manufacturing

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.

Norsewear confirmed at the weekend the brand has been sold, but the company said its socks will still be made in New Zealand.  Apparel Brands is the buyer. It is owned by Aucklander Ben Nathan, former owner of Barkers Men's Clothing. Management bought the six Norsewear stores, including the one at Norsewood.

Redundancies at the Norsewood and Wanganui factories are likely.  The company employs 22 people in the Wanganui factory and 27 at Norsewood.  The Norsewear factory is the dominant employer in Norsewood.

The company indicated it will communicate with staff early this week.  Workers first learned of the proposed sale through media reports on Tuesday. Norsewear released a statement yesterday, but refused to make further comment.  An unnamed "company spokesperson" said "intensive work" would continue on the future of the manufacturing plant in Wanganui and the factory in Norsewood.  "These are complex negotiations and it is likely to be some time before final decisions are made," the spokesman said.  "We appreciate our staff have concerns about the future of their employment. It is still likely there will be some redundancies and Norsewear wishes to assure all staff that they will receive all their entitlements in full."

Wanganui Mayor Michael Laws said his office had been in contact with Norsewear, seeking clarification on the future of the Wanganui plant and those employed there.  "This is a small but important business with skilled workers and of real value to the Wanganui economy."

Norsewear has promoted itself as a Kiwi icon. There was speculation this week that some production will be moved to China.  Mr Nathan registered a company called Norsewear Brands in July.

The head of the Canterbury Manufacturers Association says inflation in the local economy is killing the competitiveness of the tradeable sector, particularly exporters.

Monthly survey results from the CMA, a barometer for the manufacturing sector, show total sales among Canterbury manufacturers in August rose just under 1.5 per cent, compared to a year ago.  Export sales dropped 6.8 per cent in August (compared to 2.5 per cent), but they were offset by domestic sales rising just over 9 per cent (compared to negative 5 per cent).  The survey covered annualised sales of $402 million, 44 per cent of which was in exports.

CMA chief executive John Walley said the latest survey confirmed government policies were delivering "two economies" – a negative tradeables sector which covers tradeable hard goods, and a positive non-tradeables sector which covers local services and materials like cement or gravel.  The large number of infrastructure projects and strong construction sector, for example, had created a positive climate for suppliers who did not have to compete with international rivals, unlike manufacturers of export goods.

Mr Walley said monetary policy was critical: higher interest rates were felt across all sectors but the already disadvantaged tradeables sector felt it more keenly, and even more so when higher exchange rates reduced returns.  "The much higher levels of inflation in the non-tradeables sector are creating a response that is killing the competitiveness of the tradable sector, and we continue to export activity and capability offshore as a response.  This is a short sighted solution that will bring long-term problems; there has to be a smarter way."

Mr Walley said companies within supply chains were particularly under pressure. Larger companies were looking to cut costs and shift activity which was reducing local orders.  "This is due in large part to the impact of the `China price'. Some respondents are undertaking contract work, while others re-evaluate their business models in order to give themselves breathing space.

For these firms, sales volumes are down and margins are under pressure, or gone all together."

Firms reported their biggest constraint was markets (82 per cent), with staff being a major concern for 18 per cent. Staff numbers for August were up around 4 per cent.  Net confidence rose from minus-60 last month to minus-18 per cent. Thirty-six per cent of those surveyed were negative, 45 per cent were neutral and 18 per cent were positive.  The CMA's current performance index, a combination of profitability and cashflow is at 98.5, up from 96 in July. Anything less than 100 indicates a contraction.  The change index (capacity utilisation, staff levels, orders and inventories) increased to 103, and the forecast index (investment, sales, profitability and staff) is at 102.

Staff numbers for August increased by just over 4 per cent.

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.

Fisher & Paykel Appliances Holdings Limited
FPA Stock Exchange Release ASX/NZX 15 August 2007

Electronics Factory Relocation to Thailand for Fisher & Paykel Appliances

Fisher & Paykel Appliances (FPA) today announced plans to relocate its Auckland based Electronics factory operation to Thailand.  Production facilities for the manufacture of electronic circuit boards for use in Fisher & Paykel built appliances would be located in Rayong, Thailand on the same site as the proposed new Laundry plant.

After consultation with the Engineering, Printing & Manufacturing Union, the relocation of the facility will be completed by December 2008. Additional inventory will be manufactured in order to cover the lead times for the transfer and re-commissioning of the plant. This will amount to an additional temporary working capital value of between $2 and $3 million. Required capital expenditure is estimated at $3 million.

Once the line is fully operational, the expected financial benefits are in the vicinity of $6 million per annum, at a one-off cost in the order of $5 million, both at a pre-tax level. From the initial indications regarding the sourcing of local components for the Laundry factory, additional cost savings are also expected to arise from the sourcing of electronic components from local vendors in Thailand.

"In recent times it has become obvious that the future of Electronics lay with being located close to its major customer, Laundry" said John Bongard, Chief Executive Officer and Managing Director. "With the experience we have gained in the short time we have been in Thailand we are confident that these ongoing savings will be quickly realised."

The relocation will lead to an estimated reduction in the Auckland based work force of approximately 96 positions. As is the case with the Laundry announcement, the Company will endeavour to relocate as many staff as possible to other areas of the existing business as vacancies arise over the next 16 months.  Plant and equipment is expected to be shifted during the 2008 calendar year and will be housed in an 1800 sq metre air-conditioned building adjacent to the office complex on the Rayong site. Progress on the Thailand Laundry facility was celebrated with a ground turning ceremony last week and currently plans are on track for production to commence in March 2008.

Contacts:
John Bongard or Paul Brockett
Fisher & Paykel Appliances Holdings Limited
Phone +64 9 273 0600

Skellerup Holdings' shares retreated on news of a surprise business revamp including job losses to allow the rubber product maker to focus on international expansion.

Skellerup gave an annual "earnings reduction" guidance of a $9 million net profit, before abnormals, ending June 30, hit by a slowdown in trading and the high kiwi dollar.

But given abnormal restructuring costs of $16m, that net profit would turn into a $7m net loss, Skellerup added.  Skellerup's shares yesterday closed off 12c, or 9.8 per cent, at 111c, on high turnover of almost 700,000 shares crossed.

The shares fell below the 115c, 2002 issue price.

Managing director Donald Stewart said yesterday up to 100 redundancies would occur as Skellerup changed its business mix to focus on specialist rubber and technical polymer products.  The company's forecast result was based on turnover of about $190m. The loss after abnormals compares to a $13.4m net profit in the 2006 year.

Skellerup is forecasting a net profit of $12.5m in the year to June 30, 2008, and continues to target a long range annual revenue target of around $500m over the next five years or so.

"It's still possible that ($500m) target. But we're not going to reach that unless we get into some high-value growth areas and that's why we've wound up with this announcement," chief financial officer Neil Campbell said.

The kiwi dollar continued to weigh on the company despite it being an importer of material, particularly of rubber from countries like Malaysia.  But it wants to reinvigorate its offshore operations.

About 140 staff are based at Skellerup's factory north of Shanghai, in China, making products including the company's classic gumboots, which have not been manufactured in New Zealand for many years.

Stewart said an extensive review of Skellerup's business mix had led to a board decision to specialise as a global technical polymer-rubber company.  In Christchurch this would lead to a reduction in non-dairy related activities, and the sale of some operations. Dairy-based work comprised between 30 - 50 per cent of the total Christchurch workplace.

Campbell said Skellerup expected to continue to grow by acquisition to build a stronger presence in the larger, higher-growth markets.

Such technical rubber products companies were being eyed in the United States, reflecting the recent purchase of Italian firm Tumedei – a maker of custom-designed products for the vehicle and industrial products – for around $16m.

"We'll be looking along the lines of companies similar to that in other jurisdictions, and one of our key focuses will be on the US ... we know of several opportunities over there," he said.

Campbell said restructuring costs included $10m of plant and equipment writedowns and $6m of costs relating to redundancy payouts and other restructuring costs.  The decision to restructure was driven by the need to be cost competitive in a global market.

The company had the advantage of some natural hedging relating to the kiwi dollar. It was in a "net import position", meaning it imported slightly more than was exported.

But the 2007 result is to include a currency impact of approximately $4.7 million.  "For the import position that we have that is over and above the amount of exports, we are hedged going forward at around 68c for about three years ..." Campbell said.  "We would anticipate for the 2008 forward years there won't be huge forex impacts on us."

The firm with 800 employees spread around the world is keeping back office functions including human resources in Christchurch, where George Skellerup opened the first retail store in 1910.

But the upcoming redundancies – which could go as high as 100 – will hurt the local economy further.

Last month electronics exporter Dynamic Controls announced 200 jobs would be axed and a big chunk of production would shift to China.  Heinz Wattie is replacing 35 staff with machines at the Hornby factory, beverageware maker Click Clack is laying off 70 workers, as is wool tanner G. L Bowron.  Tip Top is closing its Christchurch plant with the loss of 70 jobs.

Leila Harre's piece in defence of shop workers seemed to overlook a couple of critical factors.

Unfortunately, some occupations are going to be closer to the minimum wage than others, and without some form of job evaluation and ranking, this argument is always going to surface. Some unionists shout louder and have a greater ability to inconvenience the general public than others.

Pay rates ideally should be within a range dictated by many factors, including the amount of time spent getting qualified (and competent), the inherent danger of the job, antisocial hours, responsibility for the safety of others, the ability to generate extra income by bonuses or extra hours, supply and demand, integrity and the handling of cash. Or the physical demands of strength and agility, and the number of hours required per week. The list goes on.

Mostly, brain surgeons, police, prison staff, dentists, and so on are going to outrank shop assistants, road sweepers and office cleaners. That does not in any way decry the necessity or value of these jobs, but there is a hierarchy, whether we like it or not.

Opening hours should ideally be dictated by the business owner. But in shopping malls, the demands are set by the mall owners, not the shop or business owners, and this is an area that so far has escaped unscathed. It may well be one of the root causes for the loss of jobs in the clothing and footwear industries, for example.

Let's be realistic. Long working hours in New Zealand and productivity are not related. Long working hours are demanded by the shopping malls, and if a business is required to be open from 9am to midnight, then it has to pay wages for all staff for this time, regardless of the takings.

Any analysis of daily shop turnover over a year, particularly in the clothing or footwear industries, will show that on some days, it wasn't worth opening at all, and therefore the business would have made a substantial loss. Those losses can only be made up by some good trading days.

Using that analysis, shop owners could make the decision to close on Mondays for example, like many restaurants, except on the approach to Christmas or holiday times.

But can they close? The malls say "no". Can they close at 6pm if their figures show that opening until midnight is a waste of money? The malls say "no".

The malls also often have ratchet rent clauses linked to turnover (not profit), and having ratcheted them up, the mall owners then develop a mall further up the road and take much of the trade with them. Add to that compulsory six-figure refits after six years, and the shop owner is on a hiding to nothing, having to bank perhaps $300 a week just to pay for a refit that they probably don't want anyway.

What can the shopkeeper do? Probably dump all New Zealand-made goods - where manufacturers are also forced to pay for ACC levies, maternity leave, sick pay, over the top Occupational Safety and Health requirements and for an extra week's holiday. Not to mention a culture that virtually denies the employer the right to dismiss useless, unreliable staff.

So, the shopkeeper imports from low-cost countries and in many cases, the goods for sale to the consumer are no cheaper and no better than the New Zealand-made goods were. The difference is that the shopkeeper has a margin to pay the costs of running the business.

The cutters, pattern makers, sewing machinists and other technical staff leave the clothing trade for good. Many no doubt end up on some form of benefit.

When it comes to productivity, particularly in manufacturing, the majority of local businesses are totally untrained in the techniques of real productivity improvement. Accountants and advisers abound, but few really understand true product costing and production planning. And virtually none understand labour and management cost control, material utilisation and performance training - probably because tertiary institutes no longer offer adequate training in these areas.

They prefer to specialise in the popular bums-on-seats courses, catering for the dreams of wannabe designers instead of offering the technical and managerial skills required to survive in business.

Opening at Easter is not a major problem. Let the shop owners decide when to open and then maybe they will have extra money to pay their staff. But if people can't get all their shopping done between 9am and 7pm, then there is something wrong somewhere, and everyone deserves at least one day off a week. Even the owner of a small business.

* Ray Green is a former head of management services at Bendon and operations manager for Specialty Brands (Rodd & Gunn/Logan). He is also a qualified productivity specialist for the sewn products trades - with 30 years experience, including several years tutoring AIT/AUT fashion technology courses.