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Weak Pound To Slash $2.1 Billion More From Europe Profits

VW Takes Biggest Hit, Followed by Mercedes, BMW, Peugeot.

Successful exporters of cars to the U.S. have agonised for years about how to best mitigate the effect on their profits of a weak dollar. BMW and Mercedes have invested huge sums building factories in the U.S. VW is currently doing the same.

But as the dollar rallies from its previous weakness on foreign exchange markets, these companies are probably wishing they had invested more in Britain, because the fall of the pound against the euro is now costing them serious money. Since sterling first begin to slide last summer, the cost has rocketed by $2.1 billion, according to a Citigroup Global Markets report.

By contrast, Citigroup estimates that in 2009 the impact of the dollar on the balance sheets of all the big European premium players will be a relatively miniscule $205 million.

In July last year, Citigroup estimated that the premium Europeans would see $2.2 billion wrenched from their profits in the U.S.

“The U.S., dollar has strengthened significantly against the euro in recent months, gaining almost 20 per cent since April 2008 and turning a previously forecast $2.2 billion headwind into a likely immaterial headwind in 2009. For each further one cent strengthening of the U.S. dollar to the euro aggregate auto profits will improve $128 million in 2009,” Citigroup’s John Lawson said.

But the pound’s sudden plunge will cost all the big Europeans, including the mass car makers, an eye-watering $4.1 billion.

Since last summer the dollar has rallied from $1.55 to about $1.30. In contrast the pound sterling has crashed from 0.78 in the summer of 2008 to around 0.90 now. Back then, Citigroup reckoned sterling weakness would cost the manufacturers an overall $1.8 billion. Now it’s $4.1 billion and climbing.

Worst hit will be VW with a potential negative of $1.2 billion. Mercedes is expected to see $871 million knocked off its profits because of its British operations, BMW will lose $756 million, and Porsche $64 million. Mass market Peugeot will see a hit of $615 million, Renault $372 million and Fiat $218 million.

“The strength of the euro against the pound has brought the sterling rate back on the agenda for automakers. We estimate a $4.1 billion headwind from this source in 2009, despite falling sales in the U.K. region. Every one cent further weakening in sterling would bring an aggregate $160 million hit to 2009 profits,” Lawson said.

Neil Winton – February 3, 2009

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