Porsche Exposed

In: Business and Management

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A06-04-0004

PORSCHE EXPOSED
BMW says that its decisions on where it locates production are driven by market needs, not currency considerations. Yet it has created natural hedges for itself by producing cars in America and Britain. By incurring costs in these markets, it greatly reduces the currency translation problem. Rival Porsche makes most of its cars in Germany, so its costs are mostly in euros. Yet a large chunk of its revenues come from sales of its sports cars in America. Lacking BMW's natural hedge, Porsche uses financial hedging to minimise the short-term impact of currency swings.
“Grappling with the Strong Euro,” The Economist, June 5, 2003, p. 53.
The USA represents approximately 50 percent of our total business. There are a few other countries that also use US dollars. This situation will not change much in [the] future. That is why we are hedged against currency fluctuation for the next three to four years. In our books the dollar and the yen are above the actual rates. That allows us time to react to any currency movement. “Porsche Roars Past Sales Targets,” Automotive News Europe,
September 22, 2003, p. 20.

It was January 2004 and Porsche—the legendary manufacturer of performance sports cars—wished to reevaluate its exchange rate strategy. Porsche's management had always been unconcerned about the opinions of the equity markets, but its currency hedging strategy was becoming something of a lightning rod for criticism. Although the currency hedging results had been positive, many experts believed that Porsche had simply been “more lucky than good.” There was growing concern among analysts that the company was actually speculating on currency movements. Analysts estimated that more than 40% of earnings were to come from currency hedging in the coming year. Porsche's President and Chief
Executive Officer (CEO), Dr. Wendelin…...

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