The CommSec iPod index
19 Jan 2007
The summary and attached report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.
The CommSec iPod index
· Just over 20 years ago, The Economist magazine launched an index based on a McDonalds hamburger – the Big Mac index – a practical way of assessing whether a particular currency was under or over-valued against other currencies. It was launched as a light-hearted approach to exchange rate theory, but has had a good track record in predicting the direction of currencies.
· The Big Mac index has some limitations, one being that hamburgers cannot be traded across countries. Additionally, the Big Mac index is updated only irregularly. So, in the same spirit as the Big Mac index, CommSec has compiled the iPod index – a comparison of prices for the popular iPod nano music player across the world. Results released today showed that Apple sold 21 million iPods in the past quarter.
· The CommSec iPod index is a similarly light-hearted approach to assess currency movements. And while the initial results are at odds with many analysts, we will have to wait and see. The index suggests that the US dollar has potential to appreciate against a range of major currencies, with the Aussie dollar around 15 per cent over-valued against the greenback.
· Of 26 countries surveyed, Australia is the eighth cheapest place to buy a 2 gigabyte (gb) iPod nano in US dollar terms. The most expensive country is Brazil (US$327.71), the cheapest is Canada (US$144.20), while in Australia the local purchase price of $219 in Australia converts to US$172.36.
CommSec iPod nano index
2 gigabytes, US dollars
Hong Kong $147.63
Source: CommSec, Apple
· The CommSec iPod index suggests that the US dollar has scope to appreciate, perhaps as much as 15 per cent against the Aussie dollar. Many analysts would have a hard time believing this, but stranger things have happened. But just like The Economist’s Big Mac index, the CommSec iPod index is a light-hearted look at the pricing of a good across a range of countries. Just like the Big Mac index, it may have use for currency analysis, but time will tell. And if it does prove to be useful gauge to watch for exchange rate fluctuation it would have value for investors exposed to globally-focussed companies.
· Still Australians can be comforted in the fact that they are not paying top dollar for the most-wanted Apple iPod. However a separate analysis conducted of BMW car prices provides no similar comfort. The cost of a BMW 320i in Australia is the sixth highest of 27 countries surveyed and close to double prices in Western Europe.
The Big Mac index
· Currency analysts have a range of ways to both explain exchange rate levels and forecast future movements, such as commodity prices and interest rates. But another (and longer-term) explanation is purchasing power parity PPP), a theory that uses the prices of goods in different countries. In essence it says that the exchange rate should converge to a level that equates the prices of goods and services in the respective countries.
· The Economist magazine devised the Big Mac index in 1986 as a way of looking at purchasing power. In simple terms the theory says that if a Big Mac in Australia is cheaper than it is in the US when expressed in US dollars then the Australian dollar may be perceived as undervalued. One way that the imbalance in Big Mac prices may be corrected would be for the Australian dollar to rise against the greenback.
· Interestingly at the time of the last update in May 2006, the Aussie dollar was at US75.2 cents and perceived as 21 per cent under-valued. In the period since, the Aussie dollar has lifted to US79.2 cents.
Purchasing power parity
· A key assumption of PPP is that the goods being compared are broadly the same. The Economist chose the Big Mac hamburger sold by McDonalds, a product made the same way the world over. The Big Mac index can be distorted by complications such as taxes, transport costs, labour laws and trade barriers like tariffs. But no PPP approach is perfect, just as no currency model is completely accurate.
· In 1986 there were few goods that could effectively be regarded as truly homogeneous or the same the world over. Today there are a few more, but with the progress of globalisation, production has become more concentrated. Especially in China.
The CommSec iPod index
· One product that is the same in every country as well as being widely available, is Apple’s iPod music player.
· A key difference between the iPod and Big Mac approaches is that Big Macs are made in a host of countries across the globe whereas iPods are predominately made in China.
· The iPod doesn’t meet all the criteria to illustrate purchasing power theory. Freight costs no doubt vary and countries such as the US may get volume discounts. And because the iPod is centrally manufactured it won’t incorporate changes in domestic costs. But the iPod is tradable across country borders and it is homogeneous, or the same, across the globe. So it may provide a purer assessment of currencies.
· Simply, an iPod nano should broadly cost the same across the globe. If there were substantial price differences customers would switch their purchases to other countries – especially given the power of the internet.
· One complication with the iPod index is pricing precision. Apple tends to price its products with a ‘9’ at the end of the quote, such as $219. Further, price changes are likely to be discrete movements such as of $5 or $10. But if the same changes occur globally, then the differences across country borders will be via exchange rates.
· Interestingly, the ranking of countries on iPod prices does vary across models, that is, across the 2gb, 4gb and 8gb models. These differences may highlight pricing anomalies
· Brazil is the dearest place to buy an iPod in our assessment of prices across 26 countries. And by a big margin. A 2gb iPod nano costs the equivalent of US$327.71 in Brazil, well ahead of the lowest priced country, oddly being Canada at just over US$144.
· While iPods sell across the globe, only 26 countries are in our ranking at present. Official list prices were available from Apple stores in these countries, but regions such as Latin America and Asia are covered by a range of authorised re-sellers in individual countries.
· Apple manufactures the iPod music player in China. But interestingly, especially with freight costs close to zero, China is middle ranked in terms of global prices at US$179.84. But next door in Hong Kong, the list price for a 2gb iPod nano is US$147.35, the second lowest in the sample.
· It would be expected that freight costs to Australia and NZ should be broadly the same or, if anything, higher than to Europe. But iPods are around US$20 cheaper in Australia and NZ than in Europe. Still if the Aussie or Kiwi dollars were to rise by around 10 per cent against the euro (or euro fall 10 per cent) then the situation would dramatically change.
· Overall, the results suggest that the US dollar has scope to rise against a range of major currencies except for the Hong Kong or Canadian dollars or Japanese yen. Still, the other adjustment is that Apple could alter its pricing for different parts of the world.
The results of the CommSec iPod index won’t provide joy to US policymakers – they want the Chinese yuan to appreciate, not fall in value against the US dollar.