The brain power stays in New Zealand

Mike Daniell, chief executive of Fisher & Paykel Healthcare. Photo / Paul Estcourt

New Zealanders often respond with dismay when news breaks of another local manufacturer moving overseas.

It's true that entire regions can be affected - as was seen last year when Fisher & Paykel Appliances shifted the operations of its Mosgiel plant overseas and axed 430 jobs.

But many now believe that manufacturing's shift overseas is an inevitability, given the immense distances that lie between New Zealand and its markets, as well as increasing labour costs.

But it's not all doom and gloom. A trend is emerging - especially among high-tech companies - to shift production overseas and retain higher-paid research, development and corporate staff in New Zealand.

Shamubeel Eaqub, principal economist for the New Zealand Institute of Economic Research [NZIER], says this country can benefit from the trend through its skilled labour force remaining onshore.

"Just because the production process is moving overseas does not necessarily mean its a bad thing," he says.

"What we do have in New Zealand, and in most advanced economies, is a very skilled labour force and that is where we are most suited - management and R&D and those more innovative processes."

Fisher & Paykel Healthcare has manufactured its products - including respiratory humidifier systems used in intensive care and devices to help sufferers of sleep apnoea - in New Zealand since the 1970s.

But the company is currently commissioning its first large-scale overseas manufacturing operation in the Mexican border town of Tijuana.

Michael Daniell, chief executive of Fisher & Paykel Healthcare, says the plant will begin producing "mature" products - those that the company has been manufacturing for some time and are less associated with research and development - very soon.

Around $20 million has been invested in getting the Mexican site up and running.

Daniell says the decision to move to Mexico was made to "guarantee source of supply" to its customers through having more than one manufacturing location, as well as cutting freight and labour costs.

"We expect to save around $20 million per year within five years or so as we ramp up capacity there," he says.

Up to a third of the company's production will eventually take place in Tijuana - primarily to supply the North American market.

But as a large slice of the company's manufacturing output heads to Central America, the company is investing heavily in its New Zealand research and development facilities.

Fisher & Paykel Healthcare already employs more than 250 research and development staff in Auckland, and that number is rising, says Daniell.

The company plans to double its New Zealand-based research, development and clinical marketing activities over the next five years.

Earth is currently being turned on a new, 30,000sq m building site at the company's East Tamaki headquarters. When completed, the new building will be used primarily for research and development.

"We're planning to grow [research and development] quite substantially - that's part of the reason we're building the third building in New Zealand."

Touch screen technology maker Next Window manufactures all of its products in China, Thailand and Malaysia, but carries out its research and development work in New Zealand.

"There's heaps of good reasons not to do this style of manufacturing in New Zealand," says Next Window chief executive Al Monro.

Next Window manufactures large format touch screens, such as digital whiteboards for schools, and supplies similar technology for desktop computers to companies like Sony, Dell and Hewlett-Packard.

Monro says manufacturing desk-top touch screens in New Zealand was "never an option", as the micro-electronics technology required wasn't available in this country. "The only place you can get [micro-electronics] done is up in Asia," he says.

Monro says using contract manufacturers in Asia provides a level of flexibility that would be impossible to attain in New Zealand.

"They could be adding or deleting a hundred people from our lines on a week by week basis. Can you imagine trying to do that in New Zealand?"

For a high-tech company, manufacturing in Asia means the time from order to delivery is minimised, he says.

"We had a situation recently where a German manufacturer wanted to add 6000 PCs by the end of the month, and we worked with our manufacturing partner and achieved it."

Such an achievement would never have been possible in New Zealand, Monro says.

Ross Green, chief executive of electronic motor maker Wellington Drive Technologies, says the company originally expected to manufacture its high-value products in New Zealand, and high-volume ones in China.

"But the simple fact was we just couldn't get the subcontractor support locally, and we couldn't get the logistics performance locally," he says. "Local subcontractors just didn't understand the importance of meeting dates."

These days Wellington Drive Technologies manufactures all its products in Singapore and China, where contract staff work on production lines owned by the company.

Back in New Zealand, around 35 engineers work on research and development out of the company's head office in Albany.

Green says the manufacturing model the company now uses is "absolutely super". "Singapore has the best logistics in the world by a long way. You can get stuff in and out of Singapore really efficiently."

Like Monro, Green says working out of Asia allows the company to deliver large orders in a much shorter time-frame than would be possible in New Zealand.

The company recently received an order from Coca-Cola to supply engines for 20,000 refrigerated drink cabinets in Haiti, following the recent earthquake.

He says the Coca-Cola order would be impossible to deliver on time if the company was still manufacturing out of New Zealand.

But while Asia is a good logistic option, he says New Zealand research and development staff are superior because they aren't afraid of taking risks, or "losing face" when things don't go as planned.

Green says the New Zealand education system should focus on creating individuals with the skills required to take on research and development roles.

Those jobs command much higher salaries than production line roles - and there lies the benefit for New Zealand's economy, he says.

NZIER economist Eaqub agrees, saying: "A growing innovation sector would be very positive [for New Zealand's economy]."

Monro says most Kiwis wouldn't want to carry out the work that takes place on Next Window's Asian production lines.

"It's relatively low-skilled labour, working with tweezers and soldering irons ... its laborious, painstaking work and frankly we don't tend to have the people who want to do that sort of thing in New Zealand anyway."

Green says most New Zealand companies "that deal with mass-market physical products" will inevitably end up manufacturing overseas.

But Bruce Goldsworthy, of the Employers and Manufacturers Association, believes manufacturing of some form will always take place in New Zealand.

"I don't know of any developed country that doesn't have a manufacturing sector," he says.

But Goldsworthy agrees that the world has changed, and manufacturing in New Zealand will also change.

"In another 10, 15 or 20 years' time we'll still be manufacturing, but I won't necessarily say that we'll be manufacturing all the things that we are now ... but we are likely to be [manufacturing] new things.

"It'll move into areas where, for whatever reason, New Zealand is competitive."

New Zealand manufacturing will likely move towards areas where it has specialty expertise, such as agricultural and marine technology, he says.

Green agrees, saying it would only be viable for a company making a small number of high-value products - such as superyachts - to manufacture onshore.

AUT economics head Tim Maloney says it's difficult to predict what effect companies moving manufacturing overseas, but retaining research staff onshore, will have on our economy.

"Often with high-tech firms these days the manufacturing operations are a small component of the overall cost of the company ... . a lot of [company spending] ends up in research and design, marketing and so forth.

"If those jobs stay here, and are protected essentially because of low-wage manufacturing jobs going overseas, then it could actually bolster the high wage jobs [in New Zealand]."

Maloney says it's "sort of inevitable" that increasing numbers of local manufacturers will head overseas.

"For a lot of these companies, if they don't move their manufacturing overseas, the other jobs are going to disappear anyway because they simply can't compete in a worldwide market unless they can somehow get those manufacturing costs down."

SPREADING OUT

Some NZ companies and their manufacturing operations

* Fisher & Paykel Healthcare: Mexico and New Zealand.

* Fisher & Paykel Appliances: Mexico, USA, Italy, Thailand and New Zealand.

* Next Window: China, Thailand and Malaysia.

* Wellington Drive Technologies: Singapore and China.

* Nuplex: USA, UK, Netherlands, China, Vietnam, Thailand, Malaysia, Indonesia, Australia and New Zealand.

* Fonterra: 45 operations in North America, South America, Asia, Australia, Europe and the Middle East.

* Rakon: New Zealand, UK, France, to start in China.