This is an article from AutoWeek mag:
The official explanation for price increases that climbed to as much as 5 percent on some models of the new BMW 5 Series sedan was that they were for extra equipment and an improved car.
Not everyone found this an adequate explanation. People who watched new models from other car companies arrive with flat or even lower sticker prices wondered what made BMW so special.
But those who keep an eye on the daunting world of global macroeconomics are amazed BMW didn't raise prices more than it did. These folks have watched the shift in the exchange rate between the U.S. dollar and the European Union's common currency, the euro, over the last year or so and see a price-boost tidal wave in the making.
In a recent survey of large German companies, the German research firm lfo found 90 percent of them would have trouble shipping products across the Atlantic if the exchange rate reached the point it is today.
When the euro debuted on Jan. 1, 1999, it was worth $1.17, but the rate hit a low of 82.28 U.S. cents three months before its second birthday. At that point, European cars were sometimes 40 percent less expensive in the United States than they were in their home countries or an exchange-rate basis, and that meant big profits for their manufactures.
Since then, the euro has climbed steadily, attaining an all-time high of $1.26 two days after its fifth birthday. There are financial analysts who think it could hit $1.40 this year, an increase of 70 percent in three years.
Assuming the euro hits that price this fall, U.S.-based arms of the car companies that paid $30,000 for a European-built car in October of 2000 would be paying $51,000 for the latest version of that car this fall.
The picture is complicated by the German firms' ongoing efforts to protect themselves against such currency fluctuations by buying hedge funds in various currencies to ease the pain of a rising euro.
Led by Porsche, which has fully hedged itself against the dollar through 2007, German firms have bought into this practice in varying levels. This means there is not likely to be any desperate move to raise the retail prices on new cars for a while on cars coming from Germany.
But in 2005 and beyond, if the euro stays even remotely near where it is today against the dollar, then all bets are off for Audi, BMW and Mercedes-Benz, Volkswagen in a better position since a good number of its cars come from Mexico. Ferrari and Maserati would be similarly affected because Italy also uses the euro.
The Swedish and English currencies have also grown in value against the dollar, which negatively affects Saab and Volvo, and Land Rover and Jaguar, but they are all owned by American firms, so things aren't quite as straightforward as they are for the European-owned firms.
There is also some benefit to having assembly plants in the United States, since that stabilizes manufacturing costs in cars that stay on this continent and raises profits on the models exported to Europe.
Basically, however, anyone importing cars from Europe will have to raise retail prices significantly for North American buyers or take significant hits in profitability. This is a classic dilemma, with neither horn particularly appealing to the car companies involved. But after some minor-league belt-tightening (lower marketing costs, fewer sponsorships), there is virtually nothing they can do. Lower profits or higher prices are the only choices.
When and if the price increases come, they will be across the board, but most painful at the lowest and end of the price scale. Imagine how hard it will be for BMW, for example, to hide this exchange shift in its forthcoming 1 Series, which will be the firm's new entry-level model. On the other hand, models that already have big tickets-Maybach and Rolls-Royce come to mind-will have even bigger tickets.
The last time this happened, in the early '90s, Porsche tried to raise U.S. prices to keep the profits flowing and buyers fled the brand in such numbers that the company almost pulled out of North America.
According to the trade paper Automotive News, or sibling publication, European firms are already raising prices a little on a regular basis (BMW and Mercedes), asking more than expected for new cars (VolvoS40) and cutting new car incentives (Volkswagen). So far, the higher asking prices haven't hurt, but cutting the incentives stalled VW sales, and U.S. dealers forced the company to back down.
It may not reach any significant level for a year or so, but when the fiscal realty of the dollar-euro exchange takes hold, it could make that 5 percent increase in BMW prices look like the good old days.
-Alex Law
The official explanation for price increases that climbed to as much as 5 percent on some models of the new BMW 5 Series sedan was that they were for extra equipment and an improved car.
Not everyone found this an adequate explanation. People who watched new models from other car companies arrive with flat or even lower sticker prices wondered what made BMW so special.
But those who keep an eye on the daunting world of global macroeconomics are amazed BMW didn't raise prices more than it did. These folks have watched the shift in the exchange rate between the U.S. dollar and the European Union's common currency, the euro, over the last year or so and see a price-boost tidal wave in the making.
In a recent survey of large German companies, the German research firm lfo found 90 percent of them would have trouble shipping products across the Atlantic if the exchange rate reached the point it is today.
When the euro debuted on Jan. 1, 1999, it was worth $1.17, but the rate hit a low of 82.28 U.S. cents three months before its second birthday. At that point, European cars were sometimes 40 percent less expensive in the United States than they were in their home countries or an exchange-rate basis, and that meant big profits for their manufactures.
Since then, the euro has climbed steadily, attaining an all-time high of $1.26 two days after its fifth birthday. There are financial analysts who think it could hit $1.40 this year, an increase of 70 percent in three years.
Assuming the euro hits that price this fall, U.S.-based arms of the car companies that paid $30,000 for a European-built car in October of 2000 would be paying $51,000 for the latest version of that car this fall.
The picture is complicated by the German firms' ongoing efforts to protect themselves against such currency fluctuations by buying hedge funds in various currencies to ease the pain of a rising euro.
Led by Porsche, which has fully hedged itself against the dollar through 2007, German firms have bought into this practice in varying levels. This means there is not likely to be any desperate move to raise the retail prices on new cars for a while on cars coming from Germany.
But in 2005 and beyond, if the euro stays even remotely near where it is today against the dollar, then all bets are off for Audi, BMW and Mercedes-Benz, Volkswagen in a better position since a good number of its cars come from Mexico. Ferrari and Maserati would be similarly affected because Italy also uses the euro.
The Swedish and English currencies have also grown in value against the dollar, which negatively affects Saab and Volvo, and Land Rover and Jaguar, but they are all owned by American firms, so things aren't quite as straightforward as they are for the European-owned firms.
There is also some benefit to having assembly plants in the United States, since that stabilizes manufacturing costs in cars that stay on this continent and raises profits on the models exported to Europe.
Basically, however, anyone importing cars from Europe will have to raise retail prices significantly for North American buyers or take significant hits in profitability. This is a classic dilemma, with neither horn particularly appealing to the car companies involved. But after some minor-league belt-tightening (lower marketing costs, fewer sponsorships), there is virtually nothing they can do. Lower profits or higher prices are the only choices.
When and if the price increases come, they will be across the board, but most painful at the lowest and end of the price scale. Imagine how hard it will be for BMW, for example, to hide this exchange shift in its forthcoming 1 Series, which will be the firm's new entry-level model. On the other hand, models that already have big tickets-Maybach and Rolls-Royce come to mind-will have even bigger tickets.
The last time this happened, in the early '90s, Porsche tried to raise U.S. prices to keep the profits flowing and buyers fled the brand in such numbers that the company almost pulled out of North America.
According to the trade paper Automotive News, or sibling publication, European firms are already raising prices a little on a regular basis (BMW and Mercedes), asking more than expected for new cars (VolvoS40) and cutting new car incentives (Volkswagen). So far, the higher asking prices haven't hurt, but cutting the incentives stalled VW sales, and U.S. dealers forced the company to back down.
It may not reach any significant level for a year or so, but when the fiscal realty of the dollar-euro exchange takes hold, it could make that 5 percent increase in BMW prices look like the good old days.
-Alex Law
![[confused]](/images/smilies/confused.png "Confused [confused]")
![[:D]](/images/smilies/biggrin.png "Big Grin [:D]")
