Weakening Euro to benefit VMs

Prolonged weakness of the Euro against many other currencies could be beneficial to European vehicle manufacturers, although the effects will vary, according to a report by Moody’s.

Prolonged weakness of the euro against many other currencies could be beneficial to European automotive manufacturers, although the effects will vary. Automotive manufacturers are amongst Europe’s largest exporters, with most exports headed to the US, as well as to other European countries and Asia. They have broadened their global reach and now generate sales in currencies other than the euro whilst retaining a large production base in Europe. Moody’s expects that premium car manufacturers such as BMW and Daimler’s Mercedes-Benz Cars division will benefit the most from prolonged euro weakness, considering that they export a large share of their production, mostly from Germany, to their diversified sales base including China and the US.

‘Continental automakers like BMW and Daimler with cheaper European cost bases and high non-European sales could see a benefit from the euro slide, while hotels and tourist companies enjoy more overseas visitors. However, airlines could bear the brunt with fewer people choosing to travel outside Europe,’ said Anke Rindermann, Moody’s vice president and senior analyst. ‘Despite the mixed results, the shift in exchange rates on its own is not significant enough to affect ratings,’ added Anke.

However, the weak euro will not be as beneficial for vehicle manufacturers such as Peugeot and Renault which still sell more than half of their cars in Europe and have large euro-denominated cost bases.

European car manufacturers have increasingly established local manufacturing facilities to follow demand in their core markets, which helps mitigate foreign currency risks. Volkswagen has expanded its global production network with a new vehicle plant now operating in the US. It also has 17 plants in China, its single largest market, where it aims to reach an annual capacity of over four million by 2018. (About three million vehicles were produced locally by the company’s Chinese joint ventures in 2013.)

Similarly, approximately 40% of BMW’s cars were produced outside of the euro zone in 2013. The depreciation in the value of the euro in January against the British pound could weigh on the revenue growth of Jaguar Land Rover as approximately 19% of its vehicles were sold in Europe (excluding the UK) in calendar year 2014 and it operates a large UK assembly operation. However, the earnings impact will be mitigated by the company’s significant sourcing in euro and hedging policies. JLR buys some parts from Europe and its joint venture factory in China is now operational and it has rolling hedging instruments in place to protect its earnings from fluctuations in currencies.

Car manufacturers could consider a weaker euro an incentive to sell at lower prices to enhance their competitiveness in markets where trading conditions have become more challenging. Whilst this could boost their positions in these markets at least temporarily, it would reduce the benefits from a weaker euro on their profitability.

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