Weak dollar adds twist to 'Made in America' - MSN Money
European companies that once rushed to China or India now seek to lower production costs in the US, where a culture of innovation is also part of the appeal.
By MarketWatch
Forget about China; the United States is the new hot spot for global companies looking for lower production and transport costs, increased supply-chain flexibility and a crack at wooing the world's most demanding customers.
France's Alstom, a maker of high-speed trains and power turbines, this week became the latest European company to unveil plans for a facility across the Atlantic. The company wants to build a $200 million plant in Chattanooga, Tenn., to mitigate the impact of the weak dollar on its margins and to get closer to some of its biggest customers.
"Long term, a very high euro level is not good news," Alstom Chairman Patrick Kron told French radio Europe 1. "Let me also add the issue of volatility; we are in a heavy industry and exchange rates that change at the pace they're changing add to the difficulty."
The dollar has lost roughly 20% against the euro in the past two years. It's declined about 14% against the British pound. Partly as result of that depreciation, Alstom and other companies with global exposure are taking a fresh look at the United States as an attractive location for new facilities.
In recent months, companies ranging from automakers Fiat (FIATY, news, msgs) and Volkswagen (VLKAF, news, msgs) to German steel behemoth ThyssenKrupp (TYEKF, news, msgs) to South Korean consumer-electronics maker Samsung Electronics (SSNLF, news, msgs) have either publicly debated or set in motion plans for U.S. plants.
"They're worried about the movement of the dollar, so moving to a dollar zone takes a big element of risk out of the equation," said Richard Gane of PricewaterhouseCoopers.
Super-low-cost destinations lose appeal
The trend reflects a notable shift in strategy.
"Three or four years ago the discussion among supply-chain directors and C-level executives was all about low-cost sourcing in India and China," said Mark Pearson, managing director in the supply-chain management-consulting business of Accenture (ACN, news, msgs). But the feverish rush to super-low-cost countries has lost steam.
"In the last 12 to 18 months the discussion (about where to expand industrial footprints) has gotten a lot more mature and balanced, with companies looking at factors including currency, transport costs, manufacturing automation, business risk and supply-chain flexibility," Pearson said.
Alstom said it chose Chattanooga because the city offers good transport infrastructure from which to deliver its steam turbines across the United States.
Credit Suisse (CS, news, msgs) analysts applauded Alstom's decision, saying a U.S. plant will diversify the company's cost base at a time of significant currency moves and help it gain share in the U.S. power market just as capital expenditure in the sector is accelerating.
Alstom has recently won a number of contracts in the United States, including a deal with UniStar Nuclear Energy, a joint venture between Constellation Energy Group (CEG, news, msgs) and EDF that's focused on development of nuclear power plants in the U.S.
European carmakers also are sensitive to the edge a U.S. plant could give them as transport costs have soared. "If you have oil near $100 a barrel, transport costs for heavy stuff like turbines or cars become a much bigger consideration," Pearson said.
Italy's Fiat is planning to return to the U.S. next year after a 13-year hiatus. Chief Executive Sergio Marchionne recently told analysts that Fiat's sports car brand, Alfa Romeo, needs a North American plant to be profitable.
"To be successful in the U.S. market, we must be able to produce both engines and vehicles in the U.S," he said.
Germany's Volkswagen is scouting U.S. locations for as assembly plant. "We need high volume in the dollar zone," Volkswagen's production director, Jochem Heizmann, told the trade weekly Automobilwoche.
The plant would be part of the carmaker's Strategy 2018 plan to catch up with Toyota Motor (TM, news, msgs). While Volkswagen is Europe's largest carmaker, the U.S. market accounts for just a fraction of its sales.
Luxury carmakers are also making adjustments to their industrial footprint. BMW (BAMXF, news, msgs) and Daimler (DAI, news, msgs) are expanding American production in response to the dollar's falling value against the euro. BMW wants to increase capacity at its South Carolina plant by more than 71%, to 240,000 cars, by 2010.
"Most of these companies are based in the Southern U.S. because it's quite a low-cost location," said Gane of PricewaterhouseCoopers. "Wages there are not far off from what's being paid in Mexican border towns, where it's becoming harder to recruit workers."
Although the recent decline of the dollar has exacerbated the need for some European and Asian companies to diversify their currency exposure to remain competitive, some observers argue it's not the whole story.
"I think the exchange rate issue is gravy on the Excel sheet," said Todd Malan, president and chief executive of the Organization for International Investment, a trade association for foreign companies doing business in the United States.
"No one is going to build a plant with a 30-year capacity on the basis of an exchange-rate anomaly," he said. Malan said global firms are investing in the United States because of the country's highly skilled work force, expansive infrastructure and reliable legal environment. It also gives them access to a very large market.
Tailored to local tastes
Perhaps the largest investment announced in recent months is the $3.7 billion plant that German steel giant ThyssenKrupp is building in Calvert, Ala. The plant is creating 3,700 jobs.
"This new processing facility will allow us to strengthen our position in North America," Chairman Karl-Ulrich Koehler said. "It will create major advantages in terms of quality, costs and access to a customer base with a demand greater than current supply."
The pain from the weak dollar is even sharper for Airbus, maker of the A380 superjumbo jet. Airbus has perhaps been the most vocal European company in terms of the weakening dollar's damage to competitiveness. Because it sells aircraft in dollars but incurs most of its costs in euros, Airbus plans to shift some manufacturing to the U.S. and other countries linked to the currency.
Earlier this year Airbus opened its second North American engineering center in the U.S., in Mobile, Ala., to perform the interior design and definition work for its new A350XWB aircraft.
Airbus said each decline of 10 cents in the dollar against the euro costs it 1 billion euros in profit.
Parent company EADS (EADSF, news, msgs), eager to get a piece of the U.S. defense budget pie, has teamed with American military contractor Northrop Grumman (NOC, news, msgs) to put an American face on its pitch for the $40 billion-plus contract to build a new refueling tanker. EADS has promised to build a new factory in Mobile if it wins.
Makers of mobile phones and consumer electronics are also taking fresh looks at the United States, as new automation processes bring down the labor component of its manufacturing process and eliminate a major advantage of outsourcing to countries like India and China, said Accenture's Pearson.
Another allure is the innovation culture in the United States. As technology companies such as Apple (AAPL, news, msgs) have fostered consumers' appetite for constant innovation, competitors have been forced to accelerate the pace at which they introduce new gadgets and are under pressure to tailor them to local tastes.
In part for these reasons, Nokia (NOK, news, msgs), the world's largest maker of mobile phones, has opened a research-and-development center in San Diego that is focused exclusively on developing handsets for the North American market.
Likewise, memory-chip maker Samsung spent $3.5 billion on a new plant in Austin, Texas, that opened in June.
This article was reported and written by Aude Lagorce for MarketWatch.
Weak dollar adds twist to 'Made in America'
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