Trade: Europeans Ponder Production Moves

Strong euro, weak dollar make U.S. attractive.

In 2004, the press was replete with stories of U.S. production jobs moving overseas. Will 2005 be the year of production jobs moving into the U.S.?

If the dollar continues to trade at about 1.3 euros, where it was at press time, the answer might be yes.

Although first-quarter job and import/export figures had not been released at the time of this report, there is anecdotal evidence that manufacturers with operations in European Union countries are considering moving more production to the U.S. to offset the increased cost of importing parts and finished goods here.

"The currency situation currently makes American products more affordable in foreign markets given the weakness of the American dollar," explains Joe Barker, manager of North American sales analysis at CSM Worldwide, Lansing, Mich., an automotive market research firm. European manufacturers, he says, have to make a decision: Raise prices to compensate for the exchange rate, offer incentives on their products or bring production to the U.S. The first two options, he notes, "aren't the European way of doing business."

Volkswagen

In one example, Europe's largest carmaker, Germany's Volkswagen AG, announced in December 2004 it was considering opening a plant in the U.S. to help spare a $1.6 billion loss it expected in North American sales this year, due largely to the exchange rate. Ultimately, the company decided to offset the losses by boosting production at its Mexican and Brazilian sites.

Expect more of this kind of global shifting from European manufacturers in 2005, Barker notes. "What the European auto companies are doing is they're re-evaluating their sourcing strategies. Right now, they're getting hit pretty hard from a profitability standpoint. You want to make sure that you're balanced enough where you don't take that heavy of a hit when one currency strengthens and another weakens. Right now, for the European car companies, there isn't any balance in terms of manufacturing in North America and Europe."

U.S.-based companies with European operations are re-evaluating plant locations as well. "The rise of the euro definitely has had an impact on where we move production within the company," says Dave Besser, vice president of manufacturing for Crown Equipment Corp., a New Bremen, Ohio-based manufacturer of lift trucks. As a private, vertically integrated manufacturer, Crown is flexible in terms of moving production.

Although they are facing losses in the billions, as Volkswagen predicted, European manufacturers selling in the U.S. are being patient for the most part. They're considering the move, but a major wave of production emigration has yet to hit the U.S. In the meantime, European companies that lack North American production sites are weighing their losses, while companies with U.S. operations can take swift advantage of more profitable imports to European Union countries.

Barker sees only one solution for companies on the losing side of the currency equation: "Europeans need to produce more in North America."

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