The mighty dollar and what it means for the car business

Of all the factors that drove the global strategies of automakers in the past two decades, none may be more significant than the weak U.S. dollar.

As exports to the U.S. became less profitable, Japanese and German carmakers added and then expanded assembly plants in this country — certainly not put off by the fact that it was economical to invest here.

Their suppliers also rushed in. More recently, Volkswagen came up with a grand North American strategy. The U.S. share of foreign brands went from 25 percent in 1995 to 55 percent today. U.S. vehicle exports now top 2 million.

Meanwhile, Mexico will add half a dozen plants between 2013 and 2019.

All because of the weak dollar.

But the industry is set for a new phase.

Automakers insist they don’t make short-term decisions based on currency movements. But the weak dollar has been a long-term trend that effectively reshaped the global industry. Now — barring a dramatic shift in currencies — the trend is over.

It may take time for the industry to adjust, and the adjustments may be relatively modest — allocating more European and Japanese production for North American markets and slowing production expansion here, even as the likes of Volvo and Jaguar Land Rover are said to be considering U.S. factories.

Already, the increasing strength of the dollar against major currencies is starting to ripple through the global industry, pumping up profits in Japan, raising questions about production in North America and maybe even improving supplies of German cars for U.S. dealers.

Boosted by gains in the U.S. economy and weakness in other parts of the world, the greenback in just the last four months appreciated more than 15 percent against the Japanese yen. Last week the euro was selling for just $1.14, the lowest level in a decade.

For U.S. dealers of European brands, the strong dollar could bring some relief to a problem they have faced for several years: tight vehicle supplies. When the dollar was weaker, BMW, Mercedes-Benz and Audi could make more money by sending vehicles made in Germany to China or Russia instead of the U.S.

“Listening to our OEM partners, I think there will be more cars being shifted this way,” said David Hult, COO of Asbury Automotive Group Inc., the nation’s seventh-largest dealership group.

He attributed that shift to the strong dollar and to changes in markets such as China, where growth has slowed, and Russia, where sales have declined.

“A couple years ago, there was a big push to push it to Russia and China, and I think that’s shifting a little bit now,” Hult said.

Mercedes-Benz USA CEO Steve Cannon says the strong dollar is one factor that makes sales in the U.S. more attractive.

“The flow of cars will increase,” he said.

An executive in another large dealership group said his group heard the same from BMW about increased allocation.

“We haven’t been told it’s just the dollar,” the executive said, “but a combination of demand in other parts of the world has slowed and they will shift cars to the U.S. We know the dollar and the euro has a lot to do with it.”

The shift in currencies has been welcome news at Toyota Motor Corp. Its earnings in the U.S. translate into more yen when profits are booked at home, and the effect was clear in the quarter that ended Dec. 31. Operating profit jumped 27 percent, to ¥762.88 billion ($6.36 billion). Favorable exchange gains accounted for 90 percent of the gain.

Windfalls from the weak yen also propelled profits for the maker of Subaru vehicles, Fuji Heavy Industries, and helped Honda and Mazda offset other troubles they are facing. Likewise, Daimler AG is predicting a gain of more than 1 billion euros this year because of the strong dollar.

Just five years ago, when the yen was as much as 50 percent stronger against the dollar, Japanese car companies were losing money on many of the vehicles they exported to the U.S. A decade ago, thanks largely to the euro’s strength, Volkswagen AG was losing nearly a $1 billion a year in North America.

But Honda expanded production capacity at its U.S. plants and added a plant in Mexico to build the Fit. Toyota took similar steps. Volkswagen built its plant in Chattanooga and is nearing the completion of a second Mexico plant. Likewise, BMW and Daimler have expanded output at their U.S. plants.

The build-up of production here has given those manufacturers a much greater natural hedge against exchange rates.

Nevertheless, the current situation may prompt some companies to tweak production plans.

Honda, for example, made a big bet on North American production. Last year its exports from Japan were down 75 percent, and it shipped just 10,582 vehicles to North America.

Executive Vice President Tetsuo Iwamura said Honda won’t bring large-scale production back to Japan from overseas but is looking at moving some output to different production hubs in response to favorable or unfavorable exchange rates.

For the Detroit manufacturers, the dollar’s strength presents some challenges: The money they make elsewhere translates into fewer dollars when they book earnings at home.

General Motors CFO Chuck Stevens said that was a “significant headwind” in 2014, and the company is trying to offset the impact through pricing and cost-saving measures. The company isn’t changing its upbeat outlook for the year, however.

In effect, the dramatic shift in the yen and euro rates highlights how global automakers have in the last decade largely eliminated the manufacturing imbalances that left them hurting when currencies fluctuated in the past.

As a result, the dollar’s current strength “isn’t creating a crisis for anyone,” said Jim Press, a former Chrysler and Toyota executive who led Toyota in the U.S. when the yen was much stronger and his company was rapidly building plants here.

While the dollar is a hot topic right now, Press said, “companies face a lot bigger issues than currency.”

Mike Colias, Christiaan Hetzner, Diana T. Kurylko and Amy Wilson contributed to this report.