free trade sucks

The prevailing Government policy of "internationalisation" presents the idea that New Zealand can develop a robust and growing economy, even if manufacturing companies send the "dirty bits" of their production process overseas. They promote the view that labour cost differences between New Zealand and low-cost countries make the relocation of the "dirty bits" (production) away from New Zealand inevitable, therefore we should focus on keeping the "shiny bits" (design, research and development, marketing and ownership) in New Zealand.

This message is clear in the Advancing Economic Transformation Cabinet paper released last year, which says: "The key challenges arising from international integration are for New Zealand to:

A. Position itself as an attractive location for investment and skills and for those parts of international supply chains that relate to high-value products and activities and that provide the greatest return (eg R&D and design). This includes an imperative to develop more and/or larger internationally successful New Zealand businesses, networks of businesses, and segments of the economy; and

B. Capture the best return through our businesses being part of international value chains offshore (return profits to New Zealand), through developing new business models of operating internationally (such as investing directly in offshore product and distribution chains), rather than transferring valuable activities offshore."

Few would have a problem with the document's objectives and the recommended actions appear deceptively rational. However, they are constructed around a fundamentally flawed concept that "valuable activities" can be separated without penalty. Internationalisation might work in theory, but the message from New Zealand's manufacturing sector is clear that at a practical level this will not work. For global businesses, the interaction between each of their "separate" components has a subtle and pervasive impact on their performance and effectiveness.

It is not only important to get all of the elements of the business system right, but also the interconnections between those elements. Much of the literature on internationalisation simply shows the different elements or activities of the business system. Diagrams show different components of the supply chain - customers, marketing research, development, production, etc - as different blocks. While it is obvious that a global business is not compelled to physically co-locate activities, a superficial analysis can form the view that individual blocks can be separated without penalty or risk. This view underestimates the importance of supporting interconnections between functions.

Good businesses will make decisions about the location of their activities based on suitability for the activity itself and the effectiveness of interconnections with other elements of the system. There will be tradeoffs. A firm may not seek lower labour costs because it is too important that they can produce new products rapidly, suggesting they should have all their functions in the same place. Alternatively, a company may locate R&D closer to its low-cost labour production site or locate product management closer to end markets.

This might compromise the quality of the R&D, but this affect can be outweighed by the importance of the low-cost production, the productive use of multiple time zones or some other component of the competitive landscape. The cost and reliability of the supply is also a critical factor of internationalisation. The disruption to supply chains may be a huge strategic risk, and the greater the international interdependence, the worse the effect of even short-term disruption.

In reality wage costs are a fairly minor component of the overall picture that controls the profitability of manufacturing. It is worth noting that a direct labour content of less than 5 per cent of sales is not unusual in high technology products, and exchange rate fluctuations could have five times the impact of the difference in labour rates. Many factors contribute to a country's international competitiveness so the priority for Government must be to maximise the advantages available in the policy framework. What does this mean for a country like New Zealand?

There is no one-size-fits-all solution regarding the location or value of business activities. What might suit garment manufacturing will not necessarily suit high technology electronics or other complex products. The strategy for each business will be different but there are some common themes for New Zealand, given the country's attributes of isolated geography and small population.

A number of our firms now compete globally at a micro level in small markets or in the post-processing of our "primary" outputs. Policies and assistance need to nurture the creation of entire businesses in these areas, rather than trying to prescribe which bits should be encouraged and which bits should be neglected. Even if some businesses do send production overseas, it would make sense for our policies to maintain a neutral or positive bias towards locally-based production.

Policy settings need to make it more attractive for innovative business to create wealth in New Zealand through personal incentives, company incentives and national infrastructure. Factors such as broadband, transportation networks and tax incentives for productive activity can encourage activity. This comprehensive approach to policy support will promote the retention of as many of the supply chain components as possible, rather than focusing on individual links of the supply chain. The Government must not seek to pick winners or favour particular supply chain activities, as businesses will determine the profitability of their activities themselves.

Effective policy must provide incentives, or at least no disadvantage, for winning behaviour. Investment in research, development, productive activity, skills and capability development and new ventures will all assist in increasing our international competitiveness. Incentives are best delivered through the tax code generally to encourage investment in productive activity rather than in static assets. The support of winning behaviours and monetary policy that secures a stable exchange rate will help mitigate disadvantages of the wage rates. Given such changes, perhaps more companies will keep more of their supply chain in New Zealand.

* John Walley is the chief executive of the Manufacturers and Exporters Association.

New Zealand is likely to lose more home-grown companies as head offices follow manufacturing facilities overseas, warns a Treasury report, but ministry officials say there may be little the government can, or should, do about it.  The research was part of a wide array of work at government level assessing the risks of a "hollowing out" of the economy as jobs, firms and ownership go overseas.

Consultants Andrew Sweet and Murray Nash reported to the Treasury in September that New Zealand firms with global ambitions soon encountered the almost irresistible pull of large masses of consumers and bigger manufacturing bases overseas. Once production left New Zealand, they said, sales and marketing soon followed, with head office and R&D usually left last.

"Once a company has begun relocating key components of its supply chain offshore, a self-reinforcing process often begins, with the relocated components acting as `magnets' of attraction for components remaining in New Zealand," the study, based on confidential interviews with 15 firms with substantial overseas sales, said.  Head office functions tended to be "stickiest", or most resistant to uprooting, often because key staff wanted to stay in New Zealand. However in the long run, even this was not always compelling.

The report also found that companies, once purchased by foreign owners, were more likely to have their local offices shut down and moved overseas. Other than to access New Zealand's natural resources, "firms see few compelling benefits from locating activity here".

Although the Sweet/Nash report highlights the risks of corporate exodus, Treasury's position, revealed in papers released to the Sunday Star-Times under the Official Information Act, appears to have shifted in the past 12 months. 

A December 2006 Treasury internal discussion paper on "hollowing out" says the loss of head office type functions and high-skill, high-wage jobs overseas poses risks to the economy because of spillover effects.  These include loss of income for New Zealand; loss of job opportunities and career progression; loss of international connections; and loss of expertise that could encourage the emergence of a cluster of industries.  Prime Minister Helen Clark was briefed by Treasury on the issue in March, a month before Fisher & Paykel announced 350 job losses due to shifting production to Thailand.

But by October this year officials were telling ministers there was no hard evidence any "hollowing out" was under way, and that there was little the government could do about persuading firms to stay in New Zealand.

It pointed to the fact that total manufacturing jobs have grown by 14% between 2000 and 2006, even as manufacturing declined in relative terms compared to other sectors of the economy.  Treasury said even the loss of entire firms overseas was not necessarily a problem, as long as skilled individuals and capital switched to new ventures in New Zealand. There was already evidence, for example, that ex-Navman staff and management had been re-employed.  "In practical terms this means there is probably only a limited role for policies directly aimed at holding firms in New Zealand, given the fiscal and economic risks of the government targeting support and assistance toward narrowly defined sectors or firms," it said.

Finance Minister Michael Cullen told a law firm's business breakfast meeting last month that firms would succeed by focusing on their strengths.  "If New Zealand can determine which elements in the value chain we can realistically seek to achieve some level of dominance, we can go one step further in improving our competitiveness and in securing greater gains from globalisation," said Cullen.  He pointed to the introduction of a new research and development tax credit from April 1 and said the new research showed policies such as KiwiSaver helped retain local ownership.

The future of clothing company Norsewear hangs in the balance, its owners saying they will decide this week whether to sell and sources saying the deal is already done and production may move to China.

The farming and ski wear clothing company celebrated its 40th birthday this year and has stressed in the past that it is a "Kiwi-made" company.  Norsewear exports clothing and many apparel companies, including Swanndri and Wellington-based Icebreaker, have already moved manufacturing overseas because of a high Kiwi dollar.

Norsewear director and managing director of Burleigh Evatt, the company's majority shareholder, Ian Fitzgerald said a final decision would be made this week but declined to comment further.  Sources said the company had been sold and plants in Wanganui and near Dannevirke might be closed and manufacturing moved to China.

Each factory employs about 30 staff.

A National Distribution Union official said it was told an announcement was due tomorrow.

The former owner of Barkers Men's Clothing, Ben Nathan, is understood to be the buyer.  Mr Nathan set up a company called Norsewear Brands in mid-July.

The maker of the La-Z-Boy recliner chair is closing down its manufacturing operations in this country with the loss of about 70 jobs.  Morgan Furniture is shutting its Auckland factory and moving production to Thailand and China from the start of next year.

Board chairman Graham Morgan said the move had been a gradual process, with the company having started manufacturing in Thailand a decade ago.  At one time the company had more than 300 manufacturing staff in this country and even three years ago the number was 230, Mr Morgan said.

Next year Morgan Furniture would be down to a New Zealand workforce of 30 administrative staff.  The company initially started manufacturing in Thailand after finding it was uncompetitive in leather furniture in the Australian market, which it entered about 15 years ago. 

New Zealand manufacturing was becoming increasingly less competitive, Mr Morgan said.  A high exchange rate had a major effect but essentially costs in this country kept escalating, including in areas such as ACC and holidays, he said.  He saw a gloomy outlook for volume manufacturers in this country, but thought niche suppliers would have a future.  Mr Morgan also expected the staff at Morgan Furniture losing their jobs would find alternative work quickly, although probably not in upholstery. 

The closure of Morgan's factory is part of a continuing shift of manufacturing jobs from this country to Asia.

Manufacturers and Exporters Association chief executive John Walley said the country's manufacturing base would be lost unless the Government reined in exchange rate fluctuations.  He told the Herald On Sunday that more businesses such as Morgan Furniture would desert this country in the near future.

But Employers and Manufacturers Association communications manager Gilbert Peterson said the challenges presented by countries such as Vietnam and China were big but not insurmountable.  "We have areas of expertise that other countries just can't match, including specialist skills, value-added products," he said.

About 100 Aucklanders at Fisher & Paykel - some who have been with the company for more than 20 years - will lose their jobs in the latest exodus of manufacturing production to South Asia.

The move, announced yesterday, has renewed calls for the Government to improve the current business climate or risk seeing the slow death of manufacturing in New Zealand.  Other brands - including Icebreaker - have already moved production offshore.

Fisher & Paykel said that 96 jobs would be lost in moving the manufacturing of electronic circuit boards to Rayong, Thailand.  The relocation, to be completed by the end of next year, was expected to cost $5 million but would save the company $6 million a year.  The new facility would be completed by the end of next year and be at the same site of the new washing machine production plant, which was announced in April at a cost of 350 Auckland jobs.  Fisher & Paykel managing director John Bongard said the company had exhausted all other options and had little choice.

"Some of the workers have been here in excess of 20 years and telling them is heartbreaking.  We are fiercely Kiwi and we try our best to retain workers but there comes a breaking point.  The Government and the Opposition are in favour of pursuing free trade deals with China, Thailand and India, and there are no worse countries as far as we're concerned.  But that's the hand we've been dealt."

The company has resolved to re-employ as many workers as they can in other parts of the business, and help the rest find new jobs.

The Green Party and the Engineering, Print and Manufacturing Union said the decision was disappointing.  "We're now seeing a very serious and very desperate situation in manufacturing that will have flow-on effects for our economy and our society for years to come," said EPMU national secretary Andrew Little.  He joined the Employers' and Manufacturers' Association in calling on the Government to pursue policies to nurture local manufacturers.  "A quarter of a million Kiwi workers and their families are relying on it," Mr Little said.

"After the washing machines announcement it was not unpredictable that other parts of the business would follow, disappointing as that is."  Mr Bongard could not rule out further moves offshore.  The volatile and consistently high New Zealand dollar and interest rates had played a role in the decision, he said.

Association chief executive Alasdair Thompson said Fisher & Paykel had little choice but to make the shift after its main competitor in Australia moved its production overseas.  He said many factors - including compulsory employer contributions to KiwiSaver, four weeks' paid leave and a tight labour market - made for a business climate in New Zealand that struggled to compete with overseas opportunities.

On the move

• Fisher & Paykel are moving the manufacturing of electronic circuit boards to Thailand; 96 Auckland jobs will be lost.
• In April the company announced it would shift its washing machine production to Thailand, which would cost 350 Auckland jobs.
• Other N Z brands like Icebreaker have also moved production offshore.
• Unions and businesses have renewed calls for the Government to encourage and nurture local manufacturing.

Fisher & Paykel Appliances says the Government must take its share of the blame as the whiteware maker prepares to shift its electronics factory from Auckland to Thailand at the cost of 96 jobs.  F&P said yesterday production of electronic circuit boards used in its fridges, washing machines, driers and ovens would be relocated to Rayong - the same Thai location to which F&P moved the production of washing machines and clothes driers from Auckland in April at the cost of 350 jobs.

F&P managing director John Bongard said the "overvalued" Kiwi dollar and New Zealand's interest rates, which are the second highest among the 30 Organisation for Economic Cooperation and Development (OECD) countries, were again factors in the decision.

However, the usually apolitical F&P also blames government policies.  "We've got a trade policy that's just not helpful at all to manufacturers like us," Mr Bongard said.  The Government was "running around consummating free trade deals" with Thailand, China and India that would ultimately give duty free access to "extremely" low labour cost countries.  Free trade deals with the likes of Canada, the United States, the European Union and Japan, which had similar cost bases to New Zealand, would be more beneficial.

"I'd stack our people in New Zealand up against any of those guys any day of the week.  But when it comes to giving duty free access to China, India and Thailand we really are behind the eight ball. If that's in the national interest then so be it but it certainly is not in our interest."

F&P expects shifting its electronics factory to Thailand will save about $6 million a year before tax, mostly through cutting its wage bill.  Further savings are expected from buying electronic components from Thai vendors. The move will, however, come at a one-off pretax cost of $5 million.  The relocation will be completed by December 2008.

Mr Bongard said F&P would work with staff, the Engineering, Printing & Manufacturing Union (EPMU) and other employers to try to find alternative jobs for the 96 workers.

EPMU national secretary Andrew Little said there was a "very serious and desperate" situation in manufacturing.  It would have flow-on effects for the economy and society for years if something was not done to stem the flow of factory closures.  "The Government needs to understand that the incentives from other countries to entice New Zealand manufacturers are significant, and we need to do more as a country to encourage investment in high-end manufacturing.  "A quarter of a million Kiwi workers and their families are relying on it."

F&P's Thai operations will pay no tax for eight years.

MELBOURNE - Countries that refused to confront climate change and environmental sustainability could face trade barriers on global markets, Prime Minister Helen Clark told business leaders in Melbourne yesterday. Speaking in a country that has refused to ratify the Kyoto protocols on climate change and in which the environment is emerging as a critical issue in this year's federal election, she warned that governments could not afford to ignore the need for serious measures.

Early notice of potential trade action has emerged with pressure to penalise New Zealand food and wine exports for the energy required to transport produce to Northern Hemisphere markets.

"I do believe that those who do not take sustainability seriously are likely to face consumer resistance and even trade barriers in the future," Helen Clark told a Transtasman Business Circle lunch. We need to be able to confront credibly the challenge of campaigns like that around 'food miles', with its false and simplistic assumption that distance of itself implies unsustainability."

She also warned that environmental sustainability was an economic imperative of the 21st century: "There will be no prosperity without it." Her audience included executives from some of Australia's biggest corporations, now facing a growing political debate about climate change and sustainability that Prime Minister John Howard has warned will increase energy and other costs.

Canberra has declined to ratify the Kyoto protocols because of its heavy dependence on coal-fired energy and the potential impact that present targets for emissions of greenhouse gases could have on its economy, although Mr Howard is now looking at a carbon trading scheme. He has refused to set an emissions target until after the election. The Labor Opposition has said that if it won office it would ratify Kyoto and reduce greenhouse emissions by 60 per cent by 2050.

Although not entering the Australian debate, Helen Clark said New Zealand had realised that no one could sit out those issues and that "everybody has to get on board". "If you've ratified Kyoto, as we have, you don't have a choice," she said. If countries did not try to make a difference they risked being branded in key markets as dirty and non-caring. "Different countries will take different paths to a more sustainable economy because of different stages of development and of access to different local resources," Helen Clark said. "Naturally, Australia, with abundant coal reserves, will place more emphasis on the development of clean coal technologies than New Zealand, as hydro and geothermal power generation are more readily available options for us."

She said that sustainability was becoming part of the kiwi ethos and was being put into practice by the private sector in such initiatives as the Stock Exchange's proposed carbon trading platform, as well as the CarboNZero programme. Commercial benefits were emerging through participation in a credible programme to achieve carbon neutrality, illustrated by increased demand for New Zealand Wine Company products. And facing potential trade problems such as the "wine miles" debate, Helen Clark said New Zealand and Australia had a common interest in working to steer the debate into a more rational direction.

"We must work together to share ideas on tackling global warming," she said. There were opportunities to build partnerships.

Cabinet ministers reacted like headless chooks to news that major NZ exporters are upping sticks to Asia.  Instead of lashing out at political opponents ("Just take a cold shower please, Trevor Mallard"), they would have been better off calling a summit to find a common accord on how to avert a looming exchange-rate crisis.

There's no need to subject National to another round of wedge politicking, as Mallard is obviously attempting by focusing on his opponents instead of a rather serious problem. Ministers and their National counterparts tried to do just that at a secret meeting with the heads of the Reserve Bank and Treasury last year.

They got together to study a range of supplementary stabilisation instruments devised by Reserve Bank and Treasury officials. The secrecy was blown in February after some politicking from both sides.

On the agenda this time should be an investigation into non-politically correct options: These could include currency controls under study in much of Asia; Reserve Bank intervention in the dollar; pegging the NZ dollar to its Australian counterpart, and dropping interest rates to spark an outflow of hot money.

None of these are particularly palatable. They could all fail - and might attract another judgment from Bollard that they simply won't work.

What should go onto the agenda are the elements over which the politicians do have control. Primarily lavish government spending levels, which are increasing the pressure on monetary policy, as Bollard notes.

We are all paying for the 2005 electoral auction. Labour offered interest-free student loans and expanded its Working for Families tax credits. National countered with wide-ranging tax cuts.  Irrespective of the ideological differences between the respective policy stances, the impact is obvious.

The OECD suggests that, while supplementary stablisation instruments should be pursued, adjustments to fiscal settings provide an obvious alternative. It noted that the Treasury forecasts a significant fiscal impulse in the current and next two fiscal years, which is helping to underpin domestic demand. If the stance was neutral, the burden on monetary policy would be easier and interest rates could be lower.

It suggested there is limited ability to scale back spending plans. But there should be greater flexibility around 2008-09, which happens to be smack in the middle of the 2008 election bidding cycle.

The OECD doesn't say so outright, but if Labour and National could reach an accommodation for 2008-09 - or, better still, allow Labour to reduce committed spend in 2007-08 in return for a National ceasefire on opportunistic political attacks - much economic heartache may be avoided.

The outlook for exporters is not great. If the NZ dollar remains high, squeezed profits in the tradeables sector will spread via slower wage growth, job losses and postponed or forgone business investment.

The OECD notes three potential possibilities over where the burden of adjustment might fall:

* On exporters and import-competing producers;
* Through households deciding to cut back their consumption in response to the impact of higher interest rates; and
* The risk of a less benign scenario triggered by a sharp shift in foreign investor sentiment.

If investors decided to pull out of NZ dollar denominated assets, this could lead to a large, potentially disorderly fall in the exchange rate, which would restore the external balance and boost exporters' competitiveness.  This, in turn, would place households under renewed stress as the Reserve Bank would have to increase the interest rate premium to attract investors back into the currency.

Given the potential variables, we should not be surprised at the decisions by some of our leading exporters to shift production offshore.

Fisher & Paykel's plant move to Thailand had been widely telegraphed among the Auckland business community. But the forthcoming departure of this iconic company has touched many New Zealanders, as F&P had defied the odds by keeping its Auckland plant going for so long.

The decision to move closer to markets is a rational one. The alternative is to stay at home, be punished by crippling exchange and interest rates - and still be left without sufficient critical mass to achieve the economies of scale to stay competitive.

Other competitive pressures will emerge as we slip further behind Australia. The New Zealand Institute's number-crunchers released a graphic report at last week's Australia New Zealand Leadership Forum in Sydney.

Australia's GDP per capita (A$47,181) is about 30 per cent higher than New Zealand's (A$33,682), with NZ well below the OECD average. NZ's figure is now lower than all Australian states, including Tasmania.  Top performers are resource-rich Northern Territory (A$59,649) and Western Australia (A$58,688). The lowest is Tasmania at A$35,253 - but even that state heads off New Zealand on A$33,682.

Those low incomes are driven off the low wages are paid here, which have acted as an incentive to keep manufacturing exporters here.  But there's problems ahead. Each week, about 700 Kiwis join the exodus to Australia.

If companies want to stay here and develop high-growth technologically advanced industries to replace the departing manufacturing base, they will be hard-pressed to compete for highly-skilled labour.

Other figures presented to the forum suggest that a million New Zealanders now live offshore - roughly 20 per cent of our population.

Australia, with a population of 20 million, has just 800,000 offshore.  While Australia turns to our highly-skilled people to fill gaps, New Zealand's ethnic mix is changing as we turn to the rest of the world to cover shortages. The business implications from this are profound.

Union leader Andrew Little is worried the move by Fisher & Paykel in seeking cheap labour overseas could result in copycat action by other manufacturers.  "They might say we'll do it now because the debate is running and the Government is copping it," he said.

Mr Little, national secretary of the Engineers, Printers and Manufacturing Union, said companies tended to get away with blaming shareholders wanting to maximise profits, which could be done by sending work overseas without much heed to what happened to the local communities.

"You have to wonder how worthwhile the cost savings to Fisher & Paykel of $10 million to $15 million will be ... given the disruption it is likely to cause not just to 350 workers and their families but the communities they come from."

Mr Little said the manufacturing sector was being squeezed, with jobs increasingly being shed. The workers would not necessarily be easily reabsorbed into similar work, he warned.  Mr Little challenged the manufacturing sector to "move up the value chain" and increase margins to better withstand volatile exchange and interest rates.

National Bank chief economist Cameron Bagrie said structural aspects of the economy made it more expensive to do business in New Zealand. From 1990 to 2000 there was productivity growth of 2.6 per cent per year in the business sector but from 2001 to 2006 that fell to 1.1 per cent.  "So that's been a massive deterioration ... You've got to start asking why. It suggests businesses are finding it a lot harder and, to me, there's a certain policy element to it."  Mr Bagrie said the regulatory environment saw compliance costs imposed on the business sector, which could legitimately have a few gripes.

Deutsche Bank chief economist Darren Gibbs said there was more to Fisher & Paykel's decision than currency values. To some extent globalisation had prompted matters.

"Clearly it's possible to produce some of these things cheaper offshore. While currency may have accelerated the moves, there is an argument it may well have happened in any case."

Alasdair Thompson, chief executive of the Employers and Manufacturers Association, said cheaper labour had been available overseas for a long time.  Asian Governments had also offered big incentives such as lower tax environments.  "You have to ask what finally triggers companies to go."

Mr Thompson said the local business environment had to be a major factor.  He criticised poor-quality and "out-of-control" Government spending which fuelled inflation, high interest rates and the dollar.

Mr Thompson said the Government needed to relax regulations and introduce lower and flatter taxes, reform local government and help organise assistance to exporters in overseas markets.

Fisher & Paykel workers have been warned there could be more job losses after yesterday's shock announcement that 350 staff would be axed and washing machine production moved to Thailand.

Workers at the company's East Tamaki plant eagerly filed into a meeting yesterday expecting to be given a bonus. Instead they were told the bad news. "The mouths just dropped," said one employee.

After delivering the news, Chief executive John Bongard said there were no guarantees that more production lines would not be shifted abroad. "So I can't stand up in front of you today ... and say, 'That's it', because I'd be lying to you," he said.

Today he ruled out another closure before the end of the year, but could not say if jobs would be safe from next year.

Green Party economic development and employment spokesperson Sue Bradford said today: "Fisher & Paykel is seen as an iconic NZ manufacturing company. "I am therefore very disturbed not only to hear today's announcement of 350 job losses, but also the statement of F&P managing director John Bongard when he says there are no guarantees the rest of the company's manufacturing jobs won't one day also be moved offshore.''

Overtime

Workers, who would not be named for fear it would hurt their future employment, said they had been doing overtime every week to meet targets. Fisher & Paykel blamed the move on competition, the loss of a duty preference and a "crippling" environment at home.

The announcement came just hours after the Reserve Bank raised the cash rate by another 0.25 per cent in a move that is expected to push the New Zealand dollar up and put further pressure on exporters.

Bongard said production of washing machines and clothes dryers would be moved from Auckland to Thailand, costing about 350 people their jobs. The business environment in New Zealand had deteriorated, thanks to high interest and exchange rates and some policies on trade and tariffs, Mr Bongard said. "Exchange rates and high interest rates [are] crippling the whole productive sector in New Zealand in my view."

Margins in the washing machine business had suffered considerably over the past four to five years. Most of Fisher & Paykel's competitors supplied the Australasian market from low-cost Asian countries, he said

"Without this relocation to Thailand our continued future in laundry design and manufacture would be doubtful."

Plans by a competitor to move its production out of Australia would also cost the firm a 5 per cent duty preference under the Closer Economic Relations trade agreement. "I guess the loss of the CER duty preference into Australia early next year was kind of the straw that broke the camel's back," Mr Bongard said.

Free-trade agreements with countries such as India, China and Thailand being sought by the Government were also unhelpful to the manufacturing sector, he added.

The relocation to a purpose-built factory in Thailand would take a year and result in annual pre-tax savings of up to $15 million. At present the company has a global workforce of more than 4000 people, with about 2100 in New Zealand (1600 in Auckland).

The company also has operations in Italy, the US and Australia. More than 80 per cent of its sales revenue is generated overseas. Engineers' union secretary Andrew Little said F&P's margins had been squeezed by the high New Zealand dollar, adding, "This has got to be a wake-up call for the Government".