Buying Into Japanese And German Exporters
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Investing in Japanese and German Exporters
Overview
As the euro has dropped nearly 15% this year, reaching a two-year low against the U.S. dollar, Germany?"the world’s largest exporting nation?"becomes increasingly attractive for investors. Meanwhile, Japan, with its robust export sector, also stands out despite a stronger currency. These countries are the second and third largest economies globally, making them significant players in the export market.
German Export Success
German industrial giants are thriving, even in an almost stagnant economy. Siemens saw a 13% surge in quarterly sales?"the fastest growth since 2003. BMW's sales jumped 11% in the third quarter, although profits were tempered by raw material costs and pricing pressures. The Asian market is particularly promising, with BMW projecting annual sales of 150,000 cars by 2008.
German exports have grown for three consecutive months, with non-EU sales up 18% from the previous year. This success underlines Germany's manufacturing prowess, further amplified by the weaker euro. As a result, Germany's DAX stock index has climbed nearly 20% year-to-date.
Contrast with U.S. Exports
In comparison, U.S. export growth has been modest at just 2% since 2000. Although exports to China increased by 35% during this time, the trade imbalance is significant, as Americans buy seven times more from China than they sell. This discrepancy is partly due to the varying proportions of consumer spending in GDP: 71% for the U.S., 55% for Japan, and 42% for China.
Japan's Export Resilience
Despite a challenging financial period and a currency that has appreciated over 20% since 2002, Japan remains a formidable export powerhouse. Its current account surplus has steadily increased?"$113 billion in 2002, $136 billion in 2003, and $172 billion in 2004. Amid political challenges, China's trade with Japan has surpassed that with the U.S., spotlighting China's importance as a market for Japanese goods.
Japanese exports are predominantly manufactured goods and components, with electrical equipment and machinery comprising 50% of exports to China in 2004. Key exports include automobiles, electronic components, optical instruments, imaging equipment, and computer parts.
Japan’s Competitive Edge
Japan maintains its manufacturing edge through strategic innovation. By focusing on high-value products and retaining R&D and sophisticated component production domestically, Japan effectively outsources low-end manufacturing to lower-cost countries. Despite China's considerably lower wages, Japan utilizes factory automation to minimize labor costs, making them a smaller portion of total production costs.
Strategically, domestic manufacturing shortens lead times for new products and fosters collaboration between R&D and production, giving Japan a competitive advantage. Protecting intellectual property by keeping R&D close to headquarters is also crucial.
Investment Opportunities
Japanese companies like Canon, Sharp, Hitachi, NEC, and Toyota exemplify this manufacturing superiority. In contrast, Sony lags behind due to insufficient R&D investment. For investors, the iShares MSCI Japan Index ETF offers about 50% exposure to Japan's manufacturing sector with an annual expense ratio of 0.59%.
Similarly, the iShares MSCI Germany Index ETF provides an excellent opportunity to invest in Germany’s top exporters, reflecting overall growth in German exports.
This strategic insight into Japanese and German exporters highlights significant investment opportunities, leveraging their manufacturing strengths and global market positioning.
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