Discussion Topic 3: Real Business Case – How did BMW deal with exchange rate risk?
Please respond by June 2nd at 10:00 pm.
Euro had rapidly strengthened and hit multi-year highs against the dollar and the pound in the first quarter 2018. Late 2017, European Central Bank (ECB) had issued terrifying warning that Euro is too strong and could plunge EU economy back into crisis. The dollar was relatively weak three years ago as well as during the period of 2007 and 2008.
The strong euro has caused problems for European businesses, such as BMW, and made this car manufacturer lost half a billion dollars in 2007 due to the unfavorable exchange rate. Selling cars made in Europe to US customers is no longer profitable. So, BMW planned to expand its production in the US.
Many foreign car makers are considering shifting more of their manufacturing to North America due to the recent threatening new tariffs from President Trump’s tough approach to trade. However, BMW’s South Carolina plant exports more than two thirds of the 400,000 vehicles it has produced annually, mostly to China, and China already imposed an additional 25 percent charge on vehicles from the U.S.
Made in Germany – BMW in the U.S. (Duration: 5:21), by DW-TV Deutsche Welle
Auto Makers Consider Shifting More Manufacturing to North America, by Chester Dawson and William Boston
(from The Wall Street Journal, Oct. 5, 2018)
The case study: How BMW dealt with exchange rate risk, by Xu Bin and Liu Ying
Discuss whether this is a good strategy for BMW to deal with exchange rate risk. 1. What are the possible arguments in favor of and against the hedging strategy of BMW? 2. If you are a manager or leader, what are alternative ways for BMW to hedge the exchange rate risk and to deal with the tariff issues? Your answers are limited to no more than fifteen sentences.
[Hint: You may also consider using various financial contracts and operational techniques.]
I also would like to share an interesting video with all of you. BMW released a video on May 22, 2019 to congratulate Mercedes-Benz CEO Dieter Zetsche on his retirement. On his last day at work, Zetsche hands in his work badge at the front desk, says goodbye to colleagues in the lobby, before being whisked back home by a Mercedes-Benz S-Class sedan. After the car drops him off, Zetsche sneaks into the garage to pick up his well-hidden BMW i8 sports. The caption– “Free at Last.” Here is the link to the video:Retirement is about exploring your wide open future. (Links to an external site.)Links to an external site.Enjoy!
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