BMW’s treasurer talks regulation, risk and relationship banks

By:
Duncan Kerr
Published on:

Norbert Mayer has seen much in his three decades at BMW. In an interview with Euromoney, the group treasurer of the German industrial group discusses the impact of regulation, managing risk and balancing banking relationships.

It’s not just German engineering that can last a long time – it’s also the people behind it.

This year marks an anniversary for Norbert Mayer, the senior vice-president of finance and group treasurer of BMW. Mayer celebrates 30 years at the company, three decades in which the Munich-based car, motorbike and engine manufacturer has changed irrevocably.

From a German automotive company in the late 1970s with one brand and most of its production operations in Germany, BMW has grown into an international industrial and financial services company with three premium brands (BMW, Mini and Rolls-Royce), production plants in markets including the US, China, India and Russia, and a large and lucrative customer financing or lending business.

Such a transformation, which accelerated after two group strategy “re-alignments” to increase profits and maintain market leadership in 2000 and 2007, has in turn transformed BMW’s financial profile and performance.

For the full year 2012 – the most successful year in the near 100-year history of the company – BMW Group reported record sales for its three car brands, driving net profits of €5.1 billion (compared with €1.95 billion in 2003) and on the back of record annual revenues of €76.8 billion.

Strikingly, some €42 billion of those revenues came from Asia, the Americas and other markets, with €14.5 billion from China alone – beating Germany for the first time.

Norbert Mayer, group treasurer of BMW
Mayer, a former banker who joined BMW in 1984, has not only seen this transformation but has played an important part in it since the late 1990s.

After being appointed president of BMW US Capital LLC in 1997, overseeing risk management for BMW Group’s Americas operations, Mayer became director of corporate finance, responsible globally for BMW’s capital markets activities across debt and equity financing, structured finance, and for overall risk management of currencies, rates and commodities.

In 2010 he was appointed group treasurer, overseeing corporate finance, asset management and pensions, investor relations and the group’s global treasury centres.

To say that Mayer has a few responsibilities to jonglieren would be an understatement, but with a team under him in Munich – and regional treasury teams in the US, UK and Singapore – there is ample support to help him manage and mitigate risk in all its various forms.

One area in particular in which he needs all the support he can get is in understanding the impact the onslaught of new regulations are having or will have on the financial system, and particularly the banking sector. Such regulatory creep has never been seen before.

“Even today we don’t know precisely how new regulation is impacting the banking sector and particularly in driving new business plans and business models,” he tells Euromoney. “We see what is happening but we do not know what the final outcome will be.

“This is a challenge for the treasurer because this is impacting the shape of the financial system. We will have to wait and see how this develops, and whether this could have an impact on the provision of banking products, on pricing and ultimately on the behaviour of our [banking] partners.”

An equal challenge, according to Mayer, is preparing the company for specific and pressing pieces of European Union regulation that will directly affect it, such as European Market Infrastructure Regulation, which requires new standards in the reporting of derivative transactions, and the Single Euro Payments Area (Sepa).

However, while Mayer says BMW is well prepared and has been for some time, it’s not just BMW that Mayer has to worry about.

“We took this challenge [Sepa] on at a very early stage and through our efforts the company and its systems are fully prepared,” he says. “However, our suppliers may not all be ready and that is of some concern to us. We are looking into the subject and so far we do not have an immediate indication that this might turn out to be a major problem.”

Away from the hefty challenge of regulation, risk management is one of any treasurers’ core responsibilities and, for Mayer, BMW’s global expansion in growth markets has in turn brought about an increase in certain risks for the company.

“While we are not growing so much in the euro currency area, we are pursuing growth opportunities in the US, the Americas and in Asia Pacific,” says Mayer. He adds that, as a result of this, there is increased risk around cross-border financing, market volatility and, last but not least, foreign-exchange or currency risk.

Combined with liquidity, interest rate and commodity price risk, currency risk is one of the main financial challenges any global company will face, and for BMW it was a risk that had cost it dearly. In recent years, however, BMW has reduced the negative effects of currency fluctuations by “natural” and financial market hedging.

BMW’s currency risk is dominated by those currencies – US dollar, renminbi, sterling, rouble and yen – in which it makes most sales. To combat this, it not only established production plants and component factories in each of those markets, but also increased the volume of purchases denominated in those currencies.

In its 2012 annual report, BMW said the expansion of its Spartanburg plant in the US and the opening in 2012 of the BMW Brilliance joint venture’s new plant in Tiexi, Shenyang, China, are “helping to reduce foreign-exchange risk in two of its main sales markets”.

This “natural hedge” has offset a large chunk of BMW’s medium to long-term currency risk, but the company’s short to medium-term currency risk is taken out on the financial markets via a currency hedge, much the same way the company mitigates commodity price – precious metals, for instance – and interest rate risk.

Liquidity risk, and particularly in BMW’s financial services business, has been one of Mayer’s main preoccupations since the 2008 financial crisis. The company maintains a liquidity reserve and diverse range of refinancing options, but in the financial service business it needs to match-fund maturities and currencies to offset each other as well.

“Debt on our balance sheet is €68 billion to €70 billion across a variety of currencies and this is the main challenge on the financial services side for the treasurer,” says Mayer. “On the industrial side, there is not so much of a financing need as we enjoy a very healthy cash flow, so our focus is more about risk management.”

For Mayer, the cash-management and payments business is as important as risk management, and here BMW has made some changes in recent years that it is now benefiting from.

“We introduced a global payment factory in Europe and in other parts of the world, and this is running successfully,” he says. “So we have a centralized approach on the payments and cash-management side, which has been a big step for the company.”

Mayer says the main focus of the treasury operations is on and around “utility banking” instead of the “fancier” investment banking, and cash-management services, risk-management services and services to cover liquidity risk “are the instruments we are using to execute our treasury responsibilities and operations, and this is where we need the banks”.

However, Mayer is not just looking for any big bank – he wants to see “reliability, strength, low counterparty risk” and “how competitive they are on price and the quality of their service”.

So, which banks are BMW’s core cash managers? Mayer would not be drawn, but says: “Our cash-management business is concentrated in the hands of a few of our core relationship banks.

“In Europe and the US, for instance, we have one main bank for each region and then a back-up bank as well. In Asia-Pacific we have two international banks. So we have a balance of international and local banking support in this business.”

He adds: “This group of banks has not really changed in the past five years, but overall BMW’s banking relationships are changing all the time because our business profile is changing and the banking sector itself is changing.

“Some banks have gained in strength and represent areas where our business is more active and growing, so for instance Asian Pacific-based banks are more important to us today compared to 10 years ago.”