Currency quandary

Dollar’s strength in world markets hits many suppliers hard

Too strong for too long
The gripe against a strong dollar

  • It’s out of sync with the current U.S. economic outlook.

  • If Europe’s economy is doing so well, why has the euro been falling?

  • A high dollar makes it tougher to sell products overseas when the U.S. market is softening.

  • European and Asian rivals have an advantage on pricing.

  • Currency competition could force purchasing departments to specify non-U.S. content.

  • For Magna International Inc.’s 62 European factories, business was good last year. Volumes rose from a robust pace the year before, and Magna’s average per-vehicle European content was up 8 percent for the year.

    But you wouldn’t necessarily have gleaned that from the numbers. By the time the finance department finished tallying the results, Magna’s overall European sales were 3 percent lower than those of the year before.

    The reason: a declining euro, a rising dollar.

    At the end of 2000, the euro was worth 13 percent less against the dollar than it was on Dec. 31, 1999. For Magna, the math took a $369 million toll on the financial tabulations.

    For economists, such an issue is almost academic, because big multinationals such as Magna probably buy and sell so much across national borders, it all evens out. But to a growing chorus of U.S. manufacturers, the solid strength of the dollar against other major world currencies is becoming a worrisome issue.

    U.S. automakers and their suppliers believe the dollar may be just a little too healthy — that its rock-hard value is making them less agile than their overseas competitors at a time when the industry is obsessed with lowering production costs.

    DaimlerChrysler and Nissan Motor Co. Ltd. are pursuing supplier price-reduction campaigns at the same time they are working on new-vehicle platform strategies that are shifting global purchasing decisions to offices in Stuttgart and Paris. In an era when every piece of the cost issue counts, the currency of a manufacturer’s work can be a deciding factor. “The basic issue for U.S. manufacturers right now isn’t that the dollar is strong — it’s supposed to be strong,” says Michael Flynn, director of the University of Michigan’s Office for the Study of Automotive Transportation. “The problem, according to many people, is that it is artificially high. When you are producing goods in a currency that is out of whack with the other currencies of the industry, it puts you at a double disadvantage. It makes it tougher to sell your products in foreign markets; at the same time it opens up your home market to more imported goods.”

    The mood escalates

    In August, a group of American industrial trade associations created the Coalition for a Sound Dollar to press the U.S. Treasury to bring down the dollar’s value against other world currencies. According to one of the coalition members, the Motor and Equipment Manufacturers Association, a trade group of more than 700 auto parts and tooling producers, the high dollar represents an unrealistic picture of the U.S. economy, yet other major currencies remain unrealistically low, given the health of their economies.

    The coalition seeks to bring down the U.S. dollar by pressing other countries to bring their currencies in line with their economic health.

    The coalition’s appearance represents an escalating mood among automotive manufacturers. This summer, several of the same groups took the more modest step of signing a joint letter to U.S. Treasury Secretary Paul O’Neill asking for “a clarification of Treasury policy” that might help lower the dollar against international currencies. In the June letter the trade groups stated that U.S. automobiles and parts, along with other key manufacturing sectors, are being put at a disadvantage in the global marketplace.

    “Since early 1997 the dollar has appreciated by 27 percent” against the euro, the group noted. “No amount of cost-cutting can offset a nearly 30 percent dollar markup.”

    Signing the letter were the Motor and Equipment Manu-

    facturers Association and the Automotive Trade Policy Council. The council represents the interests of General Motors, Ford Motor Co. and DaimlerChrysler. It is based in Washington.

    Chris Bates, president of the Motor and Equipment Manu-

    facturers Association, said the action was an effort to unite in expressing a “widely held concern” that the dollar is too high.

    Bates says there is some belief that makers of U.S. policy have allowed the United States to shoulder the weight of a steadily rising dollar to stimulate the economies of other nations, chiefly Japan and Korea. If it helps producers in those nations find stability, a strong dollar is a modest price to pay as a form of international aid.

    “We’ve reached the tolerable limits of that sort of foreign policy,” Bates said. “We can’t be in the position of carrying the world indefinitely through an overvalued dollar.”

    Bates warned of two immediate concerns for U.S. parts manufacturers:

    1. Lopsided currency translations are taking a toll on some dollar-based corporations. As sales results in Europe and Asia are converted into dollars for profit-and-loss statements, losses are mounting and stock prices are sagging.

    2. Sales are being jeopardized. Selling U.S. goods overseas already is tough, he said. But as long as European and Asian factories have a currency advantage, they will have greater flexibility in pricing, he added. “There will be an increasing pressure on even U.S. manufacturers to look for non-U.S. content to cut costs,” Bates warned.

    Murky evidence

    In the industry’s complex global workings, pinpointing clear examples of such a problem can be difficult. The United States has seen trade volumes with Japan, Germany and Korea rise sharply during the past two years. Last year the U.S. auto parts trade deficit with Japan began rising again after years of shrinking.

    But in the auto industry, a sudden rise in Japanese imports, for example, can just as easily be triggered by a hot new Lexus vehicle. Similarly, one reason German automotive shipments to the United States are up is the success of the American-built Mercedes-Benz M-class sport-utility. That vehicle is assembled in Alabama, in dollars, while its German-made engines and transmissions are sent over in euros. The result: A busier U.S. economy consumes more imported goods from Germany.

    Although this year’s softer market has seen a decline, unit sales of imported German autos rose 7 percent last year, according to the U.S. Department of Commerce. Japanese auto parts imports were up 8.7 percent. For the first four months of this year, shipments of Korean vehicles were up 19 percent, while those from Mexico were up 3 percent.

    Yet what arrives on the U.S. market from Mexican factories often is a product of a U.S. corporation. Ford and GM are large-volume importers of Mexican-made vehicles. So are Nissan Motor Co. of Japan and Volkswagen AG of Germany. But at the same time, just as Bates warned, in the quest to cut costs there clearly is a rush to assemble parts and other content south of the U.S. border.

    Last year 584 maquiladora factories opened along Mexico’s side of the U.S. border. More than 400,000 workers are employed in automotive maquila plants there, says Martha Tovar, president of Solunet-Infomex Inc., a maquila-tracking firm in El Paso, Texas.

    Maquila factories have been sanctioned by a U.S.-Mexican trade agreement for a decade. They permit unfinished U.S. goods to be transferred to a Mexican plant, assembled at a lower wage rate, and re-exported to the United States without paying tariffs.

    Tovar estimates that approximately 900 automotive maquila plants are operating along the border, and the number is growing.

    Such strategies are slow to put in place. Automakers typically only resource critical components during model changes or redesigns. Closing assembly plants and moving labor to Mexico is a drastic step manufacturers do not take lightly. That means most manufacturers continue their day-to-day struggle for competitiveness the old-fashioned way, by looking for factory costs to trim and overhead to eliminate.

    Bates says the high dollar is exacerbating the war on factory costs. “We’re looking for action now because the manufacturing sector is in a downturn. The currency situation just makes it that much harder for manufacturers to recover and come out of this.”

    You can reach Lindsay Chappell at lchappell@crain.com

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