Dollar’s Decline Should Help Automotive Companies

Dollar’s Decline Should Help Automotive Companies

Weakness in the U.S. dollar — currently trading at multiyear lows versus many major currencies — could be a good thing for U.S. automotive manufacturers, especially with respect to competition with Japanese automakers and suppliers. A weaker dollar would have a substantial impact on the bottom line of Japan’s automotive giants. “If, for example, the U.S., because of the enormous current account deficit, were to have the dollar weaken, you could quite dramatically see a change,” he said. “Either the Japanese margins and their profitability would deteriorate substantially, or I think you would see their (U.S. market) share go to hell if they tried to price for currency,” Ford’s Vice President and Treasurer Malcolm Macdonald said (see TAR, December 19, 2002 issue).

For months, U.S. auto manufacturers have actively lobbied for a cheaper dollar, arguing that the currency was overvalued and U.S. jobs and profits were being lost to imported goods. Now, amid fears of a costly war with Iraq, the dollar is hovering near a two-and-a-half year low against sterling, a three-year low against the euro, and a four-year low against the Swiss franc. So, makers of cars and car parts, and other exports are their wish come true.

“Some 40 percent of the profits for Standard & Poor’s 500 index companies are related to overseas activity,” said Anthony Chan, chief economist at Banc One Investment Advisors, which oversees $150 billion in assets. “So, if the decline in the dollar raises that activity, it has to be a positive.” And, quite often, higher profits translate into higher share prices.

Companies that export significant amounts of goods overseas should be the first to benefit in a weaker dollar environment, Chan said, as their goods are more competitive in overseas markets. But even U.S. producers who sell only in local markets can expect to do a little better as their foreign competitors’ prices rise in U.S. dollar terms, making them comparatively less attractive.

Even if companies don’t actually sell more physical product in foreign countries, their profits are likely to improve as they translate overseas revenue back into dollars. A weaker dollar could be positive in an accounting sense as profits and revenue go up when their foreign profit is translated back into U.S. dollars.

General Motors will likely benefit from a weaker dollar as 22 percent of its revenue from automotive sales came from outside North America in the first three quarters of 2002.

COPYRIGHT 2003 International Trade Services

COPYRIGHT 2003 Gale Group