So far this year a number of New Zealand based manufacturing companies have announced that they are relocating their operations offshore, mainly into China. While some have blamed the overvalued New Zealand dollar and the influx of low cost, imported goods for their decision, others have tended to side step this and claim that relocation enables them to be closer to their international markets and supply chains.
Since the Government established 'New Zealand Inc.' in October 2006, the case has been made that offshoring enables a company to overcome New Zealand's local transport and logistical limitations, and if that same company is registered in New Zealand, and bases its intellectual property and product design components here, then it is entitled to claim that its products are 'local'. If such a model is not embraced, then the argument is that New Zealand risks failing to develop its economic potential.
Such a model may offer benefits to some New Zealand companies, especially those operating in low tech areas, large consumer markets or with products that have large volume or significant labour inputs. However, there is no 'one size-fits-all' solution as to whether this approach is the key to building New Zealand's exporting future, and the potential costs and associated benefits involved in offshoring will vary from company to company.
If a company decides to move offshore, it must still successfully manage its relationships with customers, business partners, suppliers, managers and employees, and ensure its products meet international specifications and quality standards. Finished goods may still need to be shipped over long distances to the end-users, and there may be a requirement for additional stocks to shipped to safeguard against damage, loss, theft and out-of-stocks. Therefore, while labour and access to raw material or customers may be cheaper in a low cost country than in New Zealand, a set of costs still remain; including transportation, communication, travel, currency costs of each transaction, and the time (and money) involved in bringing people from different countries, cultures and languages together in one organisational structure.
Support and incentivisation of the 'NZ Inc.' approach and the absence of Government policy aimed at retaining activity onshore has the potential to hollow out the New Zealand economy by reducing its innovative capacity and longer term economic development. Little attention is being paid to the impact that offshoring has for local companies based on niche elaborately transformed products and their local support networks.
Companies operating in the elaborate transformed space, often referred to as the 'high tech sector', generally require the complementary skills of other firms in their supply chains over and above contractual supply relationships. These sophisticated and integrated supply chains operate on different layers, so when the larger companies, that can absorb the tribulations and costs of relocation, are peeled away, the layers beneath them break down the smaller and more specialised firms who either have to find new partners or they begin to fail.
When activity is transferred offshore, it puts pressure on the creative and development capability necessary to support any new product (device + service) of those that remain in New Zealand, directly impacting their viability. For many firms, the knowledge and workplace skills generated in the production process influences the decisions taken in the design and development space and visa versa, so when supply chains break down, gaps form in the innovation system. The bigger the gap, the harder it is for new ideas and concepts to find a route to market, and the broader specialist skills and knowledge needed to make things happen are no longer easily accessible from a physical and cost standpoint, and over time, the ability of our economy to respond to future opportunities is fundamentally damaged.
Advocates of offshoring claim that our intellectual property from the so called 'knowledge economy', will be sufficient to sustain our long term economic growth. However, countries such as China, India and Vietnam have already begun to develop their own brands, their own design, marketing and distribution capability. There is no intellectual property capture mechanism that New Zealand can rely on for the long term, and as today's partners rapidly learn to be tomorrows competitors, what does New Zealand do next? Market competition is based on either innovation or price. Without an innovative capacity we will have no choice but to compete on price.
New Zealand cannot match the low cost conditions offered in other countries. However, for many firms, a business case to relocate can be marginal, while others see value in their brand being associated with being made in New Zealand. But even these companies could be lost without a supportive policy framework that works to reduce inflationary pressure in our domestic economy without creating an uncompetitive exchange rate for our exporters.
John Walley. CEO, Canterbury Manufacturers' Association.
