2. Manufacturing Export Performance and Conditions
The conditions for exporting were particularly favourable over 1999 and most of 2000. The currency continued to depreciate, providing exporters with significant gains in terms of price competitiveness, and/or bigger margins. Furthermore, key export markets - Australia and the United States - were experiencing solid economic growth.
In this chapter we focus on the performance of New Zealand's manufacturing export sector as a whole in the context of the country's overall export performance and also against what other countries have been achieving. We also look at the how the companies covered in this study have performed against manufactured exports in total, to give some idea of their contribution to overall manufactured export receipts. But firstly we examine more closely the environment manufacturing export companies have been operating in and how they have responded to the conditions they have faced.
2.1 Conditions and Response
2.1.1 The Currency
At the time of the last study (May June 1999) the currency was retreating rapidly from the highs set at the beginning of 1997 (the time of the fourth study). The real exchange rate1 fell by around 20% over the two years ended June 1999 and fell a further 13% over the following two years, to reach a 15 year low point in the first half of 2000. Perhaps more significant than how far the currency has fallen is that it has stayed so low for so long. Over the past two calendar years the real exchange rate has been on average 13% below its post-June-1984 average.
Graph 2.1: The Real Exchange Rate
Source: Reserve Bank of New Zealand
On the face of it the low real exchange rate has boosted exporters' price competitiveness. That should have resulted in more sales and/or bigger margins. The value of manufactured exports has certainly increased (up $2bn or 40% over the past two years), but volume growth has been less impressive - just 6.5% in total over the last two years.
Graph 2.2: Manufactured Exports
Source: Statistics New Zealand, National Accounts
There are at least four possible reasons for the relatively lacklustre performance of manufactured exports in the face of such a low currency:
- Manufacturers have been wary of expanding capacity on the basis of what they see as a temporary improvement in competitiveness thanks to the low exchange rate. They expanded exports rapidly on the back of a low exchange rate in the early 1990s only to be squeezed viciously between 1995 and 1997 by a relentless rise in the currency.
- Some manufacturers entered extensive forward cover contracts soon after the New Zealand dollar fell below 50cUS, thereby shutting out the gains available from a much lower currency for the past 15 months.
- Many manufactured goods have a high import content, which means that a lower dollar pushes up input costs, which simply erode the gains from higher export prices. In the same vein, expanding capacity often involves purchasing imported capital equipment, which rises in price with a lower dollar.
- The demand for some manufactured goods fell sharply over late 2000 and through 2001. Demand for telecommunications equipment, in particular, evaporated as telecommunications companies around the world suffered from over-capacity and deteriorating balance sheets. In the United States, industrial output and total business investment spending contracted over the year ended December 2001 in real terms by -3.7% and -3.1% respectively.
- Some companies have either contracted out their production to foreign plants or have shifted the focus of their business away from manufacturing to activities such as R&D, design product development. The result is a marked fall in gross revenue (export receipts), but not necessarily a fall in net profit.
2.1.2 Manufacturers Moving beyond Australia
Over the past five years the share of all manufactured exports receipts generated from the Australian market has slipped significantly from over 41% at the end of 1996 to just over 30%. A similar decline has also occurred for the more narrowly defined elaborately transformed manufactured goods. At the same time, the share of receipts from the United States market has increased from 6.7% to 17.6% over the past five years. GDP growth in both countries over that period has been remarkably similar - 3.6%pa for the United States and 3.9%pa for Australia. The vast bulk of what growth there has been in manufactured exports appears to have gone into the United States.
A large part of the reason for the substantial shift in market shares relates to the exchange rate. Firstly, the New Zealand dollar has fallen far more against the $US (40% between 1996 and 2001) than against the $A (7.6% over the same five year period), so we are looking at a valuation driven change in shares. But secondly, precisely because of the big exchange rate change, the United States market has become more attractive and therefore the logical market to concentrate on when trying to expand export sales.
Graph 2.3: Manufactures Shifting Markets
Source: Business New Zealand, Statistics New Zealand
The fact that the value of manufactured exports to the United States has increased by over 300% over the past five years (ten times the increase for Australia) means that the market share shifts have been driven overwhelmingly by actual volume changes rather than simply valuation changes.
Of the 30 firms covered in this study, around seven have recently developed, or are in the process of developing, distribution of their product in the United States. In virtually all instances Australia is still the most significant export market for these seven firms.
Although the Australian economy has grown impressively, Australians' demand for imports, especially for sophisticated manufactured goods, has been relatively soft. It remains by far the most important market for New Zealand's manufactured exports, but companies appear to be finding the scope for expansion increasingly limited.
New Zealand's share of Australia's imports of elaborately transformed manufactured goods has been shrinking since 1998. At the same time Asian economies have been expanding their share of this import category. Following the Asian economic crisis manufacturers in the region would have had substantial excess capacity and low currencies - powerful incentives to expand exports to Australia.
Furthermore, most New Zealand manufacturers involved in exporting focus on niche products and markets. It is entirely conceivable that a 3% share of Australia's total imports of elaborately transformed manufactured goods is consistent with reasonably full exploitation of the niche opportunities available, and that further growth would have to come from opening up new markets. Hence the growth in manufactured exports to the United States over the last three to five years.
2.2 Manufacturing Export Performance
Manufactured goods led the surge in export and economic growth in the early 1990s. They are an important source of national economic growth, given the size of the manufacturing sector and the fact that its growth (primarily via exports) is not constrained by the natural limitations that hamper the primary sector.
We discussed above some of the reasons why manufacturing exports have not responded particularly positively to the lower currency. The fact that manufactured export volumes have fallen at the same time as pastoral exports (meat and dairy) have continued to climb (see graph) suggests a more fundamental change may be occurring.
Graph 2.4: Manufactured vs Pastoral Exports
Source: Statistics New Zealand, National Accounts
One possible trend in the manufacturing sector, evident from this and previous studies, that would be consistent with a slowdown in manufactured exports volume growth, is a drift toward outsourcing production.
An increasing number of firms covered in these studies have either shifted production offshore or have changed the focus of their New Zealand operations to concentrate on R&D, design and prototype or custom production onshore. As a consequence gross export sales recorded from New Zealand may decline. But from the companies' point of view they achieve the same, if not higher, net sales revenues. We are also aware of foreign owners requiring their New Zealand plants to ship product at cost - the margin is captured at the point of sale. This practice would further reduce the total value of export sales.
Four firms in this study clearly exhibit a decline in export earnings as a result of shifting production offshore or changing the emphasis of the business in New Zealand. Two to three others will expand their total international sales by significantly more than their recorded New Zealand exports as result of either transfer pricing their output or meeting increased sales from offshore factories.
The apparent stalling of growth in manufactured export receipts may reflect a general maturing of the sector and its export strategies. The focus on lifting gross sales - encouraged by award schemes based on forex earnings growth - is giving way to more sophisticated strategies that focus on the value that the New Zealand business can create and on management skills to co-ordinate activities across a number of businesses globally - manufacturing distribution. These changes will result in less emphasis on gross revenue, or the volume of production and investing in higher value activities such as R&D, new product development, prototype manufacture - the service end of the manufacturing sector.
Measuring the economic contribution of these less tangible activities (such as R&D) is more complicated than counting the number of swimsuits or alloy wheels exported. The growing level of foreign ownership and attendant transfer pricing further complicates measurement.
2.2.1 Relative Performance
New Zealand's manufacturing export performance continues to lag behind the majority of OECD countries. In Table 2.1 below we have set out the latest data from the OECD that compares demand growth in relevant markets with actual export growth. In simple terms they measure the extent to which manufactured exporters maintain, expand or lose market share. If New Zealand manufacturing exporters expand their market share the numbers in Table 2.1 will be positive. Negative numbers imply a loss of market share.
Graph 2.5: Export Performance 1990 to 2001
Table 2.1: Relative Manufacturing Export Performance2
| | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 20013 | 20024 |
|---|
| New Zealand | 7.9 | 4.2 | 3.1 | -0.2 | -8.1 | -4.6 | 0.0 | -0.9 | -4.6 | -6.3 | -4.5 | 0.4 |
| Australia | 14.9 | 3.5 | 0.6 | -3.1 | -4.1 | 2.9 | -1.7 | 3.5 | -4.2 | -10.3 | 0.2 | -0.5 |
| United States | 1.2 | 0.2 | 1.6 | -0.4 | 2.5 | 4.0 | 6.5 | -1.0 | -2.9 | -1.8 | -2.9 | -0.2 |
| United Kingdom | -1.9 | -2.6 | -0.6 | 1.6 | -1.7 | 2.8 | -1.6 | -6.2 | -2.9 | -2.7 | -1.8 | -0.3 |
| Sweden | -5.0 | -4.0 | 10.0 | 5.9 | 5.6 | -1.5 | 1.2 | -0.4 | -0.1 | -1.0 | -0.7 | 0.2 |
| Denmark | 4.1 | 2.8 | 0.3 | -3.8 | -1.2 | -4.6 | -3.1 | -7.2 | 1.2 | -3.9 | -2.8 | -0.2 |
| Ireland | 2.4 | 4.0 | 9.7 | 4.8 | 13.9 | 2.3 | 5.3 | 14.7 | 6.5 | 8.2 | 3.7 | 4.1 |
| Finland | -13.5 | 6.8 | 0.3 | -3.0 | -5.4 | -1.0 | 2.8 | -1.4 | 0.9 | 4.9 | 1.8 | 0.8 |
| Spain | 7.8 | 1.6 | 9.7 | 13.2 | 7.5 | 4.0 | 3.1 | -3.3 | 1.7 | 0.3 | 0.7 | 0.3 |
| Small OECD | -0.5 | 0.0 | 4.2 | 0.9 | 1.5 | 1.2 | 2.3 | 1.0 | 1.0 | -0.3 | 0.5 | 0.8 |
| Total OECD | -1.9 | -1.8 | -0.3 | -1.2 | -0.8 | -0.8 | 1.6 | 0.7 | -1.9 | -1.6 | -1.2 | 0.2 |
Source: OECD Economic Outlook
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