On a higher level, there is certainly a case that foreign manufacturers have more resources available per dollar per car. In other words they can afford to put more in a car for the same sale price. Trying to sketch my thoughts:
In Germany, it is thanks to European monetary policy that artificially depresses the Deutsche Mark, allowing for cheaper exports and lower costs for German companies, as well as a captive market whose currency is overvalued in exactly the same way destroying local industry (i.e. German loans pay for German cars to be sold to the Europeans but the other way round is much harder). Hello VW, goodbye Rover. On top of this Germany is absorbing East Germany which is a handy source of incredibly cheap labour (in the same way that illegal labour is in the US food and farm industry) AND massive subsidies for whoever wants to go take advantage of it (I know a company that opened a very, very expensive plant 200km from Berlin because the subsidy was such that they came out profitable even if the plant lost money for 20 years).
In Japan, it is both systematic currency devaluation and the keiretsu system (which I think is what drives the continuation of "Japanese corporate culture" rather than the other way round). Its effects are/were (til early 2000s, not sure about today): cheaper currency from systematic yen devaluation (same as the eurozone effect), lack of competition including collusion to keep wages down locally (tough immigration laws help), collusion to maintain very high prices effectively "taxing" the population with the money directly "financing" inefficiencies within keiretsu companies. These are all structural advantages to Japanese manufacturers.
Culture plays a part, no doubt. There are appeals in the Tokyo metro to buy Japanese bonds as a "patriotic duty", which is a form of voluntary further taxation (and just look at who owns the majority of JGBs). The Mittelstand culture, excellent education and long history of industry in Germany certainly help. But I think macro factors are equally if not more important, and much fewer discussed in "normal" circles (i.e. outside finance).
> In Germany, it is thanks to European monetary policy that artificially depresses the Deutsche Mark, allowing for cheaper exports and lower costs for German companies, as well as a captive market whose currency is overvalued in exactly the same way destroying local industry (i.e. German loans pay for German cars to be sold to the Europeans but the other way round is much harder). Hello VW, goodbye Rover.
The Euro actually appreciated massively between 2000 and 2008 as the German economy recovered [1].
> On top of this Germany is absorbing East Germany which is a handy source of incredibly cheap labour (in the same way that illegal labour is in the US food and farm industry)
The pay for the average German auto worker is considerably better than that for the average American auto worker [2]. (Note that this needs to be relativized somewhat because German car companies also employ temp workers that aren't paid that well, but they still make up a minority.)
If the "German Euro" was to split from the "not German Euro" tomorrow as the CHF unpegged recently, do you think it would trade higher or lower than it trades now? What would happen to Audi and VW if it was to trade twice as high?
A fictional "German Euro" would still appreciate relative to the "not German Euro", yes. My point is not that Germany does not benefit from a comparatively weak Euro – it does – but that this doesn't really explain differences between the German and the American automobile industry.
So, your economist might be right, of course, and I am not an economist, just a former junior trader who didn't work out and changed careers. Nevertheless I am pretty sure that if you jack up your prices by 50% overnight, with the prospects of them continuing to rise year on year for decades, you're going to see some price sensitivity. I thus respectfully disagree with the idea that a sudden and large currency appreciation has no effect on a country's exports.
Switzerland can get away with it because there are few locations left which respect foreigner property rights so thoroughly (including against their own government, although this is weakening). Nevertheless they were worried by the prospects sufficiently to literally go and support a peg for years.
1. I'm not saying that it wouldn't have an effect, just that the effect is difficult to predict and may very well be minimal.
2. Keep in mind that many German export products aren't particularly price-sensitive. Take for example, Delo, a typical German Mittelstand business. They produce smartcard adhesives (inter alia) and have pretty much cornered the world market on that product (a few years ago, about 80%, and a pretty good chunk of the smartphone market, too). The cost of adhesives doesn't really factor in the price of a smartcard and quality is more important, so currency valuations have relatively little effect.
3. Most of the value chain of German car manufacturers was outsourced to Eastern Europe in the 1990s [1]. Much of the effect of any increased export prices would be offset by cheaper imports.
4. I can't think of any effect that would jack up the value of a currency by 50% overnight, short of a major economic disaster. A currency appreciation would almost always be gradual and occur over several years.
5. While we are talking about counterfactuals, keep in mind that the US is a currency union also. Similar effects would result in America if the US dollar were split in, say, a Northern dollar and a Southern dollar. Detroit would suddenly see its cars become more difficult to export, while Tennessee's would become cheaper (just as Eastern Europe's under the Euro counterfactual).
Oh, a sharp move can happen, exactly as it just did with Switzerland (41% [2] although stabilized at a bit under 20%): via an exit from a peg. The monetary union is such a peg, an exit or any form of breakdown would cause a sharp revaluation. Without warning, for obvious reasons.
You could argue that an economy which is entirely in a naturally monopolistic, price-insensitive position might be able to weather some pretty severe currency moves, but I don't think Germany can be described thus. 70% of the German economy is services, and 69% [1] of German exports are to EU countries (which would be particularly hit by a EUR breakup as they'd move the same amount the other way). Cars are the largest export by dollar value [2]. I don't know how I'd get stats to show price sensitivity of exports, that being said I know of no car company which is not price sensitive, other than niche manufacturers (e.g. Morgan in the UK). Medical supplies might be another story, especially as it's capex intensive and low headcount. Imports might be part of the picture, but VW's 45% of global staff that is employed in Germany will still draw German Euro paychecks.
As per 5. you appear to agree with me: macro effects are global and "nowhere/no time is different". Although it is not Eastern Euros but Southern Euros which would devalue. Poland isn't Greece by any stretch.
Now I will admit that I agree with you a little bit: I think the fears of currency appreciations are somewhat overstated, particularly in a sophisticated economy producing high value added goods (mine is similar to the reasoning you put forward). Maybe Swiss readers can confirm, but the CHF appreciation seems to have gone alright [4]. But, I had to make the case, and it was popular amongst traders when I was still in the business.
> In Germany, it is thanks to European monetary policy that artificially depresses the Deutsche Mark, allowing for cheaper exports and lower costs for German companies, as well as a captive market whose currency is overvalued in exactly the same way destroying local industry (i.e. German loans pay for German cars to be sold to the Europeans but the other way round is much harder). Hello VW, goodbye Rover. On top of this Germany is absorbing East Germany which is a handy source of incredibly cheap labour (in the same way that illegal labour is in the US food and farm industry) AND massive subsidies for whoever wants to go take advantage of it (I know a company that opened a very, very expensive plant 200km from Berlin because the subsidy was such that they came out profitable even if the plant lost money for 20 years).
Fascinating story, if only Germany had started producing cars in 2000 with the introduction of the Euro. How do you think VW, Audi etc. fared in the 70's and 80's (and the rest of the German economy in general)? In addition, the Euro is pretty much irrelevant because the cars are mostly produced in the region where there are sold - do you think the exchange rate is relevant for the VW factories in Mexico, Tennessee and Pennsylvania for the north American market? How does a cheap Euro make the import of resources from outside the Eurozone cheaper, steel, aluminium etc.?
According to [1] around 170k of Volkswagen 370k employees are in Germany. That is a significantly higher proportion than is warranted by the size of the market. Hence export advantage.
Second, I did not claim that macroeconomics of the Euro period were sole responsible for the success of German companies. I said that one large contributing factor to the success or even survivability of German companies in export markets, versus other countries (such as the Koreans) was the fact that the euro allowed for de facto currency devaluation without any of the durable disadvantages associated (either the structural breakdown of the country that implies the devaluation, or the impact of inflation on savings, etc.)
I worded it in long form because it is a complex, high dimensional subject not suited for one sentence summaries. As is most of economics and politics.
> to keep wages down locally (tough immigration laws help),
This is the first time I've heard of tough immigration laws help to keep wages down. All I hear from the US is complaints about H-1B immigration depressing wages.
And immigrating to Japan is definitely NOT tough at all for any educated labour, only uneducated labour (and letting in uneducated labour from S-E Asia would absolutely be send wages plunging). If you have a college degree and can find an employer, you will have zero resistance immigrating to Japan. Way easier than Europe or the USA where there are strict quotas.
My mistake. I had a point to make about immigration but forgot to make it, the draft stayed in place. Regarding long term immigration, I thought gaijins could never secure PR or citizenship (i.e. residence not tied to work) unlike in say the US (Green Card) or Singapore (PR, PEP) to name two.
FWIW I think immigration policy being overly strict harms economic growth in two ways:
- depleting the supply of talent increasing the cost of running a business that depends on the talent;
- stopping foreign founders from starting a business in your country to take advantage of its better conditions cuts the number of high growth businesses.
On the first point, Singapore is the extreme example. There are/were no Haskell developers there at least at the price we were able to pay (because the only Haskellers were at Standard Chartered making about twice as much). I tell this story often so the details might be fuzzy as time passes and the numbers dissolve in my memory, but our job ad had 150 qualified applicants (i.e. completed our selection task and it compiled and worked as expected) from the rest of the world (mostly from the US, Canada and Northern Europe) and 0 from Singapore, not even on EPs, although two SCB chaps did get in touch informally asking about the salary range.
My then team of 10 would never have existed had Singapore not had its extremely open Employment Pass system (which the US does not have); every single member (bar one Singaporean who learnt Haskell) was "imported". In practice, we had planned for this eventuality and had looked into alternative locations; half the team ended up remote anyway.
On the second point, I once made a back of the envelope calculation showing that around 40% of famous Silicon Valley founders (i.e. Intel, Apple, etc. level companies - I just took the list of the highest valued and kept working down until I had a significant sample) were first or second generation immigrants. Taking our two examples, Jobs had a Syrian father and Andy Grove was born Andris Gróf in Budapest.
The real damage of the H1-B policy (other than being a lottery and being gamed to hell and back) is thus tying the visa to a workplace. It's not damaging per se, since one could in theory spin up a company and apply for the visa; it's damaging in practice, because the process takes months, expensive lawyers, and piles of paperwork which is definitely not "useful" work and usually unaffordable to a "normal" startup founder. Singapore, again, has it right: an Employment Pass takes around 7 working days to be approved, making it extremely easy to change jobs.
(However, due to people using its EntrePass to skip investor visa requirements, it now has ridiculous requirements such as hiring levels to be maintained and having to be invested in from a shortlist of approved investors none of which actually do seed investing. So people spin up a company with their accountant as the local director and get themselves an Employment Pass that way...)
It's never been easier and cheaper to start an international software company, and software is "eating the world" so I suspect at some point a location will realize the potential. I wonder how long Silicon Valley's advantage in capital and knowledge will last as it restricts its effective talent pool to a population of 300 million vs the other 9 billion in the world rapidly arriving to middle class living standards and knowledge; but so far no country has gone forward and allowed foreigners (or non-Europeans, in the case of Europe) to start companies easily in their land.
> Regarding long term immigration, I thought gaijins could never secure PR or citizenship (i.e. residence not tied to work) unlike in say the US (Green Card) or Singapore (PR, PEP) to name two.
Permanent Residency is easy to obtain in Japan as long as you do the time (which is as low as 3 years if you have a native spouse). Gaining citizenship is also not a problem, but they don't allow dual citizenship (meaning you have to give up your original citizenship), which makes it a very unattractive option.
Japan has issues attracting educated foreign labour, but it has nothing to do with immigration but rather to do with language barriers, a very poor work environment, and in tech in particular, absolutely noncompetitive wages.
3 years if married, 10 years if not [1]... well, it's better than "not available" but still a significant impediment to starting a business! Nevertheless I was wrong, thanks for correcting.
I was wondering the same thing and did some searching. It turns out the mark is still exchangeable to Euro, fixed at 1.95583 marks to EUR. As of 2012, there were billions of marks supposedly still in circulation. Not directly related to the GP comment, just interesting IMO. http://www.wsj.com/articles/SB100014240527023043738045775209...
That's the whole point! The monetary union means the EUR (the "new" mark) is lower (from a German standpoint) than it would be should it be trading separately. Having Greece in the EU is an ADVANTAGE to German manufacturers. Greece is "passing on" its currency advantage to Germany.
See what just happened to the CHF when the peg lifted.
In Germany, it is thanks to European monetary policy that artificially depresses the Deutsche Mark, allowing for cheaper exports and lower costs for German companies, as well as a captive market whose currency is overvalued in exactly the same way destroying local industry (i.e. German loans pay for German cars to be sold to the Europeans but the other way round is much harder). Hello VW, goodbye Rover. On top of this Germany is absorbing East Germany which is a handy source of incredibly cheap labour (in the same way that illegal labour is in the US food and farm industry) AND massive subsidies for whoever wants to go take advantage of it (I know a company that opened a very, very expensive plant 200km from Berlin because the subsidy was such that they came out profitable even if the plant lost money for 20 years).
In Japan, it is both systematic currency devaluation and the keiretsu system (which I think is what drives the continuation of "Japanese corporate culture" rather than the other way round). Its effects are/were (til early 2000s, not sure about today): cheaper currency from systematic yen devaluation (same as the eurozone effect), lack of competition including collusion to keep wages down locally (tough immigration laws help), collusion to maintain very high prices effectively "taxing" the population with the money directly "financing" inefficiencies within keiretsu companies. These are all structural advantages to Japanese manufacturers.
Culture plays a part, no doubt. There are appeals in the Tokyo metro to buy Japanese bonds as a "patriotic duty", which is a form of voluntary further taxation (and just look at who owns the majority of JGBs). The Mittelstand culture, excellent education and long history of industry in Germany certainly help. But I think macro factors are equally if not more important, and much fewer discussed in "normal" circles (i.e. outside finance).