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Germany’s Economic Growth Points Towards Emerging Market Demand

Germany’s Economic Growth Points Towards Emerging Market Demand

by Tony D’Altorio, Investment U Research
Monday, April 4, 2011

Germany is well known as an industrial powerhouse, producing high-quality goods. Its companies have maintained their leading positions for decades, even while many American businesses fall by the wayside.

Part of this is because of their ability to adapt to changing economic conditions. Even now, German companies like Siemens ADR (NYSE: SI) and Daimler ADR (PINK: DDAIY) are doing just that.

Like a growing number of other industrial firms, they are strengthening research and development (R&D) in emerging markets. Their intent is to develop products more suited to local market needs.

Take Bosch, an engineering and car parts company, and Siemens. Both have helped pioneer “localizing” products by simplifying them.

Bosch, for one, calls some of its mid-priced controls for machine tools in China the “just enough” segment. They have the same base performance as elsewhere, but with usability adapted specially for Chinese needs.

Emerging markets demand, especially in Asia, is rising rapidly for high-quality products. But consumers there want lower prices and less functionality than Western versions.

To develop just that, most large German industrials are increasing their R&D budgets.

R&D Spending Increases for Emerging Market Demand

In February, automaker Daimler said it aimed to lift R&D spending by a third, to about $28.5 billion this year and next.

The company did not specifically say how much of that would flow into emerging markets. But it has already revealed plans to spend over $5.5 billion on plants in China and India.

Daimler also said it is working with local partners to build locally branded, lower-priced trucks and electric cars for the Chinese market.

Meanwhile, Siemens’ chief financial officer, Joe Kaeser, says his company plans to spend nearly $700 million more on R&D this year than 2010’s nearly $5.5 billion.

He says: “We will spend the bulk of this incremental spending on adapting products for emerging markets. We have to enforce our local engineering to better meet demand in those regions.”

That makes sense, considering Siemens’ tremendous success so far in localizing products and selling them globally.

For instance it developed its Somatron Spirit, an entry-level CT scanner, in China and has produced it there since 2005. Today, more than 80% of those sales come from outside China.

German Companies Adapt to Realities of Global Markets

German companies have adapted quickly to the realities of global competition. Not too many other countries can claim the same.

Industry experts say that many businesses need to move into low or medium-priced products in order to keep growing. The same goes for if they want to withstand emerging market competition.

Why else would even Apple (Nasdaq: AAPL) be thinking about producing lower-priced iPhones aimed at such areas?

Many people, especially in the U.S., don’t like the idea because it costs domestic jobs. But German companies manage to keep a significant part of their R&D and other capabilities at home.

And Stifterverband, an industry association that promotes science, says they plan to boost R&D spending again this year, by more than 4%, to about $85 billion.

Germany shows that pushing into emerging markets can be done without losing local jobs. Such policies could explain why German unemployment has fallen to its lowest level since records were compiled for a reunified Germany in 1992.

In March, it dropped to 7.6%, a much lower rate than in the U.S. – America and its companies can learn a lot from that example.

German companies like Siemens seem to have it right, both for their country and their shareholders. After all, since the bear market lows in late 2008, their stock has nearly tripled.

Good investing,

Tony D’Altorio

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.

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