Foreign Exchange and Political Risks in Volkswagen Group

This study discusses the foreign exchange and political risks faced by Volkswagen Group and provides risk management strategies. It explores the impact of currency fluctuations and uncertain political environments on the company's performance. The study also analyzes the financial trends of Volkswagen Group and its corporate and financial actions. Additionally, it highlights the key areas of strength and weaknesses for the company. The study concludes with risk management strategies for foreign exchange risk and political risks.

International Money
and Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
Political Risk................................................................................................................................6
Exchange Rate Risk.....................................................................................................................7
Risk management strategies........................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
This study will discuss about foreign exchange and political risks that had influenced
Volkswagen Group and on the basis of identified risk strategies for risk management will be
recommended. Foreign exchange risk refers to losses that occur in international financial
transaction and the main reason behind this is currency fluctuations. Political risk refers to risk
that a business faces because of uncertain political environment of the country. Volkswagen
Group is a German multinational automotive manufacturing company that is headquartered in
Wolfsburg, Germany and it was founded in Berlin, Germany in 1937. Products of the company
include automobiles, commercial vehicles, internal combustion, engines, motorcycles and
turbomachinery. Volkswagen Group has brands automotive brands, commercial and designing
facilities. Owner of the company includes Porsche SE, State of Lower Saxony, QIA (Qatar
Investment Authority) and Volkswagen Group employs around 307,342 employees.
Company Description
Volkswagen Group operates worldwide and operates 118 production facilities across 20
European and 10 further countries in Asia, America and Africa (Fu, Ogasavara and Sousa-Filho,
2018). Concerned with production output in 2020 it was 8900,000. Concerned with market share
of Volkswagen Group, in 2020 its market share slightly increased. In 2020 Volkswagen Group
delivered 9,305,400 to customers worldwide. On the basis of market share Toyota is biggest
automobile brand and this is followed by Volkswagen Group. This means the on the basis of
market share Volkswagen Group is second biggest automobile company in the world (Wall,
2017). On the basis of markets for sales of Volkswagen Group, company has highest sale in
Germany which make it key market for Volkswagen Group and followed by this central and
eastern European market is second important market for the sales of Volkswagen Group cars.
Along with this, South America is another key market for products of Volkswagen Group. Other
than these, markets for Volkswagen Group products include Western Europe, North America and
Asia Pacific.
Financial trends for Volkswagen Group
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Financial trends, is concerned with financial performance of the company and factors that
have affected financial trends of company. Financial performance of Volkswagen Group-
2020 2019 2018 2017 2016
Sales Revenue 222,884 252,632 235849 230682 217267
Operating
Results
9675 16960 13920 13818 7103
Earnings
before Tax
11667 18356 15643 13673 7292
Earnings after
Tax
8824 14029 12153 11463 5379
Above data about sales revenue, earnings before tax and earnings after tax outlines in the
year 2020 Volkswagen Group have experienced significant reduction in sales revenue, earning
before tax and earnings after tax. In this reduction was in sales revenue, earnings before tax and
earnings after sales have been seen after continuous increase from 2016. This means that from
2016 there is continuous growth in sales revenue, earnings before tax and earnings after tax. It is
being considered that the reduction is because of the impact of Covid-19. Above data outlines
that in 2017 performance of Volkswagen Group was very good and as result in 2017 there was
6.2% increase in sales revenue, 94.5% increase in operating results and 90.8% increase in
earnings before tax. This means that overall 2017 was very good performing year for
Volkswagen Group (Annual Reports, 2021). However after 2016 Volkswagen Group’s
performance is continuously increasing and in 2018 performance was moderate, this means that
even though there was no loss, however any significant profit and gain is also not visible.
Followed by this, in 2019 Volkswagen Group’s performance improved and increase in sales was
experienced. However, in 2020 sales revenue and other financial performances of the company
were less than 2017 in which company experienced significant growth and improvement in
financial performance.
Corporate and financial actions
Volkswagen Group has undertaken different financial developments in recent years and
one of the recent corporate actions of Volkswagen Group is to launch of new Volkswagen Polo
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in India and this new version is based on MQB A0 platform (Jung and Sharon, 2019.). Another
corporate action for development taken by Volkswagen Group includes that company uses single
scalable EV platform for its all future models. This single platform for most electric cars will be
used across brands in the future and Volkswagen Group have developed new car architecture
which will eventually replace the current MEB and PPE platforms. In its development efforts
and actions Volkswagen Group also is likely to build battery cell plants in Spain, Portugal and
France as a part of its electric vehicle expansion. As a action for development recently
Volkswagen Group have also focusing in exploration of flying cars and under this action
Volkswagen Group exploring feasibility of flying cars in china. Along with this in 2020
Volkswagen Group also inaugurated new research and development centre in China.
Recently Volkswagen Group have also confirmed its alliance with Ford. Through this
alliance both the companies intend to develop commercial vans and medium-sized pickups for
international market. Through this alliance both the companies will be able to share investments
in automobile architecture through which they aim to deliver multiple capabilities and
technologies.
Key areas of strength for Volkswagen Group include their research and development capabilities
(Sergio and Rylova, 2018). This means that company have strong research and development
capabilities and because of this, company become able to enhance existing technology. Along
with this strong financial performance of Volkswagen Group is also its key strength. In terms of
competitors Toyota, General Motors, Ford, Renault Nissan are included. However, among these
Volkswagen is top performer after Toyota on the basis of market share. This means that
Volkswagen’s competitive performance is very strong. In terms of geographical locations Europe
and Germany are its strength as they contribute significantly in overall market share of
Volkswagen.
Key weaknesses of Volkswagen include emission scandal and lost case in EU which affected
goodwill and reputation of Volkswagen. This can allow opportunity to competitors of the
company.
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Political Risk
Volkswagen Group is a international automobile company and this is why it get exposed
to several political risks. This involves uncertainty of governments in the countries where it
operates. Uncertain political environment can make significant impact on overall performance
and effectiveness of Volkswagen Group in foreign market (Sottilotta, 2018). This means that
political uncertainty have impact on legal uncertainty, this means that when political conditions
and government in a country keep changing in less time, they also bring changes in different
rules and regulations and it creates difficulty for businesses operating in that country. This is why
political and legal uncertainty is very important risk for Volkswagen Group.
Political environment is full of uncertainties and this is why there are several other factors
included in this and European Union is one of the factor that recently created risk for
Volkswagen Group and this have significant impact on goodwill and reputation of the company.
Regulatory risk is also included in political element and environment for Volkswagen
Group. Regulatory risk is concerned with risk that a company has because of different
regulations that can create challenges for the company. This means that Volkswagen is a
automobile company and have its manufacturing facilities in around 30 countries and because of
this, it is required to consider regulatory requirements of these 30 countries regarding operational
regulations and other regulations related to manufacturing activities. Environmental regulations,
is an example of how regulatory requirements can affect organisations and its operations. Every
country have its own environmental regulations and in different countries these are required to be
considered. The major risk in this is that when these regulations are not followed by
Volkswagen, in such situations these can cause legal complications for company (Ewing, 2017).
These are not good for company in both contexts financially as well in context of performance of
the company.
Along with regulatory requirements for manufacturing and production activities
Volkswagen Group is also required to adhere to regulatory requirements for sales and
commercial activities in different companies. Every company has their individual regulations and
legislator requirements regarding commercial activities and for businesses in the country and
when these are not in favour of Volkswagen, it is a risk for the company.
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Exchange Rate Risk
It is important for every company to find to do analysis of currency risk so that they are
able to deal with that particular currency. Basically, currency rate is dependent on foreign
interest rate. Thus, any change in interest rate directly affect on foreign currency rate. Similarly,
as Volkswagen operate at global level so they have to deal in various currencies. Thus, it highly
influences on shareholder equity, cash flow and revenue of firm. It has been found that cost of
company is influenced due to Dollar, Euro, etc. So, any change currency or interest rate highly
impact on financial risk and performance of Volkswagen (Mimouni, 2017). Along with it,
dominance of Dollar and Euro has led to giving positive revenue of company in global level. But
on contrary it is evaluated that US currency is considered as proper currency to deal and borrow
cash of country. Moreover, it has been found that some of Euro currency debt and financial asset
as well as liabilities are not shown in financial currency of company.
It is stated that in recent, times currency swap has led to trading in negative way.
Volkswagen enter into interest and currency rate risk through cross interest rate swap. Thus, it
may create a negative economic impact on their fixed foreign borrowings as it will be converted
into Euros. Besides that, currency swap has also resulted in increasing net debt of company in
US. But in normal market conditions it is found that Volkswagen has not entered into currency
hedging. This is because the management of organization believe that it will not provide any
benefit to shareholder in long term and it will create negative impact on revenue of firm as well.
Volkswagen has laid down strict measures related to currency protection. In that they have
limited capital expenditure and tax as well as dividends. In hedging instrument there is forward
option of contract in which exchange rate of transaction if fixed. Thus, it can be beneficial for
firm as it will reduce exchange rate fluctuation risks. Along with it, there are some other steps as
well which is taken by Volkswagen. In that they have lowered cost of production, maintained a
diverse portfolio of products, monitor economic trends, etc. (Sikarwar, 2021). In addition to it,
forecasting of foreign exchange currency rate enabled them in making things easy and getting it
predicting financial performance.
Apart from it, if there occurs any change in Dollar currency rate then it impacts on Euro
currency rate as well. This is because Dollar rate is high than Euro. So, in this case Volkswagen
has to deal with various currencies at global level. In that they prefer to deal in Dollar so it
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results in earning huge revenue in nation where currency rate of Dollar is high. Thus, these are
some risk which can occur in foreign currency rate. So, it can impact on revenue of Volkswagen.
Risk management strategies
There are four main type of risk management strategies that are- avoid it, reduce it, transfer
it, and accept it. Using these four main strategies any kind of risk whether it is financial or
political it can be mitigated and managed in an appropriate and accurate manner (van Winsen
and et. al., 2016). Here are following risk management strategies for Volkswagen in the areas of
foreign exchange risk and political risks:
Currency swap risk can create negative impact upon organization for longer duration and
there are chances that it will not provide any kind of benefit to the organization for long time
period. For management of this risk, it can be avoided. Volkswagen do not focus upon entering
into currency hedging and in order to avoid it, they focus upon lowering their production cost,
monitor overall national economy trend. This way they can directly avoid this risk and maintain
their diverse product and service portfolio. Currency change is another risk that can impact
overall business operations of Volkswagen and can also impact their financial performance in
negative manner. for this risk mitigation risk management strategy can be focused upon
(Accastello, Blanc and Brun, 2019). Change in currency rate can directly impact overall
performance of company so in order to reduce chances of occurrence of this risk. Volkswagen
can focus upon using hedging technique to avoid impact of this risk upon financial performance
of the company. Hedging technique can directly help Volkswagen in reducing or mitigating risk
of currency exchange. It can also be said that using this technique risk of management or
mitigation of currency exchange risk can be lowered and cost for its management can also e
reduced which can fisher help in lowering its impact upon organization.
There are many political risk as well that can impact Volkswagen that are required to be
managed, some of risk management strategies for political risk are as follows: lack of legal
certainty is one of the most important risk that can directly impact Volkswagen and its business
performance (van Winsen and et. al., 2016). This risk can be minimized by developing and
adopting strong corporate governance. It will directly help them in promoting ethical business
practises and will further help them in reducing impact of risk of lack of legal certainty. It will
further help the company in remaining aware of risk that can arise because of political
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uncertainty in advance so that organization can deal with those issues in an accurate manner.
Another risk that can impact business operations of Volkswagen is regulatory risk. Due to this
risk, operating licence of company can be revoked. Due to which economic value of Volkswagen
can get impacted (van Winsen and et. al., 2016). This risk can be avoided implementing specific
policies, procedures and protocols that can help in ensuring that organization is in compliance
and is updated in advance about any kind of regulatory changes that can help in reducing
changes of occurrence of these risk.
CONCLUSION
It can be summarised that for companies to operate in international environment is highly
challenging and complicated and Volkswagen Group have managed to effectively deal with
these challenges and perform effectively at international level. Discussion regarding Volkswagen
Group outlines that company is performing effectively in terms of financial performance of the
company. This is the reason that it could manage to maintain its sales better than what it
expected in times of pandemic. This is because pandemic affected all industries and automobile
industries also got negatively affected by this. However, there are challenges for Volkswagen in
terms of exchange rate, and this is a challenge for Volkswagen Group as it an international
business organisation. Along with, this political risks also affect and influence Volkswagen
Group, because being an international organisation, it get exposed to political environment of
several countries and every country’s political environment have different type of impact on
Volkswagen.
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REFERENCES
Books and Journals
Accastello, C., Blanc, S. and Brun, F., 2019. A framework for the integration of nature-based
solutions into environmental risk management strategies. Sustainability. 11(2). p.489.
Ewing, J., 2017. Faster, higher, farther: The inside story of the Volkswagen scandal. Random
House.
Fu, L., Ogasavara, M.H. and Sousa-Filho, J.M.D., 2018. Location choices at the subnational
level perspective: the case of the Volkswagen Group in BRIC countries. International
Journal of Comparative Management, 1(1), pp.106-126.
Jung, J.C. and Sharon, E., 2019. The Volkswagen emissions scandal and its aftermath. Global
Business and Organizational Excellence, 38(4), pp.6-15.
Mimouni, K., 2017. Currency risk and microcredit interest rates. Emerging Markets Review, 31,
pp.80-95.
Sergio, R.P. and Rylova, M., 2018. Employee engagement and empowerment as gateway
towards retention: The case of Volkswagen group. Journal of Eastern European and
Central Asian Research, 5(2), pp.120-130.
Sikarwar, E., 2021. Time-varying foreign currency risk of world tourism industry: effects of
COVID-19. Current Issues in Tourism, pp.1-5.
Sottilotta, C.E., 2018. Ethical criticism as a source of political risk for multinational enterprises:
a conceptual framework and a research agenda. International Journal of Business
Environment, 10(1), pp.1-13.
van Winsen, F., and et. al., 2016. Determinants of risk behaviour: effects of perceived risks and
risk attitude on farmer’s adoption of risk management strategies. Journal of Risk
Research. 19(1). pp.56-78.
Wall, H.B., 2017. BMW, Daimler, Fiat, PSA, Renault and Volkswagen: leaders in managing 5-D
value in the european auto industry.
Online
Annual Reports. 2021. [Online]. Available Through: <
https://www.volkswagenag.com/en/InvestorRelations/news-and-publications/
Annual_Reports.html >.
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Fu, L., Ogasavara, M.H. and Sousa-Filho, J.M.D., 2018. Location choices at the subnational
level perspective: the case of the Volkswagen Group in BRIC countries. International Journal of
Comparative Management, 1(1), pp.106-126.
Wall, H.B., 2017. BMW, Daimler, Fiat, PSA, Renault and Volkswagen: leaders in managing 5-D
value in the european auto industry.
Jung, J.C. and Sharon, E., 2019. The Volkswagen emissions scandal and its aftermath. Global
Business and Organizational Excellence, 38(4), pp.6-15.
Sergio, R.P. and Rylova, M., 2018. Employee engagement and empowerment as gateway
towards retention: The case of Volkswagen group. Journal of Eastern European and Central
Asian Research, 5(2), pp.120-130.
Sottilotta, C.E., 2018. Ethical criticism as a source of political risk for multinational enterprises:
a conceptual framework and a research agenda. International Journal of Business
Environment, 10(1), pp.1-13.
Ewing, J., 2017. Faster, higher, farther: The inside story of the Volkswagen scandal. Random
House.
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