Currency Crunch

There is no true international language, but when money talks, everyone seems to understand, whether you're in Europe, Russia, Japan or the U.S.

The ebb and flow of currency is the lifeblood of the global economy, but its valuation has become one of the biggest friction points in global trade. It now is the biggest single issue that is both drawing markets together and dividing the world's major auto-producing sectors.

The concepts of free enterprise and capitalism have fared well globally, winning converts in countries such as Russia and China, where hard-line socialism has given way to a new economic outlook.

Despite this perceived victory for market-driven economies, there is growing concern among many economists that free markets never can be truly free — and fair — so long as governments manipulate the value of their currencies for the benefit of their own economies.

In September, the Group of Seven (G7) industrial nations called for more flexibility on currency exchange rates. The statement was targeted largely at Japan, which has been accused of intentionally manipulating the value of the yen to boost exports.

Critics say the practice gives Japanese auto makers doing business in foreign markets an unfair advantage, allowing them to gain market share by offering lower-cost, higher-value and higher-margin vehicles. In the U.S. that means they can offer cars and trucks with more features and nicer interiors, slap on a rebate and still make a nice profit. Now the European market is suffering a similar fate as the euro gains value.

The U.S. Big Three auto makers have complained their Japanese counterparts have an unfair advantage, and that the Bank of Japan should be admonished for buying and selling in currency markets to ensure the yen stays some 20% undervalued. That equates to a 20% price advantage for the Japanese, the Big Three charge.

“When governments manipulate currency prices, they create more problems,” says General Motors Corp. Chief Economist G. Mustafa Mohatarem. “We'd like to see all governments get out of that business. Events sometimes necessitate it, but not on an ongoing basis as Japan has done.”

William Duncan, general director of the U.S.-based Japan Automobile Manufacturers Assn. (JAMA), writes in the October issue of its Japan Auto Trends newsletter that the currency controversy misses a key point — that market shares are not won or lost on price, but on value for the money.

“Competition among auto manufacturers depends on management efficiency, the development of new technology and the ability to apply it,” Duncan writes.

The fluctuating yen has been an issue for the international auto industry for two decades. The currency argument also has a few holes, considering that many of the best-selling Japanese cars and trucks now are designed and built in the U.S. and use U.S.-built engines and transmissions.

Even so, the fight rages on. Japan's currency was valued at ¥135 to the dollar in early 2001, and that value had risen to about ¥109 per dollar as of mid-October. Without intervention by the Bank of Japan, GM's Mohatarem contends the exchange rate would fall to around ¥100 per dollar — and would quickly even the playing field between U.S. and Japanese auto makers.

The value may seem subtle, but in the web of economic interconnectedness known as currency trading, the slightest adjustment can mean the difference between fortune and failure.

Toyota Motor Corp.'s operating profit reportedly drops ¥23 billion for each ¥1 of gain against the dollar, which Mohatarem says illustrates how much the ongoing Japanese economic recovery depends on the U.S.

“The Japanese want a strong dollar because their own economy is a mess,” Mohatarem says.

Granted, Japanese OEMs have invested billions in new vehicle plants in the U.S. — and consequently have created tens of thousands of jobs for Americans — but Mohatarem says the yen manipulation ultimately is self-defeating, encouraging investment outside Japan and holding back recovery of its domestic economy.

JAMA's Duncan says the debate over currency rates is misguided. “The advantages or disadvantages from fluctuating exchange rates will be rendered relatively insignificant compared to what happens at the drawing table, in the laboratories and on the factory floor,” he writes.

The G7's stand on exchange rates suggests Europe may be ready to do what Washington hasn't done: vigorously oppose Japan's currency manipulation.

“Japan's currency advantage is shifting to Europe from the U.S., and the Europeans won't take as much a laissez-faire attitude about it as the U.S.,” Mohatarem says. Europe's options: claim unfair trade practice to the World Trade Organization or set out to manipulate the euro as a retaliatory tactic.

The currency issue is particularly acute for countries relying heavily on exports. South America's Mercosur trade pact (Brazil, Argentina, Uruguay and Paraguay) is considering a single currency — much like the euro — to foster macroeconomic coordination.

In this special report on the state of the international industry, we'll explore the three major auto-making regions of the world outside North America.

South America is ending a hard year, with slumping economies, foundering sales and ballooning unemployment and inflation.

In Europe, an onslaught of new product is leading the way as auto makers attempt to reverse another year of stagnant sales.

In Asia/Pacific, the focus is shifting away from recession-wracked Japan to high-growth, developing markets such as China, India and South Korea.

SOUTH AMERICA REGION DRIVEN BY EXPORTS, TRADE PACTS

By Barbara McClellan

There is only one way out for South America's troubled auto industry in 2004: expanding exports.

Slumping economies, foundering car sales, rising taxes, fluctuating currencies, ballooning inflation, growing unemployment, political wrangling and crushing national debt have left a key survival year in tatters.

Domestic auto makers since 1977 have invested $30 billion in Brazil, alone, in hopes consumers there would buy 3 million vehicles by 2003. Yet, the year's production is projected at 1.8 million units, with expected sales of 1.3 million — far less than the 2 million vehicles sold in 1997.

The ultimatum Volkswagen AG CEO Berndt Pischetsrieder recently gave striking workers in Sao Paulo — accept transfer from their plants and retrain for jobs elsewhere or be fired — is a measure of the frustration.

Six years ago, VW led the country's four major OEMs: General Motors do Brasil Ltda., Fiat Automoveis SA and Ford Brasil Ltda. Today, Brazil has 25 producers, and the top four's market share has shrunk considerably.

Parent VW's worldwide sales totaled $81 billion last year, yet only 6.5% came from Brazil, compared with 12.8% in 1997. The country represented 9.8% of VW's global output, or 5 million units, in 2002.

Other Brazilian subsidiaries' share in their parent company's global sales in 2002 include General Motors, 2.2%; Fiat, 6%; Ford, 1.8%; DaimlerChrysler AG, 1.1% and PSA Peugeot Citroen, 1.4%.

GM says part of the answer lies in tax relief, which represents more than 40% of production costs. The company points to vehicle plants running at 40% capacity, their combined factory lots glutted with more than 160,000 cars, as evidence that something must be done.

This, plus a strong currency against the dollar, prompted GM Brazil President Walter Wieland to ask the government for a long-term fiscal policy to help get the industry out of its rut, noting 2003 as the most critical for Brazil's auto industry.

“GM has been in Brazil for nearly 80 years…but nothing has been as bad as the present crisis,” Wieland says. “The auto industry is currently too big for the market.”

The government yielded to pressure and in August temporarily reduced its industrial product tax by 3%-5% on cars, vans and light pickup trucks until Nov. 31. But industry observers question how much consumers have benefited, as car prices do not reflect the tax cut.

Most agree more measures are needed to stimulate the country's auto industry, which employs 1 million workers. A recent study by a private firm and the National Assn. of Automotive Manufacturers suggests the only way to sustain and consolidate Brazil's auto industry is to increase production to at least 2.7 million units annually.

For that to happen, domestic sales would need to reach 1.8 million to 2 million vehicles annually and exports double from 400,000 to 800,000.

Yet demand is stagnated. Some 70% of sales are financed, and current interest rates are steep. And things don't look likely to improve soon. Brazil's central bank in October reportedly cut its economic growth forecast for the year by more than half, from 1.5% to 0.6%. The government now says consumer spending will not begin a recovery until 2004, with this year's inflation expected to top out at 8.9%.

For domestic OEMs, that leaves exports as their salvation, but to whom? Argentina, once Brazil's major trading partner, this year is expected to produce a mere 20% of its 800,000-vehicle annual capacity. An early forecast calls for output of 150,000 units for the year, the lowest level since 1971.

Nevertheless, a recovery appears to be under way, with Argentina accounting for 13% of Brazil's vehicle exports through October, a jump from 7% in 2002. VW Brazil, which sold 800 units in the country last year, expects to sell 20,000 vehicles this year. The VW Gol is Argentina's No.1 bestseller, with 11.2% market share.

“Argentina has improved considerably this year,” says a Ford Brazil spokesman, noting the auto maker's exports to the country swelled 17% in the first nine months, compared with year-ago's 12%. But Brazilian auto makers worry the government's 12% discount on domestic new cars may hurt their future exports.

Venezuela sold only 37,975 vehicles in the first eight months, down 62.8% from year-ago, says the Camara Automotriz Venezuelana. August sales, alone, suffered a 52.6% decline, to 5,021 units.

The country was GM Brazil's largest export market in 2001. But President Hugo Chavez in January imposed currency restrictions to halt a slide in the boliver as Venezuelans moved their savings overseas.

Vehicle sales plummeted. But Brazil's President Luiz Inacio Lula da Silva plans to meet with the Venezuelan government to conclude a $1 billion agreement to finance exports for 2004. Under the deal, GM will be able to export $100 million in completely knocked-down (CKD) Corsa models.

But that won't prevent a gathering storm. “No foreign currency means you can't import car parts,” says Global Insight Senior Market Analyst Diego Portillo.

“The Venezuelan car parts association is warning of drastically low levels, even for the aftermarket,” he says, predicting the situation will last another six months. “We'll see GM and Ford putting pressure on the government. They can't produce cars with these restrictions.”

Brazil has sought auto trade accords with other countries — including Mexico, Canada, the European Union, Chile and Cuba.

And while da Silva continues to resist the proposed 34-country Free Trade Areas of the Americas that he denounces as a U.S. attempt at “annexation” — he is working to integrate all of South America as a free-trade zone, hoping to link Mercosur and the Andean Community of Nations by Jan. 1.

VW Brazil in October began producing the Fox, to compete with the Ford Fiesta, with 100,000 units annually earmarked for Europe. GM Brazil exports 100,000 to 120,000 CKD kits annually to various countries.

Ford Brazil had hoped to export its popular compact EcoSport cross/utility vehicle to the U.S. But U.S. management considered it too small and nixed the plan, Portillo says. Portillo expects Brazil's total 2003 light-vehicle sales to reach 1.24 million units and 2004's to hit 1.39 million. “That assumes a fairly mild but decent recovery in the economy,” he tells Ward's.

Production of completely built-up light vehicles for 2003, he says, will stay even with the prior year at 1.5 million units, with trucks and buses adding 95,000 units. Exports in 2004 will push total vehicle production to 1.84 million, including 1.7 million light vehicles.

Portillo forecasts Argentina's 2003 total light-vehicle sales at 132,000 units, marking 50% growth over the previous year, albeit a pale comparison with 450,000 units in 1998. Nevertheless, it is a reversal of four straight years of double-digit decline.
— with Sol Biderman in Sao Paulo

EUROPE NEW PRODUCTS MAY DRIVE MILD TURNAROUND

By Kevin Kelly

As the Western European auto market tries to recover from yet another year of lackluster demand, domestic manufacturers are returning to a fundamental course to improve the future: new product.

Overall Western European auto sales through the first nine months of the year are trending down 2% from year-ago to 12,522,144 units, according to Ward's data. The overall market is expected to end the year at 13.9 million units, nearly 500,000 vehicles shy of year-ago's 14.4 million, according to analysts at J.P. Morgan Securities Ltd.

The Eurozone's overall economy is following that same trend. The International Monetary Fund's World Economic Outlook predicts overall unemployment will top off at 9.1% for the year, compared with 8.4% in 2002, while economic growth will come in at a paltry 0.5%, nearly half the 0.9% growth rate seen in 2002.

“There are still relatively few signs of a broader pickup in real (economic) activity,” the IMF says.

While such frightening prospects might cause some to hunker down and slash expenses, European auto makers are seizing the opportunity to introduce vital new products in key volume and luxury segments.

Chief among them: the new Volkswagen Golf and Opel Astra. The Golf, alone, accounts for 15% to 20% of unit sales for the entire VW Group. Profits from the car are estimated at 50% for the entire VW brand, according to Commerzbank. The Golf hits Europe in the fourth quarter, followed by the Astra launch a few weeks later.

BMW AG also goes on the offensive with several new vehicles, including the 5-Series, which went on sale in Europe in September. It will be joined by the 6-Series coupe before year's end, as well as a refreshed X5 and all-new X3 cross/utility vehicle.

The X3 marks an important expansion for BMW into a smaller line of CUVs, while the 6-Series resurrects life in a segment BMW vacated in 1989. The entry-level 1-Series also is slated for late in 2004.

Renault SA, meanwhile, goes on its own product blitz with the remainder of its Megane 2 family (coupe/cabriolet, sedan, wagon and Scenic 7-passenger) due to hit the market before year's end.

“One of the key issues for the Renault brand over the next few years will be how the Megane 2 performs,” says Adam Collins, auto analyst with Commerzbank.

The new product offensive may be just what the market needs. J.P. Morgan analysts suggest the effort will help to propel Western European auto sales to 14.4 million units in 2004, on par with the more robust levels reported in 2002.

“(The new models) should have an impact on the market for certain. Particularly in…Germany, because the models that are being launched are heavily weighted toward the German market. Obviously the Golf and the Astra (are good examples),” Nigel Griffiths, director of international automotive industry research for Global Insight, tells Ward's.

Indeed, the largest market in the region, Germany, is expected to rebound dramatically to an annual rate of 3.5 million units, compared with the 3.3 million projected for 2003.

“We expect an improvement (in the German market) given the upcoming tax cuts and a number of new product launches,” says Himanshu Patel, auto analyst with J.P. Morgan in London.

The U.K. also should see demand rise by 150,000 units in 2004, and France should boost overall vehicle sales by 100,000 units. Italy is expected to remain in a slump next year. Government-initiated incentives boosted sales in the early months of 2003, and that will make it difficult for OEMs to keep pace next year.

The Eurozone economy should perk up in 2004, however. The IMF predicts the overall regional economy will grow by 1.9%, with gross domestic product rising 1.9%. The only negative rests in job growth, with unemployment seen rising to 9.2% from 9.1% in 2003. All of these estimates remain fragile, because exports will drive the momentum.

“Although the worst may now be over (for the Eurozone), the short-term regional outlook still appears quite weak: Recovery prospects are mainly dependent on a pickup in external demand,” the IMF says.

ASIA/PACIFIC JAPAN FADES; NEW MARKETS BLOSSOM

By Katherine Zachary

On the historic automotive map of Asia, there was Japan, and then there was a collection of satellite markets.

The relatively small, highly industrialized island nation has loomed larger than life, while ancillary markets — India, China and Southeast Asia nations — have represented more pipedream potential than hard sales and profits. Other established arenas, such as South Korea and Australia, have been strong but self-contained.

But a new map is being created, reflecting an automotive landscape that has Japan fading into the background, and China, India and the Association of Southeast Asian Nations (ASEAN) leaping to the forefront. For these emerging markets, the future has begun.

Global auto makers no longer view China in terms of long-term potential, flocking there to meet growing demand, bolstered by lowered trade barriers as a result of China's ascension into the World Trade Organization.

ASEAN, represented by its Big Four markets of Thailand, the Philippines, Malaysia and Indonesia, also is attracting renewed interest thanks to a recently implemented free-trade agreement, making it a regional, and eventually global, production hub, with an eye toward export.

And India, while not yet an automotive powerhouse, is emerging as a world engineering center.

Japan, with its perpetually faltering economy and historically fluctuating yen, stands in stark contrast. Unlike its neighbors, the country continues to wallow in the doldrums brought on by its 1998 financial crisis.

Auto makers there, which have thrived on the back of the North American market, increasingly have been driven offshore in search of new sales and better production opportunities.

Such opportunities are plentiful elsewhere in other Asian countries — notable for strong markets, cheap labor, central locations, and often-liberal trade policies. Indeed, Asia will account for more than half the global automotive growth in the next decade, says Ashvin Chotai, director-Asian automotive industry research, Global Insight.

Production forecasts through 2013 show a dramatic shift away from Japan and to less pricey manufacturing bases elsewhere. The upshot: Output in Japan will be cut by a staggering 1.18 million units over the next 10 years, Global Insight forecasts.

But the losses will be more than compensated for, and overall Asian vehicle production will increase 8.2 million units in that same timeframe. More than half — a whopping 4.5 million units, is slated for China, with the ASEAN region accounting for a combined 2.18 million vehicles and India chipping in 1.68 million.

Also, in the next 10 years, sales are forecast to grow by 9.4 million units — 4.3 million in China, alone. ASEAN again represents a significant force, comprising a forecasted 2.1 million in additional sales in the period. India's potential represents another 1.5 million units.

The flurry of automotive activity in China will culminate in 2008, when the country hosts the Olympic Summer Games. Global Insight forecasts a bit of a correction after this event, which has been a prime motivator for China's aggressive growth.

By then, virtually every global auto maker will be active through at least one joint venture with a Chinese partner, in anticipation of exponential sales growth.

The ASEAN nations, meanwhile, are seeking automotive dominance through cooperation. ASEAN is in the process of dramatically reducing tariffs through its ASEAN Free Trade Area pact.

The region also is putting the finishing touches on a trade agreement with Japan and recently entered into trade talks with China. Taking the long view, ASEAN recently forged an agreement to create a 10-state economic community, much like the European Union, by 2020.

Such trade pacts could pose a significant threat to China, especially since manufacturing and export hubs, such as Thailand, gladly welcome foreign auto makers — without the bureaucratic hoops.

Recent announcements see several auto makers, from Hyundai Motor Co. Ltd. to BMW AG, looking for sales growth in the region. DaimlerChrysler AG, alone, is expected to pump some E100 million ($116 million) into the market over the next two years, part of an effort to triple sales in the next decade.

And in India, auto makers continue to set up plants in anticipation of the market's emergence. As is the case in Southeast Asia, global auto makers are embracing the region not only for local potential but also for export possibilities, including components and parts.

Some, such as Volkswagen AG, are waiting for the market to stabilize before committing to major investment in India. Those taking the risks, however, are reaping rewards. Hyundai Motor Co. Ltd. is enjoying a sales boom due to the popularity of its low-priced, popular hatchbacks. Also hot are high-end segments, including luxury cars and the more utilitarian SUVs and multipurpose vehicles.

Forecasts are bright for domestic makers Maruti Udyog Ltd. and Tata Motors Ltd., both of which recently underwent major restructuring in preparation for a possible onslaught of competition.

Australia's more mature market is riding an exceptional wave, breaking all-time records almost monthly in 2003. The market has benefited from intense competition between traditional leaders, the Holden Commodore and Ford Falcon. Falcon sales topped Commodore's in September, ending its 70-month run as Australia's bestseller.

The industry is positioned to end the year at 900,000 units — well ahead of last-year's record. Imports, whose sales are on the rise thanks to the strength of the Australian dollar, also are contributing to record results.

And despite its isolated location, Australia's exports — particularly to the Middle East — continue to bolster production, including the Holden Monaro, rebadged as the new Pontiac GTO, which began arriving in the U.S. in October.

Also slated to play an increasing role is South Korea, which is forecast to increase production by some 810,000 units in the next 10 years as GM Daewoo Auto and Technology Co. Ltd., Hyundai, and Kia Motors Corp. grow their global footprints.

GM-Daewoo is resuming normal operations and boasts aggressive plans for production ramp-up and new product. Due largely to the strength of the reborn company, 2003's production represented a 166,000-unit growth from year-prior.

The country's total sales in 2004 are forecast to be 45,000 units more than in 2003, when the market shrunk versus year-prior, according to Global Insight.

The South Korean market, which experienced many twists and turns in the wake of the breakup of large conglomerates and the protracted GM-Daewoo deal, once again finds itself on solid footing — if not necessarily the meteoric growth trajectory that much of the continent continues to ride.