Quotes of the Day

Of all European companies, Volkswagen should know better. Headquartered in Wolfsburg, Germany, Europe's biggest automaker outgrew its German base decades ago, selling about 5 million cars and trucks a year worldwide and producing them at 45 locations, including the U.S., Brazil, Argentina, Eastern Europe, South Africa, India and China. A multinational manufacturer like that has to be used to the difficulties of operating in many fluctuating currencies. Yet last week, when Volkswagen announced that its pretax earnings had dropped by almost 67% in the first three months of this year, where did it place the blame? The sharp rise in the value of the euro against the dollar. "Our exposure is significant," complained finance director-elect Hans Dieter Pötsch.

Oh, please. Complaining about the strong euro is fast becoming Europe's favorite corporate fig leaf, the poor excuse for poor performance. It replaces yesterday's excuse — prewar uncertainty over the situation in Iraq. Before that, companies could (and did) blame higher oil prices, the bursting of the technology bubble, the slump in equities and advertising, the Y2K scare, El Niño, or, just a couple of years ago, the weakness of the euro. Some companies are already preparing their shareholders for the next round of excuses, including sars or, more exotically, the fact that Easter came near the end of April this year. (Nestlé and Unilever both used that over the past month to justify disappointing results, arguing that chocolate and candy consumption was down in comparison with the first quarter of 2002, when the Easter Bunny came earlier.)

Unlike terrorist attacks on Manhattan or killer viruses in Asia, currencies are a terrible excuse. Yes, the euro has risen dramatically against the dollar. As any American tourist reeling from sticker shock on the Champs Elysées can tell you, the greenback buys around 10% fewer euros than it did in January — and over 20% fewer than a year ago. But it's one thing for tourists to complain; it's quite another for sophisticated international companies to do so. Their basic beef: because of the exchange rate, goods sold in dollars bring in fewer euros once the money is changed. But the argument doesn't hold up well. Most Volkswagens, for example, are sold in Europe, and thus shouldn't be greatly affected by currency swings. And for several decades, even Mom-and-Pop sized exporters have been able to hedge their currency positions; for a price, their local bank will sell them foreign-exchange forward contracts. For bigger international firms, finance specialists and math gurus have developed a range of highly sophisticated devices that mitigate risk, enabling firms to lock into certain exchange rates by using futures and options or even more complex bond or currency-swapping strategies with arcane names such as Modified Macauley Duration or Convexity. You don't need to master the gobbledygook to know that smart companies find ways to protect themselves.

Yet in the past few days, such corporate titans as Swatch, the biggest Swiss watch company, consumer group Henkel and drugmaker Altana have all played the weak-dollar card. "I cannot recall the currency ever having had such a material effect on results," said Nikolaus Schweickart, Altana's CEO. But companies that are performing relatively well have better excuses, if they have any at all. BMW announced a drop in earnings last week — but one due to a change in product line. The luxury-car company still expects record profits this year. And, unlike VW, it says it is fully hedged for currency fluctuations through late 2004.

By contrast, Volkswagen officials were grilled during an analyst conference call, when they said some €400 million of the shortfall was a result of the euro's strength. Several analysts asked about the company's hedging strategy, but Pötsch refused to answer "for competition reasons." Keith Hayes of Goldman Sachs had had enough. "You've all danced around this exchange-rate issue," he snapped. "A year ago or so the company told us there would be no exchange-rate effects. Now we find there are exchange-rate effects, and they're fairly significant.'' Pötsch finally acknowledged that VW had hedged only about 35% to 45% of its dollar exposure. Why so little? No explanation.

Such obfuscation won't fly in the post-Enron world, where transparency is key and investors are kicking the tires for any indication that top management may not be up to the job. By carping about the strong euro, Volkswagen and others are drawing attention to their own management shortcomings.

• PETER GUMBEL
• The European Single Currency is the latest business scapegoat