German auto manufacturers are facing the prospect of having their US profits from imported models slashed due to the weak performance of the dollar. For many, this is just more bad news in an industry on edge.
Profits on cars made in Germany and sold in the US could be slashed
German car manufacturers are facing a tough time in the United States as the weak performance of the dollar against the euro threatens to undermine any profits companies like Mercedes-Benz, BMW and Porsche make over the Atlantic.
The European single currency rose from around $1.20 in September to an all-time high of $1.3667 at the end of December over concerns about the increasing US trade and budget deficits. The euro has since been trading around $1.30, but many analysts say it could hit $1.40 this year.
US exports have benefited from the weak dollar, making them less expensive for overseas customers but has the opposite effect on euro-zone goods, making them more expensive in the United States, the biggest auto market in the world, or eating into manufacturers' profit margins as they try to keep prices steady.
Analysts at the German WestLB bank have estimated that effect of the currency rate as it is as at the moment could detrimentally effect BMW's North American business to the tune of €886 million ($1.13 billion). Mercedes' profits are likely to be hit even harder with losses in business nearer €933 million for this year, although projected sales for sister company Chrysler and the company's commercial vehicle range in the US may go some way to reduce this estimated loss.
Mercedes delays B-Class launch in US
Inside the delayed B-Class Mercedes.
Such are the jitters running through Germany's auto giants that Mercedes announced on Monday that its parent company DaimlerChrysler AG is delaying the US launch of its Mercedes-Benz B-Class sport wagon over the exchange rate concerns with fears that the weak dollar would eat too deeply into profits.
The North America launch for the compact four-door hatchback was expected later this year but DaimlerChrysler have now put the brakes on its release, just a week after it was presented the car at the North American International Auto Show in Detroit.
"Given the current dollar-to-euro relationship, the launch is being delayed for now," spokesperson Toni Melfi told reporters.
Melfi declined to say when the launch would take place, but stressed that the exchange rate has to be "substantially better." The B-Class, however, will be brought out in Canada and Mexico as planned.
Figures estimated to show another huge loss
The delayed launch of the B-Class is seen as more bad news for Mercedes, suggesting that the Stuttgart -based carmaker is uncertain about the small wagon's prospects in the US market. Mercedes is also in the middle of a damaging earnings slump and is due to release less than favorable fourth-quarter and 2004 results on Thursday. Experts believe that DaimlerChrysler's top brand is facing a profit loss of some €2.7 billion for the year, following on from the €3.1 billion loss recorded in 2003.
The exchange rate situation is unlikely to get any better for the German car makers in the foreseeable future. The German Automobile Federation has cautioned manufacturers to avoid any quick-fix solutions and prepare themselves for an industry environment with a permanently weak dollar.
"It looks as though the US exchange policy follows the motto: our currency -- your problem," VDA president Bernd Gottschalk recently lamented.
Hedging on US production increase
Both Mercedes and Volkswagen have announced increased production of vehicles at plants in the United States in the hope that sales of vehicles built in the US will help fill the gaps in the profits of imported models. Daimler will double its production of the six-seater R-Class at its plant in Alabama, traditionally the transatlantic birthplace of the M-Class, and add the new G-Class to the plant's roster in the future. VW intends to increase the production of the Bora and Fox hatchback in its plants in Mexico and Brazil in an attempt to make ground on an estimated €1 billion loss penciled in for 2004. BMW, however, has no plans to expand production of its X5 SUV and Z4 sports car at its assembly plant in Spartanburg, South Carolina.