Industry Press Releases

Automotive Manufacturers largely positively affected

Wednesday, Mar 04, 2015

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.2 They have broadened their global reach and now generate sales in currencies other than the euro whilst retaining a large production base in Europe.

“We expect 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, “ said Anke Rindermann, Moody’s vice-president and senior analyst.

However, the weak euro will not be as beneficial for car makers such as Peugeot S.A . (Ba3 stable) and Renault S.A. (Ba1 positive), which still sell more than half of their cars in Europe3 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 China4 , its single largest market, where it aims to reach an annual capacity of over 4 million by 2018. (About 3 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 Automotive Plc (JLR, Ba2 positive) 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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