German industrials spotlight: Sand in the gears

The German auto industry is under threat from cheaper Asian imports. Despite the recent correction, the yen has weakened by 14% vs the euro year to date (to 31 May). This is principally due to the Bank of Japan’s plans to double the monetary base and give Japanese auto manufacturers a significant price advantage over European peers. Furthermore, Japan’s reflationary policies are likely to provoke reciprocal action from key trading partners such as China and South Korea. If a series of competitive devaluations develops, then the euro will automatically appreciate vs both the yen and the won. Under this scenario, Asian cars will offer increasing value to eurozone consumers and German manufacturers may begin losing market share in their home continent. These developments coincide with deepening concern about China’s economic outlook. China is an increasingly important export market for German auto manufacturers and lower demand growth from this region would have a noticeable impact on revenues and profits.

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