Automotive News Europe - February 16, 2009 - 14

PAGE 14 · www.autonewseurope.com February 16 , 2009 Focus on currencies Carmakers battle against currency exchange shifts Strong euro makes it tough to generate profits abroad Hurtej Kaur Automotive News Europe MUNICH As if a global recession isn’t worrying enough for Europe’s automakers, sharp fluctuations in currency exchange rates are sharpening the blow. European carmakers with exposure to the dollar are especially vulnerable to exchange-rate swings, said Garel Rhys, emeritus professor of motor industry economics at Cardiff Business School in Wales. “The German carmakers are particularly at risk [because of the weak dollar], so they try to hedge to an extent by having some production elsewhere,” he told Automotive News Europe. The US is the biggest single sales market for Mercedes-Benz and BMW, as well as for Volvo. Big swings in the Czech crown-euro exchange rate cost Skoda the chance to make the Up. Volatility of Czech crown hits Skoda Lyle Frink Automotive News Europe PRAGUE Wild swings in the Czech currency are hitting VW and its Skoda unit hard. The fluctuation of the Czech crown hit profits in 2008. It was also cited by Volkswagen as the reason it will not build the Up minicar at Skoda’s plant in Vrchlabi. Appreciation of the Czech crown peaked at 22.9 crowns to the euro in July 2008. Since then, the currency has fallen by nearly 25 percent against the euro to 28.6 and is expected to slide further. “You can’t trust the currency. It is not stable. Of course it would be better to have the euro,” Skoda spokesman Jaroslav Cerny said. Cerny added that Skoda has not benefited from the better exchange rate because of the drop in sales. “If you are not selling cars, the exchange rate does not matter,” Cerny said. By contrast, Slovakia entered the euro zone on January 1, replacing the Slovak crown with the euro. It could be the main beneficiary of the Czech crown’s swings. Adopting the euro may have helped Volkswagen in Bratislava get new business. Late last year, VW was granted investment incentives for its ¤299 million plan to make two new car models on its AOO platform. VW spokeswoman Daniela Rutsch cautioned that VW has not decided whether it will build the new small family of vehicles in Slovakia yet, but added that the call will be made in the next few weeks. “As the biggest Slovak exporter, the euro will have a positive impact on our company,” Rutsch said She listed four primary benefits: Elimination of exchange rate changes against euro, decreasing the number of bank accounts and bank fees, more planning stability, and simplified transactions inside ANE VW group. Better, but not great Although the dollar has strengthened somewhat, to $1.28 to the euro last week, from $1.60 last summer, it still is weak compared with the 2002 exchange rate of 85 cents. A weak dollar makes it harder for foreign carmakers to price their cars competitively and profitably in the US. Plus, anyone who hedged the dollar when the euro was at its peak could be in for a financial hit should the dollar remain strong until their hedges expire. BMW spokesman Mathias Schmidt said: “We continue to believe that the additional adverse currency impact in 2008 will be around ¤400 million.” In 2007, it was ¤517 million. Schmidt added that BMW has used the current strength of the US dollar to improve its hedging quota for 2009. Building cars at its US plant in Spartanburg, South Carolina, protects BMW against fluctuations in the euro-dollar exchange rate. to hedge against them,” said Philip Wylie, director of investment banking firm Houlihan Lokey in London. Most automakers reduce their dependency on exchange rate fluctuations by having production capacity in the major overseas markets where they sell cars. Manufacturing vehicles in a local market is known as a “natural hedge.” Carmakers also increase purchasing volume in those markets. Thomas Klier, an economist with the US Federal Reserve Bank of Chicago, said about 25 percent of motor vehicle parts used in production in the US are imported. Another 25 percent of parts are produced in the US by foreign-based partsmakers. However, companies can go too far with their hedging strategy, warns Jürgen Pieper, head of research at Metzler Equities in Frankfurt. “The worst thing you can do is what BMW did in the past, and change their strategy every two or three years to catch the right trend,” Piper said. “It doesn’t work. You end up hedging a lot. If the dollar is strong, you make money, but then you have to change it at the point the dollar gets weak.” Porsche has established currency hedges against the British pound and Japanese yen for up to four years. The British pound has been struggling lately, and fell to a 23-year low against the dollar in January. That weakness can actually help an automaker like UK-based Jaguar, because a vehicle sale in a market with a stronger currency means higher profits when converted back into pounds, Rhys said. Volvo also claims it is able to use currency fluctuations to its advantage. Spokeswoman Maria Bohlin said the US dollar was working well for them before Christmas 2008. But Bohlin added that the dollar has to remain strong for some time before Volvo can see any long-term gain. What’s more, as Volvo mostly sources parts in the pricey Eurozone, but sells many vehicles overseas, it has to make the tough choice between keeping its cars price-competANE itive or making a profit. A must for smaller brands For smaller brands that cannot afford the expense of an overseas assembly plant, hedging is the main solution. Audi takes the hedging approach, particularly in relation to the US dollar, British pound, Canadian dollar and Japanese yen. Similarly, Porsche makes its cars in Germany, but its biggest markets are the US, Asia and Russia. In November, Porsche Chief Financial Officer Holger Härter told Reuters that Porsche had no choice but to renew expiring currency hedges for its dollar exposure at “far weaker exchange rates.” Härter added that Porsche’s position is that the current dollar strength is a temporary phenomenon, and that Risky business Hedging a currency locks in a specific exchange rate, which can help a business to avoid fluctuations. It is similar to a futures contract, except the raw material is currency, rather than oil or oranges. Not that a hedge is a guarantee. If the exchange rate goes up during the period of the contract, the business only has to pay the lesser agreedupon price. However, if the rate falls it can prove costly, and mean paying too high a price for a weak currency. To avoid this, some companies hedge currencies in both directions. “If you’ve got big exposures to lots of currencies, then you probably want Rolls-Royce will aim ‘baby’ sedan at younger buyers Tony Lewin Automotive News Europe GOODWOOD, England Rolls-Royce will display a concept car smaller than its Phantom sedan at the Geneva auto show in March. The concept will preview a “baby” Rolls-Royce sedan due to go on sale in the first quarter of 2010. CEO Tom Purves said the car’s launch has not been delayed despite the financial downturn. “We’re on plan with RR4. We haven’t pulled the plug on anything,” Purves said in an interview at RollsRoyce’s headquarters here. Rolls-Royce uses the code-name RR4 for the “baby” sedan. The production RR4 will be targeted at younger buyers and will be “more like a well cut sports jacket than a tuxedo [the Phantom],” Purves said. The RR4 will be powered by a new 12-cylinder engine not seen before on any BMW-group product, Purves said. BMW owns Rolls-Royce. About 80 percent of the car’s parts will be unique. Although systems such as air conditioning are shared In 2010, Rolls-Royce plans to launch a smaller car than the Phantom (shown). with BMW, the switchgear visible to the Rolls-Royce owner will be completely different. Most production RR4s will be sold at a slightly lower price than Phantom, custom versions could overlap the larger Phantom in price. The Phantom sedan begins at £270,000 (about ¤236,000) in the UK. The production RR4 could sell at about £200,000. The model’s name has not been finalized, a Rolls-Royce spokesman said. Some sources have speculated that the company will revive its historic Silver Ghost nameplate for the model. The Geneva show car will be almost identical to the production car, Rolls-Royce insiders told Automotive News Europe. The concept for the RR4 most likely will be called the EX200. RollsRoyce uses the EX designation to denote experimental concept models. Previous EX concepts have accurately previewed upcoming production models such as the 2007 Phantom Drophead Coupe and 2008 Phantom Coupe. The production version of the EX200 will be shown at the IAA in Frankfurt in September. Olive Keogh contributed

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Automotive News Europe - February 16, 2009

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