I should begin this post with an admission: I haven’t take a class in macroeconomics in general or world trade in particular since I was a junior in college. That is now some time ago. However, I know enough to realize that a devalued currency should open up opportunities. That gets us to the recent announcement that Mercedes would begin making C-Class cars in Alabama (Mercedes-Benz Confirms C-Class Production in U.S., Dec 2, Edmunds AutoObserver). This is largely a currency play:
It has long been believed that the continuing weakness of the dollar has led to exchange-rate vagaries that are severely impacting the bottom line for every European automaker. In a release, Daimler indicated the decision to move C-Class production to the U.S. is being driven by a need to decouple profits from exchange rates — but also purportedly will enable Mercedes to more swiftly answer changing customer tastes and preferences.
“The decision to produce the C-Class closer to the markets (in which it is sold) will make Daimler more independent of exchange rates, will optimize its profitability in this price-sensitive segment, and will allow it to fulfill regional customer requirements even faster and more flexibly,” Daimler said.
This is not a wholesale shift. Only 20% of C-Class production is going to the Heart of Dixie. But the C-Class is the most popular Mercedes in the US so producing a significant share of that volume here will reduce the firm’s exposure to exchange rate fluctuations. Whether that guarantees cheaper costs, I can’t say but it should limit fluctuations in euro-based earnings. Note that this is similar to recent challenges faced by Airbus that we have posted about in the past.
I said that this is largely a currency play but there a few other things involved. First, labor restrictions in Alabama are little laxer than in Germany. As the Washington Post reports (Daimler moving some C-Class production to Alabama, Dec 2):
The lack of unions at the factory “doesn’t hurt,” Aycock said, but added: “This is such a productive plant. They’re very cost effective … because they started from scratch almost. They put in an entirely new production system that’s being replicated around the world.”
This suggests that the combination of American flexibility and a cheap dollar could lead to manufacturing growth in the US. Two things, however, are less optimistic. First, various government entities have loaded up a mess of incentives to make this happen. That is, this as much about money for employee training and tax abatements as currency hedging. Second, the lead times in production planning in the auto industry are kind of long so don’t expect to see a Crimson Tide C-Class until 2014. Whether this strategy pays off then depends on how long the dollar is in the tank.