VW to BMW Plan $25 Billion Hedge by Building Autos Abroad

With the yen weakening and Europe’s debt crisis spreading, Volkswagen AG (VOW) and its German peers are planning to spend more than $25 billion by 2017 to expand production outside their home region and insulate themselves from currency convulsions.

Bayerische Motoren Werke AG (BMW), already among the largest U.S. car exporters, says it will start producing the new X4 sport- utility vehicle at its factory in South Carolina, in addition to the other three SUVs it makes there. Daimler AG (DAI) is expanding a Mercedes-Benz plant in Alabama, and VW’s Audi is building a $1.3 billion factory in Mexico.

The German manufacturers’ overseas investment leads European rivals PSA Peugeot Citroen (UG), Renault SA (RNO) and Fiat SpA (F), which remain more focused on their home region. VW opened its 100th production facility this year -- a $550 million engine plant in Silao, Mexico -- helping make the company the world’s most global carmaker.

VW has 77 percent of its production capacity outside its home country, outpacing General Motors Co. (GM)’s 76 percent and Toyota Motor Corp. (7203)’s 59 percent, consultancy Oliver Wyman estimates. BMW, Mercedes and Audi have a more diverse footprint than luxury rivals like Lexus, Cadillac and Volvo.

Photographer: Susana Gonzalez/Bloomberg

As the euro’s troubles persist and the yen surges, Volkswagen AG and its German carmaking peers are moving to further insulate themselves from the risks of further currency convulsions with plans to spend roughly $25 billion by 2017 to expand capacity outside Europe. Close

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Photographer: Susana Gonzalez/Bloomberg

As the euro’s troubles persist and the yen surges, Volkswagen AG and its German carmaking peers are moving to further insulate themselves from the risks of further currency convulsions with plans to spend roughly $25 billion by 2017 to expand capacity outside Europe.

“Our approach is a global approach,” Jonathan Browning, head of VW’s U.S. operations, said in a Bloomberg TV interview at the New York International Auto Show last month. “If you’ve got a spread of geographic presence, a spread of brand segments across the marketplace, then you can manage these fluctuations more easily.”

Currency Squeeze

The investments come even though the euro’s 18 percent slide against the dollar since its 2008 peak has made it more profitable for the Germans to manufacture at home. Daimler says its operating earnings got a 958 million euro ($1.25 billion) boost from currency swings last year as the euro sank to a two- year low versus the dollar. And with the dollar up almost 20 percent against the yen since November, analysts expect Toyota’s profit to jump 50 percent this fiscal year.

Yet Germany’s automakers know the other side of an exchange rate squeeze. Daimler says currency swings this year will reduce operating profit by 200 million euros. And Porsche --now part of Volkswagen -- almost collapsed in the early 1990s because it sold most of its cars in the U.S. while having all its production in Germany, exposing it to a drop in the dollar that choked finances.

Photographer: Ariana Lindquist/Bloomberg

Workers inspect the trunk of an SUV as it moves along the production line at the Bayerische Motoren Werke AG (BMW) manufacturing plant in Spartanburg, South Carolina. Close

Workers inspect the trunk of an SUV as it moves along the production line at the... Read More

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Photographer: Ariana Lindquist/Bloomberg

Workers inspect the trunk of an SUV as it moves along the production line at the Bayerische Motoren Werke AG (BMW) manufacturing plant in Spartanburg, South Carolina.

That lesson led to the first wave of international expansion, when Mercedes and BMW opened U.S. factories in the 1990s. With Europe struggling and China, Russia and Brazil getting richer, German carmakers are boosting investment away from home to target growth and keep currency risks in check.

European Blues

“We aim to move closer to the customer,” said Joachim Schmidt, head of Mercedes-Benz sales and marketing. “We’re expanding our production capacity in China and the U.S. and we’re considering other countries for vehicle assembly, such as Russia or Brazil.”

The companies haven’t given up on traditional financial hedging. BMW raised its protection in foreign-exchange markets by 39 percent in 2012 to 36 billion euros, according to its annual report. VW boosted hedges by 27 percent to 103 billion euros, and Daimler increased its currency hedging by 11 percent, the companies said in their annual reports.

Currency volatility, meanwhile, is near historic lows. JPMorgan’s Global FX Volatility Index dropped to 8.74 percent on April 12 from 9.88 percent in February, and it remains below its 10-year average of 10.64 percent.

Remaining Profitable

International expansion has kept German automakers growing and profitable even with European car sales in the midst of a six-year contraction. Since 2007, VW’s market value has risen 21 percent to 68 billion euros and BMW’s has surged 56 percent to 44 billion euros. While Daimler has fallen 35 percent, that’s better than Peugeot’s 83 percent plunge in part because of limited international operations.

“The manufacturers suffered from currency fluctuations in the past,” said Fabian Brandt, a partner at Oliver Wyman in Munich. “That’s why they are now trying to manufacture in the regions where the demand is.”

VW, based in Wolfsburg, has seven new Chinese plants in various stages of planning, part of $19 billion in investments in production outside Europe expected by 2017. After spending $1 billion on a factory in Chattanooga, the company may further increase U.S. capacity with production of a big SUV based on the Crossblue concept.

Daimler will spend about $5 billion by 2015 expanding operations in China and upgrading a factory in Alabama to produce the Mercedes C-Class sedan and a new high-end SUV.

SUV Exports

BMW has earmarked some $900 million for adding to its 4 million-square-foot facility in South Carolina, and it will spend 500 million euros on its Chinese facilities together with its local partner. BMW’s U.S. plant, which makes cars for 130 markets worldwide, is the company’s only SUV factory and exports some 70 percent of its output. That helps offset the currency exposure to imports of vehicles such as the 3-Series manufactured in Germany. The Munich-based company is also planning a new factory in Brazil.

“The markets that are supporting us now are the markets where we have expanded our capacity,” BMW Chief Executive Officer Norbert Reithofer told reporters at the Geneva Motor Show in March. “It’s our aim to be balanced globally and not depend on one market.”

BMW, the world’s largest luxury-car maker, last year built 29 percent of its vehicles outside Europe, up from 16 percent a decade earlier. Mercedes produced more than 90 percent of its cars in its home region 10 years ago, when European demand accounted for 70 percent of the brand’s global sales. In 2012, Mercedes made about 70 percent of its cars in Europe while deliveries in the region dropped to 40 percent of its total.

Faster Pace

The faster pace of international expansion is evident with plans by VW and its joint-venture partners in China to spend 9.8 billion euros by 2015, versus 16 billion euros invested in the course of more than 25 years in the country.

German carmakers are also increasingly sourcing components from local manufacturers. VW says it aims to purchase 80 percent of the parts of its North America-made vehicles from local suppliers.

Still, the strategy forces VW, BMW and Daimler to deal with other risks, especially maintaining “made in Germany” quality so far from home.

“Back in 2002, the world was relatively easy,” but as emerging markets take center stage, regional diversification is critical, said Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch Gladbach, Germany. That, he said, “increases complexity enormously.”

To contact the reporters on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net; Dorothee Tschampa in Frankfurt at dtschampa@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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