Porsche Exposed
Porsche 1. How does Porsche differ – operating structure, financial results, etc. – from other major European-based auto manufacturers? To begin with Porsche is a privately owned company controlled by the Porsche and Piech family. They hold all the 8. 75 million voting shares while mainly large institutional investors hold the other 8. 75 million non-voting shares. Despite the fact that stock exchange and analysts’ requests more frequent and more detailed financial reporting Porsche is not willing to meet these needs.
Another questionable input is the management compensation that only depend on Porsches profitability from year to year and not the share prices. Porsche manufacturing is conducted in German but also in Finland which make them a global brand with a cost base mainly in euro. They want to keep it so despite the fact that 42% of its revenues come from sales in the US since they believe that the heart of the brand comes from its performance in manufacturing and engineering. Porsche is therefore, by far the most exposed company among other European-based auto manufactures to changes in exchange rates.
While the other manufacturers increase their amount of natural hedging by conducting more manufacturing in their countries of large sales Porsche increase their put option hedging. According to their 2006 model year they are going to fully hedged all their sales. This is done even though Porsche has the largest US exposure among the manufactures. Their hedging strategy has been criticized for being more lucky than thoughtful. Porsche also differ with their extreme anti-debt attitude. Porsche have a strong competitive position and another aspect that is very specific for Porsche’s products is the exchange rate pass-through.
They pass through the changes of exchange rate upon the final consumer. 2. Describe Porsche’s foreign exchange operating (economic) exposure. How has the company been managing this exchange rate exposure? Porsche’s exposure to the US is currently 42 % of it sales and this numbers are believed to increase with increasing sales. The sales’ to the UK market is also relatively large with 11 %. Therefore the largest exposures are towards the dollar and the pound. Porsche is not using any natural hedging even though this type of “hedging” is increasing among other major European-based manufactures.
Porsche use an aggressive put option strategy to hedge against the US dollars and according to their model year of 2006 they are going to be fully hedged against their sales. They will achieve this by a three year rolling portfolio of put option contracts whit prices based on currency forecasts. 3. What methods are theoretically available to Porsche to manage or hedge its currency exposure? Why have these other methods not been used? If Porsche believe that their sales in US will prevail high they could do as the other manufacturers and start producing their cars in the US.
If they do so they will match their sales with their costs in a beneficial way and that is how natural hedging is conducted. This procedure is probably quit costly to conduct but on the other hand this might create dollar debt that they could match their sales to as well. There is always a chance that this would affect the manufacturing and engineering skills. Another alternative that were very specific for Porsche’s products is the pass through of changes in exchange rate to the final consumer. Porsches has an approach to non debt but they could in fact use currency swaps to match their underlying exposure.
But I don’t really know if Porsche has any debt that they could swap. 4. So, all things considered, what do you think of Porsche’s hedging program and strategy? What do you think they should do? I understand why Porches currency strategy has been widely criticized even though it has done very well. It must be a very expensive strategy to keep up and as the criticism has stated there is a belief that Porsche has been more lucky than skilled in their hedging. But what if they haven’t? I really think they should re-consider their no-debt statement to realize that there might be other valuable and less costly strategies out there.
It feels like they just remember that they couldn’t lend money when they needed and not the fact that they lost a lot of money. This aspect could happen again if their predictions’ about the future is wrong. There is also always a risk when hedging all of the exposure but this need’ to be weighted to the win of hedging all of the exposure. Maybe there is a change that they could use a collar, swaps, loans or new manufacturing positions in their hedging. The magic is to find a suitable approach to match the exposure of the sales.
