Bayersiche Motoren Werke Group (BMW Group) is a German company whose operations are “focused on the premium segments of the international automobile markets (BMW Group)”. BMW Group was founded in 1916 and established its main plant and headquarters in Munich, Germany just after World War I in 1922. Those facilities exist as BMW’s headquarters and flagship plant to this day (BMW Group). BMW Group coordinates its activities in more than 150 countries on 6 continents and operates 29 manufacturing facilities in 13 of those countries (BMW Group). Those manufacturing facilities are concentrated in Western Europe with 9 in Germany, 2 in Austria, and 3 in the UK. Its other manufacturing facilities and joint-owned plants are scattered abroad with 3 in North America, 2 in South America, 2 in Africa, and 7 in Asia (BMW Group). With BMW, MINI, and Rolls-Royce, the BMW Group owns three premium brands in the global automobile industry. In addition to its strong position in the motorcycles market with the BMW brand, the BMW Group also offers a successful range of financial services which make up a relatively small portion of BMW Group’s total revenue (BMW Group). BMW Group reports its segmented revenues according to geographical sales. The graph below breaks BMW Group’s overall annual revenues into 4 geographic categories with 3 subcategories:
Figure 1 – Overall Revenue Growth by Geographic Operating Segment
Expressed in Euros. Source: BMW Group’s 2012 Annual Report As shown in Figure 1, the European and Asian markets in particular have shown impressive sales growth since 2009 with CAGRs of 7% and 44%, respectively. BMW Group’s revenues from China alone have increased from €2.76 billion to €14.44 billion in 4 years (CAGR:51%). Huge sales growth in the Asian market has proven very lucrative for BMW Group who forecasts further growth, especially in developing markets.
Figure 2 – Business Segments as % of Total Revenues
Figure 2 shows BMW Group’s segmented revenue as it relates to total annual revenue. This chart emphasizes, again, the growth of BMW Group’s Asian segment, the relatively flat percentage of sales in the Americas, and the slight decrease in total revenue coming from Europe. With the majority of BMW Group’s manufacturing facilities in Europe, we might see more facilities being built in Asian countries like China as BMW Group shifts its focus to lucrative emerging markets in the future.
Figure 3 – Revenues by Segment for Reporting Purposes
For reporting purposes, BMW Group breaks their statements into categories: Automotive and Other (Motorcycles, Financial Services, Other Entities, and Eliminations). Figure 3 offers an example of the detailed breakdown with subcategories included. See Appendix A for further details.
Source: BMW Group Annual Statement
As a percentage of total revenue, Figure 3 indicates that automotive sales made up 91.4% of BMW Group’s revenue in 2012 and 91.9% in 2011. This slight downward trend can be attributed to the growth of BMW Group’s financial services sector which is relatively new having begun in 1993 (BMW Financial Services).
Figure 4 – Growth of Balance Sheet Components
Source: BMW Group Annual Statement
Figure 4 offers an insightful glance at BMW Group’s Asset/Liability balance. One important note is the debt/equity ratio shown on the right side of the graph. BMW Group states its equity ratio at 23.1% in 2012 and 22% in 2011 (BMW Group). This means BMW Group chooses to finance its operations mostly with debt. To aid that decision, BMW Group has an S&P short-term credit rating of A-1 and a long-term credit rating of A+ allowing BMW Group to borrow at lower rates (BMW Group). This will be discussed further in our risk management policy overview. Another important note is the ratio of current assets/non-current assets which sits around 33%. BMW Group’s current assets consist mostly of receivables from sales financing and inventories while their larger non-current assets consist mostly of long-term receivables from sales financing and leased products. As a measure of liquidity, BMW’s current ratio for 2012 is 1.04 which signifies that BMW Group maintains an efficient operating cycle and is capable of handling its financial obligations, even though €32 billion are tied up in non-current receivables. BMW Group’s Foreign Exchange (FX) Risk Management Policy
In order to achieve growth, profitability, and sustainable levels of business in the future, BMW Group understands that it must expose itself to a degree of calculated risk. In its most recent quarterly statement to its stockholders, BMW Group recognized that, “Managing risks is a fundamental prerequisite for being able to deal successfully with the constant flow of changes in the relevant political, legal, technical and economic landscapes” (BMW Group). BMW Group’s discussion in its annual report around the many risks it faces is extensive. The report includes risk topics around sales and marketing, pension obligations, information technology, raw materials, and many other detailed business components. For this discussion, we will focus on financial risks and those relating to their international risk management.
The first category of financial risk is exchange risk. For BMW Group, the sale of vehicles outside the Eurozone gives rise to exchange risk because changes in exchange rates, especially between the US dollar, Chinese renminbi, British pound, Russian rouble, and the Japanese yen, subject BMW Group to transaction exposure. BMW Group claims to manage currency risks at two different levels: strategic (medium and long-term) and operating (short and medium-term) (BMW Group). For medium and long-term risks, foreign exchange risks are managed by “natural hedging”, or by increasing the volume of purchases denominated in foreign currencies or increasing the volume of local production (BMW Group). An example of strategic risk mitigation in this context might be the opening of a new plant in South Carolina, USA in 2012 to help reduce foreign exchange risk in a major sales market. For short and medium-term risks, hedging transactions are entered into with financial partners of excellent credit standing to mitigate operating risk. In its most recent annual statement, BMW Group clarifies that they only use derivative financial instruments for hedging purposes “in order to reduce currency, interest rate, fair value, and market price risks from operating activities and related financing requirements” (BMW Group). BMW Group operates under International Financial Reporting Standards (IFRS) which requires all derivative financial instruments (interest, currency swaps, forward currencies, forward commodities contracts, etc.) to be measured at fair value, regardless of the intention for which they are held.
At year end, 2012, BMW Group held derivative instruments (mostly interest rate swaps) with terms of up to 25 months to hedge interest rates arising on financial instruments with variable interest payments over the forecasted two years. BMW Group also held derivative instruments (mostly commodity swaps) with terms of up to 60 months to hedge raw material price risks attached to future transactions over the next five years. Lastly, BMW Group held derivative instruments (mostly option and forward contract options) with terms of up to 72 months to hedge currency risks attached to future transactions. As stated in a previous segment, BMW Group’s debt ratio is carefully manipulated to achieve what BMW Group feels is its optimal capital structure. BMW Group’s debt ratio has averaged about 78% for the past five years with no indication of a future change in their annual statement. An important aspect of risk management as it relates to their capital structure is the careful selection of financial instruments with the objective to achieve matching maturities for their debt requirements and other financial obligations (BMW Group). BMW Group seems to do a good job of timing their payments and managing the risks associated with those payments to make sure they can shoulder the burden of their nearly €70 billion in total financial liabilities (Q3 2013 Report).
Another category for discussion is the risk around BMW Group’s procurement of raw materials. Since the availability and price of certain groups of raw materials are subject to change, BMW Group pays close attention to commodities markets to stay aware of changing landscapes (BMW Group). According to their annual statement, BMW Group utilizes financial derivatives to hedge against price risks for essential metals like platinum, palladium, aluminum, copper, and lead.
BMW Group also recognizes the risk they face because of the indirect impact changes in the price of crude oil have on their production costs. Oil prices affect customers’ behavior around purchasing BMW Group’s products because consumers will often search out a substitute instead of absorb higher fuel costs. BMW Group feels that a proper response to this risk is simply to develop and sell efficient and economical engines to reinforce their value proposition (BMW Group).
BMW Group is concerned about the creditworthiness of its lenders, borrowers, and derivative instruments partners. Every borrower’s creditworthiness is tested for all credit financing and lease contracts entered into by the BMW Group (Annual Report). Retailers’ creditworthiness is assessed using validated scoring systems integrated into the purchasing process (BMW Group). BMW Group’s overall credit risk related to derivative financial instruments is minimized by the fact that BMW Group will only consider contracts with parties of first-class credit standing. Because of BMW Group’s close attention to detail and aggressive management of its international risk, the general credit risk on derivative financial instruments utilized by BMW Group is considered to be insignificant (BMW Group).
Figure 5 – Breakdown of Other Comprehensive Income
Source: BMW Group Annual Statement
Figure 5 presents a detailed breakdown of Other Comprehensive Income including the gains/losses on financial instruments used for hedging purposes and the exchange differences on translating foreign operations for 2011 and 2012. Since BMW Group claims it only utilizes derivative financial instruments as a risk management tactic, this segment should operate as a cost center. On average, the gains/losses on financial instruments should help protect BMW Group from wild volatility from its many sources of diversifiable risk. Exchange differences are also lumped into OCI and shows the effect of exchange rate differences in the currencies belonging to the many countries BMW Group serves.
BMW Group has expanded in a fairly short period of time into operations (through direct investment or licensed dealerships) in more than 150 countries. To date, BMW Group has done an exceptional job expanding and
investing in foreign markets. In many cases, the use of joint ventures with local companies has helped BMW Group enter new markets. This is usually a less risky undertaking because if the venture fails, they shoulder a smaller risk than their local counterparts. If the venture is successful, then the company transitions smoothly into the new market with greater confidence and consistency. This method has proven to be very effective for BMW Group, especially in the rapid growing Asian markets where they can test new markets and mitigate risk by transferring most of the risk to their venture partners. BMW group has built strong foreign segments, especially in the United States and China. This has been evidenced in the US by strong brand awareness and brand association coupled with significant overall revenue performance with the US contributing 18% of BMW Group’s revenues. BMW Group’s strong performance in China is evidenced by a 51% CAGR over the past 5 years which boosted BMW’s overall revenue from €53 billion in 2007 to €77 billion in 2012 (CAGR: 15%). With their large success in international expansion, they have had mixed success with their hedging strategies. Their gains/losses on financial derivative hedging instruments in 2012 were a large improvement over 2011 with a €770 million increase in 2012 compared to a €733 million decrease for 2011. Conversely, BMW Group took a loss in exchange differences from foreign operations of €123 million in 2012 and a €168 million gain and 2011 (Figure 5).
Without further detailing the historical patterns of those line items, it seems BMW Group is getting progressively better at managing their transaction exposure and other foreign operations risks. A brief look at BMW Group’s annual statement proves that they have done an excellent job identifying potential risks and setting controls and policies to protect themselves. If they can continue to grow their segments in the Americas and Asia, they will continue to establish themselves as a global manufacturer of quality vehicles as is their stated mission. One organizational risk that BMW recognizes and must continue to avoid is using derivative financial instruments for speculative trade instead of loss prevention. If BMW Group can maintain their brand in Europe, continue to grow in their American and Asian segments, and continue to use hedging and derivative tools conservatively as a risk mitigation tool, they will see continued success and healthy growth with solid future earnings and a steadily growing stock price.
Figures expressed in Euros. Figures expressed in thousands.
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