05-03-2024 09:00

Volvo Cars' heritage from a volatile currency

In the latest Nordea On Your Mind, “Euro in the Nordics 2.0,” Johan Trocmé interviews Daniel Aspenberg and Marcus Alfredson from Volvo Cars Treasury about how to manage the significant FX risk of having a major Swedish footprint with global sales.
The Stockholm view

How does a large multinational corporate handle the FX risk from being based in a country with a floating currency, such as Sweden? For answers, Nordea On Your Mind author Johan Trocmé interviews Volvo Cars Group Treasurer Daniel Aspenberg and Marcus Alfredson from Volvo Cars Treasury about FX exposures, how they are changing and how they are managed. The aim is to reduce the FX volatility in earnings and to keep total exposure within a tolerable limit. This approach would likely be kept if Sweden were to adopt the euro, and the potential benefits would include lower transaction costs and FX risks.

Johan Trocmé: Could you briefly describe how you approach FX risk at Volvo Cars? What are the key risks and currencies? Transaction risks versus translation risks versus balance sheet risks? How do you assess and manage them? 

Daniel Aspenberg: FX is, and has historically always been, a major exposure for Volvo Cars, even if it has become a bit easier to manage as our global manufacturing footprint has evolved and diversified into more locations than our plants in Sweden and Belgium. It remains a material risk for us, as we still have a limited number of production sites, but sales all around the world, in many different currencies. We accordingly see FX as a risk which we need to manage actively. A major focus is transaction risk in our daily flows, which also includes the EBIT translation risk in our foreign subsidiaries, but we also consider the translation of equity in the subsidiaries. 

Marcus Alfredson: Regarding transaction risks, we work with a forecast for the next four years. We put this into a model with correlations and volatilities, from which we estimate what we call cash flow at risk for the group. We report this to our CFO, who has been mandated by the board of directors to decide on hedging of FX and other risks, including raw materials and electricity. We review and discuss these with the CFO every quarter. The discussion usually culminates in being able to conclude that, with 95% confidence, we do not stand to lose more than a certain amount of money from FX movements. We want the discussion to conclude with how much risk we are able and willing to take. What we hedge is a share of the risk that we are exposed to. In addition, we have a continuous nominal hedge of the exposure from our four biggest currency exposures. Management hence always knows that we have hedged at least this minimum percentage of anticipated flows in year one and year two. And we can opt to hedge more, under the mandate from our board and CFO. We define hedging out to 24 months as structural, where we continuously add new hedges. Hedging 25-48 months is our strategic mandate, which we can use if we believe exchange rate levels are exceptionally attractive, or if we need to manage FX risks from a specific project or situation. 

DA: In our external financial reporting, we refer to an FX impact, which is the estimated y/y effect. With our hedging, we aim to reduce the volatility of this impact. Group management considers FX risks along with all the various risks the group is facing, and the mandate for us to hedge FX risks originates from a perceived need to reduce our risk in this area. Our hedging of translation risk in the earnings of our international subsidiaries is driven by an overall aim that as much of profits as possible are distributed to the parent company, obviously subject to our transfer pricing policies and any other restrictions. We think along similar lines regarding equity in our subsidiaries, where we make an active choice when we see a need to hedge the equity. We often do this with a net investment hedge, matching the currency of the equity with corresponding debt. All financial assets and liabilities in foreign currency on the balance sheet not related to subsidiary equity are kept FX-neutral. 

Daniel Aspenberg, Group Treasurer, Volvo Cars

JT: Does the fact that your reporting currency is SEK affect your approach to FX risk management? Is the legal domicile for the company a factor? Or is it more about your currency split for costs and revenues, or assets and liabilities?

DA: Yes and no. I would describe it as our Swedish heritage having taught us to live and operate with a group currency that has limited liquidity and greater volatility, which can significantly affect a company's financial performance. I think it is fair to say that there has been more focus and attention on FX risk in Volvo Cars because of our Swedish origin, footprint and reporting currency, compared with if we had been based in Continental Europe and reported in euro. That said, the very international sales and production footprints of our business would make us see FX as an important and significant risk to manage under virtually any circumstance, thus requiring attention and active measures. But the mission and tasks as such would not be different with another reporting currency than the Swedish krona. The work might be different for another reporting currency, such as the euro, which is less volatile than the Swedish krona.

MA: We also need to make the distinction between Sweden adopting the euro to replace the Swedish krona, and Volvo Cars starting to report in euro, despite being domiciled and listed in Sweden. Sweden joining the eurozone would transform our Swedish equity into euro and reduce FX risk in the group, which would be positive, all else equal. But reporting in euro while the Swedish krona still exists would give rise to a significant FX risk from our Swedish equity. And this FX risk could be bigger than the current SEK risk from all our euro-denominated equity in the group. Just starting to report in euro might give a slightly positive net effect, from the combination of more equity translation risk but lower volatility in the reporting currency. Sweden adopting the euro would give a more significant total net risk reduction. 

There has been more focus and attention on FX risk in Volvo Cars because of our Swedish origin, footprint and reporting currency, compared with if we had been based in Continental Europe and reported in euro.

Daniel Aspenberg, Group Treasurer, Volvo Cars

Marcus Alfredson, Volvo Cars Treasury

JT: Volvo Car Group is very global, with ~88% of revenues outside Sweden (January-September 2023). Do you see any advantages or disadvantages to reporting in SEK? 

DA: As we touched upon, FX complexity is a part of our business, whether we report in SEK, EUR or another currency. Should Sweden adopt the euro, there would be one less currency risk to manage – and for Volvo Cars that would be very important. Another factor to consider would be transaction costs. If there were no longer any Swedish krona flows, there would be no costs for exchanging SEK into EUR and vice versa. 

MA: The historical pattern has been that the Swedish krona is more volatile than major currencies, and this has been particularly notable during shocks, when higher risk aversion in capital markets has weakened the krona. We have had ten years of a weakening krona. We do not know what will happen going forward, but ten years of a sharply strengthening krona would not be good for Volvo Cars' financial performance, all else equal. What might be helpful financially would be to report in a less volatile currency than the Swedish krona.

DA: I want to emphasise that it is not necessarily only a benefit to have ten years of a weakening krona. A profitability boost must also be viewed from the foreign perspective of investments in Sweden. A chronically weak currency can raise question marks about the future real value of investments made in a country, and lead to such investments requiring a risk premium. Volvo Cars is also different from raw materials industries, which have overwhelmingly local currency costs but international revenues. A lot of our incoming materials and components are denominated in euro and other foreign currencies. And this goes to an extent also for R&D, which has costs other than local salaries. 

JT: How would you describe Volvo Cars' SEK exposure? How helpful could a weak krona be for your costs – are significant materials and components volumes purchased in other currencies? Has the nature of your SEK exposure changed significantly compared with ten years or 20 years ago?

DA: If you look back 10-15 years, we had production only in Sweden and Belgium, with sourcing mainly in SEK and EUR. Today we also have production in the US and China, and we are establishing our third plant in Europe, so our cost currency mix is more diversified. And if we look ahead, our shift to electric cars should accelerate this trend, with more costs in USD and CNH from sourcing of key components such as batteries. The Swedish krona's share of costs per vehicle should decline going forward. 

MA: We have a strategy of pursuing what we call natural hedging, essentially trying to match cost and revenue currencies. We in Treasury are involved in bigger purchasing decisions, so this factor can also be considered. 


Should Sweden adopt the euro, there would be one less currency risk to manage – and for Volvo Cars that would be very important.

Daniel Aspenberg, Volvo Cars Treasury


JT: From the company's point of view, what would be the optimal FX situation? A strong SEK, a weak SEK, a stable SEK exchange rate versus other major currencies? Or other FX factors?

MA: The key benefit for us would be stable exchange rates. We have major outflows in SEK, CNH and EUR. Theoretically, if these three were to strengthen against all other currencies simultaneously, that would be the worst outcome for Volvo Cars. But this would be purely the FX impact. There may be a macro hedge in it, as any currency appreciation driven by strength in these markets would also potentially benefit us in terms of demand. 

JT: Would you say that currency is a meaningful factor weighing into Volvo Cars’ investment decisions, such as technology centres or production sites, or choosing major suppliers?

DA: It is one of several factors in major investment decision. It is significant, but not right at the top. We need to consider available talent pools, supplier bases, the logistics of sourcing, political stability, trade tariffs and rule-of-law, to mention a few very important factors. But currency certainly plays a role, particularly from a group perspective, considering our global footprint and currency mix for costs and revenues. 

MA: There is this old article in Swedish business daily Dagens Industri from when the exchange rate was SEK 6-7 per USD, which someone showed me a few years ago. In the article, it was argued that we should consider exiting the US car market, as it would not be profitable to produce the cars in Sweden and export them there at such exchange rates. It feels like a different era from today. We now also manufacture in the US and have USD costs, for example from batteries. I think it is a good reminder that currencies move over time, that businesses need to evolve, and that there is a need to plan and act with a long-term perspective.        

About Nordea On Your Mind

Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.

Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.

Find out more
Nordea On Your Mind