BMW International Business What Did

BMW

International Business

What did BMW do in order to manage global financial risk and why?

The recent collapse of the American auto industry has made risk management an obsession for car manufactures everywhere. Even for foreign automotive companies, the flagging fortunes of the industry as a whole means that mitigating potential losses is essential. In the early 1990s, BMW emerged as a pioneer of risk management. As sales of BMW fell, the company began to open new manufacturing plants abroad, in America and in Mexico. BMW attributed its failures partially to the high production costs in Germany, particularly the cost of labor. Reducing input costs and improving technology can maximize profits but so can a new production and marketing strategy. "The diversification provided by having production capacity in various countries reduces an automobile manufacturer's economic exposure" to risks particular to a nation or region (Kim & McElreath 2001). Risk management against further losses was accomplished by expanding BMW's field of operations to different nations, raising its sales volume purchases of component parts through acquiring new brands, and by expanding its market offerings to reach a wider and more highly segmented car-buying populace.

For example, the Mexican currency exchange rate was favorable to BMW as well as Mexico's cheaper cost of labor, and the state of South Carolina offered tax incentives to attract BMW within its borders as well as provided a market for the manufacturer's products. This shows how for many companies, international expansion is a way of mitigating regional risks and engaging in cost containment at the same time. Joint ventures are often preferred because of the information such agreements provide about the host culture to the foreign business and also because they are less costly in terms of the capital investment required. However, BMW instead chose to grow larger rather than partner with another corporation in Great Britain when it acquired 80% of British automaker Rover, in the hopes of making larger purchases from suppliers and operating on a larger and thus more cost-effective economy of scale. Of course, BMW also hoped to take advantage of Rover's 13% market share in the UK. BMW has always placed a heavy emphasis on improving its logistics: "Even before the establishment of its U.S. plant, BMW was spending several hundred million dollars annually in North America to procure parts and materials for its German-made vehicles. Although transportation costs were higher, exchange rates and lower production costs made them cheaper to import to Germany than to acquire [them] domestically or elsewhere in Europe" (Kim & McElreath 2001).