Manufacturers tell of doing hard yards

MICHAEL BERRY
Last updated 05:00 16/02/2013

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Christchurch clothing company Earth Sea Sky is the last specialised, high-quality Kiwi outdoor clothing brand to use New Zealand factories, co-owner Jane Ellis says.

The others, such as Kathmandu and Macpac, had moved production offshore, she tells the "Parliamentary Inquiry into the Future of Manufacturing".

Labour MPs Clayton Cosgrove and Megan Woods, Greens Russel Norman and Denise Roche and Andrew Williams of NZ First will be present at a hearing chaired by New Zealand Manufacturers and Exporters Association life member Cameron Moore.

The Government did not hear Ellis. It had labelled the inquiry "a [political] stunt" and refused to make it official.

Indeed, many of the comments and questions raised by the inquiry MPs are leading questions about whether their party's policies would benefit the submitters.

Meanwhile, Ellis says Earth Sea Sky works with about six Kiwi factories, all of which are struggling. Those factories - which together employed about 100 people - have effectively stopped training workers and half were on short weeks due to a lack of activity, she says.

"It would be easier and make much more sense to close their doors, but they continue to operate because of their loyalty to their employees."

New Zealand had signed free trade agreements with low-wage, Asian countries but no Western countries on a similar footing with New Zealand have signed such deals, she says. Excepting, of course, the long-running Closer Economic Relations agreement with Australia.

Those economies had an unfair advantage due to their being poor, which gave them exceptionally large margins and the chance to undercut Kiwi-made rivals, she says.

She believed the quality of formerly Kiwi-made brands had been eroded and the prices of the imported clothing flooding the market were too low for the quality to be retained.

However, people were buying on the cheap and ignoring the quality and longer life of the more expensive brands. The Government included, she says.

Some departments - such as the Air Force and the Department of Conservation - had contracted Earth Sea Sky for waterproof clothing.

However, most Government contracts focused on the cost alone, she says, with no thought for longevity or the benefits of locally-sourced products.

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Elastomer Products managing director Tom Thomson drops a foot of fibre optic cable on the table.

The Christchurch plastics manufacturer points to the plastic casing covering the ultrafast broadband cables that Government and industry are rolling out across the country in a $3.5b infrastructure project.

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"I would have been into that like a pig into strawberries," he fumes.

He had been through all the tender documents and found no mention of the product that will encase about 23,000 kilometres of UFB cable. It would have been millions of dollars of work, he says.

Many skilled Kiwis have struggled to find work for years and exporters have laboured with a high dollar, he says, while the country was welcoming Asian imports cheaper than cost.

"The problem here is that China has a 50-year plan, we have a three-year electoral cycle and a feeling that supporting your manufacturing base is somehow cheating."

Chinese giant Huawei is providing the equipment for Christchurch UFB contractor Enable, while Sweden's Ericsson is supplying Chorus which is developing 70 per cent of the nationwide rollout.

Elastomer is almost 40 years old and at its height had four other sites around the country with overseas sales and manufacturing bases as well.

Thomson led a heavily-leveraged management buyout after the sudden retirement of the company founder, because he wanted to retain the company as a Kiwi manufacturer.

Despite that, the company was forced to follow two major customers - Electrolux and Fisher & Paykel Appliances - to Thailand, with a factory set up in the emerging kingdom to service them.

"[Losing the contracts] would have cost 50 jobs overnight and half of the development and production capability."

All that in the maelstrom of the global financial crisis.

Forced to consolidate to two Garden City factories, it was hit badly by the quakes.

He wanted the Government to look beyond helping small firms grow to $500,000 of turnover.

More needed to be done to help medium-sized businesses swell into truly large manufacturers while still remaining in Kiwi hands, he says.

Those companies create the trickle-down work that fosters new manufacturers and bring the bacon home with their export earnings, he says.

It's a Kiwi tradition to wave goodbye to such companies after foreign buyouts and watch the jobs leak and then gush overseas.

"I'm watching the slow demise of our industry as people like myself head towards retirement age. The advice you get is: ‘sell and walk away'. There has to be a better way . . ."

He fears his company will be end up bought by an overseas manufacturer and the work moved overseas.

AW Fraser chief executive Gordon Sutherland is another manufacturer who has found himself all in. He has heavily mortgaged his home to fund new machinery.

"You could say what I've done isn't a flash business decision."

But he sees the nation as the potential loser. An engineering graduate with a masters in business from Stanford University and an entrepreneurial spirit - if things went belly up he was confident of getting a well-paid job overseas.

But New Zealand's welfare system would have another 200 families to feed and house. And GDP would take another papercut.

"We're the sort of people we want in New Zealand. The type of people we want to bring back to invest in businesses that can increase the standard of living."

The currency is the most important driver of his profit, he says. "It drives me insane when I hear people say, ‘oh, the dollar's gone up, why don't you just put your prices up?' "

Companies had to charge as much as they possibly could while still getting the business, and efficiency was a daily ritual.

With prices fixed in a foreign market that does not share his exchange rate pressure, his margins are squeezed until they are less than nothing, he says.

At a US70 cent exchange rate he can make a comfortable 8 per cent profit, but a gain of 10 cents cuts that to 2 per cent and at 83 cents it's almost nothing.

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Contex Engineering managing director Brian Willoughby is bewildered by business commentators cheering the rebuild as a way to soak up the unemployed and underworked. All he sees is a looming boom and bust - one to end all the others that make up the routine legacy of the construction industry.

What will happen to a generation of building tradesmen and engineers once the building is finished and the factories are shuttered, he asks.

Willoughby is also president of the NZ Manufacturers and Exporters Association which says an economy overly reliant on primary industry was headed for trouble and physical limitations.

The claim that Kiwi manufacturing companies can split their operations to keep the "clean bits" of design and sales in New Zealand, while moving the "dirty bits" of production overseas is nonsense. The advantages companies create are usually in the links between the two. Manufacturing jobs support more indirect jobs than other sectors and provide the middle-income roles that prevent a society splitting into haves and have-nots, the association says.

The Government's targeted GDP growth in exports is only possible through manufacturing, and the industry is too insecure to invest in the current climate, it says.

The association wants the tax emption from capital gains removed, a reinstatement of research and development tax credits and accelerated depreciation on equipment.

It also wants action to devalue the currency.

A compromise managing the currency and keeping it from jumping to crushing levels for exporters could be put in place, it says. Switzerland had decided to protect its manufacturing and export sector - and the jobs it supported - despite it meaning higher prices for imports.

Willoughby says the high dollar is disproportionately hard on exporters compared with the effects of a low dollar for importers.

"Take the difference between an importer and an exporter: if you import and the dollar goes higher, the only risk is that your competitor bought better than you and that he will sell with a better margin. And the cost would be borne for one stock turn - in the next round of purchasing you have the chance to make it back."

Meanwhile, an exporting manufacturer would have to live and die by his price for years, with every increase in the dollar sending his costs up and his revenue down.

The high dollar meant he was effectively giving his employees 18 per cent more pay, but they could not buy any more for it. There was no gain from it in New Zealand, he says.

He has no hope of help from the Government or the Opposition.

"If you want a change, it has to be done from the bottom up. We're not going to get a top-down solution to this, it's a massive cultural change."

Only one in 10 Kiwis workers are involved in exporting, the result of decades of inaction from both sides of the House, he says.

"We've given up on the pollies," he tells the manufacturing inquiry MPs. Not one of them bats an eyelid.

- BusinessDay.co.nz

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