BMW’s Strategy for managing the global financial risk

Global companies are always under financial risks which could affect the profitability of the company. There are a number of ways in which the financial risks could be reduced. Here we’ll examine the specific case of BMW so as to how it has managed its global financial risk.

ESTABLISHING NEW PLANTS OUTSIDE THE HOME COUNTRY

BMW which had its manufacturing plant in Europe built one more in the United States in 1994. This was done by the German manufacturer because it found that the German Deutschemark was strengthening against the US dollar. Its value had increased from $0.34 in 1985 to around $0.64 by 1992. As a result the manufacturing cost in (terms of USD) for BMW gradually kept on increasing.

Though its profitability in the German/ European market was not affected considerably, its profits in the American market had drastically reduced. More over the higher production costs in Germany (the cost of labor was one of the highest in Germany) made the export of its products to the US market difficult. In that situation exporting to the US market by manufacturing its automobiles in Germany was becoming more and more difficult and less profitable.

However on the other side it was a very attractive proposition for BMW to manufacture in the US and export it to Germany with higher profits. Many companies use this strategy of manufacturing in such countries where the exchange rate is less and then exporting to those countries where the exchange rate is more. This increases the profitability of the company.

Later, BMW also established its manufacturing unit in Mexico. It did this mainly to cater to the demand of the rapidly growing car sales in Latin America. This gave two fold advantages to BMW. Firstly, it reduced the distribution expenses and shipping/ freight charges and secondly, it enabled BMW to tap into the low cost labor force in Mexico. As in the above case, it would also be an attractive proposition for BMW to export automobiles manufactured from the Mexican plant.

INCENTIVES FROM THE STATE OF SOUTH CAROLINA

One of the main reasons why BMW chose to set up its plant in South Carolina was because of the incentives that it got from the State of South Carolina. It is estimated that BMW got incentives in the range of $130 million to $200 million. As a part of the deal, BMW got the manufacturing site leased for a period of 30 years at a rate of $1 a year (The Company can buy the land after the end of contract period for $36.6 million). Since BMW has negligible or no variable cost on land for a period of 30 years, it’s overall cost of production reduces.

PRODUCT SOURCING FROM AMERICAN SUPPLIERS

BMW used to acquire parts and materials for the manufacture of its automobiles from the American market (even before the establishment of its plant in South Carolina). This was done in spite of the high transportation cost because of the higher exchange rates and lower production costs in the American markets. Once BMW set up its plant in the US, its sourcing from the US market further increased.

ACQUISITION OF ROVER

BMW in a $1.2 billion deal acquired 80 percent of the British automaker, Rover. Through this acquisition, BMW got Rover’s 13 percent share of the Britain’s car market. The purchase not only gave BMW the production capacity at low cost but also led to larger economies of scale in its purchases from its suppliers. Its production also increased.

References

Cheol Kim, McElreath. “Managing  operating exposure: A case study of the automobile

 industry.” Multinational Business Review V 9, Iss 1, 2001: 21-27.

BMW Group. BMW 25 Apr. 2009. <www.bmwgroup.com>