With the euro down nearly 15% this year and at a two-year low against the US dollar, the world’s largest exporting nation is worth a good look. So is another country that has thriving exports despite a stronger currency. We are talking about Japan and Germany, respectively, the second and third largest economies in the world.
The top lines of major German industrial companies are coming in with impressive numbers for an economy of near zero growth. Siemens’ quarterly sales rose 13%, the fastest since 2003. BMW’s sales rose 11% in the third quarter, though high raw material costs and price pressure resulted in weak net profit. One bright spot is Asia, where BMW expects to sell 150,000 cars a year by 2008.
Overall, German exports were up for the third consecutive month and sales to countries outside the European Union were up 18% annually over the previous year. Clearly, the Germans are good at making things and selling them to the world, and the weak euro is helping to spur growth. Germany’s DAX stock index is taking notice and is up almost 20% year to date.
Meanwhile, US exports have risen a paltry 2% since 2000. Although exports to China have increased 35% over this same period, Americans now buy seven times more from China than we sell to them. One good reason is that, according to research by Morgan Stanley’s Stephen Roach, consumer spending accounts for 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 also remains an export 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, trade China-Japan bilateral trade now exceeds Japan-to-Japan trade. and America
Most 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 main exports to the world include automobiles, electronic components, optical instruments, imaging equipment, and computer parts.
Much is being made of China’s huge trade imbalance with the United States, which reached $126 billion in the first eight months of this year. To be sure, a sizeable portion of Chinese exports to the United States are packed with Japanese components. While some of these components were made in offshore facilities, many were made in Japan, which has been able to maintain its industrial base better than the United States.
How they did it? First, the Japanese are continually moving up the value-added curve and are careful to keep R&D and manufacturing of sophisticated components close to home, while outsourcing the low-end to low-wage countries.
Second, despite China’s wages being around 5% of Japan’s, factory automation has made labor costs less important. For advanced high-tech products, it accounts for only 10-15% of total costs. Having manufacturing closer to home also shortens delivery times for new products and increases cooperation between R&D and production teams, creating a crucial advantage in staying ahead of your nimble competitors. 2,000 mile supply lines can be problematic.
Perhaps most important is the critical issue of intellectual capital protection. Having research, development and production closer to headquarters better protects proprietary technologies.
Canon, Sharp, Hitachi, NEC and Toyota are all good plays on Japan’s manufacturing lead, while Sony will continue to lag behind until it ramps up its R&D and catches up on product development.
The iShares MSCI Japan Index trading fund is an attractive option, as it has around 50% exposure to Japan’s manufacturing sector with an annual expense ratio of just 0.59%. Similarly, in Germany, the iShares MSCI Germany Index is packed with that country’s top exporters and would be an excellent indicator of overall German export growth.