Pure monopolies in Japanese manufacturing

A big hat tip to one of my students Arno Albici for spotting a superb article in the Economist about a cluster of mid-sized Japanese manufacturers who continue to enjoy near pure-monopoly power in highly specific, high value-added businesses. decades of industry expertise and reinvesting profit to fund high levels of research and innovation continue to give these companies a remarkable competitive strength in the market. The barriers to entry for rival manufacturers are very high and this helps to explain the limited contestability in the global marketplace.

For example:

Shimano earns around $1.5 billion a year by supplying 60-70% of the world’s bicycle gears and brakes
YKK makes around half the world’s zip fasteners by value,
75% of motors for hard-disk drives in computers come from a firm called Nidec
90% of the micro-motors used to adjust the rear-view mirror in every car are made by Mabuchi

“Many technology products have become commodities, but certain components have not, since they require continual innovation. So entry barriers to the business of making them remain high, and although the margins on the final goods have deteriorated, the margins on specialised, high-end components are still juicy.: Much more here

Supply problems in Ivory Coast drive cocoa prices higher

There is an excellent article in the Times today about the surge in the world price of cocoa. Cocoa prices have hit a 30-year high as poor weather threatens to drive the price of chocolate up again for Western consumers. Cocoa has reached $3,412 a tonne in New York as concerns deepened about demand outstripping supply for the first time since 1968. This is a really good article to use to consolidate students’ understanding of how shifts in supply and demand can lead to price volatility. And also the importance of price elasticity of demand and supply in shaping price changes.

“The surge in price also indicates that cocoa is increasingly being used for financial investment rather than merely sold to industry”

* What factors are limiting cocoa supply?
* Why is demand from western economies rising - even though many are still in recession?
* Will cocoa farmersd necessarily gain from higher world prices?

Sugar prices and the terms of trade for exporters

World sugar prices are close to a 30 year high with values on the Chicago mercantile exchange hovering just under $30c per pound. For countries whose sugar exports account for a large proportion of their export earnings, the steep increase in world prices has brought about an improvement in their terms of trade and - because demand for many foodstuffs is price inelastic, a favourable change in their balance of trade. A good example of this is the African country of Mozambique, a nation almost destroyed by a long running civil war that eventually ended in the early 1990s but which has also been hit in recent years by severes drought hit many central and southern parts of the country, including previously flood-stricken areas. And where half of the population must survive on less than $1 a day.

This BBC news article reports that Mozambique’s government is planning to almost double its annual sugar production following soaring sugar prices and an abundance of available arable land. Helped by free access to the lucrative EU single market under the Everything But Arms (EBA) initiative, the issue is whether the sugar growing industry can scale up sufficiently to take advantage of a period of high prices to drive higher production, exports and lift average incomes for the thousands directly or indirectly employed by the sugar sector.

Sugar prices are inherently volatile and this poses big risks for investors in new supply capacity. Political risks and fluctuations in exchange rates must also be taken into account as Mozambique exports most of her sugar to European and American markets. In recent months the Mozambique currency has appreciated a little against the dollar which may make it slightly harder to sell sugar into US markets. But a weak currency against the Euro together with favourable trade arrangements is making Europe a good bet for a country desperate for higher foreign exchange earnings to boost her development.

Read more about the Everything but Arms Initiative here

Tea Prices

My lower sixth have been sent away over the Easter break to find an article that will form the basis of their first piece of coursework on microeconomics.

Remember candidates have to produce four economic commentaries (650 -750 words) based on news articles form within the last 6 months. These pieces must cover different areas of the IB syllabus. There is an article on the BBC website today that deals with tea prices and would be a an excellent basis for a micro commentary.