With the euro down nearly 15% this year and at a two-year low
against the U.S. dollar, the world's largest exporting nation
is worth a good look. So is another country that has thriving
exports in spite of a stronger currency. We're talking about
Japan and Germany, respectively, the world's second- and
third-largest economies.

The top lines at leading German industrial companies are
rolling in with impressive numbers for an almost zero-growth
economy. Quarterly sales at Siemens rose 13%, the fastest since
2003. BMW's sales rose by 11% in the third quarter, although
high raw-material costs and pricing pressure resulted in weak
net profits. A bright spot is Asia, where BMW expects to sell
150,000 cars per year by 2008.

Overall, German exports are up for the third-straight month and
sales to countries outside of the European Union rose 18%
annually from a year earlier. Clearly, the Germans are good at
making stuff and selling it to the world, and the weaker euro
is helping spur growth. Germany's DAX stock index is taking
notice and is up nearly 20% year-to-date.

Meanwhile, U.S. exports are up a paltry 2% since 2000. Although
exports to China are up 35% during this same period, Americans
are now buying seven times more from China than we are selling
to them. A good reason why is that, according to research by
Morgan Stanley's Stephen Roach, consumer spending represents
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 too, remains an exporting 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, bilateral trade
between China and Japan now exceeds trade between Japan and
America.

A majority 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 top exports to the
world include autos, electronic components, optical
instruments, imaging equipment and computer parts.

Much is made over China's huge trade imbalance with America,
which reached $126 billion in the first eight months of this
year. No doubt a sizable share of Chinese exports to America
are chock full of Japanese components. While some of these
components were made in offshore facilities, many were made in
Japan, which has been able to hold on to its industrial base
better than America.

How do they do it? First, the Japanese are continually moving
up the value-added curve and are careful to keep the R&D and
manufacturing of sophisticated components close to home, while
outsourcing the low-end to low-wage countries.

Secondly, even though China's wages are about 5% of Japan's,
factory automation has lessened the importance of labor costs.
For advanced high tech products, it accounts for only 10% to
15% of total costs. Having manufacturing closer to home also
shortens new product lead times and increases cooperation
between R&D and production teams leading to a crucial edge in
staying ahead of its nimble competitors. Supply lines of 2,000
miles can be problematic.

Perhaps most important, there is the critical issue 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 plays on
Japan's manufacturing edge, while Sony will continue to lag
until it boosts its R&D and catches up in product development.


The iShares MSCI Japan Index exchange-trade fund is an
attractive option, since it has about 50% exposure to Japan's
manufacturing sector with an annual expense ratio of only
0.59%. Similarly in Germany, the iShares MSCI Germany Index is
loaded with that country's top exporters and would be an
excellent proxy for overall German export growth.


About The Author: Carl Delfeld is head of the global advisory
firm Chartwell Partners and editor of the the "Asia-Pacific
Growth" newsletter and is the author of "The New Global
Investor." For more information please visit
http://www.chartwellasia.com