Can The Detroit Automakers Capitalize On The Weakened Dollar?

Implications: The U.S. automakers are hoping that a decline in the dollar and renegotiated labor contracts will provide the spark they need to once again turn a profit.

Analysis: For decades, the U.S. auto industry has been hampered by high labor costs and stiff competition from foreign car makers importing vehicles. Often foreign cars have the advantage of cheap labor and relatively few barriers for entry into the U.S. car  market, and as a result they were able to produce a superior, less-costly product.

The Detroit Three are hoping that the global economy will be more receptive to the now cheaper U.S. cars, especially in places with a rapidly growing consumer class, such as China. Further strengthening the global competitiveness of U.S. autos are the newly-signed contracts between the car makers and the UAW. The union softened its demands in order to keep the industry afloat, as the U.S. was the most expensive country in the world to make a car.

However, there are still significant concerns that the U.S. will never be able to compete with labor costs in the economies of Asia, which are still a fraction of what the domestic car makers pay. The Detroit Three have been less successful than they had hoped at enticing tenured, higher paid workers to take a buyout, in favor of cheaper new hires.

U.S. car makers are in a familiar spot between a rock and a hard place, and the shift to focus internationally-while strategically sound-is far from a panacea. The declining dollar does enable the U.S. to compete more effectively globally but cost cutting will continue to be an important goal for U.S. car makers.

From a long term investment perspective, the fundamentals at Ford and GM seem to be slighty undervalued, but the concern is that the auto industry will continue to struggle unless they can carry out significant cost cuts.