02.14.08

GM and its upside down international strategy

Posted in Strategies, Clean Technology, Exchange Rates at 5:30 am by Administrator

GM posted this week a record loss of $722 million for last quarter. But digging into it further the loss was from the sagging North American operations where the company is rapdily losing market share to Toyota, Honda and other international manufacturers. For 2007, GM’s revenue was flat in North America compared to the 50% gain in Latin America and 20% growth in Asia Pacific. The company continues to lose automotive U.S. market share–falling from 23.6% in 2006 to 23.1% in 2007. GM barely held on to its title as the largest automaker in the world, beating Toyota by just 3,000 vehicles.

This result came at a time when the dollar was at record lows against the Euro and was relatively weak against the Yen. Yet international carmakers figured out how to cut prices of exports to the US. Most of the international auto makers also have operations in the US and they also managed to profit despite the rise in prices for imported components due the weaker dollar.

GM, like most US manufacturers, exports relatively few cars. It chose a strategy after the Second World War of having local assembly or manufacture. In fact, GM cars in Europe bear little resemblance to the ones produced in the US. There is some sourcing of parts from the US but most of the content is local.

Over the past two decades, GM and Ford international operations have been more efficient and profitable than the domestic counterparts. But it leaves the auto makers unable to take advantage of a weak dollar since they export little. On the other hand, when the dollar is strong, imports are more competitive.

The US automakers have vigorously fought the new high fuel efficiency standards. They now must retool to produce more efficient engines. The international manufacturers, particularly the Japanese, have already made the investments in clean technology.

GM has much to do with ”right-sizing” its domestic operations. It also faces challenges in “greening” its fleet. However, if the company loses such money in weak dollar environment, watch out if the dollar suddenly strenghens. 

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01.26.08

Wild Week in the Markets Underscores Interconnectedness of World Economy

Posted in Economic Analysis, Taxes & Tariffs, Exchange Rates at 12:31 am by Administrator

What was interesting about the tumult of the last week in global stock markets is that the concerns began in Asia about worries over the direction of the US economy. That led to Asian investors pulling out of US stocks and European investors followed suit. The US markets were closed on Monday but it was clear to the Fed and US Treasury Department officials that with the drop around the world, the US markets would face a tsunami of sell orders at opening bell. The Fed reacted quickly by cutting some rates by 3/4 of a point and the President and Congressional leaders advanced their timetable on a stimulus package. Was it enough? We’ll have to see but the markets are still clearly worried at week’s end. My personal opinion is that there are short term liquidity issues that the markets are reacting to and long term growth issues as the US consumer has cut back on spending due to changes in the mortgage market. The equity line of credit piggy bank, which financed most of the growth in consumer spending since 2002, has been broken. It’s going to take a while for the consumer to pay down debts to start consuming again.

But let’s think through the international business implications of the policy changes in Washington this past week. The cut in interest rates made short term financial investments in the US less attractive versus the Euro or Yen zones. That will keep the dollar weak, now at $1.46/Euro. That will be good for US exporters and for foreign tourism coming to the US. That will also make it more difficult for European countries to expand their economies via the traditional export markets. I would expect the ECB to also cut rates, even with the fears about inflation.

The economic stimulus package will also affect the other major trading partner of the US, namely China. With the Yuan tied to the dollar, the interest rate cut will have little effect. However with a larger percentage of US income being spent on imported goods (estimated to be 21% today versus 19% in 2001), the stimulus package will increase demand for goods from China and part of the stimulus package will leak out of the economy.

Bottom line — Weak dollar, boost for US exports to Euro-zone and boost for Chinese exports to US.

What is your opinion - post a comment!

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01.09.08

How much has the export driven strategy led to the boom in China.

Posted in Economic Analysis, Exchange Rates at 5:34 am by Administrator

I found the article in the January 3 Economist entitled “An Old Chinese Myth” to be quite fascinating. It takes a contrarian view that increases in domestic demand, not the export surplus, have led to the economic boom in China.

Begin Quote: “MOST people suppose that China’s economic success depends on exporting cheap goods to the rich world. Headline figures show that China’s exports surged from 20% of GDP in 2001 to almost 40% in 2007, which seems to suggest not only that exports are the main driver of growth, but also that China’s economy would be hit much harder by an American downturn than it was during the previous recession in 2001. …If exports are measured correctly, however, they account for a surprisingly modest share of China’s economic growth…

“Jonathan Anderson, an economist at UBS, a bank, has tried to estimate exports in value-added terms by stripping out imported components, and then converting the remaining domestic content into value-added terms by subtracting inputs purchased from other domestic sectors.

“Once these adjustments are made, Mr Anderson reckons that the “true” export share is just under 10% of GDP. That makes China slightly more exposed to exports than Japan, but nowhere near as export-led as Taiwan or Singapore (which on January 2nd reported an unexpected contraction in GDP in the fourth quarter of 2007, thanks in part to weakness in export markets.  Surveys suggest that one-third of manufacturing workers are in export-oriented sectors, which is equivalent to only 6% of the total workforce.”

I have a slightly different take on the process based on my experience in countries like Chile and Argentina which opened their markets to international trade in the 1980’s. An exchange-rate policy that favors exports at the beginning of the process is certainly an important first step. However, in my opinion, the key policy change is that by orienting the country to international trade, an economy can rapidly close the technology gap with the developed world. In doing so, productivity increases and domestic sectors that feed the export industry can also increase production. In a few years, countries that were laggards in technology because of self-imposed isolation can catch up to the most modern production techniques.

One of the issues that critics of globalization seize on is that income gaps widen during this process of modernization. This results from the above processes. The sectors that are open to international trade advance quickly, only limited by the pool of skilled workers, while traditional sectors lag. This is not the fault of globalization but rather a reflection of sectors where the economy has not kept up to date because of low skill levels. The answer is not to slow down globalization but rather to increase investments in education and infrastructure.

China has boomed not from low-wage exports or a “rigged ” exchange rate but rather by moving up the value chain. That in turn has allowed a good portion of the traded-sectors to grow rapidly. The challenge in China, as other economies have experienced, is to bring the non-traded sectors of the economy up to the same levels of productivity.

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12.12.07

Great Article on Exchange Rates, China and Inflation

Posted in Economic Analysis, Exchange Rates at 6:36 pm by Administrator

I recommend you read Steven Pearlstein’s article in today’s Washington Post. It reiterates a point in one of my earlier blogs that we are exporting the inflationary pressures of the excess demand from the large US deficit. That is sustainable only as long as China is willing to keep an fixed exchange rate and maintain sterilization operations to limit domestic Chinese inflationary pressures. As I noted last week, many analysts are expecting contractionary policies after the Olympics. Pearlstein put is very well in the on-line discussion this morning in the Post:

“Q: how long can nations such as China tie their currencies to the dollar? It seems to me that at some point, that strategy will backfire.

Steven Pearlstein: Well, there is a limit on how long they can do it, as we now see. Without getting into the details, let’s just say that all the market turmoil you are seeing is an indirect effect of their currency manipulation all these years with the currency of a large trading partner. It causes all sorts of other distortions in market economies and financial markets, and those distortions eventually cause problems that come home to roost. These may look like our problems at the moment, not China’s. But if you look more closely, you see that China’s economy is overheating, inflation is very high and rising, there are bubbles in its real estate market and its stock market, and things are looking a bit dicey for them as well. Because they are still a controlled economy, they think they can handle this and let the steam out gradually — they raised bank capital reserve requirements to 14.5 percent the other day, which is very very high in an attempt to slow growth in credit and money. But markets have a funny way of correcting indirectly what they are not allowed to correct directly. All of which is a longwinded way of saying that the peg can’t last much longer.”

What do you think? What would be the impacts on your business strategy?

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12.05.07

Is China headed for a post-Olympics slowdown?

Posted in Strategies, Economic Analysis, Exchange Rates at 8:58 pm by Administrator

At the annual Business Climate Finance Outlook of the German American Business Association of California (www.gaba-network.org), Robert Prion of Citi Private Bank noted that his bank had lowered world economic growth estimates because of the US home mortgage crisis and because of an expected slowdown in China after the Olympics.

In China, the economy remains overheated, in part due to the dollar-pegged exchange rate. Because it is a non-reserve currency and is running a huge trade surplus, the Bank of China has had to undertake major sterilization operations to stop the money supply blowing up because of potential injections of dollars into the Chinese economy. The Chinese authorities have avoided taken the necessary adjustments (allowing the Yuan Renminbi to appreciate or significantly raising interest rates). (It should be noted that the government consolidated all credit decisions last week — a good first step.) However it appears that Beijing wants to wait until after Olympics to apply the brakes.

This is very reminiscent of what happened in Spain during their Olympic year of 1992. I was the economic attaché at the US Embassy during this period. The Spanish had pegged the peseta to the Deutsch Mark in the 1980’s and pumped up the economy with a major public works program to build infrastructure for the Olympics. (Spain was one of the fastest growing countries in the world in the 1980’s.) Shortly after the Olympics finished, Felipe Gonzalez took the necessary corrective actions, which led to his losing power to Aznar.

So in terms of strategy, my advice would to be to plan for a weaker Chinese market and an appreciation of the Renminbi.

What are your thoughts?

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11.30.07

How to take advantage of the weak dollar

Posted in Strategies, Economic Analysis, Exchange Rates at 5:03 am by Administrator

The economic laws of supply, demand, expectations and speculation work in the long run - it’s just that its sometime difficult to predict when the long run will occur. The mistakes of US economic policy over the past ten years (tax policy that gives incentives to spending over investing, large federal deficits, an energy policy that encourages petroleum imports, lax regulation of the mortgage market to name a few) have caught up with the US. We’re now facing a probable recession that will take several years to work through. One by-product is that the dollar has weakened substantially and it is part of the self-correcting nature of the markets. (The increase in exports helps expand the economy and jump start consumption.)

If your products are denominated in dollars, now is the time for your business to look at international markets. There are some short term profits that can be made solely on the basis of price and you can find those opportunities relatively easily. The mistake that many international business managers make is not following up on the low price “teasers” made possible by the favorable exchange rate. Take advantage of the opening by strengthening your international market presence: you should identify your customers, work as appropriate with distributors or local representatives and find ways to differentiate your produce/service from the competition in that market.

A recent study by the San Francisco Federal Reserve found that the export boom ended when the Fed raised interest rates as the economy matured. Thus, in your market strategy, use the opening to gain new markets and keep a close watch on the Fed’s interest rate policy (particularly the differential with the Euro rates). When the rates change direction, that is the time to work aggressively to keep the international markets.

You’ll find that if you can establish your product through weak and strong dollars, you will have a corporate strategy that will get allow you to weather weak domestic markets by expanding exports.

What is your stategy to take advantage of the weak dollar?

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