Jaguar Cars

A Case on Foreign Exchange Exposure

Jaguar, a luxury UK car manufacturer, is exposed to exchange rate
fluctuations since a large proportion of its sales are in dollars whilst its
costs are in sterling and Deutschmarks. This case raises some
interesting issue regarding the rationale for hedging foreign exchange
exposure within an internationally competitive environment.
From 1979 to 1981 Jaguar Cars lost 120 million. The cars that the company produced at
the time were unreliable and badly finished. In addition, the strength of sterling, at an
average rate of $2.33 in 1980, was given as another explanation for the losses. The
variability of exchange rates has caused great concern in Jaguar, since a large proportion
of their revenues comes from overseas, mainly in the USA, while most of the companys
raw materials and components are bought in the UK.
The Company and its History
In 1922, William Walmsley and William Lyons formed the Swallow Sidecar company to
build motorcycle sidecars. In 1935 the company was floated on the stock exchange and in
March 1945 it changed its name to Jaguar cars.
The company produced a series of successful sports cars. In 1960 Jaguar doubled its
capacity by purchasing Daimler company. Jaguar, however, was still small compared
with its European and American competitors. This put the company at a disadvantage in
terms of development and distribution costs. In 1966 Jaguar cars merged with the British
Motor Company to form British Motor Holdings, and in 1968 BMLC was formed from a
merger of BMH and British Leyland.
In 1980 John Egan was appointed chief executive of Jaguar. Bill Hayden from Ford later
described the progress of Jaguar in the 1980s as follows:
In 1980 Jaguar was on its knees. What few cars it made were of appalling quality
and the government was about to turn the lights out. John Egan has more than
trebled production over the past 10 years, introduced a new saloon and still
managed to invest half a billion dollars on new equipment.
Jaguar became an independent company through privatization in August 1984. Exhibit 1
provides some financial data on the company.

This case was written by Evi Kaplanis and Antonio S. Mello as a basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation. Evi Kaplanis and Antonio
S. Mello, 1990.
1

Exhibit 1 Jaguar Cars financial data

Total turnover
(m)
166
195
305
472
634
746
830
1002
1076

Year
1980
1981
1982
1983
1984
1985
1986
1987
1988

US turnover
(m)

-469
469
544
555
468

Profit
(m)
-52
-36
6
49
42
87
83
61
28

Total Sales
(000 cars)
16
14
21
29
33
38
41
47
50

US sales
(000 cars)
3
5
10
16
18
21
25
23
21

The Market for Luxury Cars

The most important market for luxury cars is the USA. Exhibit 2 gives the distribution of
sales by area for Jaguar, Mercedes-Benz and BMW.
Exhibit 2 Distribution of sales (% by value)
Company
Jaguar
BMW
Mercedes

Home Market
30
32
48

USA
42
19
15

Rest of Europe
16
32
23

Other
12
17
14

The major competitors of Jaguar in the US luxury car market are predominantly based in
West Germany. Mercedes-Benz and BMW are both much larger than Jaguar with 1980
sales exceeding 500,000 cars, and Porsche, with annual sales of around 30,000 cars, is a
similar size (see Exhibit 3). Some, however, argue that Jaguars are closer substitutes for
Cadillacs than Mercedes or BMW, because of their smooth ride, soft seats and the easy
steering.
The scale advantage of Mercedes and BMW ensures that they are less dependent than
Jaguar on the luxury segment of the market (see Exhibit 4). The chairman of BMW,
Eberhand van Kuenheim, considers that the only truly serious opposition for BMW is
Mercedes, saying that Jaguars output of 50,000 units annually is simply too low,
representing a world market share of only 0.1 % compared to BMWs 1.4%.
Jaguars position, and its dependence on the US luxury car market, is indeed closer to
that of Porsche. Porsches chairman, Heinz Branitzki, states that
In the future, the Porsche for beginners is a used Porsche. The 20,000 segment is
definitely a thing of the past; I would like to concentrate on the 40,000 plus, but
the air up there is quite thin. We are not Mercedes, and dont sell cars like
Mercedes. Our ambition is to provide sheer driving pleasure.

Exhibit 3
US luxury car market 1987
Mercedes
10%

Porsche
3%
Volvo
13%

BMW
10%

Audi
5%
Jaguar
3%
Cadillac
29%

Saab
5%
Other US
4%

Lincoln
18%

Exhibit 4 Prices and production shares of luxury cars

Jaguar
M
XJ6
V12
XJS

BMW
Mercedes
P
PS
M
P
PS
M
21
75
COMP
3
11
69
33
6
MID
5
16
18
27
19
S
6
37
1
7
41
12
*M-Model, P-price (000), PS-production share (%)

P
15
18
49

PS
32
53
15

Porsche
M
944
911
928

P
32
42
57

PS
n/a
n/a
n/a

Jaguars Currency Hedging Strategy: April 1988

Jaguar has substantial currency exposure which derives from the fact that 70% of its
output is exported, whilst its production is concentrated in the UK. Prior to privatization,
in August 1984, Jaguar had left its foreign exchange exposure largely uncovered, in line
with British Leyland policies. By early 1985, Jaguar wanted to be more certain of its
forward revenues and had started to implement forward hedging.
Jaguars finance director, John Edwards, describes that forward sale policy:
We basically stick to managing our major exposure, the US dollar. Our aim is to
sell forward 75% of the estimated dollar receipts on a rolling twelve month basis.

When there are occasions, either for reasons of taking advantage of very good
exchange rates or where we feel we would like to lock in a profit number for a
period, then we extend this cover to more than 75% and more than twelve months.
In the spring of 1985 we were able to sell up to two years forward at rates which
proved in the 1986/87 to be very beneficial in terms of profit contribution.
Since 1985 we have continued this policy and we are now [February 1988] in a
position where we have locked in 95% of anticipated receipts of 1988 at $1.55 to
the pound and 40% of 1989s anticipated exposure at around $1.70.
There is very little questioning from analysts of anything other than cash flow
exposures. As the translation impact goes through reserves and not through the
P&L, it is very rarely considered.
We find that people only want to know about the US dollar. However, we do have
exposure to currencies of other countries to which we export cars. We are long in
all European countries (other than Germany) and every other market. In Germany
we have started to buy considerable numbers of components and particularly the
new XJ6 has substantial costs in Deutschmarks. What we have done here is to
leave the exposure open as we are looking towards a balances position on this
currency, as sales increase in Germany.
Treasurer Michael Lane amplifies Jaguars policy:
As a company we need to give ourselves time to react. It is no good getting up
one day and say we are losing money-lets cut costs. What dollar hedging does is
give us time to make the necessary adjustments (in production, marketing and
sales, and cost structures) to such a degree that we will still be profitable. Hedging
is just buying time, nothing else. Banks are quoting us rates around 1.75 for the
early part of 1989 and are only prepared to give us the stronger rate of 1.70 for the
end of 1989. We dont think it is worthwhile increasing our 1989 hedging ratios
now because we think the dollar will strengthen between now and then, which
will allow us to lock in our 1989 receipts at a better rate than is currently
available.
The problem with options is that we have to pay for them. We have to pay to get a
benefit which is unknown, as opposed to the premium cost which is the only
certainty. We have looked at options many times and have rejected them,
principally on the cost of the premiums when we can sell forward at rates that are
acceptable to us. Whats more we have been very successful in the forward
market.
Exhibit 5 gives the average rates achieved by Jaguar and the average spot rates and
forward rates for the period 1984-1989. Exhibit 6 gives quarterly spot and forward
exchange rates since 1976. Exhibit 7 shows the relationship between Jaguars share price
and the Deutschmark and dollar exchange rates during the period 1984-89.

Exhibit 5 Dollar/sterling spot and forward rates (annual averages)

Year
1984
1985
1986
1987
1988
1989

Spot rate
1.34
1.29
1.47
1.64
1.78
1.63

1-year forward rate

1.24
1.27
1.42
1.61
1.75
1.58

Rate achieved by Jaguar

1.26
1.28
1.44
1.55
1.7

Exhibit 6 Dollar/Sterling exchange rates. 1984-1989

US dollar/UK Pound Spot Rate

7/1/1989

1/1/1989

7/1/1988

1/1/1988

7/1/1987

1/1/1987

7/1/1986

1/1/1986

7/1/1985

1/1/1985

7/1/1984

1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1

1/1/1984

2
1.9

Exhibit 7 Relationship between Jaguars share price and exchange rates, 1984-89
R(Jaguar)
R(Jaguar)
R($US)
R(DM)

= 2.64 + 0.35 R($US) + 1.31 R(DM)

:Monthly % return from Jaguar shares
:Monthly % return to UK investor holding $US
:Monthly % return to UK investor holding DM

R= 0.13

Porsches Hedging Policy

Jaguars views are echoed by Porsche, one of its main German rivals. Finance director
Hans Vollert says:

We have been hedging our dollar receipts for a few years and have not been
convinced of the value of options. We do not use options on a large scale because
we think they are too expensive. It doesnt make any sense to use them in an
environment which has seen the dollar heading down consistently. We are no very
optimistic about the dollar and so we will continue to use the forward market.
Porsches policy has been to sell 6-9 months forward. Consequently, as at April 1988,
Vollert had hedged all incoming dollar receipts up till October that year at a $/DM rate of
1.80-1.90. Porsche has no intention of extending its hedging horizons as far ahead as
those of Jaguar.
Until March 1989 Porsche had shared Jaguars aversions to options. Then, says finance
director Hans Vollert, we changed our minds. Now we are partly using options-mainly
zero-cost- to cover 20-25% of our dollar/Mark transaction exposure.
This conservative strategy, which involves buying put options at the same time as selling
calls (forgoing some of the potential gain, but offsetting some of the premium paid) is
used for about half Porsches hedging; the company is currently covered about 50% for
1989 at a level of around DM 1.85=$1.
The change of heart at Porsche came after a period of months considering the
possibilities, given that the dollar was drawing ever closer to a level where it might
rebound.