Global operating companies are always facing financial risk related to currency volatility. It affects all aspects of the global companies. Global automobile industry is a major industry which is affected crucially by the currency fluctuations. In this case study, the foreign exchange risk management strategy of BMW, a major player in the automobile industry is discussed in order to identify the effectiveness of the strategies followed by it to get the optimum results.
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What did BMW do in order to manage global financial risk and why?
The currency risk management is a complex process. Relative strength of the dollar in respect of the relevant foreign currency, and the specific operating activities of the company are influencing the currency exposure management. In the management of currency exposure, factors such as financial, marketing, production etc have to be considered. International investment is an effective tool for avoiding the operating exposure risks. In order to reduce the operating costs and avoiding the complexity in dealing with currency exposure, BMW adopted various strategies. In the passenger car industry, there exists keen competition of well-functioning firms. Cost reduction is essential for getting competency in the industry. Thus BMW adopted translational production and operating strategy through joint ventures, mergers, and acquisitions.
The foreign exchange risk management strategy of BMW
In the initial stage of operation, BMW adopted home country production strategy. Due to higher transportation charges, exchange rate risks, higher operating costs through labour costs and related expenses with the raw materials as well as product distribution, BMW changed its production plant from home country to the marketing countries. Manufacturing plant of BMW was set up in USA in 1992 in order to avoid the exchange rate risks and exploit the opportunities of lower operating costs and reduced transportation charges. It helped the company to attain competing strength in the foreign market. In the home country the production costs are comparatively higher. The labor cost and social benefits legally obliged to offer to the customers are the highest in the world. The exchange rate of German currency over USD is also not favorable for the financial competence of BMW. In order to assist the marketing operations in Latin American region, BMW started new production unit in Mexico in 1994. This helped the company to exploit the benefits such as low cost labor with high quality in Mexico with potential demand for the passenger car in the Latin American region. Elimination of currency risks and exploitation of lower operating cost are the major factors behind the transnational production strategy of BMW. The diversification in production centers in different countries helps BMW to reduce the economic exposure at a greater level. It facilitates the transfer of production in case of decline in real exchange rate in one country to another that offers rising real exchange rate. BMW adopted acquisition strategy in UK by entering in $ 1.2 billion deal with British automaker Rover. It helped to attain the production capacity at low cost. It increased the production capacity of the BMW. The raw material resources for the production are procured from Latin America where the exchange rate and lower production costs make the purchasing at lower cost even though the transportation cost is higher. In order to compete in the industry, BMW reduced its product development cycles from seven to three years. The number of models and variation offered are diversified through applying up-to-date technology in the production process. It helped the company to keep up the changing customer preferences in time. BMW occupy the brand image of Luxury cars, and the acquisition of Rover provides BMW, to expand their product offerings in different ways. Introduction of Rover helped them to enter in the economy car industry sector without affecting the original image of BMW. Local governments are adopting incentive packages for attracting foreign investors towards the country. BMW is better facilitated through tax incentives and other benefits from the state of South Carolina for transplanting its production unit in that state. (Cheol, McElreath & Robert, n.d).
FX risk management principles
Corporate FX risk management principles are adopted by players in the international automobile industry to mange the FX risk at a reasonable level. As a part of the FX risk management, BMW adopted ways such as minimizing the transaction costs, accurate and timely information on performance versus objectives, rigorous error and compliance checking etc. To execute the company’s FX policy in the most accurate manner, well qualified and experienced human resource are employed by the company. It provides the currency risk management and FX trading in the most appropriate manner. (Wallace, 1999). BMW has formulated measures for reducing the impact of global financial risk. Sales strategies of BMW are focused on improving the earnings. The alignment of sales volume in specific market is based on actual demand. Maintenance of strong customer relation and stable dealer organisation helped the company to ensure strong market positioning in the international automobile industry. The product and sales strategies of BMW are customer focused and thus maximum customer satisfaction is ensured by the company. “The contrast in the company’s business between emerging and mature markets remained sharply defined in the quarter. Tepid growth in the U.S., Japan and Western Europe was offset by strong demand from emerging markets. The U.S. in particular showed increasing signs of weakness, with deliveries down 9%.” (Lagorace, 2008).
The transnational operating policy and marketing strategy of BMW are capable of exploiting the situational advantages and reacting quickly to the changes in market demand. Flexible working methods and working time accounts enable the company to change according to the demand in the market. “BMW continues to aim to achieve a return on sales of at least 6% in 2010 through the application of market recovery strategies. The extreme flexibility of the BMW Group’s production network provides a competitive edge in terms of the ability to realign production volumes where necessary.” (Korzeniewski, 2008).
Cheol, Kim Yong., McElreath., & Robert. (n.d.). Managing operating exposure: A case study of the automobile industry; multinational business. (Provided by customer).
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Korzeniewski, Jeremy. (2008). autobloggreen. Web.
Lagorace, Aude. (2008). BMW’s profit hit by financial crisis, weak dollar: Falloff in U S deliveries. Market Watch.
Wallace, Jeffery B. (1999). Core principles for managing multinational FX risk. The Group of 31 Report. Web.