Into Japanese And German Exporters
by: Carl Delfeld
With the euro down nearly 15% this year and
at a two-year low against the U.S. dollar, the
world’s largest exporting nation is worth
a good look. So is another country that has
thriving exports in spite of a stronger currency.
We’re talking about Japan and
Germany, respectively, the world’s second-
and third-largest economies.
The top lines at leading German industrial companies
are rolling in with impressive numbers for an
almost zero-growth economy. Quarterly sales
at Siemens rose 13%, the fastest since 2003.
BMW’s sales rose by 11% in the third quarter,
although high raw-material costs and pricing
pressure resulted in weak net profits. A bright
spot is Asia, where BMW expects to sell 150,000
cars per year by 2008.
Overall, German exports are up for the third-straight
month and sales to countries outside of the
European Union rose 18% annually from a year
earlier. Clearly, the Germans are good at making
stuff and selling it to the world, and the weaker
euro is helping spur growth. Germany’s
DAX stock index is taking notice and is up nearly
Meanwhile, U.S. exports are up a paltry 2% since
2000. Although exports to China are up 35% during
this same period, Americans are now buying seven
times more from China than we are selling to
them. A good reason why is that, according to
research by Morgan Stanley's Stephen Roach,
consumer spending represents 71% of America’s
gross domestic product. The figure is 42% for
China and 55% for Japan.
Speaking of Japan, the aftermath of the financial
bubble has obscured the fact that it too, remains
an exporting powerhouse, despite a currency
that has risen more than 20% since 2002 and
13% this year alone. Just look at Japan’s
current account surpluses over the past three
years: $113 billion in 2002, $136 billion in
2003 and $172 billion in 2004. China is a major
market, and despite political difficulties,
bilateral trade between China and Japan now
exceeds trade between Japan and America.
A majority of Japan’s exports are manufactured
goods and components. Fifty percent of its exports
to China in 2004 were electrical equipment and
machinery, and its top exports to the world
include autos, electronic components, optical
instruments, imaging equipment and computer
Much is made over China’s huge trade imbalance
with America, which reached $126 billion in
the first eight months of this year. No doubt
a sizable share of Chinese exports to America
are chock full of Japanese components. While
some of these components were made in offshore
facilities, many were made in Japan, which has
been able to hold on to its industrial base
better than America.
How do they do it? First, the Japanese are continually
moving up the value-added curve and are careful
to keep the R&D and manufacturing of sophisticated
components close to home, while outsourcing
the low-end to low-wage countries.
Secondly, even though China’s wages are
about 5% of Japan’s, factory automation
has lessened the importance of labor costs.
For advanced high tech products, it accounts
for only 10% to 15% of total costs. Having manufacturing
closer to home also shortens new product lead
times and increases cooperation between R&D
and production teams leading to a crucial edge
in staying ahead of its nimble competitors.
Supply lines of 2,000 miles can be problematic.
Perhaps most important, there is the critical
issue of protecting intellectual capital. Having
research, development and production closer
to headquarters better protects proprietary
Canon, Sharp, Hitachi, NEC and Toyota are all
good plays on Japan’s manufacturing edge,
while Sony will continue to lag until it boosts
its R&D and catches up in product development.
The iShares MSCI Japan Index exchange-trade
fund is an attractive option, since it has about
50% exposure to Japan’s manufacturing
sector with an annual expense ratio of only
0.59%. Similarly in Germany, the iShares MSCI
Germany Index is loaded with that country’s
top exporters and would be an excellent proxy
for overall German export growth.
About The Author
Carl Delfeld is head of the global advisory
firm Chartwell Partners and editor of the the
"Asia-Pacific Growth" newsletter and
is the author of "The New Global Investor."
For more information please visit http://www.chartwellasia.com.
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