The case, Jaguar PLC, 1984 deals with the luxury automobile manufacturer that is currently controlled by the government but being privatized through initial public stock offerings. The British Leyland (BL) Company competes in the international automobile market and faces major competition from Daimler-Benz, BMW, Porsche, and Japanese manufacturers entering the market. Over the past four years, Jaguar has re-established itself as a quality producer. It has nearly tripled its revenues from 1980 to 1983.
Manufacturing takes place in Coventry, England but exports about 75% of its vehicles. In 1984, the U.S. was the world’s largest market for automobiles costing $30,000 or more and Jaguar sold 54% of its cars to that market. Due to the large quantity of exported cars, Jaguar exposes itself to operational, transactional, and translational risk. The dollar-sterling exchange rate has changed from $2.39 per BP in 1981 to $1.35 per BP currently, which in turn has resulted in the opinion that the dollar is overvalued compared to other currencies and will continue to depreciate. Analysis:
Based on the expectation that the value of the dollar will continue to decline, Jaguar is facing too much operational risk. As the sterling is undervalued by 36.42%, compared to 11.94% three years ago, Jaguar is realizing higher than expected profit margins. The luxury car market is not price sensitive in comparison to the rest of the automobile market and therefore Jaguar did not feel it necessary to lower its U.S. prices.
However, in relation to its competition, if Jaguar were to increase its prices in the U.S., the demand for their cars would drop and they would lose market share. Since the German DM is less undervalued than the British Pound, they will be less affected by the depreciation of the dollar. In order to protect against the depreciation of the dollar it is in Jaguar’s best interest to locate manufacturing facilities in the U.S. This would reduce the operating exposure, as building in the same currency would minimize the risk caused by the depreciating dollar.
If German automakers decide to raise or reduce the prices of their luxury cars, Jaguar must keep their prices relative to not lose market share to competitors. In projections for U.S. sales from 1984 to 1989, with an exchange rate change of 5%, we can expect sales to increase from $440.5 million to $592 million.
By producing in the U.S. we avoid the effects of the depreciation of the dollar when converting back to British Pounds, as this would cause the sales to go from 325.5 million British Pounds to 342.8 million British Pounds. If the exchange rate were to change more drastically, say by 25%, converting sales to British Pounds would diminish profits in the U.S. If the dollar depreciates at this higher rate, profits suffer in a more advanced fashion.
Being a multinational corporation, Jaguar must protect itself against economic and operational risks. If Jaguar maintains all of their production in England, the depreciation of the dollar will ultimately diminish the value of the company. By producing in the United States, Jaguar can better protect itself against these risks.