from Follow the Money

Global adjustment in action

December 4, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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With one euro now selling for $1.45-1.50, German auto makers seem to be having truoble making money -- or at least as much money as they would like -- producing cars in Germany (or Eastern Europe) for sale to the US market.   Audi and VW are both looking to manufacture more in the US.

"[Audi CEO] Stadler told Auto Motor und Sport magazine that the dollar's weakness had forced his group to consider building a factory in the United States.

"It is not enough to turn out just a few parts like door finishings in the dollar zone; we must look at components with more added value such as the engine and transmission," Stadler explained.  ... He said Audi might produce its Q7 sports utility vehicle (SUV) in the United States, which currently accounts for less than 10 percent of the car maker's total sales.  ....

Audi's parent group, Volkswagen, has also said it is looking closely at a second factory in North America to complement its present plant in Puebla, Mexico.

Back in late 2004 a German economist well-aquinted with the German auto industry indicated that it would take a euro over 1.30 to really make production in the US attractive.   The German auto makers hadn't acheived the same level of efficiency in their US plants that they had achieved in Germany.  US plants tended to be less flexible -- they had trouble switching from model to model -- making production in the US relatively less attractive.    The Euro is now well over 1.30. 

The rise in "transplant" production in the 1980s was a major source of the adjustment in the US trade balance.  Auto and auto parts are still a fairly large component of US imports (and US demand); more German investment and production in the US could play a role in the current adjustment. 

That said, the yen isn't strong enough -- I would bet -- to make it imperative for Japanese producers to locate in the US.  Indeed, back when the yen was at 120, Japanese producers had a fairly strong incentive to produce as much in Japan as possible.  The profit margins on Japanese cars exported to the US topped the profit margin on Japanese cars made in the US (see here).   And the RMB certainly isn't strong enough to dull the incentive to import more auto parts -- and soon Chery autos that Chrysler with market -- from China.

That is the key difference between now and the late 1980s.  In the late 1980s, the dollar fell against all the key regions of the global economy.   Right now, by contrast, it has only really fallen against the European currencies -- and the Canadian loonie.

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