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Old August 9th, 2001, 10:52 PM   #1
Magic Mtn Dan
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Strong dollar to boost German carmakers further in U.S.

ANALYSIS-Strong dollar to boost German carmakers further in U.S.

By Madeline Chambers

FRANKFURT, Aug 9 (Reuters) - German car makers this year are relying on robust exports to the United States to help make up for falling demand at home, a trend analysts say will continue as long as the dollar is strong relative to the euro.

General Motors Vice Chairman and Chief Financial Officer John Devine on Wednesday, commenting about the detrimental effect of a strong dollar on U.S. manufacturers, had underlined the potential gains of foreign rivals.

"It's frankly destroying the manufacturing capability, the manufacturing competitiveness of this country," said Devine. "The strong dollar in the last couple of years has certainly given a lot of strength to the Germans and to the Japanese."

Analysts agreed that the strong dollar combined with growing U.S. demand for luxury cars are helping European and Asian carmakers dent the "Big Three" automakers' market share.

"There is no doubt that the Germans, as the main European exporters, have gained and will probably continue to gain from a strong dollar," said one London-based analyst.

The U.S. accounts for at least 20 percent of all German carmakers' sales and a greater proportion of their profits.

The euro has fallen since its introduction at $1.17 in January 1999 to $0.8877 as of Thursday. The drop began to have an appreciable effect on auto exports last year, analysts say.

In the first seven months of this year, unit sales at GM, Ford Motor Co and the U.S. Chrysler arm of DaimlerChrysler slipped between around seven and 12 percent.

At the same time, sales for BMW, the Mercedes-Benz unit of DaimlerChrysler, the Audi unit of Volkswagen, and Porsche climbed in the U.S.

Many economists expect a slight appreciation of the euro against the dollar in coming months and a further boost from the launch of euro cash on January 1. But a substantial recovery of the euro is far from certain.

INCENTIVE DRIVE

With a cheap euro, European companies can keep down their production costs measured in dollars and the dollar prices of their products. The favourable exchange rate also has helped them to afford high discounts on vehicle prices to boost sales.

A German bank said in a research note that European manufacturers' sales incentive costs per unit for July 2001 in the U.S. on average had climbed significantly from a year ago.

It said VW's Audi had tripled per-unit incentives to $2,043, while the VW brand had nearly doubled its to $929.

"The companies clearly believe they are better off selling cars with incentives in the U.S. than selling in Germany," said one U.K.-based analyst. He noted that this policy could only continue as long as the dollar remained strong.

Meanwhile, the German market, which slumped 11 percent last year offers little hope of recovery until 2002.

Only sportscar maker Porsche, which sells around half its vehicles in the U.S., gives no incentives. Its affluent customer base is less likely to be attracted by discounting, say analysts.

Many experts predict higher global growth rates for luxury vehicles than for the auto market overall in coming years, but some say that the potential for faster growth of the U.S. luxury market is limited.

"An increasing percentage of the population wants luxury products in the States, so there is underlying growth but there is a limit - this won't go on for ever," said one.

PRODUCTION IN US DAMPENS POSITIVE EFFECT

The positive effects of the strong dollar for BMW and Mercedes-Benz are partly offset by their production facilities in the U.S. They will reap the rewards from these once the euro appreciates substantially against the dollar.

"But with the current strength of the dollar, there is not much difference between the cost of producing in the U.S. and in Germany," said one London-based analyst.

While analysts agree that all German carmakers owe some of their profit growth to the favourable terms of trade with the U.S., they say conservative hedging policies at Porsche and BMW have capped the gains, whereas VW has benefited from a less cautious approach.

Ultimately, the carmakers know it is probably only a matter of time before the dollar dips from its current levels, and they know the impact of a weaker dollar would be significant.

Analysts at Schroder Salomon Smith Barney say on an unhedged basis, a 10 percent move in the dollar to the euro would affect BMW's profits by 15 percent.

In the meantime, German automakers can enjoy the party.
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