BMW: a German carmaker that built cars in dollars to tame the exchange rate

The situation

In January 2004 the euro stood at about $1.25 and Germany’s carmakers were counting the cost. Volkswagen blamed at least EUR 1.2bn of losses in 2003 on unhedged currency swings. PSA Peugeot Citroën warned it might lose EUR 600m in 2004 because of the strong euro. The New York Times sent a reporter to Munich to ask how BMW was coping.

BMW’s exposure was large. The United States accounted for about a quarter of its annual sales of roughly $53bn. It sold about 277,000 cars there in 2003, and about 217,000 of them had been built in Europe, with costs in euros. Its plant at Spartanburg, South Carolina, built nearly 160,000 cars a year, but about 100,000 of those were exported, mostly to Europe, and only about 60,000 were sold in the US. So even with an American factory, most of the cars BMW sold in America were paid for in dollars and built with euros.

Joachim Herr, head of BMW’s risk management, explained the company’s position. BMW had hedged about two-thirds of its expected dollar exposure for 2004 and about one-third for 2005. Its models put the long-run fair value of the euro near $1.10, so at $1.25 it chose not to lock in heavy cover for 2005, betting that the dollar would recover. “Our owners and employees prefer to see smooth operating results,” Herr said.

The question behind the hedging was bigger than any one year. Financial contracts could smooth results for a year or two. They could not change the fact that BMW’s costs were mostly in euros and a large share of its revenue was not. The decision this case follows is how far BMW should go in moving production and purchasing into the currencies where it sold its cars, and how that should sit alongside its financial hedging.

Background

BMW traces its founding to 7 March 1916, when the aircraft maker Bayerische Flugzeugwerke (BFW) was founded. It built its first motorcycle in 1923 and entered car production in 1928 by buying a vehicle factory in Eisenach. After the Second World War the Allies dismantled its Munich plant, and it restarted with motorcycles and then, from 1952, cars. In December 1959 shareholders rejected a takeover by Daimler-Benz, and the industrialist Herbert Quandt increased his stake and helped turn the company round. The BMW 1500 of 1961, the first “Neue Klasse”, became its breakthrough model.

Production went abroad slowly. BMW’s first foreign plant was at Rosslyn in South Africa, taken over in 1972. In 1994 it opened Spartanburg, initially to build the Z3 roadster, and in the same year bought the British Rover Group. BMW sold Rover in 2000 and kept only MINI, which it relaunched from a plant at Oxford in 2001. It acquired the Rolls-Royce car brand in 1998, opened the Rolls-Royce plant at Goodwood in 2003 and set up the BMW Brilliance joint venture in China the same year, with the Dadong plant at Shenyang opening in May 2004. A plant at San Luis Potosí in Mexico started production in 2019.

BMW makes money from three businesses. Automotive, which sells BMW, MINI and Rolls-Royce cars, is by far the largest. Financial Services leases and lends to buyers and dealers; in 2010 it earned a record EUR 1.2bn and financed or leased 48.2% of new BMW Group cars. Motorcycles is small. The company sells premium cars at high prices, so its margins depend on keeping prices firm in each market. That is why exchange rates matter so much: a premium carmaker that raises dollar prices whenever the euro rises risks losing buyers to rivals, while one that holds prices takes the hit on its margin.

By 2024 the group was far larger than in 2004. It had revenue of EUR 142.4bn, profit before tax of EUR 11.0bn and deliveries of 2,450,854 cars. It produced 2,513,830 vehicles, more than one million of them in German plants. In 2025 revenue fell to EUR 133.5bn and profit before tax to EUR 10.2bn on deliveries of about 2.46 million cars. The group employed 154,540 people at the end of 2025 and sold in more than 140 countries.

The industry

BMW competes in the premium car segment, mainly against Mercedes-Benz and Audi. The three German brands share a structural problem. Each built most of its cars in Germany for decades and sold a large share abroad, in the US, the UK and later China. Their costs were in euros (before 1999, in Deutschmarks) and much of their revenue was not.

The New York Times report of 2004 shows how differently German carmakers handled that problem. Porsche, seen as the most conservative, had hedged all its dollar exposure as far ahead as July 2007 using options, so it could hold US prices steady. It had learned the lesson in the early 1990s, when it raised US prices as the dollar weakened, customers left and its American business nearly collapsed. Volkswagen had raised its hedging from 30% to 70% of exposure in late 2003, after its losses. DaimlerChrysler was less exposed because Chrysler sold most of its cars in the US, and it planned to expand its Mercedes plant at Tuscaloosa, Alabama, partly to take advantage of the weak dollar.

Several forces shape this industry. Rivalry is intense and largely on product and brand, which makes price rises hard to push through. Buyers of premium cars can switch between brands, so a carmaker cannot simply pass on a currency loss. Building a car plant takes years and costs billions, which means production location is a long-term choice, while exchange rates move by 10% or more within a year. Governments add a further layer: tariffs on imported cars and parts, local content rules, and subsidies for local production all change the economics of where to build.

Two newer forces matter for the later part of the case. The first is China, which became one of BMW’s largest markets; in 2025 BMW sold about 626,000 cars there, more than in any other single market, but its Chinese sales then fell sharply. The second is trade policy. In 2025 the US raised tariffs on imported cars and parts, and the EU imposed anti-subsidy tariffs on battery-electric cars made in China. Both touched BMW directly, because it imports cars into the US from Europe and Mexico, exports from the US, and imports some electric models into Europe from China.

Exhibit 1: The euro against the dollar at points in the case

Sources: The New York Times, 17 January 2004; BMW Group Management Report 2024; BMW Group Half-Year Report to 30 June 2025.

The decision

A company in BMW’s position has two broad ways to manage currency risk, and they work over different time spans.

The first is financial hedging: forward contracts and options that fix or cap the rate at which future foreign revenue will be converted. Its strengths are speed, flexibility and low cost. Its weakness is that it only buys time. If the euro stays strong for several years, each new hedge is written at the new, worse rate, and the company ends up with the same economics it would have had without hedging, only later. Hedging also involves judgement. BMW’s choice in 2004 to hedge only a third of 2005 rested on a view that the euro was overvalued. That view could be wrong, and in this case the euro kept rising for several years.

The second is operational or natural hedging: moving costs into the currencies in which a company earns revenue, by building cars and buying parts in its sales markets. It changes the underlying exposure rather than offsetting it. But it is slow and costly, and it locks in decisions for decades. A plant must also make sense on labour, logistics, supplier base and market access, not only on currency.

BMW faced several linked questions in the mid-2000s:

• How much of next year’s and the following year’s expected currency flows to hedge, and whether to take a view on the rate or hedge mechanically.
• Whether to expand Spartanburg beyond its role as a builder of a few models, many of them for export, into a plant that matched BMW’s US sales.
• Whether to shift purchasing of parts and materials into dollars, even where European suppliers were established.
• Whether to add capacity in other currency zones, such as China, the UK and later Mexico, and how much of each plant’s output should serve local buyers.

Opinion outside the company was divided on how seriously German carmakers took the problem. Ferdinand Dudenhöffer, director of the Center for Automotive Research in Gelsenkirchen, told The New York Times in 2004 that German carmakers tended to see themselves as car businesses rather than currency businesses. Thomas Aney, an analyst at Dresdner Kleinwort Wasserstein, warned that the industry was going into the following year with what he called a naked hedge.

What they did

Absorbing the strong euro

The euro kept rising after 2004, and BMW’s hedges, written at progressively less favourable rates, could not protect it. BMW booked a foreign exchange charge of EUR 666m in 2006 and EUR 517m in 2007. Its pre-tax profit for 2007 was EUR 3.87bn, down 6.1%, on record sales of 1.5 million vehicles. Chief executive Norbert Reithofer explained why BMW suffered more than its rivals: it was the most successful European carmaker in the American market, so “the dollar’s persistent weakness hits us harder than competitors”. The company warned that the strong euro would again pose major challenges in 2008.

The 2007 strategy

In September 2007, with the euro at record highs against the dollar, Reithofer announced a new strategy. BMW would cut costs by about $8.5bn by 2012, require productivity gains of at least 5% a year and focus the organisation on return on capital. On currency, the company said it would “strategically step up natural hedging as well as purchasing, primarily in U.S. dollars”, and would also increase its financial hedging. The plan set out capacity changes in several currency zones:

• Spartanburg, South Carolina: capacity to rise from 140,000 to 240,000 vehicles a year by 2012.
• Oxford, England (MINI): capacity to rise to 260,000 cars a year without further investment.
• China: first steps to raise capacity from 30,000 to 44,000 units a year.

Stephen Cheetham, an analyst at Sanford C. Bernstein, said the announcement should finally lay to rest the idea that BMW’s management did not care about profitability. BMW’s shares fell 1.5% that day.

There is a small inconsistency in the public record here. The New York Times in 2004 said Spartanburg built nearly 160,000 cars a year, while the 2007 plan gave its capacity as 140,000. The two figures may measure different things (output in a strong year against rated capacity), but the sources do not reconcile them.

Hedging alongside production

Financial hedging continued. At the annual accounts press conference in March 2011, finance chief Friedrich Eichiner said BMW had been very well positioned in its foreign currencies in 2010, that its planned exposure for 2011 had largely been hedged on favourable terms, and that it expected another currency tailwind in 2011. BMW measures currency risk with what it calls a cash-flow-at-risk model, which estimates how far cash flows could fall over a period at a given level of confidence. According to Risk.net, citing BMW’s annual report, its net US dollar exposure fell from EUR 3.3bn at the end of 2016 to EUR 1.1bn at the end of 2017.

Spreading the production network

The production network kept spreading. BMW added a second Chinese plant at Tiexi in Shenyang, a plant at San Luis Potosí in Mexico that builds 2 Series and 3 Series cars, and a plant at Debrecen in Hungary. By 2025 BMW listed more than 30 production sites on five continents and described its approach as “local for local”. Spartanburg became the group’s main source of large X-model sports activity vehicles. BMW Group investment in South Carolina passed $14.8bn between 1992 and 2024.

What happened

Within three years the currency effect turned from a heavy cost into a gain. BMW reported a currency gain of EUR 334m in 2010 compared with 2009, which Eichiner said mainly reflected better transaction rates for its main currencies, the US dollar, the Japanese yen and the Chinese renminbi. That year the group reported record revenue of EUR 60.5bn and profit before tax of EUR 4.8bn, with an automotive operating margin of 8%.

Exhibit 2: Currency effects and results, selected years

Sources: The Local (AFP), 18 March 2008; BMW Group PressClub, March 2011; Risk.net, 21 March 2018; BMW Group Management Report 2024; BMW Group Half-Year Reports 2025 and 2026; BMW Group press release, 13 October 2026.

Spartanburg grew far beyond the 2007 plan. In 2024 it built 396,117 vehicles, all X models, with daily output of more than 1,500 and capacity of up to 450,000 a year. It employed more than 11,000 people. Nearly 57% of its output, close to 225,000 vehicles worth more than $10bn, went to about 120 export markets, led by Germany, South Korea, China, Canada and the UK. That made BMW the largest US car exporter by value for another year. Nearly half of all BMWs sold in the US in 2024 were built there.

Exhibit 3: Spartanburg and BMW’s US business, 2003 to 2025

Sources: The New York Times, 17 January 2004; AP via Gasgoo, 28 September 2007; BMW Group PressClub USA, 26 February 2025; BMW Group Report 2024 and 2025.

The export role changed the nature of the hedge. Spartanburg no longer only offset dollar revenue from US sales; it also created dollar costs for cars sold in Germany, China, South Korea and the UK. BMW summed up the outcome in its 2024 report: Spartanburg built just under 400,000 vehicles, roughly matching BMW’s US sales, and “Europe, the US and China each produce more or less the same number of BMW Group vehicles as are sold there”. It linked this directly to currency, saying that production based on market demand reduces currency risk and makes the network more resilient.

The balance is by volume, not by vehicle. About half of the cars BMW sells in the US are still imported, mainly from Germany and Mexico, while more than half of what Spartanburg builds is exported. Currency risk is reduced because the dollar costs of the exported X models offset the dollar revenue from imported sedans. Each flow still crosses a border, however, which is why the arrangement later proved sensitive to tariffs.

Other views

Inside the industry, Porsche’s approach in the 2000s offered a contrast. It relied almost entirely on financial hedging, covering its whole dollar exposure years ahead with options, and accepted the cost. A Porsche spokesman, Immo Dehnert, declined in 2004 to say what this cost, adding only: “You don’t get it for free.” BMW’s choice reflected its size: a carmaker selling hundreds of thousands of cars in the US could justify an American plant in a way a small maker could not.

Analysts at the time questioned whether German carmakers managed currency risk actively enough. Dudenhöffer’s remark that they saw themselves as car businesses, not currency businesses, was a criticism of that. The New York Times also noted that German executives rarely discussed hedging and often reported currency gains inside operating profit in years when the dollar was strong, which made it hard for outsiders to judge how well the risk was managed.

Researchers have studied the same question in general form. George Allayannis, Jane Ihrig and James Weston, writing in the American Economic Review in 2001, examined whether operational and financial hedging act as substitutes or complements for multinational firms. BMW’s own practice, using both at once, is an example of the complementary approach.

The natural hedge has critics of a different kind. Building in the market where you sell reduces currency risk but increases exposure to that market’s trade and political rules. BMW’s production chief Milan Nedeljković said in February 2025, as US tariff threats grew, that Spartanburg’s strong export share “underlines the importance of free trade for the USA”. In other words, BMW’s largest plant now depended on open borders in two directions: for parts and imported cars coming in, and for X models going out. A purely domestic plant serving only the US would have had a smaller tariff exposure but would have lost the economies of building every large X model in one place.

US local and state officials have been strong supporters. South Carolina’s governor Henry McMaster and commerce secretary Harry Lightsey both praised the plant’s role in the state’s economy when the 2024 export figures were released. These statements come from the company’s own release and should be read with that in mind.

Reading it through a framework

Transaction, translation and economic exposure

Finance textbooks split currency risk into three types. Transaction exposure covers known foreign currency cash flows, such as dollar payments for cars already sold or about to be sold. It is the natural target for forwards and options. Translation exposure arises when a foreign subsidiary’s results and balance sheet are converted into euros for the group accounts. In the first half of 2025, for example, translating at the stronger euro reduced BMW’s reported total assets by EUR 11.7bn without any change in the underlying business. Economic exposure is the long-run effect of exchange rates on a firm’s competitive position and future cash flows.

BMW’s financial hedging, two-thirds of 2004’s expected exposure and one-third of 2005’s, dealt with transaction exposure a year or two at a time. It could not fix BMW’s economic exposure, which came from building about 217,000 of the 277,000 cars it sold in the US in Europe. When the euro stayed strong, the charges of EUR 666m in 2006 and EUR 517m in 2007 showed the limit of hedging. Only moving costs into dollars could reduce the economic exposure, which is why the 2007 plan paired more hedging with more US production and dollar purchasing. By 2024, with production and sales roughly balanced in each major region, the economic exposure had been cut at its source. The fall in net dollar exposure from EUR 3.3bn to EUR 1.1bn in a single year, 2017, also shows how much the hedging position can move with management’s view and the market.

Real options

Real options thinking treats investments in capacity as options that give a firm the right, but not the duty, to act later. A plant in another currency zone works as a switching option. When the euro is strong, a company can shift output for some markets towards the cheaper location; when it weakens, it can lean on European plants. BMW’s network, with plants in Germany, the US, Mexico, China, the UK, Hungary, South Africa and elsewhere, gives it several such options. Switching is not free, because moving a model between plants takes time and new tooling, so the options are most useful when exchange rates stay out of line for years rather than months.

Spartanburg’s growth from about 160,000 cars a year in 2004 to 396,117 in 2024, with spare capacity up to 450,000, shows an option being exercised and then extended. The 2024 spare capacity of roughly 54,000 vehicles is itself an option: BMW can add output in the US without a new plant if tariffs or exchange rates make that worthwhile. The cost of these options is large, more than $14.8bn in South Carolina alone, and unlike a forward contract they cannot be bought quickly or sold back. That is the trade-off at the heart of the case: financial hedges are cheap and fast but short-lived, while real options are slow and costly but last as long as the plant does.

Since then

Trade policy has tested the network since 2025. BMW said higher US customs duties and the EU’s anti-subsidy tariffs on battery-electric cars imported from China cut its automotive operating margin by about 1.5 percentage points in the first half of 2025, and by about 2 points in the second quarter alone. It expected a partial reduction of US tariffs on EU cars and parts from 1 August 2025, after an EU–US agreement announced in late July. At the same time the euro rose against the dollar from 1.04 at the end of 2024 to 1.17 at the end of June 2025, and BMW warned that currency effects, particularly from the renminbi, would have a significant negative impact on earnings in the second half.

The 2025 result showed the combined effect. Group revenue fell to EUR 133.5bn and profit before tax to EUR 10.2bn, and the automotive operating margin was 5.3%. BMW’s chairman wrote that earnings stayed above EUR 10bn despite import tariffs and a difficult Chinese market. Sales in the US rose about 5% to more than 419,000, and Europe passed one million for the first time since 2019, while China weakened.

The pressure continued into 2026. In its half-year report BMW said additional US tariffs had again cut the automotive margin by about 1.25 points, partly offset in the second quarter by claims for refunds of some tariffs. Negative currency effects came mainly from the US dollar and the South Korean won. Deliveries in China fell 20.4% in the first half, while Europe rose 5.4% and the US 3.9%. On 16 June 2026 BMW cut its 2026 outlook for the automotive operating margin to between 1% and 3%, from 4% to 6%, and said it expected group profit before tax to fall significantly. Third-quarter sales, published on 13 October 2026, showed the US up 2.5% and China down 24.8% on the previous year.

Spartanburg’s role is changing again. BMW is building a $700m battery plant at nearby Woodruff and expects to ship the first electric vehicle from Spartanburg in late 2026, with six fully electric models assembled in the US by 2030. The first Neue Klasse model, the new iX3, appeared in September 2025. Whether the production network that balanced currency risk so well can absorb tariff swings and a shrinking Chinese market as easily is the open question.

What to take from it

• Financial hedging smooths currency effects over a year or two, but only matching costs and revenues by currency protects against a long period of adverse exchange rates.
• A foreign plant built partly for currency reasons can grow into an export base, which changes the firm’s currency exposure rather than removing it.
• Balancing production and sales by volume in each region reduces currency risk, but the cross-border flows behind that balance leave the firm exposed to tariffs.
• Taking a view on where the exchange rate should be, as BMW did in 2004, is a bet that can go wrong for several years in a row.
• Production decisions made for currency reasons must also make sense on labour, logistics and market access, because they last for decades.

Questions to think about

1. In 2004 BMW hedged two-thirds of its 2004 dollar exposure and one-third of 2005’s, because it thought the euro at $1.25 was above its fair value of $1.10. Was that a sound risk management policy or a currency bet? What policy would you have recommended?
2. Suppose BMW sold 277,000 cars in the US at an average of $40,000 each, with 217,000 of them built in Europe. Estimate the effect on euro revenue from those European-built cars of a move in the euro from $1.10 to $1.25, and compare it with the EUR 517m charge BMW reported for 2007.
3. Spartanburg exports more than half its output while about half of BMW’s US sales are imported. Does that make it a better or a worse natural hedge than a plant that built only for the US market?
4. Why might BMW’s net US dollar exposure fall from EUR 3.3bn to EUR 1.1bn in a single year? What does that suggest about how far hedging policy is a matter of management judgement?
5. How should the rise in tariffs since 2025 change the way a carmaker weighs currency risk against trade risk when it chooses where to build?
6. Porsche relied on financial hedging and BMW on a mix. What features of each company explain the difference?

Concepts at work

Currency exposure types, real options, natural hedging. Explore them in Insights.

Further reading

Oxford University Press covers this story as a teaching case in Cases in International Business on Oxford Business Trove. The sources below are the public record this page was written from.

Written from the public sources listed below. Figures are as those sources report them.