Jaguar Write Up – Economics of the Luxury Automobile Business
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Jaguar plc, 1984
This case is designed to be a vehicle for discussing operating exposure to real exchange rate changes and various alternatives for managing such exposure. The case setting is the privatization of Jaguar plc in 1984. Students are asked to value the shared being offered for sale as a function of expected exchange rates. Jaguar is a particularly interesting company to analyze because it has notable exposures to two different currencies, the US dollar and the German mark. Further, at the time of the equity offering, many analysts felt that the dollar was overvalued, and that the sharp rise in dollar-sterling exchange rate was likely in the near future. This precisely what happened, and there is a lot of information to share with students about how Jaguar and the industry responded.
Economics of the Luxury Automobile Business
Before addressing the problems of valuation and exposure estimation, it is helpful to ask students to identify the salient characteristics of Jaguars business. Jaguar manufactures a high- priced luxury consumer durable. Customers presumably shop, but do not make purchase decisions solely on the basis of retail prices. Features and options, image, performance, engineering/design quality, and post-sale service are all dimensions on which manufactures compete. Manufactures in this segment would prefer not to compete on price, and customers, at least in the United States, are described in the case as somewhat price-insensitive. One would expect to see price cuts, rebates, and dealer incentives to raise unit volume only as a last resort. As such, retail process should be fairy stable, and changes are likely to be effected in an orderly fashion, with one firm playing the role of leader in periodically necessary price adjustments. In the US markets, Daimler-Benz appears to play this role among the competitors described in the case.
Exchange Rate Exposure
Jaguars large volume of exports to the United States is an obvious source of exposure to the real dollar/sterling exchange rate. This part of Jaguars exposure is a clear example of the classic type of operating exposure described in many international finance textbooks. Although some if its raw materials are sourced in global markets, Jaguar imports relatively new parts, and its labor pool is basically all U.K. Due to the stickiness of dollar product price in its major market, the United States, a large fraction of Jaguars revenue behaves as if denominated in dollars. Thus, an increase in the sterling value of the dollar (a decline in the dollar/sterling exchange rate) results in higher sterling cash flow to Jaguar. Students need to understand this basic relationship before the discussion proceeds to various embellishments or to quantitative estimates of exposure. In particular, it should be emphasized that it is real