Can Detroit Capitalize on a Weakened Dollar?

The Wall Street Journal reports that the Big Three American auto-makers (General Motors (GM), Ford (F), Daimler (DAI)) are looking to export their vehicles as a way to ease tension from sluggish domestic sales.

For decades, the U.S. auto industry has been hampered by high labor costs and stiff competition from foreign car makers importing vehicles. Often foreign cars have the advantage of cheap labor and relatively few barriers to entry into the U.S. car market, and as a result they were able to produce a superior, less-costly product.

For years it looked like the U.S. auto makers struggles would continue indefinitely until there was a catalyst for change in the global auto marketplace. The U.S. car makers are hoping a decline in the dollar and renegotiated labor contracts will provide that spark that they desperately need to once again turn a profit.

The U.S. dollar is in a prolonged decline against other global currencies, and this has the effect of making U.S. exports cheaper in foreign markets. In the past, U.S. cars have been exported in generally few numbers because they were simply too expensive with the exchange rate, and combine that with the fact that many countries have high tariffs in order to protect their own domestic cars.

The Big Three are hoping that the global economy will be more receptive to the now cheaper U.S. cars, especially in places with a rapidly growing consumer class, such as China. Further strengthening the global competitiveness of U.S. autos are the newly signed contracts between the car-makers and the United Auto Workers Union. The UAW reigned in its demands in order to keep the industry afloat, as the U.S. was the most expensive country in the world to make a car.

However, there are still significant concerns that the U.S. will never be able to compete with labor costs in the economies of Asia, which are still a fraction of what the U.S. auto-makers pay. The Big Three have been less successful than they had hoped at enticing tenured, higher paid workers to take a buyout, in favor of cheaper new employees.

There are more barriers to entry into foreign market places is the form of tariffs, as well. The U.S. auto-makers are seeking alternatives to the status quo because the already unprofitable North American operations have soured further as consumer spending in the U.S. has begun to slow out of fear of a recession.

U.S. auto-makers are in a familiar spot between a rock and a hard place, and the shift to focus internationally-- while strategically sound-- is far from a panacea. The declining dollar does enable the U.S. to compete more effectively globally but cost cutting will continue to be an important goal for the U.S. auto-makers.

From our long term investment prospective, the fundamentals of GM and F make them appear to be slightly undervalued, but our concern is that the auto industry will continue to struggle unless they can carry on significantly cutting costs.

We hope that exporting globally will help, but the reality is that the U.S. will never be able to make a car as affordably as their global competitors. It will continue to be a tough market and this does not significantly raise our outlook for General Motors, Ford Motors or Daimler.

Disclosure: none

Comments

[Gumby]

Tokyo had been selling its own yens overseas so that they can sell their new cars to Americans who really couldnt afford them had they not keeping selling yens. Toyotas, Hondas, and Nissans would have been selling for double the prices on the sticker window by now.. This is heck of hard selling?? At whose expenses? Why is it fine with the Japanese over there that their yens be kept dumped all over the world so not to make our dollars look worse than supposed to?????? Face it, Americans you really cant afford Toyotas, Hondas, Nissans.. They are for the wealthy only..

[rancelot]

Excuse me, but since when was Daimler ever part of the Big Three? Daimler bought Chrysler, true. Then they were known as the Big 2.5 because Daimler was a German (not American) company.

Now that Cerberus has purchased Chrysler, we have the Big Three again. Daimler never figured into the mix.

[Steer]

GM built a million sold a million cars in China last year. They were also built there, so I'm not sure currency devalue will help. I agree dwith the trade barrier problem. I is beyond me why the US tolerates this since it is the one running the trade deficiet. Who stands to lose a trade war? Certainly not the US.