This case explores the operating exposure of Jaguar PLC in 1984, just as the government is about to relinquish control and take the company public via an IPO. The primary concern of the CFO is that Jaguar sells over 50% of its cars in the US, while its production costs and factories are U.K.-based. This currency mismatch creates operating exposure for the firm that needs to be hedged.
While the current trend in the USD has been higher, the markets are expecting a pullback in the currency. With labor accounting for a significant portion of the cost base for luxury car industry, it is unlikely that the expense will decline in the near future. Again this creates a potential liability in the matching pf the cash inflows and outflows. Given Jaguar's primary competitors have operating expenses in DEM, the CFO should also be concerned with the competitive advantages that are associated with favorable exchanges rate when compared to the competition. Thus, there also exists the issue of the GBP/DEM exchange rate. The overarching themes and underlying issues that must be addressed in order to address Jaguar's currency exposure are: Valuation of the risks associated with firms with multiple currency exposure Risks associated with revenue streams and expenses in different currencies Valuation and assessment of highly competitive niche luxury car markets Supply chain effectiveness and labor trends in the automotive industry Strategic positioning of operations for a multinational firm
After thoroughly weighing the issues from a qualitative and quantitative perspective, we believe that there are several strategies that Jaguar Management can undertake in order to maximize the profitability of and mitigate the exchange rate exposure for the revenue that is generated in the US. In particular, we would recommend: Management should locate a proportionate level of its manufacturing facilities in the US to foster a reduction in operating exposure since revenues and costs would be denominated in the same currency. Jaguar Treasury should engage in Forward/Swap Contracts to Sell US$ and hedge against currency fluctuations. Jaguar Treasury could also Buy Call Options on GBP to hedge its operating exposure is to use option. By paying an option premium, Jaguar could reserve the right but not bear the obligation to exercise the option based on favorable or unfavorable currency levels. Jaguar Treasury could create Money Market Hedges by borrowing USD, converting the proceeds into GBP using spot rate, and using the revenues generated in US market to pay back the USD principle and interests in the future. This would provide a "natural" hedge against Jaguar's dollar revenue stream.
May 10, 2005
Jaguar and the Luxury Automotive Business
Jaguar was founded in 1922 as Swallow Chairs and originally operated as a sidecar and car trimmings company. In 1945 it officially became Jaguar Cars Ltd and had initial production of 1,132 cars. In the mid 1960's it merged with other British motor companies to become British Leyland. After significant losses, the government found that BL was in serious financial trouble and acquired nearly all of their equity. During the next 20 years the government was able to turn the company around. The standards were increased and reputation for quality production was developed. Revenue growth grew 40% annually from 1980 to 1983 and employee morale and overall image improved with international races. In 1980, exports accounted for 60% of sales and by 1983 exports totaled 75% of sales. By 1984, Jaguar has come to be regarded as a leading manufacturer of luxury high-priced automobiles. However, the company needs to assess its economic exposure to exchange rates.
Recent developments in the international markets indicate that the US Dollar is set to begin to decline against other currencies. Jaguar's CFO agrees that the sustained real appreciation of the U.S....