Why are they building new US car plants?

Discussion in 'Economics' started by BoyBrutus, May 31, 2006.

  1. Why have Japanese and Korean car manufacturers announced plans for new car plants in the US and Canada? I thought they would invest new production dollars in China, India and Brazil, the cheaper alternative. Can anyone shed any light on this?

    Honda says new US plant to have room to grow
    TOKYO (Reuters) - Honda Motor Co. Ltd said on Tuesday its new U.S. passenger car plant in the United States would start small and have room to grow.

    Honda last week said it would spend $400 million on a fourth U.S. assembly plant in the Midwest that is expected to come on line by 2008. The plant will raise Honda's North American output capacity by 200,000 to 1.6 million vehicles.

    The plant is part of aggressive expansion plans that also include an engine plant in Canada and a new auto plant in Japan as Honda seeks to boost global sales to 4.5 million cars in 2010, up 34 percent from 2005 levels.
  2. Typical results of the expectation of USD depreciation. If US Dollar keeps depreciation, the cost of manufacturing cars in Japan will be higher and higher when measured in dollar, but the cars are sold in US and are paid in U.S dollar, and it's not easy to raise prices. So building factories in U.S is a way to hedge away this currency risk, now they can pay salary and materials also in U.S dollars.

    Geman car makers have lost billions of dollars due to U.S dollar depreciation in recent years.
  3. Tums


    because the labour component of building a car is getting so small, it does not matter if the car is built in North America. The saving will be offset by the transportation cost.

    Bear in mind the total cost of the product -- the intellectual component (i.e. cost of designing the car, which is most likely done in NA) and marketing component is the same even if the car is built cheaper elsewhere.
  4. Chagi


    Correct. It also helps to shape sentiment in Canada and the US, e.g. helping to reduce protectionism.
  5. jerryz


    no its not because of any of those economic reasons guys. it's all politics. the japanese manufacturer needs government approval for something. in return, the manufacturer has to build a plant and provide jobs an influential senator's state. it's always something like this.
  6. That's a no brainer. The way things are going, the US will soon be building cheap cars using cheap labor for export to rich countries like China, Korea, a.o.
  7. wow
  8. 'cause someday they'll make nice condos?
  9. Wouldn't you think somebody would invent a derivative product that allows people to hedge their currency risk? And wouldn't you think that businesses who face a lot of currency risk would be eager to trade this derivative product (hedging their exposure)? A forward contract or an option whose underlying is the EURUSD exchange rate, might have helped those German car makers.....
  10. Correct me if I am wrong, but I think it's very hard to hedge away long-term currency risk using financial derivatives.
    #10     Jun 1, 2006