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| VW: faces strategic challenges in pushing sales and cutting costs, but currency risk is often overlooked |
At the end of February, Standard & Poor's revised its outlook on Volkswagen's single-A rating from stable to negative, owing to the car company's lower than expected 2003 earnings. VW's operating profits were down 48% to e2.5 billion in 2003, according to its headline numbers published last month. S&P said the sales performance of its new Golf, retaining its profitability in Europe and its ability to carry out planned annual cost cutting of e1 billion were the company's key challenges in 2004.
Yet some analysts think that S&P should be focusing more on VW's currency risks, which reduced operating profit by e1.2 billion in the first three quarters of 2003. When it formally publishes its full-year results in March, the currency hit to VW's balance sheet, particularly the euro/dollar rate, is likely to account for half of its fall in operating profit. The problem is not going away in 2004.
Traditionally, Europe's biggest carmaker hasn't hedged a lot of its dollar currency exposure, despite the fact that it has a strong sales base in the US in dollars yet no manufacturing base there and most of the cars it sells in the US are produced in Europe.