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      10-26-2007, 10:11 PM   #1
chitown08
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US$ tanking vs. Euro - Effect on M3 cost?

I was curious, so I did a 5 min analysis.

As you can see below, the conversion rate between the US$ and the Euro has been dropping (weakening US$). In the past two years it has dropped from 0.83 to 0.69! I made some assumptions about the cost BMW incurs to produce an M3 (before admin, adv, depr, etc). I'm assuming BMW execs operate like a normal business that sets a profit margin they would like to achieve on a product before setting its sales price.
I assumed it costs 36,000 euros to produce an M3.(COGS)

Whats important is not the estimation of COGS or the $60,000 price tag.(or the profit margin)

What is important is the fact that BMW's profit margin will continue to decrease on US sales of M3's as the value of a dollar drops. To correct this problem (and achieve their target profit margin), they must raise the US price.
If BMW set the price at $60k in sept, by today they would have lost 1,000 euros of profit margin (or 2%, from 16.7% down to 14.8%) as a result of the exchange rate decrease.

Since they will not allow the slumping US$ to erode their profits, they must adjust the sales price of the M3 in the USA.

To erase the devaluation of the past month only, the price would have to be raised $1,380. (From $60,000 to $61,380)

To erase the devaluation of the past year, the price would have to be increased by $7,907. (From $60,000 to $67,907)


If I had used $55,000 instead of $60,000 the price increases would change but only marginally. The jist would remain.

Not only is this bad news for our wallets, but it may be a reason why BMW is postponing the price release for the US.

Let me know if I am missing something.

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      10-26-2007, 10:28 PM   #2
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Haven't seen it approached this way yet. Kudos.
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      10-26-2007, 10:32 PM   #3
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Nice

Good work to fully quantify the effect. This definitely has BMW (and all other EU OEMs) very worried/pissed. But I do think that the competitors price points will be a much larger factor than exchange rate. It is all about competition. If the C63 AMG comes in about 62-64 the M3 just has to be less.

On a slightly related inquiry to everyone (or just those that still think it) what do you think about the base still coming in under $60k??
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      10-27-2007, 12:13 AM   #4
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Have to say that I believe BMW has had the price set for quite a while and that there is no delay in US pricing. Simply put, US pricing will be released in the same time out from production as in Europe.

As for the Euro and Dollar relationship. I think you are onto something and this does serve a factor in pricing. However, its one factor among hundreds of others.

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      10-27-2007, 12:27 AM   #5
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Thus the continued expansion of the Spartanburg plant, and others like it worldwide, is designed to mitigate these effects.
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      10-27-2007, 12:49 AM   #6
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Originally Posted by Keto View Post
Thus the continued expansion of the Spartanburg plant, and others like it worldwide, is designed to mitigate these effects.
True, but only for the Z3 and X5, right?

All the M3 parts and labor will be still be in Euros...
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      10-27-2007, 01:04 AM   #7
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Key word: expansion: if trends continue, you'll be buying a US-made 3 series.
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      10-27-2007, 01:31 AM   #8
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good job with those numbers. definitely an interesting question.

fortunately the US represents ~50 percent of the M3 market. we've already seen how our friends in panama, bulgaria, and slovenia pay "outrageous" prices for the M3 so that it can be cheaper in the states. because of the quantity of sales and the marginal cost of an M3, BMW will be able to afford a cheaper price in dollars. i would assume that BMW will try to do as much as possible to defer their losses due to dollar/euro differences to add-ons and options. BMW knows that americans are going to load their cars up, so they can keep the base price low, but make money back after. just MO.
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      10-27-2007, 01:59 AM   #9
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Quote:
Originally Posted by Keto View Post
Key word: expansion: if trends continue, you'll be buying a US-made 3 series.
gotcha. Is that true that the 3 will begin production in the US?

I guess that would fix the labor portion, but the parts would probably still be from overseas (purchased in Euros and thus subject to exchange rate fluctuation)?

Unless they start buying from Delphi...
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      10-27-2007, 09:29 AM   #10
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It's not happening yet AFAIK but building things where it's cheapest to do so makes sense.
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      10-27-2007, 09:36 AM   #11
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Although I don't think this will be the case for the M3, selling at no profit or loss is not entirely out of the question to preserve market share.
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      10-27-2007, 10:29 AM   #12
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Another way to address the currency problem is the do the opposite - that is lower the price (or keep the MSRP significantly lower than the competition) which would increase unit sales, thereby increase profits as well as market share.
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      10-27-2007, 11:39 AM   #13
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Quote:
Originally Posted by carnuts3 View Post
Another way to address the currency problem is the do the opposite - that is lower the price (or keep the MSRP significantly lower than the competition) which would increase unit sales, thereby increase profits as well as market share.
I believe this to be the most accurate of statements. We must remember that BMW is a global company with global competitors. There are many things a global company can do to offset profits as it relates to the exchange or interest rates, such as purchasing specific bonds or options.

A good way to look at things is a grocery store. Grocery stores do not make huge profits on food. what they make is a small percentage over and over creating larger profits. BMW has said it wants to sell more, and this should be an indication they need to increase profit margin. So how does a company sell more cars? i think you can fill in the blank there.
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      10-27-2007, 01:45 PM   #14
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Yes, I agree. Sophistocated international corporations hedge their currency exposure by using futures, options, and swaps. Lets hope BMW finance is on the ball, because corporations continually fail to adequately hedge foreign exchange risk exposure (like VW).

As far as profit margin, yes grocery stores have low profit margin (Wal-Mart supposedly only ~2%), but grocery stores end up making decent return on equity because they are leveraged thru debt but more importantly, because of their high turnover. They cycle thru inventory so many times in one year that profit margin is magnified. (ROE = profit margin x asset turnover x leverage)

Automakers cannot increase turnover as significantly. That is why they rely on debt leverage(GM Ford?) and require certain profit margin. BMW has boasted almost 7% margins and cannot all the sudden drop their margin to 4% to be nice to the USA unless they plan on compensating via debt leverage (risky), or significantly increasing turnover (impossible). Or they don't mind their stock price dropping.

In the end, weaker US$ dollar = more expensive imports, but less expensive exports. Since we are importing the M3, we suffer. Hedging typically only negates short term fluctuations (one yr). Eventually, you must increase the price of the M3 in the US.
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      10-27-2007, 05:22 PM   #15
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Quote:
Originally Posted by chitown08 View Post
Yes, I agree. Sophistocated international corporations hedge their currency exposure by using futures, options, and swaps. Lets hope BMW finance is on the ball, because corporations continually fail to adequately hedge foreign exchange risk exposure (like VW).

As far as profit margin, yes grocery stores have low profit margin (Wal-Mart supposedly only ~2%), but grocery stores end up making decent return on equity because they are leveraged thru debt but more importantly, because of their high turnover. They cycle thru inventory so many times in one year that profit margin is magnified. (ROE = profit margin x asset turnover x leverage)

Automakers cannot increase turnover as significantly. That is why they rely on debt leverage(GM Ford?) and require certain profit margin. BMW has boasted almost 7% margins and cannot all the sudden drop their margin to 4% to be nice to the USA unless they plan on compensating via debt leverage (risky), or significantly increasing turnover (impossible). Or they don't mind their stock price dropping.

In the end, weaker US$ dollar = more expensive imports, but less expensive exports. Since we are importing the M3, we suffer. Hedging typically only negates short term fluctuations (one yr). Eventually, you must increase the price of the M3 in the US.
hmm, I disagree but that is cool. I have said it before we all think we are getting a "better" car thus the need for an increase. Is the new M3 a better car then the previous most would say YES. If the exchange rates were equal do you think it is going to cost BMW that much more to make then the previous? Come on that is just now good business. We can debate the economics of it all day long and exchange rates, interest rates, economy of scale, but the fact will remain
  • They will not over price their competitors.
  • They will price the car to ensure increased sales.
  • They will not under/over price their current line or the SPO line.
  • BMW will profit off the car.

Not that I am biased or anything but in my opinion BMW is one of the smartest and best run companies in the world and they just happen to sell cars and oh ya ones that I like.
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      10-27-2007, 05:55 PM   #16
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Quote:
Originally Posted by SD330i View Post
hmm, I disagree but that is cool. I have said it before we all think we are getting a "better" car thus the need for an increase. Is the new M3 a better car then the previous most would say YES. If the exchange rates were equal do you think it is going to cost BMW that much more to make then the previous? Come on that is just now good business. We can debate the economics of it all day long and exchange rates, interest rates, economy of scale, but the fact will remain
  • They will not over price their competitors.
  • They will price the car to ensure increased sales.
  • They will not under/over price their current line or the SPO line.
  • BMW will profit off the car.

Not that I am biased or anything but in my opinion BMW is one of the smartest and best run companies in the world and they just happen to sell cars and oh ya ones that I like.
Well, I'm not sure what we disagree about at all.

I agree that BMW will price the car appropriately.

I didn't post this to pretend that the M3 is gonna cost 70k base, I was just curious as to how much the tanking dollar will erode foreign profits (and thus cause BMW to consider raising the price to Americans

There are a thousand other variables that affect pricing, which you have pointed out. The ultimate price will be a result of many factors, all I'm saying is that exchange rate will be one of them and it is stacked against the US. Increased sales goals will be a factor stacked in favor of the US.

I'm simply saying the more the US$ devalues, the more expensive our M3 will become. Whether it is $100 extra or $5000 extra. If we 'think' we are getting a better car (as you say), then they can charge more (and overcome the exchange rate loss) because increased US demand will allow for a higher price. And I don't think it necessarily costs more to produce E92 vs. E46. I assume it does tho just because raw materials cost more via inflation.(BMW has stated that raw materials have been increasing significantly - even more than normal inflation)

Again, all I'm saying, is that in general, the weakening US$ will make this car more expensive to us in the long run. BMW can play games with leverage, demand, mnfg plant location, hedging, etc - but the price of US imports (M3) inevitably rises when the US$ weakens.

Whether the price ends up at $55k or $65k,

It would have been a bit lower guaranteed if the US$ was not weakening.


I assume you agree with that, just misunderstood me.
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      10-27-2007, 09:09 PM   #17
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As a Economist I would say the following statement is an assumption. For this I could be wrong and I am sure a lot of you will say "I told you so" but here it goes:

"I believe that that weaken dollar to the euro will have no effect on the price of the 08 M3 in the US. It will priced like all other BMWs before it and others after".

There I have said it and now we will all wait see.
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      10-27-2007, 10:30 PM   #18
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This shouldn't be much of an issue (I really hope)

Any respectable international manufacturer will take steps to hedge against exchange risk by transacting in futures contracts, or entering into currency swaps. As the U.S. is a major market for BMW (I don't want to make up numbers, but I think it's around 50%), they undoubtedly have hedged against a weakening dollar. It would be irresponsible not to.

Whereas the above calculations are valid (I assume, I haven't verified) they don't have the exact impact on BMW's bottom line that it would seem. While the profit of each car goes down as the dollar weakens, the fact that BMW is certainly short the dollar in a hedge means that a financial institution will owe BMW a cash payment that only increases with such moves. Ideally, the hedge will exactly offset any direct losses from dollar movements. (This isn't the case, but I'm sure BMW has got it pretty close after all of these years.)

To sum things up, if the dollar weakens, BMW is making less off of "you" but by an amount that should be closely offset by an inflow of cash from their hedge's counterparty. (Net gain/loss to BMW = $0) Conversely, if the dollar strengthens, they will make more money off of "you", but have to pay out a similar amount to the counterparty.

It's late, so that may not read very clearly, but, to sum things up, BMW has "locked in" their profit margins based on projected sales, by making a currency hedge, and actively adjusting it. This enables them to have a steady income stream over time, and not have their cars get wildly cheaper or more expensive over time.
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      10-27-2007, 10:56 PM   #19
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No sympathy here

Falling US dollar ... pffft

The price of the M3 in Australia is $157,000 AUD (this includes a "luxury car tax").
On current exchange rates:

157,000.00 AUD = 143,878.30 USD

How'd you like to be doing your sums on that price?
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      10-27-2007, 11:08 PM   #20
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Quote:
Originally Posted by GeriFix View Post
Falling US dollar ... pffft

The price of the M3 in Australia is $157,000 AUD (this includes a "luxury car tax").
On current exchange rates:

157,000.00 AUD = 143,878.30 USD

How'd you like to be doing your sums on that price?
Ouch. If I've ever seen justification for importing a "grey market" car, that sounds like it. You won't have a warranty, and will have to deal with transport, but I'd say that's worth getting a car for 40-50% off. This was common practice in the U.S. in the '70s and '80s before foreign makes like Ferrari, Lamborghini, and Porsche had strong distribution networks in the U.S., and the dollar was a lot stronger against the Lira and Deutsche Marke. Tons of Porsches from those years were brought in by people besides Porsche of North America.
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      10-28-2007, 12:02 AM   #21
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Quote:
Originally Posted by Seth_Horwitz View Post
Ouch. If I've ever seen justification for importing a "grey market" car, that sounds like it. You won't have a warranty, and will have to deal with transport, but I'd say that's worth getting a car for 40-50% off. This was common practice in the U.S. in the '70s and '80s before foreign makes like Ferrari, Lamborghini, and Porsche had strong distribution networks in the U.S., and the dollar was a lot stronger against the Lira and Deutsche Marke. Tons of Porsches from those years were brought in by people besides Porsche of North America.
Unfortunately, "grey imports" for Australia are limited a little by the fact we drive on the left side of the road here. If I were to go to the UK to purchase an M3 coupe it would still cost $114,000 AUD, even before all the hassle of transporting it.

Actually, If I were to buy one in Germany it would cost $104,000 AUD on current exchange rates (and I got no idea if they would make a right hand drive version for a car purchased in Germany anyway).

A price of $60,000 USD ($65,500 AUD ... just to give some perspective to this post) seems absurdly low by comparison to anywhere else in the world.
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      10-28-2007, 12:39 AM   #22
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Quote:
Originally Posted by SD330i View Post
As a Economist I would say the following statement is an assumption. For this I could be wrong and I am sure a lot of you will say "I told you so" but here it goes:

"I believe that that weaken dollar to the euro will have no effect on the price of the 08 M3 in the US. It will priced like all other BMWs before it and others after".

There I have said it and now we will all wait see.
Oh cmon man. I already stated there are a thousand variables that go into pricing. Furthermore, I stated that BMW more than likely hedged against the exchange rate risk - thereby completely negating it.

All I said was IN THE LONG RUN ALL US IMPORTS WILL INCREASE IN PRICE (hedging or not). If they successfully hedged for this year, then maybe the '08 M3 will be unaffected. But the 09 will increase then. You cannot escape exchange rate devaluations in the long run. Period. Do I have to post a source for this obvious indisputable statement?

Once the M3 price is released neither one of us will be proven correct. All I am saying is this is going on in the background and companies do not hedge to infinity. They hedge for a year or two. Once those hedges expire, they must buy new hedges at the new price. And wahla, the change hits. You CANNOT escape this fact.
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