Jaguar Plc, 1984
Executive Summary: Jaguar PLC, 1984
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
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