KEY POINTS:
If the dollar keeps slumping against the euro, the United States could become the next Mexico - a low-cost manufacturing haven for European carmakers and suppliers.
European carmakers are holding to their strategies, bumping up North American output as the euro shows no sign of weakening against the dollar. The euro is expected to soon top US$1.38.
The weak dollar-strong euro relationship makes European goods expensive to buyers using dollars. That has given European carmakers three choices:
* Raise prices on European-built vehicles sold in the US.
* Maintain prices and take a hit to profits.
* Move manufacturing to the US or another low-cost location.
Some carmakers have opted for the latter. Among the recent moves:
BMW, which reported it lost nearly US$1.38 billion in 2006 because of the weak dollar, says it will build the next-generation X3 crossover at its Spartanburg, South Carolina plant.
It will pull the X3 from the Magna Steyr plant in Graz, Austria. X3 production at Spartanburg begins in 2010. BMW also will build the X6 crossover in Spartanburg starting in 2008.
DaimlerChrysler has spent US$1 billion to double capacity at its Vance, Alabama, Mercedes-Benz plant and is making three vehicles there. The expansion gives the plant annual capacity of 170,000 vehicles. Mercedes-Benz exports M-, R- and GL-Class models to 135 countries from Vance. The Chrysler group - soon to be an independent American carmaker again once the sale to Cerberus Capital Management LP is complete - also is moving production of two vehicles from Magna Steyr's Graz plant to North America. The Chrysler Grand Voyager, the European version of its minivan, will be exported from St. Louis starting at the end of the third quarter. The European version of the Chrysler 300 will be built in Brampton, Ontario, starting in 2010.
Volkswagen chairman Martin Winterkorn has said VW will consider a US plant if the dollar remains weak. "It is still too early to talk about that," Winterkorn said. "We can produce a lot of cars in Mexico, but we cannot provide the whole market in the US from our plant in Mexico."
Magna International Inc. - the giant, Toronto-based supplier and contract vehicle assembler - may build a contract manufacturing plant in the US to offset the lost BMW and Chrysler production at its Magna Steyr plant in Graz.
Mark Hogan, president of Magna International, said: "I think that the equation that drove BMW to think about not exporting from Europe is going to drive others to do the same thing."
Chrysler spokeswoman Shawn Morgan says the dollar's weakness was one of several reasons for its decision to move European production of the Chrysler 300 to North America.
Basically, carmakers can hedge against currency rates by buying contracts that guarantee certain exchange rates or by relocating production. Building a factory in America is considered a "natural hedge."
Thomas Froehlich, a spokesman for DaimlerChrysler in Germany, says currency hedging contracts play a large part in the company's strategy.
"For 2007 we are almost fully hedged to dollar exposure. And for 2008 we are already hedged by 50 per cent, maybe a bit more. We work on three-year terms in terms of currency issues."
But Froehlich adds that DaimlerChrysler has doubled the manufacturing capacity of its Mercedes plant in Alabama. "And we are looking to do more with suppliers in the dollar region," he adds.
VW also is exploiting its natural hedge. All global production of its Jetta and new Beetle models is done at its Puebla, Mexico, plant.
Says Christine Ritz, VW's head of investor relations: "As far as the dollar is concerned, we are comfortably hedged for the next two years."
Juergen De Graeve, a spokesman for Audi in Germany, says the carmaker sells only 10 per cent of its output in North America and is less concerned about the dollar's weakness than some of its competitors.
To counter its lack of a factory in the US, Audi has tried to shift purchasing to low-cost countries with currencies tied to the dollar. China is one such country.
"We already have some 100 million euros (US$138 million) in cost reduction programmes since we have no natural hedge like a factory," says De Graeve. "The only way to correct it is to reduce costs, to increase efficiency."
European carmakers and suppliers feel the impact of the weak dollar more than their Asian rivals. The Japanese yen has remained steady against the dollar, causing US carmakers to charge that the Japanese government manipulates the yen's value to give its manufacturers an edge. So far, the dollar shows no sign of recovering its former strength.
- Reuters
