European Automakers Hit by Falling Dollar

By Tom Ripley

To those of you who would like to believe you could some day afford a European vacation, the falling value of the dollar is like a blow to the heart. Instead of Paris, France, you might have to settle for Perris, California, which is pretty much the same except for the differences in history, beauty, culture and charm. Now consider the plight of the European automakers. Some European companies, even those assembling vehicles in the United States, are now absorbing at up to a 40 percent disadvantage compared with prices commanded for the same vehicles in Europe, according to John Hoffecker, a managing director of AlixPartners LLP. He made his observation in an opening keynote speech to more than 200 auto-industry executives at the 10th Annual Global Automotive Conference, sponsored by the non-profit Global Advanced Leadership Center in Bowling Green, Ky.

Hoffecker noted that in the past five years, the U.S. dollar has depreciated more than 30 percent versus the European euro and that some foreign, especially European, automakers manufacturing in the U.S. are still sourcing less than a third of their parts domestically, which means they are in a severe cost-price squeeze. Rather than passing on the increased costs to the consumer, which the competitive market makes difficult, many of these companies are choosing to suck it up and take less profit or even sell vehicles at a loss.

“These European automakers should be quickly rethinking their sourcing strategies and moving faster toward more 'natural hedging' -- more local parts purchases and investments,” he said. “Clearly, some are not moving fast enough.”

Hoffecker also stressed that all auto companies, no matter where they are based, need to be more fully aware that outsourcing parts purchases and manufacturing to countries like China is no longer as simple a calculation and decision as it once was. The Chinese price advantage, while significant, is dwindling.

“In addition to the recent dramatic shifts in currency exchange,” he said, “labor costs in the most industrial part of China, the southeastern provinces, have risen 50 percent in the past four years.”

He pointed out that many of the Chinese-government export credits have been recently eliminated or greatly reduced for a number of auto-part exports. Using the example of tires made in China, Hoffecker noted that due to a combination of currency swings and China's recent reduction in a value-added tax rebate for exports, Chinese tires are now 16 percent more expensive to export to the U.S. than they were in 2007.

“Fast-changing currency exchange rates and sky-rocketing costs in general in some developing countries are clearly changing the game when it comes to making optimal sourcing decisions,” said Hoffecker. “Countries like China and India are still a very attractive venue for automakers and suppliers, particularly when they are servicing the local markets as well as exporting. However, other low-cost countries such as Mexico are more attractive today than they were just a couple of years ago because of their closer tie to the U.S. dollar and lower labor inflation rates.”

In the simplest terms, the lower value of the dollar means that American consumers are likely to pay more for foreign-produced goods like automobiles, but the complex, global nature of the car business means that the effects won’t be nearly as harsh as some might anticipate. Meanwhile, car manufacturers are working harder than ever to satisfy the still-affluent American customers at prices they can afford.