The US is Suddenly a Low-Cost Manufacturing Country

By Chris Haak

04.09.2008

Thanks to two relatively recent developments – the falling value of the US dollar relative to other currencies and the significantly lower cost structure that GM, Ford, and Chrysler negotiated with the UAW last fall – the domestic auto companies are now hoping to use their lower cost bases to supply US-built vehicles to export markets.

Last year, the US exported $50.66 billion worth of cars and light trucks, while it imported about three times as many. Although $50.66 billion is a lot, many of those exports went to Canada and Mexico, and not to Europe or Asia, where many imported vehicles sold in the US originate. The Detroit Three expect this to change in the next few years.

Other than cost, which is a big factor, manufacturers over the past few years have worked hard to merge vehicle architectures under common platforms, perhaps with the visible parts of the vehicle differentiated. This not only cuts overall development costs significantly (since one single platform may substitute for three or four previous ones), but also allows engineers to put more effort into the handful of platforms that are still necessary. Furthermore, platform sharing across continents means that production of all vehicles built on the same platform can be easily moved to any plant capable of that platform worldwide based on local demand and currency fluctuations.

For example, the Saab 9-3 is built on a version of GM’s Epsilon architecture. A variant of the Epsilon architecture also underpins such American stalwarts as the Pontiac G6, Saturn Aura, and Chevrolet Malibu. However, in its current iteration, the differences between the European Epsilon and the US Epsilon make it impossible to build Saab 9-3s in the US. Unfortunately, this means that Saab is forced to raise prices in a difficult market to offset the weak dollar, while GM has plenty of extra production capacity at the plants that produce its US Epsilons. However, the next generations of these vehicles are being developed collaboratively between Europe and the US, so the next generations of these vehicles will also have the ability to be built in any Epsilon plant.

GM has already announced an agreement with the Chinese government to export the Enclave crossover to China, to help satisfy a buying public that loves its Buicks (you may have heard that Buick sales in China exceeded Buick sales in the US last year).

For its part, Chrysler has decided over the past two years to not renew its third party assembly contracts with Magna Steyr to locally build versions of its North American models in Europe for European consumers. Instead, it will build the Chrysler 300 in Canada and export it to Europe, and will build the Chrysler Voyager (a version of the Dodge Caravan) in the US and export it to Europe. Chrysler still builds some Jeep models in Europe, but when its contract with Magna Steyr expires in 2009, it’s likely to move that production to the US as well. Chrysler is also exporting compact Dodge and Jeep vehicles such as the Caliber and Patriot to Europe from its plant in Illinois.

It’s not just the Detroit Three who are taking advantage of the economics of the weaker dollar; Volkswagen is likely to build a new plant in the US (which it may also share with Audi), and Fiat is in discussions with US partners to build Alfa Romeo cars in the US. Also, BMW is injecting $750 million into its South Carolina plant to significantly increase its production capacity; once the expansion is complete, the plant will build all BMW SUVs for worldwide consumption, most of which is destined for Europe.

The risks to these strategies are numerous; most companies will say that they do not make long-term decisions such as plant construction based on variables that are guaranteed to fluctuate such as currency exchange rates. If the dollar suddenly strengthens – which could happen if manufacturing activity in the US suddenly spikes, or if the economy strengthens in the next year or so – cost projections may go out the window.

For US automobile companies intending to export their products to overseas markets, particularly to developed nations, they have to ensure that the products they intend to export are relevant in those markets. European consumers prefer small, lithe, efficient vehicles (often with diesel engines) and have little interest in the generally larger, more powerful vehicles sold in the US. It’s a similar story in Japan. For developing countries such as China and India, and many Latin American nations, many consumers don’t have the purchasing power to buy the expensive vehicles generally sold in the US, although China and India are expanding so quickly economically that they are seeing the ranks of citizens who can afford larger, more expensive cars growing rapidly.

As with so many developments in the automotive industry, the only thing constant is change. A year ago, unionized US manufacturers were crying about being cost-uncompetitive with their foreign rivals, and today the US companies are in the stronger competitive position. Who knows where they will be in twelve months?

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