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Home / Business

<i>Fran O'Sullivan:</i> Trading in a changing world

Fran O'Sullivan
By Fran O'Sullivan
Head of Business·Herald on Sunday·
19 Apr, 2008 05:00 PM5 mins to read

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Fran O'Sullivan
Opinion by Fran O'Sullivan
Head of Business, NZME
Learn more

KEY POINTS:

Fisher & Paykel's decision to up stumps and shift its Dunedin production line offshore along with 450 jobs is a body blow to New Zealand confidence.

But shareholders in Fisher & Paykel Appliances will see the move as rational, securing the future of this iconic Kiwi company in the cut-throat international whiteware market.

The Fisher & Paykel board has obviously been weighing up this decision for months.

Chairman Gary Paykel has had plenty to say, largely behind scenes, about the difficulty of running internationally competitive manufacturing export businesses from countries that pay First World labour costs, are distant from the world's major consumer markets, have outrageously uncompetitive transport costs and, in particular, are slammed by a crazy monetary policy which, in New Zealand's case has had our dollar rubbing up at US80c for far too long.

Paykel repeatedly made these points last year when Fisher & Paykel began shifting its electronics and laundry unit production lines from Auckland to Thailand, massaged by the nifty tax incentives the Thai Government offers to entice manufacturers to base production there rather than in China.

As I wrote then, the decision was a rational one. The alternative was to stay at home, be punished by crippling exchange and interest rates - and still fail to achieve the economies of scale needed to stay competitive.

Out of sentiment, which is only natural given that he is a descendant of one of the two founders of this iconic company, Paykel has continued to keep some production and the engineering and design teams in New Zealand.

But despite his warnings and those of other manufacturers the Government did nothing major to offset the situation, despite labelling 2007 Export Year. It could have explored a special tax rate, as suggested by New Zealand First and United Future, to gear business towards increasing its export footprint offshore from manufacturing bases here. But didn't.

It could also have cut Government spending, as the OECD suggested, to take the pressure off monetary policy. But didn't.

The New Zealand dollar has appreciated 27 per cent against the greenback in the past two years. Investors are sucked in by interest rates that dwarf those in other OECD countries as the Reserve Bank tries to squeeze out inflationary pressure.

The persistently high dollar has affected Fisher & Paykel. Its March 2008 revenues are expected to be well down.

It's not as if the Government has been unaware of the potential impact of over-reliance on monetary policy. The OECD, concerned about this, suggested three areas where the burden of adjustment could fall.

They were:

On exporters and import-competing producers (now happening).

Through households deciding to cut their consumption as interest rates rose (now happening).

A less benign scenario triggered by a sharp shift in foreign investor sentiment (not happening yet).

Cabinet ministers clearly hoped the adjustment phase would not happen before the election. But it is under way and will inevitably have a political effect.

The Mosgiel-based F&P plant is not the only one on the move. The company will also close its Brisbane and California-based operations. It is relocating major production lines to Thailand, Mexico and Italy to take advantage of cheaper labour costs (particularly in Thailand and Mexico) and preferred access to major consumer markets, such as the European Union and America, granted by major free-trade pacts.

Fisher & Paykel shares jumped on the news. The company expects to save $50 million a year after a one-off matching cost to fund redundancy and other payments to shut the factories.

Trade Minister Phil Goff publicly criticised Fisher & Paykel chief executive John Bongard for citing the China free trade deal as a factor in the company's relocation decision. Goff said Bongard had not raised this during discussions in the lead up to the agreement being signed. (Bongard disputes this).

The free-trade agreement will cut tariffs on Chinese-sourced whiteware by 2013, which will increase domestic competition here. But Fisher & Paykel's export operations will clearly benefit from the labour costs (in Mexico they will be one-sixth New Zealand rates) and lower tariffs paid on Mexican-sourced products going into the US market.

New Zealand manufacturing is not dead - far from it. Statistics New Zealand's manufacturing survey for the December quarter showed total manufacturing sales increased 8.3 per cent and manufacturing volumes rose 3.4 per cent.

But the ability of manufacturers to withstand higher compliance costs, such as the KiwiSaver superannuation phase-in, will get tougher if the exchange rate persists at current levels.

Fisher & Paykel is already facing a brand attack by the Engineering, Printing and Manufacturing Union headed by Labour's Andrew Little. The company needs to be upfront about its motivations in response.

But the reality is that Fisher & Paykel's move is also a consequence of globalisation. The New Zealand Institute's David Skilling has promoted the necessity for more businesses to go offshore and relocate closer to markets.

Skilling's weightless economy is predicated on the notion that if New Zealand keeps the brains trust here - the designers and engineers who create the products and the company headquarters - New Zealand will benefit.

ANZ is also shifting some backroom operations to India. The move, called offshoring, is part of an international trend. Forrester Research forecasts that by 2015 offshoring in the United States will have resulted in the loss of 3.3 million US jobs.

Many of these will be in the service sectors such as computer sciences, architecture and business operations. Get used to it.

Discover more

Opinion

Can NZ do anything to save local manufacturing jobs?

17 Apr 12:06 AM
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