BMW and Globalization: Exporting and Economy

Bayerische Motoren Werke, better known as BMW, is a German automobile manufacturing company that was founded 1916. During World War 1, BMW was contracted to develop engines for planes. In 1923, BMW added motorcycles to their list of manufactured items and eventually expanded into what they are today. BMW also owns and produces Mini automobiles and is the parent company of Rolls-Royce Cars. They are known for their vehicle’s streamlined design, luxury, and performance. In 1994, BMW became the first European manufacturer to build a factory in the South Carolina, United States of America.

In the field of exportation, governments help corporations that have a vested interest in the community and those that help stimulate the economy, whether it is local or national. In the 15 or so years that the United States has been manufacturing BMWs, they have exported more than 1 million units. A record like this could not have been possible without the help of government aid. The United States uses several forms of government aid. Export loans and grants are just two forms of this. Although similar in that both help fund a business venture, export grants are renewable and enable exporters to upgrade their facilities, bring products to new markets and hire new employees without having to repay the government subsidy. There are also grants that are interest free that need only be repaid if the venture is successful (Workman, 2009). Loans are generally easier to receive and are low-interest. The government also co-signs on the debt associated with the loan. Many states have even developed international offices in major markets to provide assistance in making contacts in foreign markets, providing various services. Of these services, the offices assist trade leads with foreign buyers, trade missions, promotional service, and qualifications of potential buyers, agents, or distributors.

There are two ways of exporting: direct and indirect. Direct exporting is the most popular option for big companies to develop their international marketing strategies. It also gives the company greater control over the marketing function and the opportunity to earn more profits. Where they use distributaries to sell their product and BMW use direct exporting way by distributaries for example BMW distributor in UAE is ABMC.

Moreover, BMW today have 22 factories in 12 countries one of these countries is USA.BMW made a huge step by building a factory in the USA in South Carolina where they produce all models of X5 and Z4 to USA customers and export to the rest of the world.

One of the reasons why BMW chose to build a factory in the united state because USA is the largest market for cars in the world so they build a factory closer to their customers to avoid export and import taxes.

Other reason is due to the international trade conditions the US dollar value is less than before by comparing it to the euro or any other currencies and so because of that USA is more competitive and provide a better value to its BMW cars and that because now exporting from the USA factory is cheaper than other BMW factories.

Moreover, it’s a fact that labor in developing countries is cheaper and it’s attracts a lot of companies to build their factories there, but in developed countries such USA they will find more professionals and skilled people who are expertise in producing luxury cars and because of that United State attracted BMW management to build their factory there.

BMW had chosen Syncreon to deal with their CKD and SKD export from USA factory. Generally CKD (completely knocked down) is exporting vehicles from the region country to other countries by the sea and by using CKD and SKD they cut some of the taxes and government give subside to help giving jobs in the factory. On the other hand, SKD (semi knocked down) is the same as CKD but not complete vehicle just parts and in BMW case is the engine and other parts of the car they use in X5 and Z4 series. Syncreon helps BMW with packing, warehousing and inventory plus exporting.

Further to the topic, in the USA there’s a low called U.S. Department of Commerce which helps promoting their export companies online in the Export Yellow Page which is sent to trade centers, embassies and consulates worldwide.

The Make-Buy decision is determination of whether it is more advantageous to make a particular item-in house, or to buy it from a supplier. The choice involves both qualitative (such as quality control) and quantitative (such as relative cost) factors.

We will be analyzing what are some of the factors that affect a company’s make-buy and locations decisions, in our case the BMW (Bavarian Motor Works) company. In this company, in 1984, between 50 and 75% of the property of the firm was in the hands of the Quandt family who also held a very active position in the supervisory board of BMW; the remainder of the firm was owned by a group of European banks and employees of the firm. The owners of BMW were very much involved in the management of the firm (in their long-run decisions) but, at the same time, they delegate short run decisions such as marketing plans to the subsidiaries. As Jenster et al. (1990, p. 142) point out: “Although the parent company, BMW in Munich, established broad guidelines, the subsidiaries are responsible for developing their own strategic objectives and marketing plans within their regions.”

Selecting a location for production is a complicated decision. The various locations to be considered have to be evaluated according to a large number of different criteria, and the individual evaluations must subsequently be summarised to form an overall evaluation of each alternative. The best alternative is then selected on the basis of this overall evaluation.

One of the factors includes market access, Green Innovation management has opened up new markets to companies around the globe. Green Innovation Management could be defined as the process to identify, implement and monitor new ideas that improve company’s environmental performance while enhancing its competitiveness. Identification includes not only the understanding of environmental demands (shortage of resources, new environmental legislations, public pressure, etc), but also customer’s requirements and acceptance of environmentally-friendly products, competitors’ actions, amongst other factors that need to be considered in the innovation of processes or products. Implementation refers to the development of the idea in the market. And finally, monitoring is the activity that should feedback the company about its green innovation in order to enhance the learning of innovating in sustainable way.

The automotive industry is one of the industries that have visibly suffered a strong demand for higher environmental performance. This industry have enjoyed years as the main source of employment and economic growth and still have a strong political influence; nevertheless, today it is being pointed out as one of the major contributors to air pollution in urban centres. Indeed, the benefits of cars are clear: they provide a door-to-door transportation system, the means to gaining access to life’s necessities and employment, and a source of pleasure and social status. However, despite these benefits there are environmental burdens as well: local air pollution, greenhouse gas emissions, road congestion, noise, mortality and morbidity from accidents, and loss of open space to roads, car parks and urban sprawl (Vergragt, 2006). Thus, companies in the sector have been trying different strategies to overcome these challenges. For instance, BMW (Bavarian Motor Work) this German car company innovated by implementing a multi-millionaire landfill gas-project for its production site in Spartanburg (USA), ending up in various environmental and economic gains.

When globalizing its operations to USA in order to be closer to its largest consumer market, BMW decided to bring the state-of-art technology building one of the most advanced car manufacturing facilities worldwide. The plant in Spartanburg (USA) was regarded by its innovation in the paint shop using water-borne systems. This fact already provided enormous benefits regarding the company’s environmental improvements, once the paint shop is the major source of environmental impacts amongst the car manufacturing processes. The use of water-borne systems reduced substantially the amount of solvents used in the processes, therefore, minimizing the emissions of harmful substances to paint the cars.

Furthermore, as the global economy shifts, global companies must rebalance, Since the beginning of the year, BMW sales in China have nearly doubled to 114,000 vehicles, making it BMW’s third-largest market. Meanwhile sales in the two larger markets, U.S. and Germany, have increased just 5% to a total of about 330,000 cars after falling sharply from pre-recession levels. That is precisely the kind of pattern that rebalances’ have been hoping for.

China is now BMW’s largest market for its largest and most profitable sedans. Bernstein Research estimates that 50% of BMW’s operating profits come from China; BMW says that the profit number is a “lower two digit number.”

“It’s kind of a windfall,” says Mr. Eichiner, BMW’s 55-year-old CFO, in his Munich office. “But our strategy isn’t to rely on that development. If you do, you lose your focus in the U.S. and Europe.” (Eichiner)

Overall, consumer spending makes up just 40% of China’s gross domestic product, compared to 70% in the U.S. and 56% in Germany, and Chinese households save more than 25% of their disposable income.

In addition, there is the political risk of doing business in an autocratic government whose policies can change suddenly. Mr. Eichiner says he is especially concerned Beijing may want to give domestic small-car producers a boost by crippling imports of BMWs and other larger vehicles through fuel-efficiency regulations or taxes.

While government policies-exchange rates, interest rates, taxes, trade barriers-play a role, rebalancing depends critically on decisions made in corporate boardrooms.

Another factor in determining a company’s make-buy and location decisions is foreign exchange rates. BMW this year is almost fully hedged against adverse exchange rate fluctuations and expects an earnings contribution from currency effects in the low hundreds of millions of Euros in 2010. Expanding your company’s borders to offer products to countries around the world can be a very lucrative endeavor. However as much as it is lucrative, it is also cumbersome. Each country has its own rules and regulations for doing business and most countries around the world have different currencies. For import and export companies, foreign exchange volatility is one of the most difficult and frustrating aspect of doing business internationally. It fluctuates constantly and can either increase profits or result in losses.

Foreign exchange risk is difficult to control even large companies can get so focused on their regular business activity that they forget to hedge their currency exposure. Take BMW, one of the world’s largest car manufacturers for example. In 2003, the Euro rallied 20 percent from a low of 1.04 to a high of 1.25 against the US dollar. The company did very well and revenues increased 4.2 percent, however, according to their annual report, the weakness of the US dollar against other currencies caused their total year’s profit including the effects of currency to turn into losses, their revenue for 2003 was down by 2.1 percent.

A company as large as BMW turned profits into losses just because they did not hedge currency risk properly, which makes it even more important for small companies, where every dollar that is earned or lost is even more important to hedge against currency risk.