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International Financial Management




                    Notes            The Strategy
                                     BMW took a two-pronged approach to managing its foreign exchange exposure.
                                     One strategy was to use a "natural hedge" - meaning it would develop ways to spend
                                     money in the same currency as where sales were taking place, meaning revenues would
                                     also be in the local currency.
                                     However, not all exposure could be offset in this way, so BMW decided it would also use
                                     formal financial hedges. To achieve this, BMW set up regional treasury centres in the US,
                                     the UK and Singapore.
                                     How the strategy was implemented. The natural hedge strategy was implemented in two
                                     ways. The first involved establishing factories in the markets where it sold its products;
                                     the second involved making more purchases denominated in the currencies of its main
                                     markets.
                                     BMW now has production facilities for cars and components in 13 countries. In 2000, its
                                     overseas production volume accounted for 20 per cent of the total. By 2011, it had risen to
                                     44 per cent.
                                     In the 1990s, BMW had become one of the first premium carmakers from overseas to set up
                                     a plant in the US - in Spartanburg, South Carolina. In 2008, BMW announced it was investing
                                     $750m to expand its Spartanburg plant. This would create 5,000 jobs in the US while
                                     cutting 8,100 jobs in Germany.
                                     This also had the effect of shortening the supply chain between Germany and the US
                                     market.
                                     The company boosted its purchasing in US dollars generally, especially in the North
                                     American Free Trade Agreement region. Its office in Mexico City made $615m of purchases
                                     of Mexican auto parts in 2009, expected to rise significantly in following years.
                                     A joint venture with Brilliance China Automotive was set up in Shenyang, China, where
                                     half the BMW cars for sale in the country are now manufactured. The carmaker also set up
                                     a local office to help its group purchasing department to select competitive suppliers in
                                     China. By the end of 2009, Rmb6bn worth of purchases were from local suppliers. Again,
                                     this had the effect of shortening supply chains and improving customer service.
                                     At the end of 2010, BMW announced it would invest 1.8bn rupees in its production plant in
                                     Chennai, India, and increase production capacity in India from 6,000 to 10,000 units. It also
                                     announced plans to increase production in Kaliningrad, Russia.
                                     Meanwhile, the overseas regional treasury centres were instructed to review the exchange
                                     rate exposure in their regions on a weekly basis and report it to a group treasurer, part of
                                     the group finance operation, in Munich. The group treasurer team then consolidates risk
                                     figures globally and recommends actions to mitigate foreign exchange risk.
                                     The Lesson
                                     By moving production to foreign markets the company not only reduces its foreign
                                     exchange exposure but also benefits from being close to its customers.
                                     In addition, sourcing parts overseas, and therefore closer to its foreign markets, also helps
                                     to diversify supply chain risks.
                                     Questions
                                     1.   Discuss the challenge faced by BMW.
                                     2.   What was the two-pronged approach that BMW took to manage its foreign exchange
                                          exposure?
                                   Source: http://www.ft.com/intl/cms/s/0/f21b3a92-f907-11e1-8d92-00144feabdc0.html#axzz2c
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