The Spartanburg Plant Investment by BMW AG

Index of the 3rd Case Study: Multinational Finance Decisions

1. Introduction: Multinational Finance Decisions
1.1 Strategic reasons and benefits for going Multinational
1.1.1 Market seekers
1.1.2 Raw materials
1.1.3 Production factors
1.1.4 Know How Seekers
1.1.5 Low cost countries
1.1.6 Fewer regulations
1.2 Chances and threats for multinational companies
1.2.1 Corporate Culture
1.2.2 Financing on the domestic and foreign markets
1.2.2.1 Economies of scale
1.2.2.2 Managerial and marketing expertise
1.2.2.3 Superior technology based on heavy research
1.2.2.4 Financial strength
1.2.2.5 Differentiated products
1.3 Summing up
1.3.1 Strategic Management Process
1.3.2 Means of financing
1.3.3 European Mid Term Notes (EMTN):
1.3.4 Euro Commercial Paper (ECP) :

2. Reasons for BMW’s Spartanburg investment: An evaluation of the chances and threats behind the decision
2.1 Reasons for why BMW decided to produce outside Germany and Europe
2.1.1 Chances and threats for Non-US manufacturer in the US car market
2.1.1.1 Exchange rate fluctuations
2.1.1.2 US luxury tax
2.1.2 BMW’s new Strategy
2.2 Reasons that made BMW decided to produce in the USA
2.2.1 Advantages of BMW being a domestic manufacturer
2.2.1.1 Independent of exchange rate fluctuations
2.2.1.2 The new BMW image in the US public
2.2.1.3 Taking part in NAFTA
2.2.1.4 Being a part of America's automobile industry
2.2.2 Other advantages
2.3 Reasons for why BMW selected the Spartanburg Site
2.3.1 Examination of the locational advantages
2.3.2 BMW’s economic impact to Spartanburg’s new welfare
2.3.3 South Carolina’s and Spartanburg’s incentive packet for BMW
2.3.3.1 Political and local environment
2.3.3.2 Monetary incentives by State and Local Government
2.3.3.3 Development of local infrastructure
2.4 Conclusion
2.5 Appendix

3. Financial aspects of BMW’s Spartanburg investment
3.1 External and internal financial decisions in the year 1992
3.2 External and internal financial decisions in the year 1993
3.3 External and internal financial decisions in the year 1994
3.4 External and internal financial decisions in the year 1995
3.5 External and internal financial decisions in the year 1996
3.6 External and internal financial decisions in the year 1997
3.7 Summery: 10th anniversary in Spartanburg and numeral overview
3.8 Numeral figures overview

Bibliography of 3rd Case: Multinational Business Finance

1. Introduction: Multinational Finance Decisions

In the pursuit of success, higher profit, gaining market share and dealing with the challenges of day to day business. The big national companies, wherever they may be, have dreams and aspirations. As a CEO or General Manager of a big company; there is several objectives to achieve and strive for. Among them, on the top of any list, these will be some of them;

- Get the most of the revenues and provide for the shareholders, it has in the recent years become more and more apparent, that the big companies seem to focus on “shareholder value”. This is often found in the US and is finding its way to the European continent.
- Another primary aim is to expand and become bigger or at least as big the main competitor. There is several reasons and valid objectives; one being the natural instinct of any CEO or General Manager; to achieve success and become an even bigger share of the global market. Other reasons may be the search for new markets, for whatever reason, the need for cutting the production costs, to be closer to the customers or even to have access to new technologies or raw materials.

We will in the 3rd case deal with the issue of BMW AG’s decision in the mid 90’s to go abroad. To settle on the US market, starting up a manufacturing facility.

There is a wide range of reasons, concerns and objectives to be dealt with prior to make that certain move, settling on foreign shores and setting up business. In order to understand what we are dealing with, we need to define multinational: “Companies operating in multiple countries, but responding to local product-markets through more customized approaches“^[1] In order to deal and operate in that environment, that company is expected to have highly qualified resources and access to a wide range of information’s; such as pricing, local laws and regulations, knowledge and understanding of the customer’s need and preference’s to name of few. The road that the company is about to embark upon, prior to going multinational, is full of risks in all sorts of different areas; such as political risks, financial risks, regulatory risks and risks dealing with competition.

There must be a solid research team ready at hand, being able to provide the management team, with the necessary information’s and background information.

We will cast a light on the problems, benefits, motives and challenges regarding multinational business.

1.1 Strategic reasons and benefits for going Multinational

There is a handful reasons for investing abroad; most of these reasons will apply to any company, no matter, in what field they are active. There may be more reasons for moving abroad but these primary reasons always apply:

- Markets seekers
- Raw materials seekers
- Production factors seekers
- Know How seekers
- Low costs countries seekers
- Fewer regulations seekers

1.1.1 Market seekers

By investing in an overseas market; a company gains access to a new market, opens up new opportunities, challenges and enabling the company to utilizing the products one to one or modified from your domestic market. One of the industries benefiting from the strategy over the past century is definitely the automotive industry. As an example; in the past Ford Motor Company have tried with moderate success to implement this strategy; taking your know how or products overseas on a one to one scale, like the Ford Mondeo, hence the name “Mondeo”. This car is sold worldwide, virtually identical, only difference is the name and slight modifications catering for the local market.

The US based automotive manufactures such as the “ Big 3 “; General Motors (GM), Ford Motor Company and Daimler Chrysler have in the past used this vehicle as a way of expanding their activities by either setting up their production abroad or by, which has been the most common approach, by buying into an established local manufacture.

GM started, in Europe, in the UK – taking over Vauxhall, in Germany in the late 20’s they took over Adam Opel AG and thereby becoming a multinational player. Ford, like GM, started out in the late 20’s in Europe. They built their first plant in Berlin in 1925 and later moved it to Cologne. Ford later started manufacturing cars in and for the Australian market by opening a plant in Geelong near Melbourne. Chrysler, were far less active abroad in the past century; they had a few stints in Europe. In the late 50’s they took over Simca, the French automaker. That deal came to an end 20 years later as Chrysler sold their European activities to Peugeot-Citroen.

GM and Ford have with success integrated on the European market, gained access to the European continent, not by selling their domestic products, but rather by selling products made for the local market. These companies; Opel and Ford, are perceived as European brands; very few people consider these companies as US companies.

In countries like the US; where there is a very strong sense of buying local made products, foreign companies are realizing that the solution is to enter that market and integrate. This applies very much to the automotive business; companies that in the past manufacturing “at home” and were exporting, were doing well in other markets, where there were less apprehension or inhibitions buying imported goods, tried to enter the US market by the same means, but soon realized that they had only a moderate success. This was not because the product was of a lesser quality, but rather that the consumers wanted local made cars. This meant that a lot of companies manufacturing volume products, for example; the Honda Civic or Toyota Corolla in the late 70’s needed an edge; a plant in the US. These companies set up production in the US, often in the South (Kentucky or Tennessee), where the rate of unemployment was higher than in the Midwest or the East Coast.

In the 2nd part of this case study we will examine the opportunities for foreign automobile manufacturers to conquer US markets. Aided by local governments in low industrialized states, in order to develop their industrial infrastructure by investments for plants and by creating of new jobs and revenues.

In the past most European automaker’s were very focused on their home turf; the European market and thanks to the European Union, the companies had an even bigger domestic market, which meant, that there was little need for going into other foreign markets, such as the US market. But now we do see that changing. Daimler had over the past decades been selling well in the US, an exclusive brand, not a mass volume product. But what then happened was a decision made in Stuttgart by Juergen Schrempp; CEO of Daimler, was to enter the US market and adapt their product line to the US market. To gain access to the market; they decided to merge. The merger or the take over as it turned out, with Chrysler, the then 3rd largest manufacture in the US was the entry to the US market. This deal between Daimler and Chrysler was surely spurred by the desire on behalf of Daimler to become multinational or even a global player. This meant that they were now a local player and not seen as a foreign company, thereby serving its purpose of seeking a new market. Daimler Chrysler did start up production of Off Road vehicles (ML-Series), for there was an enormous demand, especially on the US market. The question remains, whether the ML would have been this successful if it had been manufactured in Germany, both revenue wise and numbers of units sold.

Other industries that have turned multinational business into a success are the oil industry, pharmaceutical industry, banking and IT business.

In the oil business we use to have many small and large companies on the market. But in the last 20 years all these companies has been swallowed by a few companies, leaving little or no room for small companies. The big oil companies have also diversified their business; it is not just oil these days, there are a lot of related venues within the energy business; such as solar energy and motor oils. The European is pretty much split between a handful of companies; such as Shell, British Petroleum and Texaco/Chevron. This largely due to the global economy and the nature of; “Survival of the fittest” as Charles Darwin said regarding the laws of nature.

In the pharmaceutical business we see the same trend; the big companies become ever larger and larger – in order to gain control of the market and to secure itself from being a target of a take over. The banking world is definitely global these days, we find the big companies expanding beyond their own borders and slowing integrating in their new market.

The global economy has helped to remove a lot of political and monetary borders. Today nobody thinks twice about Deutsche Bank being a major on the world market. It is perceived as normal and this does not just apply to the banking industry but to other businesses as well. Nobody concerns themselves with the idea the for instance Diesel clothing is an Italian company.

IT business, knows of no borders, it can be done at any place, the big US software program companies, have set up shop in India, where they have access to cheap and skilled labor.

All these examples of companies, working and operating multinational, shows that these companies sought new markets, for many reasons and adapted in to their new environment and integrated themselves on the local market.

1.1.2 Raw materials

Very few, if any, automakers have settled on a foreign continent with the motive of getting access to raw materials. This strategy has often been implemented by companies such as oil, pharmaceutical and chemical companies.

The oil industry has always been looking for raw materials. In the beginning of the 1900’s, the oil companies started out drilling for oil locally and soon needed more raw material as the industrial revolution took place and started drilling off shore and on foreign continents. That meant that US (Standard Oil) and European (BP & Shell) companies needed to find oil somewhere else. The demand was skyrocketing and they went to South America, Africa and Asia looking for raw materials.

This had other benefits as well; cheap labor in the undeveloped countries.

1.1.3 Production factors

This was a frequent used option by automaker’s in the past. In the US for example; the unions has always had a lot of power, the famous UAW (United Auto Workers Union) union has ever since the late 30’s been in the headlines. The UAW has an enormous power and forced the management teams of the different companies to rethink their strategy in regards to production sites. Over the past decades, the Big Three has manufactured in Canada, right across from Detroit. They crossed the border and set up production in Sarnia or Windsor, Canada and even went south across the US-Mexican border and manufactured their cars there. Thanks to the NAFTA agreement, which was implemented in 1994 and removed most trade barriers and investments barriers among USA, Canada and Mexico, the North American market became one. The NAFTA agreement virtually changed the North American market overnight and gave the companies a massive incentive to invest within the NAFTA countries. In Europe the same trend took place. The European Union gave the companies an unlimited access to new markets, previously being hindered by custom or export restrictions. One of the advantages of EU was that the big companies, such as VW or Ford, would open up plants in “low cost“ countries such as Spain or Austria.

With the constant expansion of the European Union, the companies gained access to new production sites and the logistics were really no problem. In one country they would assemble the motor and in another the frame and in a third country they would assemble all the different parts.

1.1.4 Know How Seekers

Gaining access to "know how", has always been a prime motive for M & A’s and thus ending up being a multinational company. The obvious problem of manufacturing and Research & Development (R&D) is that if a company is working on a design, mechanical or technical problem / product, it is very likely that the competitor is doing the same thing or is already ahead. Which means that time is being wasted; spending enormous resources; such as manpower, financial and time on the developing a new product or a technical feature, that someone else is also working on. Another reason for M & A’s or settling in other country is access to highly qualified workers. This is the case in the computer business more than anywhere else. All the big computer companies, which manufactures programs for computers, has set up shop in India, where they have access to highly qualified workers and cheap labor costs. A highly skilled IT worker in Europe probably earn up to 10 times of what an Indian IT worker would earn. So the big companies have a lot of incentives to become multinational by means of setting of their business on foreign shores, just or one reason; to utilize the cheap, yet skilled labor. In the automotive business this applies as well, in the US you have a highly skilled labor force and the automotive industry plus its suppliers, such as automotive controls (robots) have their operations near the plants. This was one of the reasons that a company like ABB, the Swiss-Swedish engineering group, was doing so well in the US. They used their robots as a vehicle, allowing them to becoming multinational, giving them access to a new market, settling in and becoming a part of the process chain. Other companies, such as, Allen Bradley, also in the automotive controls business, was successful in Europe, there unique product line and / or unique knowledge o open doors and once on the market, they diversified into other businesses other than the automotive business.

All these companies, among many others, benefited from the demand for skilled labour and utilized the know-how present. The synergy effect was / is predominant in these cases. It is often very hard for companies with high end products to go abroad, because they enter a market with set standards and expectations to quality and design. A good example is an American company called Hillenbrand Industries, specializing in hospital equipment. They have almost 90 % market share in the US and in the early 90’s they decided to sell their products in Europe. They went direct and started selling their products. Problem was that the products were good, high quality of workmanship, but the design just did not appeal to the European customer; meaning the hospitals. Hillenbrand Industries decided to “go local” by buying up local companies in Germany, Austria and France and thereby getting the advantage of the domestic know how in regards to design. They changed their design on their products for the European market and made products for the European market rather than selling products made for the US market in Europe. The revenues went up and now after approximately 10 years, they are being perceived as being successful and as an European manufacture, which they would have never achieved if they had not taken the European know how on board.

1.1.5 Low cost countries

The paramount motive for moving production overseas is low costs; whether that may be labor costs or costs related to subsidies given by the federal or local government. This has been an attractive reason for companies in the automotive industry to go abroad. The foreign country or government would give the company a wide array of beneficial options, if the company decided to settle in that county. One example would be Brazil or Mexico. The company gain access to cheap labor and at the same time the government tries to entice the company to settle there by means of offering the production site at an extremely low price or by giving other incentives, this has proven to be an option from which both partners benefited. The local government had clear objectives; getting a major company to settle within their boundaries thereby providing jobs, improving the infrastructures and other benefits deriving from the company. For the foreign company, for instance, VW in Mexico or Ford in Spain had all of a sudden a new plant at a minimal cost of what it would cost at home. Often the incentives were more than just getting the land cheap or at no cost, often tax relieve packages were negotiated and for the local authorities it was like winning the jackpot. Immense investments took place and the company committed herself to the local site for years to come. A case of; “If you scratch my back, I will scratch yours.”

Yet times are changing and fast; in the recent past, since the Berlin Wall came down more than a decade ago, many companies ceased the chance and moved their production to the former East Block countries, such a Poland or the Baltic states. These countries provided the companies a chance to become multinational; leaving the HQ in there home country and having the entire manufacturing division settle in the new host country. A good example is for instance a German hospital equipment manufacture; Wissner-Bosserhof (WI-BO) from Wickede in West-Germany. They bought 50 % of a, at the time, primitive manufacturing company near Prague called Linet. WIBO experienced an enormous increase in revenues. WIBO was suddenly able to compete with the established companies in Germany; the products were good and WIBO was able to make “special order’s“ meaning if a hospital wanted something not off the shelf; WIBO made it. They had a very flexible production line, whereas the German based companies had very rigid manufacturing standards not allowing the company to make any changes to the product. This edge gave WIBO the momentum that they had needed in the past, thanks to the flexibility and more than anything, the low cost at the plant near Prague. So in a matter of a few years, WIBO became and still is a major player on the German market.

1.1.6 Fewer regulations

An incentive that has over the past decades proven to be ideal for the company coming in, they were looking for an environment, where they could “do as they please, without having to worry about the authorities”. These incentives given by the host country, at first glance, seemed to be with no consequences, yet as the years passed by and the company either moved away and left a polluted site behind or as it happened years ago in India; the dreadful accident “ Bhopal “. In 1984 in India, the company Union Carbide, experienced a leak of gas (pesticides) from their plant in Bhopal and approximately 3500 people died as a result of that accident.

The reason for this accident was among others; lack of tight regulations and maybe even the authorities turning a blind eye to the situation on site.

Other examples of a total disregard of the environment by the multinational companies are the big logging companies working in the rainforests of Brazil and Indonesia. This is just one example of the environmental consequences and other motives may be issues such as; no union or even organized labor force in these third world countries.

All in all, there is a multitude of reasons and motives for a company to go abroad and thereby becoming multinational. The benefits has been presented, such as, access to a new market, access to cheaper labor costs, utilizing the synergies by merging with other companies. Yet going overseas is not just a road filled with benefits; it is a journey along a road filled with pro’s and con’s.

1.2 Chances and threats for multinational companies

One of the obvious concerns for a multinational company is; currency risks. Any company operating in several countries is forced to have a good currency management system implemented. Prior to the European common currency; the Euro, things were very complicated. The amounts of different currencies entering the accounts were vast and meant that the company needed to spend extensive resources on dealing with that issue. Thanks to the introduction of the Euro things have gotten better hence less work involved. Companies like big multinational companies have to deal with this issue constantly and at DaimlerChrysler they deal with it on a large scale:^[2] “The international orientation of our business activities results in cash receipts and payments denominated in various currencies. Particularly due to the fact that exports from Germany exceed the flows of imports from other currency regions, DaimlerChrysler is subject to exchange-rate risks. Net exposure, which is the difference between exports and imports in each currency, is regularly monitored within the framework of the centralized foreign currency management. Currency exposures are hedged with the use of suitable financial instruments according to exchange-rate expectations which are constantly reviewed.”

The companies are faced with a different set of concerns and challenges than they would be in the domestic market. The concerns and challenges are manifold. Whereas on the domestic market you know your competition and know how to react, how to deal with the reaction of the market; the customer is a known factor, the preference and needs of the customer is a known factor. On the domestic, “the multinational company to be”, grew up there and is most likely widely known, respected and accepted by the market at large. The company has over the years set up a comprehensive network; giving the company information’s and thereby gaining the edge and at the end of the day; all these factors has given the company the momentum that is now enabling them to go multinational.

Prior to being able to operate as a multinational company, there has to be spent resources on researching and understanding the new market.There is the obvious concern of different corporate cultures, different laws and regulations, financing etc. etc.

1.2.1 Corporate Culture

The problems with corporate culture plays a significant role, looking at Daimler Chrysler, we see the lack of consideration in regards to corporate culture on behalf of Daimler. This merger is now being seen as a hostile take over, rather than a “friendly” merger between “two equals” Today almost the entire management by Daimler Chrysler in the US is German; hardly any from the Chrysler management survived the merger. Daimler was and still is being perceived as an aggressor, leaving neither space nor tolerance for the local management. The company is still facing lawsuits, almost 5 years later, after the merger. Many of the Chrysler stockholders were at the time of the merger skeptical, and as it turned out, their fears were confirmed. Now 5 years later some of them are suing Daimler Chrysler for misleading the stockholders. One of the most well known lawsuits is about to go to court; Kerkorian vs. Daimler Chrysler. It is a $ 9 billion lawsuit, Kerkorian being a major Chrysler stockholder.

This is an eminent example of how a company misread or disregarded the corporate culture.

1.2.2 Financing on the domestic and foreign markets

The, by far, most paramount concern for a company is financing their operations on the domestic and foreign market. In order to invest, operate and survive on the global as a multinational company, you are required to have a thorough understanding of many aspects regarding financing on a global market, you need to have managers with excellent managerial skills, a team dedicated to research and knowledge of the market you are about to enter. Based on the observations of firms that have successfully invested abroad, some of the competitive advantages enjoyed by MNE’s (Multinational Enterprise) are;^[3]

- Economies of scale
- Managerial and marketing expertise
- Superior technology based on heavy research
- Financial strength
- Differentiated products

1.2.2.1 Economies of scale

The advantage that some major companies enjoy is their immense capacity to diversify their production; as example given in the book “Multinational Business Finance” by Eitemann, Stonehill & Moffett;^[4] is Ford that is utilizing their extensive network of production sites; thus manufacturing their engines at one site and the doors and quarter panels somewhere else. This is not an unique situation, as we will see other companies such as BMW is using the same approach in the US plant Spartanburg, where they manufacture the X5 and Z-series. All these cars are assembled in US, but for instance, the engines come from Munich. The same applies to Daimler Chrysler’s plant in Tuscaloosa. The ML-series is being manufactured in the US, but the engines come from Germany.

1.2.2.2 Managerial and marketing expertise

The skills of the top management is a deciding whether an investment overseas will turn sour or whether it will bear fruit. The skills required is a profound knowledge of international investment and financing; the tools available to obtain enough financing to undertake the investment and as we will show in this case, there is many tools available and many risks to be watching out for; currency problems, hedging just to name a few. Other skills is marketing and the understanding of the local market; if you look at brochures for a Ford car in Europe and compare it to an American; you will see distinct differences; such as features important for the US customer may not apply at all to the European customer and vice versa e.g. is fuel economy an important issue to an European customer whereas an American customer do not see that as a priority.

1.2.2.3 Superior technology based on heavy research

Another criterion for going overseas and being successful is the appreciation of research and an unique insight in how to utilize the knowledge gathered by others; such as other companies or even military research. An example of expanding on an idea initially researched for the military is the company; Sonosite. A US based company with roots in the military. The US army did research on ultrasound and wanted to develop mobile ultrasound equipment; to be used on the front in a battle field. They came up with some ideas, because an ordinary ultrasound unit is the size of a medium sized refrigerator and that was obviously not mobile enough. So the engineers at the US army formed a company and later became Sonosite and developed a small, laptop sized ultrasound unit, with all the benefits of the ordinary unit and started selling the unit in US and within 3 years the company expanded to Europe with an enormous success, with their small portable unit.

1.2.2.4 Financial strength

Most big international companies are listed on one or a number of stock exchanges and thereby they have several options of getting access to capital, by issuing shares and if the company has a good standing on the market they find no problems in getting the funds required for an overseas investment. Other companies, usually smaller and medium sized companies, have to go the expensive way of getting funds from banks and investors. This way is often costlier and comes at times with a high price. For instance, a bank may provide the company with the funds and the company is then burdened by repaying their debt and with interest. In other case they sell a stake of the company to a or a group of investors in order to gather enough funds, which leaves them in a situation where they have lost 100 % control of their company. So the financing part of succeeding is the most vital part and requires a superior knowledge and feel for investing overseas, because an investment ill thought thru, may break the neck of a good and solid company.

1.2.2.5 Differentiated products

As already mentioned; products selling well in one market, may not necessary sell well overseas. Therefore modifying products for a particular market is often a “must” in order to insure that it will sell. A differentiated product range is another key to ensuring that the investment overseas will be viable. In the case of BMW, a BMW 320 has a different configuration in Europe than in the US. In Europe you will find a basic 320 with no extra’s being sold e.g. Air Condition and CD player in Europe is an option, whereas in the US it is a part of the standard package. The same applies to VW Passat; in the US you will find the Passat often with a loaded package of extra’s as standard model that you would have to pay dearly for in Europe or Germany. So it is up to the company to offer the product in the right configuration in order to make sure it will sell, because nobody would buy a Passat or BMW 320 in the US without, by European standards, a basic model.

1.3 Summing up

As we have tried to show in the introduction, going overseas or becoming Multinational is not just a matter of having a great idea or product. The companies needs to invest heavily in researching the new market they are about to enter and in the needs and wants of their new customer. The need for a solid investment program is also a must. Going about it the wrong way or not having spent enough time on researching the options in regards to financing, the company will head for dire straits. There is a process known as the:^[5]

1.3.1 Strategic Management Process

Strategic Planning Process:

illustration not visible in this excerpt

[...]

^[1] LBS, Transnational Management

^[2] DaimlerChrysler Annual Report 1999

^[3] Multinational Business Finance 9th Edition by Eitemann, Stonehill & Moffett, Chapter 13 P. 386-387

^[4] Multinational Business Finance 9th Edition by Eitemann, Stonehill & Moffett, Chapter 13 P. 387-388

^[5] LBS, Transnational Management