Buy from Japanese and German exporters
With the euro falling nearly 15% this year and a two-year low against the US dollar, the world’s largest exporting nation deserves a good look. So is another country that has prosperous 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 the major German industrial companies are coming in with impressive numbers for a near zero growth economy. Quarterly sales at Siemens increased 13%, the fastest since 2003. BMW sales increased 11% in the third quarter, although high raw material costs and price pressure resulted in weak net earnings. One bright spot is Asia, where BMW expects to sell 150,000 cars a year in 2008.
Overall, German exports were up for the third month in a row and sales to countries outside the European Union were up 18% annually from the previous year. Clearly, the Germans are good at making things and selling them to the world, and the weaker euro is helping to stimulate growth. Germany’s DAX stock index is taking notice and is up almost 20% so far this year.
Meanwhile, US exports have risen a paltry 2% since 2000. Although exports to China increased 35% during 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 an important market, and despite political difficulties, bilateral trade between China and Japan now exceeds trade between Japan and America.
Most of Japan’s exports are manufactured goods and components. Fifty percent of its exports to China in 2004 were electrical machinery and equipment, and its main exports to the world include automobiles, electronic components, optical instruments, imaging equipment, and computer parts.
Much is 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 considerable part of Chinese exports to the United States is 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 sophisticated component manufacturing close to home, while outsourcing low-wage countries to low-wage ones.
Second, although China’s wages are about 5% of Japan’s, factory automation has diminished the importance of labor costs. In the case of advanced high-tech products, it represents only 10-15% of total costs. Having manufacturing closer to home also shortens lead 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 fundamental question of protecting intellectual capital. Having research, development and production closer to headquarters better protects proprietary technologies.
Canon, Sharp, Hitachi, NEC and Toyota are all good games in Japan’s manufacturing advantage, 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 exchange 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 loaded with top exporters from that country and would be an excellent indicator of overall German export growth.