Monday, September 08, 2008

Did Uncle Sam Trade In His Chevy for a BMW?: European Auto Manufacturing in the U.S.

Sources: Financial Times, Manufacturers Turn to US; New York Times, European Automakers Likely to Build Plants in the United States;, ‘Marketplace’ Report: BMW Moving to U.S.;, Weak Dollar Boosts Foreign Manufacturing in U.S.

The devaluation of the dollar against the euro has led to an emerging trend in manufacturing: European cars are increasingly being made in the U.S.A. Because the falling exchange rate has led to higher prices on European cars for American consumers, European automakers are faced with the decision to expand production to stateside factories or retreat from the U.S. market. For example, in Michigan, BMW can pay employees in devalued dollars, while lowering production and transportation costs on the cars it sells to Americans. In contrast, if it manufactures cars in Germany, it must pay employees in euros as well as take on import and increased transportation costs. U.S. manufacturing translates to reduced prices for American consumers and increased profits for the European automaker during a weak U.S. economy.

Other factors indirectly linked to currency fluctuations have contributed to the auto manufacturing shift. Relatively cheap American labor and relaxed factory regulations, alluring state tax breaks, and rising labor costs in East Asia, Eastern Europe, and Latin America have led many major European automakers to establish production in the United States. In addition to monetary incentives, manufacturers cite states’ willingness to fund the roads that lead to factories and train employees, and the productivity of U.S. workers, as enticing reasons to jump the pond.

While luxury German carmakers BMW and Mercedes have maintained plants in the American South since the 1990s, BMW aims to expand U.S. manufacturing in South Carolina by 50% during the next 5 years. Volvo of Sweden is in negotiations to build a plant in New Mexico. Analysts at Italian carmaker Fiat determined that it needs to build a North American factory to profit from the upcoming re-launch of its Alfa Romeo model. Tennessee recently closed a deal with Volkswagen to build a $1 billion factory by offering $577 million in incentives. Volkswagen previously operated its North American plant in Puebla, Mexico, but has not turned a profit since 2002. Last year its losses totaled $808 million.

As the exchange rate continues to fluctuate, manufacturing in the U.S. becomes a more attractive option for European automakers. Such foreign direct investment also provides employment opportunities and affordable European cars during a tough year for many Americans.

What will become of Sam’s Chevy?

Questions for the Reader:
1) How could American carmakers use currency fluctuations to revive the auto manufacturing industry at home?
2) In the present economy, would you prefer to buy a car from a European car company manufacturing in the United States, or an American car company manufacturing abroad?
What factors would influence your decision?
3) Do nationalism and brand loyalty still play a role in today’s car market?

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