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- 1. Hedging European Economic Risk: Ford Motor Company Craig Stone April 30, 2012
- 2. Dealing with Potential Euro Devaluation State of Greek and European economies Impact on Ford’s European operations Ways to limit financial losses Recommended course of action
- 3. State of Greek and European Economies Greece has now received two bailouts May 2010: 110 billion Euros (US$145 billion) February 2012 – 130 billion Euros (US$170 billion) Third bailout likely necessary for Greece Precedent set for Spain, Ireland and Portugal
- 4. Future for Greek Economy Greece could continue to be floated by bailouts Inflation potential Greece could default on debt “Contagion effect” recession throughout Eurozone Greece could leave Eurozone Massive currency devaluation
- 5. Impact on Ford’s European Operations Lower sales as European economies struggle Decreased inventory value as Euro weakens Less profit from financing activities as currency devalues Source: Ford Motor Company, April 2012
- 6. Ways to Limit Financial Losses Make all deals in U.S. dollars Shorten payment cycles with dealers Purchase exchange risk insurance on larger contracts Ramp up production in European factories
- 7. Recommendation #1: Increase Production in European Facilities Ford of Europe factory facilities Decreased cost of production 46,250 plant workers already in place Eventual export potential
- 8. Successful Production Hedge: BMW BMW expanded production in South Carolina plant during U.S. recession Production increased 73% in four years 2008: 160,000 units 2012: 276,000 units
- 9. Positive Results for BMW BMW Stock: December 2008 to April 2011 Source: Yahoo! Finance
- 10. Recommendation #2: Insure Large Contracts Denominated in Euros Must protect value of contracts with large, multi-dealership firms Monthly premiums as low as .1667% of insured amount No obligation to purchase Euros, unlike forward or options hedges
- 11. Recap Devaluation of Euro seems likely Must protect assets while maintaining market share Recommendations: Increase production in Ford’s European factories to create a natural hedge Insure contracts with multi-dealership firms in Europe
Editor's Notes
- SPEAK SLOWLY Hi everyone I’m Craig Stone (ABC Consulting). Hired to research how Ford can hedge its European economic risk and protect its European operations.
- What we’ll be covering today…
- PRE: As you all know, Greece is in a major financial crisis and has required two bailouts, which only came after strict austerity measures. PERSPECTIVE: Greece’s GDP is 301.08bn USD LATEST BAILOUT, had to cut 3.3 billion Euros ($4.37 billion) from budget IMF and Greek PM have both said they expect Greece to need 3 rd bailout. Possible inflation caused by releasing so much new cash into the economy.
- 2a. One economist compared this scenario to Lehmann Bros. going bankrupt. Said odds of recession would be 110%. 3a. Argentina detached peso from USD in 2002 and the peso quickly devalued >200%
- In U.S., people made cars last through recession. Avg age of cars in U.S. is now a record 10.8 years. All cars sitting on lots will be worth less and less… Sold for same amount, but Euro worth less. Loans from Ford Credit div. to European car buyers would become burdensome. Accounts receivable constantly losing value.
- Pre: $149M operating loss in Europe in Q1, but cannot afford to decrease presence. Need to protect market share. Cannot do this because not dealing with other companies... dealing with dealerships and customers We are in a partnership with our dealers. Can't crush their margins by forcing them to pay for vehicles in USD European customers would never take out financing on a car if they knew they had to pay in USD 2. so they can't sit on inventory and pay at last minute when currency is lowest. This would probably anger them... 3.
- Pre: COUNTERINTUITIVE! But it’s a natural hedge. Labor, materials 10 main facilities throughout Europe, employing more than 46,000 workers To other places where they can’t produce as cheaply
- 1. HEDGE during U.S. recession 2. 2 years into this increased production, German auto analyst Stefan Schoppner credited a strong quarter in part to these efforts: “ The natural hedge definitely helps. Sensitivity to the dollar rate is lower”
- BMW’s stock price has gone up 250% since employing this hedge tactic. Compared to a 50% gain in the DJIA. Prior to this, BMW’s stock price had dropped 65% during the recession. Follow BMW’s lead, but on their turf!
- Can’t afford to let 7-figure contracts lose a huge percentage of their value. ONE SIXTH OF ONE PERCENT Forward and options hedges come with inherent risk
- QUESTIONS?!