[Bandini3]

Anyone who follows the financial markets will be aware that the U.S. dollar has depreciated significantly against the Euro over the past year. For example, one U.S. dollar currently buys 0.698 Euro, compared to 0.839 Euro in early June 2010 – a decline of almost 17%.

At first glance, it might appear BMW faces significant pressure to boost M/Y 2012 pricing in the USA to offset the depreciation of the USD. For example, as shown in the attached table (Case 1), in June 2010 the base price of a 535i ($49,600) translated into €41,619. At current exchange rates, the 535i base price ($50,100) translates into just €34,990 (a 16% drop).

Of course, BMW produces the 5-Series in Germany and incurs most of its development and production costs in Euros. So, will the boffins in Munich be pushing for a sharp increase in U.S. pricing to restore profit margins on U.S. sales?

I think the answer is a resounding “No”.

The comparison based upon the change since June 2010 represents something of a ‘worst case’ scenario. My rough calculations suggest BMW’s current Euro revenues from each U.S. sale of the F10 are roughly 4% below the level in effect when U.S. pricing of the new model was first announced (mid-March 2011). Note: this ignores any impact of transfer pricing between BMW AG and BMW NA.

As shown in the table (Case 2), the base price of a 535i was equivalent to €36,263 at the exchange rate prevailing on March 15, 2010 (0.731). The 1% price increase implemented in early 2011 was sufficient to hold unit revenues constant in Euro terms. At the exchange rate prevailing on May 27, 2011 the 535i U.S. base price corresponds to €34,990. Assuming the USD/EUR exchange rate remains constant at current levels (0.698), BMW would have to increase pricing by 3.6% to restore unit revenues to the original level in Euro terms (i.e. €36,263).

So, despite the headlines regarding the declining value of the U.S. dollar, my guess is there is little danger of a sharp increase in pricing for the 2012 model year.

BMW faces strong competition and is well aware that the U.S. economic recovery has been relatively weak. That argues for a modest price increase. My guess is 3%, and possibly more if BMW believes it won't have a significant impact on unit sales. (BMW also has to contend with the effects of global inflation on labour, material and services, but that’s another story.) There is probably not a lot of scope to 'de-content' the 535i to disguise an increase in the base price (more on the 550i). I am sure that will be considered.

[BobRBob]

It's hard to see how they can avoid a price increase. The competition faces the same issues so they will probably go up too.
Inflation is coming.

[pyramid]

Even if increase by 5% (all brands included), should still considered affordable in the US. Especially when breaking down for 24 months lease, the different is nothing earth shaking.

[Robin_NL]

36/41k euros for a 535i in the USA.



In Germany starting from 50k euros. In Holland starting from 64.5k euros base.

[gcreese]

Nice theory, but I don't buy it. In March 2011, BMW NA increased the price of the 3 Series coupe in two ways: they increased the base price and discontinued the Sport Package, making the more expensive M Sport Package the only way to get Sport seats. The 335i xDrive coupe that I'd ordered in December 2010 for European Delivery cost me an additional $1,000 when I picked it up in April after I'd been forced to reconfigure it due to the March changes.

Second, BMW is on record saying profitability is a higher priority than market share. Given that their market share is growing nicely, I expect them to view the model change as a good time to go for some extra profit.

[BobRBob]

It is precisely because of their focus on profitability that we are likely to see prices rising. It's a natural response to increased demand even without the declining currency.

[Autojack]

That trend has perhaps recently declined or stopped, with the dollar gaining a bit of value vs foreign currencies.

[Keto]

All the multinationals, especially ones with sales and manufacturing in multiple countries, maintain currency reserves to hedge against fluctuations in the value of various currencies. That's why you don't see big swings in price from year-to-year, or month-to-month, based on the market. Imagine if all BMW prices were in Euros only and converted on-the-spot; sales would plummet if the market starting trending up.

[raleedy]

BMW has a nice hedge from the fact that it produces the X3 and X5 in the US for the Euro market. They don't need to respond much to volatile foreign exchange markets.

[RichReg]

The Euro has been outpacing the dollar since it introduction in 2001-2002.
I haven't seen any really drastic moves in any of BMW's pricing since then, so I
really don't see why anyone should expect it to happen now. Besides, they and
other European companies saw this coming years ago and have already invested
in manufacturing plants that are outside of Europe, which spreads out their costs
among other currencies.

[GARBAJ]

This conversation is getting near to a topic that most likely is forbidden on the board... I'll tell you why the inflation is coming this way... It has to do with socialist tendecies of an administration that favored a stimulus bill that didn't...

[Needsdecaf]

Originally Posted by GARBAJ

This conversation is getting near to a topic that most likely is forbidden on the board...

It's only getting there because you are taking it there.

[Bandini3]

Originally Posted by Needsdecaf

It's only getting there because you are taking it there.

Well said.

My quick analysis was meant only to stimulate discussion and entertain. The main point was, despite what might appear in the popular media (dollar depreciation), there is really no risk that BMW will raise U.S. prices in a big way.

The fact remains, a 5-Series sold in the USA today is less rewarding to BMW than one sold a year ago. And, on the face of it, U.S. pricing of the F10 looks favourable (to the purchaser) compared to many other markets.

BMW does have a natural hedge though -- the Spartanburg SC factory is the sole source for the X3, X5 and X6, which are sold globally. A declining exchange value of the USD reduces costs and makes that operation more profitable. That, in turn, could encourage further expansion of BMW's U.S. production, which would make some Americans happy.

[roho3323]

If BMW was losing their shirt in exchange rates, they wouldn't be discounting cars or giving away Nav for free on the 5.

...just sayin

[pharding]

Originally Posted by GARBAJ

This conversation is getting near to a topic that most likely is forbidden on the board... I'll tell you why the inflation is coming this way... It has to do with socialist tendecies of an administration that favored a stimulus bill that didn't...

The real damage to the economy and national debt was done by that Texas Cowboy that we had recently for a President. Plus after 9/11, he accidentally invaded the wrong country.

[BobRBob]

Politics aside, devaluation of the US $ is real and it is not just against the Euro. The Cad$ is over par now as well, up from the mid 80s just a couple of years ago. The decline has slowed recently and that's good but it will be hard to hold the line on US price increases forever if the $ keeps falling.

[raleedy]

Originally Posted by BobRBob

Politics aside, devaluation of the US $ is real and it is not just against the Euro. The Cad$ is over par now as well, up from the mid 80s just a couple of years ago. The decline has slowed recently and that's good but it will be hard to hold the line on US price increases forever if the $ keeps falling.

We've been here before, Bob. You may also note that we have a chronic trade deficit and high unemployment, both of which would be helped a lot by a lower dollar.

[RichReg]

Originally Posted by roho3323

If BMW was losing their shirt in exchange rates, they wouldn't be discounting cars or giving away Nav for free on the 5.

I think that sums it up quite nicely.
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