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Decline of the Dollar and the Auto Parts Industry In the past four months the dollar has decreased in value by over 10 % versus the euro and yen. It has also decreased in value by 3 % versus the Canadian dollar. At the same time the dollar has increased in value by 6 % versus the Mexican peso. The impact of these trends will be increasingly felt by the auto supplier community in the U.S. if the dollar stays at or near its current level or continues to decline. The first effect of the falling dollar will be reflected in vehicle prices. The cost of Japanese and European made vehicles will increase by around 10%. The automakers may absorb some of these cost increases, but it is likely that as time goes on these increased costs will be passed on to the consumer. This will affect the auto parts makers in the U.S. in two ways. First, the Big Three will be able to sell more vehicles, raise prices or a combination of the two as their costs will not rise as much as the imported vehicles. Second, the Japanese and European vehicle makers with North American assembly plants will look for U.S. sources of supply to offset the increased costs of imports. The last time we experienced a similar period in exchange rate movements was 1984 - 1986. The dollar was gaining strength through the early eighties. The U.S. automakers were complaining of the unfair advantage that a weak yen gave Japanese automakers. As a result the U.S. imposed "voluntary" restraints on car imports from Japan. On September 22, 1985 the finance ministers from the major developed countries announced what became known as the Plaza accord. Among other things this accord committed the countries to a weaker dollar and stronger yen and D-mark. As a result the yen went from 260 to the dollar at the time of the accord to 120 yen to the dollar at the end of 1987. The D-mark went from 3.30 to 1.57 during the same time period. This gave the U.S. automakers the breathing room to restructure and make themselves more competitive. Unfortunately for the U.S. based suppliers the Big Three took advantage of the exchange rate movements by raising the prices of their vehicles rather than keeping prices down and increasing market share. Thus, the Big Three did not start taking back market share until 1987 and 1988 when the dollar had already been cut in half or less vis a vis Japan and Germany. Thus the suppliers in the U.S. were not able to increase their sales as the overwhelming share of their production went to the Big Three. The Big Three have been losing market share to the Japanese, German, and Korean automakers. In 1995 they had 72.5% of the U.S. market for light vehicles. In 2001, six years later, that share declined to 64.5%. It looks like that percentage will continue to decline in 2002 as their market share for the first six months of this year was 63.4%. Some of this decline has been due to the weak euro and yen. Now that the dollar has fallen by more than 10% over the past four months what will the Big Three do to take advantage of the decline in the dollar and how will this affect the U.S. supply base. The Big Three will not be able to raise prices as much as in the past as both the Japanese and German automakers have increased their presence in North America. In 1985 European and Japanese vehicle assembly capacity was just over a half of million vehicles. Today their capacity is over four and a half million vehicles and growing. Over 18% of the light vehicles sold in the U.S. this year come from non-Big Three owned plants located in North America. Thus, the decline in the dollar's value will also help these companies and give them the flexibility to counter any moves the Big Three makes. Given this environment it is likely that the Big Three automakers will go for market share. This means that suppliers with business with the Big Three should see their business increase. The second change that is likely to take place is an increase in the procurement of parts produced in North America by the Foreign owned automakers with assembly facilities in North America. These automakers are still importing a significant amount of parts and components from their home countries. As these imports become more expensive the German and Japanese automakers will look to source more components in North America. Given that we imported over thirteen billion dollars in parts from Japan and over three and a half billion from Germany there is considerable room for shifting sourcing from Japan and Germany to North America. Given that the Mexican peso has declined by a little less than ten percent during the same time period, it is likely that a good portion of the gains in North American sourcing will take place in Mexico. Given the nature of the OE procurement practices it is unlikely that companies will be picking up new business anytime soon. As most contracts are let out two to three years in advance and most contracts are for multi-year periods, the recent decline in the dollar will not impact these contracts. If the dollar stays where it is or declines further for the next year or so then there may be a shift in suppliers. What is more likely to happen is that suppliers with operations overseas and in the North America who are now supplying their North American customer from an overseas location may shift that work to their North American locations. Also, for those companies without plants in North America, they will look at the economics of putting a plant in North America. The last time we had this situation after the Plaza Accord in 1985, it took several years before work was shifted to North America and North American suppliers. The immediate good news for suppliers is that their overseas competitors for new business will have seen their prices vis a vis the North American supplier increase by at least ten percent. This will hit home right away with tier two and three suppliers such as tool and die companies and raw material suppliers. This also may give the Bush administration an excuse for lowering or eliminating the steel tariffs that were recently applied as a result of the steel industry's trade complaint. If that is the case the declining dollar could turn out to be a win win win for the supplier base in the U.S. |
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