chickensevil
Active Member
Wouldn't they still have to change price every so often as the currency floats too far out of spectrum? I mean the hedge is only going to be valid for so long, right?
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Wouldn't they still have to change price every so often as the currency floats too far out of spectrum? I mean the hedge is only going to be valid for so long, right?
I think you're right, CE; the hedge would only be economic for short periods and it would simply protect Tesla's gross margins between price resets.
That adds complexity to business, having to hedge or revise prices with currency moves.
When buying stuff like machinery, the price is always in the country of origin currency, not in my local currency. I wonder if Tesla can sell cars in USD all around the world. Let buyers worry about the exchange rate and bear the cost. Though I have never seen any car maker do that, probably for good reasons.
pz1975
Active Member
That would piss off buyers having to buy in USD in their own country - I know I would be as a Canadian. It would make them seem like the "stereotypical American" who has no awareness outside of their own borders.
Would that deter you from a purchase?
It is standard practice to sell some goods in a country of origin currency. It may not be standard practice for cars, so people are not used to it. Like they are not used to buying cars directly :wink:
chickensevil
Active Member
I have bought tiny consumer goods in foreign currency. Specifically Euros and Pounds... When making the purchase over the internet usually the service negotiates the transaction for you at that time and you pay whatever the listed going rate is for conversion. I don't know if the online service hedged anything or not, it didn't matter. I wanted the product, could only get it from a foreign site and happily paid whatever the conversion was.
Why is this any different? You are buying a product online... I would almost prefer a real-time conversion of the going rate at the point of sale.
The only risk there is that currency can fluctuate before you actually pay the rate since it takes about 3 months to get your car. That would be the only remaining risk to Tesla and I think that was what they were attempting to point out on the earnings call. The point at which a customer "negotiates" price is not the point at which the sale actually transpires.
Why is this any different? You are buying a product online... I would almost prefer a real-time conversion of the going rate at the point of sale.
The only risk there is that currency can fluctuate before you actually pay the rate since it takes about 3 months to get your car. That would be the only remaining risk to Tesla and I think that was what they were attempting to point out on the earnings call. The point at which a customer "negotiates" price is not the point at which the sale actually transpires.
It would be a difficult thing for most consumers in "foreign" countries (foreign to you, domestic to them) to relate to a price in USD. In principle I agree with you but in reality there is a big difference between buying a $10 gadget from Ebay or Dealextreme.com and a $100k car. They would run in to all sorts of issues: how to you register the purchase price with local authorities? Price lists for cars used by insurance companies would be messed up. Financing would be messed up. Etc.
As a side note I've found that with for example PayPal I get the option to pay in Norwegian Kroner and is shown their conversion, but it always pays for me to choose to pay in USD (when buying something that priced in USD) or in whatever other currency I'm paying in. VISA or Mastercard then does the conversion, but always a better rate than for example PayPal would. Interestingly, I once tried to understand precisely how VISA calculates their currency conversion rate - I even called their European head office in London, but it was utterly impossible to get a hold of the "equation" the use internally. So if you pay with VISA or Mastercard the only real way to know the rate you're getting is to do the purchase and check the transcript after two days...
chickensevil
Active Member
I'm not saying it is "easy". I didn't like trying to quickly guess what the underlying price was for some stuff I was shopping around in pounds as I was comparing those prices against some things priced in USD. But it isn't that hard to quickly google the going exchange rate to tell you how much the final bill of sale will be. So my car came out to 96.5k, I put that into google and it says it will run me 77.6k Euro. So I look at my current financial situation and then determine if *about* that price is doable for me financially. The final price shouldn't come out much different than that if I am able to "lock in" my price at the time of order. Which then Tesla will tell you what that is. So again, Tesla would only have to worry about drastic price movements within that 3 month window (or however long it takes to take delivery). This stuff doesn't move very fast. Yes, over a period of years you see a lot of movement, and for 2014 we have been steadily dropping value compared to the Euro (or rather the Euro is getting stronger compared to the USD), but it has been pennies at a time over months. How much would that really hit Tesla's bottom line?
I agree that from Tesla's POV it would be best to get payed in USD from anywhere in the world and not have to worry or spend on hedging. But my point is from the global customer's POV and what I'm saying is that at this time I think it will be a difficult thing to get accepted.
chickensevil
Active Member
I could buy that. People wouldn't like the random variation in price... They would view a yearly (or every 6 month change or whatever) as normal price changes, but I could see them not accepting the frequent changes.
I mean look what happened the last time when they actually lowered the prices because of the Euro drop compared to USD. Everyone tried to claim it was because Tesla was actually trying to get more demand in Europe because it wasn't working out for them, when really they were just trying not to overcharge the consumer. I bet none of the shorts will write an article this time around when they do a price increase... -_-
But yeah, I get it, people won't like it... but in this day and age people should learn to adapt to operating in a global economy that doesn't deal in your local fringe currency. Which was actually one of the good things about the Euro was that it sorta unified the currencies across the board in those countries that participated (yes there was a LOT of bad about the Euro... I wouldn't wish that on anyone... just pointing out the one thing I liked about it).
So the only way to get around all the bad things that is sharing currency across sovereign nations, is to get used to doing on the fly conversions.
Sorry for the longer post, but I want to debunk the common misconception that you can (feasibly) hedge away future exchange rate movements.
I think it's best explained through an example, so let's suppose company ABC will sell premium dinner forks to Canada each year for the foreseeable future, with the USD/CAD starting at 1.00. Here are the options of how they can deal with currency fluctuations.
Option A: Unhedged
The company will set the price of their forks based on the current exchange rate and revise prices as required.
Option B: Typical FX Hedging
The company will forecast sales for the quarter (time period can vary) and hedge this amount to lock-in the pricing for sales during this period. At the end of this period, you would forecast and hedge the next period based on the prevailing spot rate at that point (roll your hedge forward).
The below table shows how it would work if you have perfectly stable sales, thus perfect forecasting. The three sets of numbers are unhedged, hedged (theoretical), hedged (with example cost built in).
Notice that over time, the economics still reflect the underlying currency. There is no way to escape this. All you can do is always push out the volatility forward one period (whether that be a quarter, year, or otherwise), as your new roll cost will reflect the spot rate at that point. You basically pay to push forward the rate by one period perpetually as you roll your hedge. I coloured the different rows based on which spot rate it's based on to highlight this.
While locking in upcoming cash flow exchange rates has a lot of merit (more reliable quarterly guidance, as one), over time you are incurring a cost for the hedge transaction. In addition, it adds risk that the cash flows occur as predicted in your forecasts, if the quantity or timing is off then your hedge itself becomes currency speculation.
While this tradeoff makes tremendous sense for a lot of businesses like a commodity producer with thin margins, it may not necessarily be the case for a high margin product growth company that is long-term focused and can absorb some short term fluctuations. Personally, I think there's no clear case as to whether Tesla should or shouldn't hedge at this point - it can be justified either way.
I think it's best explained through an example, so let's suppose company ABC will sell premium dinner forks to Canada each year for the foreseeable future, with the USD/CAD starting at 1.00. Here are the options of how they can deal with currency fluctuations.
Option A: Unhedged
The company will set the price of their forks based on the current exchange rate and revise prices as required.
Option B: Typical FX Hedging
The company will forecast sales for the quarter (time period can vary) and hedge this amount to lock-in the pricing for sales during this period. At the end of this period, you would forecast and hedge the next period based on the prevailing spot rate at that point (roll your hedge forward).
The below table shows how it would work if you have perfectly stable sales, thus perfect forecasting. The three sets of numbers are unhedged, hedged (theoretical), hedged (with example cost built in).
Notice that over time, the economics still reflect the underlying currency. There is no way to escape this. All you can do is always push out the volatility forward one period (whether that be a quarter, year, or otherwise), as your new roll cost will reflect the spot rate at that point. You basically pay to push forward the rate by one period perpetually as you roll your hedge. I coloured the different rows based on which spot rate it's based on to highlight this.
While locking in upcoming cash flow exchange rates has a lot of merit (more reliable quarterly guidance, as one), over time you are incurring a cost for the hedge transaction. In addition, it adds risk that the cash flows occur as predicted in your forecasts, if the quantity or timing is off then your hedge itself becomes currency speculation.
While this tradeoff makes tremendous sense for a lot of businesses like a commodity producer with thin margins, it may not necessarily be the case for a high margin product growth company that is long-term focused and can absorb some short term fluctuations. Personally, I think there's no clear case as to whether Tesla should or shouldn't hedge at this point - it can be justified either way.
Great post eepic. I agree in principle. Also remember that Tesla buying from Japan and selling globally acts as a natural hedge: strong dollar means lower cost for batteries (Deepak Ahuja made a point of them paying in Yen) but lower revenue when overseas sales are returned to USD and vice versa: weak USD makes for better revenue (in USD) but more expensive batteries. As Tesla become more global, perhaps with production on several continents, the "need" for hedgeing will be even less.
All the SC accesory prices are in USD even on the Canadian site . Buying all weather floor mats I had to pay more after it was converted to Canadian.
Yes, it would be crazy to have a single currency and central bank for a bunch of different places with varying laws, taxes and economies. It would never work. :|
I would have no problem with real time pricing buying from other countries.
bsd
Member
It also causes problems for those needing to finance their car. Bankers aren't too fond to deal with plus-or-minus $10,000.
Oh, and since the biggest cost item on the car are the batteries, we should denominate in yen.
Never mind that paying VAT on goods invoiced in a foreign currency is a PITA., especially when deposit payment, delivery and invoicing all on a different day. Then you get all kind of different fun rules in action like if invoicing is before/after the 15th day of the month during which you took delivery and whatever. Can't even think about the hassle of trying to convince insurance companies to cover the currency risk in your policy when you decide for a 'make-me-whole-on-accident' type of coverage (don't know how this is called in English). You don't want to burden your customers that way.
Nice post. The bottom line that everyone needs to understand is that hedging is a temporary stabilizer. Hedges expire, and CFOs will typically re-establish hedges every so often at whatever the new spot rates are. It's inescapable unless there is natural hedging (for example, you buy materials in less expensive Canadian dollars, and you have similar salary in that same currency). Natural hedging is never perfect.
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