investment bankers with much higher than expected revenues, despite falling unit sales.



Sudden dollar weakness
But the outlook for the German manufacturers, including upscale Porsche, has suddenly been clouded by worries about the dollar's weakness.
A study from Deutsche Bank shows that if the dollar fell 10 percent against the euro, BMW's annual net profit would be slashed by $730 million, DaimlerChrysler's by $630 million, and VW's by $725 million. Porsche would take a $230 million hit.
In the first 4 months of 2006, European brands sold 360,000 vehicles in north America, up 10.7% compared with the same period of 2005, led by BMW with 88,353 -- up 21.6%, closely followed by VW (excluding Audi) 73,824 -- up 21.6% and Mercedes (72,572 +17%), according to Autodata.
These booming sales figures could be in jeopardy.
BMW had looked unstoppable, until the dollar's slide suddenly quickened. Last year it overtook arch-rival Mercedes Benz as the world's leading luxury car manufacturer. Investors had expected the profit target to be met in 2006, and progress to carry on.
CEO Helmut Panke said 2006 will be the most successful year in BMW's history, with the launch of 3-series coupe in September, and the new X-5 and Mini later in the year to keep the customers satisfied.


Well hedged for 2006

Citicorp also sounded the alarm bells about the threat to German profits in the U.S., although it pointed out that for the rest of 2006, all German car makers are believed to be well hedged against expected dollar fluctuations.
"The 4 German car names (Citicorp includes Audi with its VW parent) have by far the greatest exposure to dollar change of Europe's automakers, with between 14 and 34 percent of sales in North America. All have significant financial hedging in place," said Citicorp said in a report.
Currency hedging involves the companies using financial transactions to protect or insure income against fluctuating exchange rates.



"All save Porsche also have a form of natural hedging in place using local assembly operations, although these are being expanded in all cases," according to Citicorp.
About 14 percent of VW's total sales are in the U.S., 34 percent of Porsche's, 23 percent of BMW's and 8 percent of DaimlerChrysler's, says Citicorp.
Citicorp was relatively sanguine about the German's prospects at current rates, although an extended period of the recent lower dollar rate against the euro might prompt a reevaluation.



Worries mount for 2007, 2008
"There are few worries for 2006 earnings with all the assemblers covered, but DaimlerChrysler and BMW are at most risk in 2007 and 2008, having declined to hedge at current rates. VW moves from being one of the least to best covered assemblers, extending its cover for up to 54 months, albeit at less favorable rates than fully hedged Porsche," Citicorp said.Standard & Poors also expects European sales for the rest of 2006 to be broadly stable, although it sees profitability declining.
Maria Bissinger, S&P analyst based in Frankfurt, Germany, fretted about the impact of the sliding dollar against the euro on BMW, VW-Audi, and Mercedes, and pointed to another foreign exchange factor that will hurt them: Asian manufacturers pushing into Europe, also benefiting from the strengthening of the euro.


Neil Winton, European columnist for Autos Insider, is based in Sussex, England.

 

[Imhotep Evil]

Well this is bad.

From what I've read BMW lost ~670 million euro, or was it dollars, because of this fall of the dollar.

 

[Deutsch]

so what's the long term solution??? any ideas??? I personally don't know too much about exchange rates, could learn more. Please educate me??? Thanks!!!

 

[Brookside]

so what's the long term solution??? any ideas??? I personally don't know too much about exchange rates, could learn more. Please educate me??? Thanks!!!

Good Question...and I don't know enough about it except that at this rate German cars will be more expensive in the future...that seems to be the logic in the article- yes?
But how much more?
Perhaps the U.S. will be home to more German manufacturers- Audi plants, Mercedes.... without the cradle-to-grave UAW agreements.
Obviously this is something that'll have to be worked out...given the sales goals of all the German brands to sell more of their cars in the U.S.
It's a tough one.

 

[Deutsch]

A "tough one" indeed, if the ever 3er approaches $50k that's it, all bets are off.

 

[Brookside]

A "tought one" indeed, if the ever 3er approaches $50k that's it, all bets are off.

Funny you said that...(I put in something similar-and deleted it)>!!

 

[dOmInIX]

A "tough one" indeed, if the ever 3er approaches $50k that's it, all bets are off.

With some additional equipment it can easily reach €50 k here. I think that's not a fair price. The same thing is w/ C270, €50 K..But hey, this is Europe!

 

[Beemer B773ER]

Similar to how the majority of airlines are seeing their profits decline in the face of rising fuel costs.... the simple answer is hedging. All 4 German marques already do that, so there really isn't much to worry about it terms of going bankrupt or anything, but yes, it will erode profits.

It will be very interesting to follow the US and Global sales for BMW, MB and Audi over the next few months. In another thread, I compared the global sales for the 3 brands for Jan-April and all I saw was a fluctuating trend for all 3 of them. There is little consistency in sales numbers, but the reasons behind that I can't figure out.

Here's the thread i'm talking about:http://www.germancarforum.com/showthread.php?t=4088&page=2

 

[Osnabrueck]

"Falling" Dollar?

Um.... the dollar has been yo-yo'ing between anywhere from $1.18 on the Eruro to as bad as $1.35 since 2002. Take my word for it, there's nothing new about the Germans having to grapple with a weak dollar.

(And please Bozzor, get me if I'm wrong.)

 

[YoungWarrior]

Why dont they just open some factories in America then?

 

[Osnabrueck]

Why dont they just open some factories in America then?

For a litany of reasons. Even so, if half of BMW's manufacturing was done in the United States it wouldn't alleviate the bind the low US dollar puts them in. There's little BMW or any other German Brand can do as a countermeasure against the current situation aside from being shrewd and hedging their bets so they won't be stuck between a rock and a hard place if the worst-case scenario comes to pass.

Of course, if I'm wrong Boz will correct me. Won't he? (Hint hint...)

 

[Mr. Mercedes]

As the US Dollar slowwwwly concedes its long held dominance as the preferred currency of trade, pain is going to be felt everywhere. In the long term, currency hedging can only delay this pain. Other avenues will have to be explored.

That said, I don't think the German car manufacturers are going to adopt strategies inciting a widespread shift of production to the US. Reasons for not shifting most of the production to the US:
* Costs
* Possible decline in prestige (it would not longer be predominantly a foreign product)
* Possible quality debacles. MB in particular is only now learning how to build cars properly again in Germany. Imagine trying to get Alabama to assemble a new S.
* In the longer term other emerging markets will likely more than make up for the decline in profitability in the US. Gradual investment into these markets, particularly China, is more likely.

 

[Deutsch]

U.S mkt will loose share in the majority of premium brand sales, I can promise you. I think the Japenes pay a good bit more than we do. I think things will change in the future, I hope.

 

[Bozzor]

One thing to bera in mind is that whatever the Germans do in terms of hedging or US asembly plants, it won't impact the fact that consumers will have less money to spend on german luxury marques simply because the costs of other goods and commodities has gone up. If essentials such as fuel, food and other consumables have gone up, then consumers are less inclined to spend money on luxury items i.e. German cars. Of course, for the very well off this is not an issue, but for many peopel an E class at USD 55 K is a borderline decision to do with leasing costs etc. They are the ones hurt and they are the ones the Germans are worried about.

 

[Osnabrueck]

But the luxury playing field isn't even is it Boz?

We've got American and Japanese luxury brands in the fray, and they've got leverage against brands pinned down by the Euro.

Right?

 

[Imhotep Evil]

The only things I can come up with is a combination between hedging, boosting US manufacturing, increasing productivity/eficiency.

 

[Osnabrueck]

Let's not forget that the volatility of the currency excange weighs into this. The dollar has swung wildly over the past few years and nothing's to say that it won't swing back to Euro parity within a few years.

I think it's hard to base a long-term business plan on currency speculation.

 

[Bozzor]

Pretty correct Osna: to some degree, all cars are luxury items (for many people, though not all) which can be affected by falling discretionary incomes, but the ones that are more expensive and luxurious (i.e. those that offer relatively little utility) would most likely be hit by a change in people's circumstances. At the least, the more expensive the Europeans, the harder people will look to see if that extra money is worth it.

 

[Matt530i]

For 2007, BMW has decreased the difference between invoice and MSRP in the US, at least on the 5-series, which is the only '07 model with pricing announced.

For model year '06, MSRP was roughly 9.4% higher than invoice and it's around 8.2% higher for model year '07. Since a lot of people try to negotiate off of the invoice price, I think this is an attempt by BMW to increase the actual transaction price of the cars they sell. If they are able to increase the transaction price by 1.2% in the US, that's bound to make up for part of the US-euro exchange rate.

 

[Osnabrueck]

Interesting. Raising invoice is a transparent way of raising the bottom line without it entering the public conscious. People will be apt to say "geez, those BMW dealers are tightwads," but that's much less damaging than rasing MSRP.