6. Location
Our distance from export markets combined with the small scale of the economy and business activities create cost, knowledge, skills and infrastructure hurdles for manufacturing export companies trying to expand their businesses. But firms (both local and foreign owned) are investing to expand their plants in New Zealand suggesting that they have found ways around these distance and scale issues. In this section we look in more detail at why firms are investing in New Zealand and the nature of New Zealand-owned businesses investing offshore.
In our 1999 study we investigated whether location was a major issue for export businesses. The response from firms was that location is largely a "given" for their business and that there are more important issues that determine the success or otherwise of the business than its location.
One of the most obvious disadvantages for firms operating a long way from their key markets is the potentially high cost of transporting product to customers and the danger of not meeting delivery requirements. From the interviews, two important points emerge on this issue:
- Transport costs are generally a small component of the final value of the product - one company air-freights cast metal products to customers in America and Europe, another consolidates product manufactured throughout Asia in Auckland before dispatching it to customers in Europe and America.
- Because distance threatens delivery performance, companies have concentrated on ensuring the delivery process is monitored closely and meets market requirements. Two companies actually exceed market/ customer expectations in terms of delivering product to America and to the United Kingdom. They have turned a disadvantage into an advantage in the eyes of their customers. As one company put it "distance is a state of mind" - there are plenty of ways to resolve what appears to be an issue. Clearly, for some products distance and transport costs are not so easily dismissed.
Not one of the companies interviewed was looking to shift their business offshore. Indeed, unlike in earlier studies fewer than five companies raised the threat of moving or thought there were more attractive locations for their businesses. One manager talked about Australia being a better location for his business, but conceded that his Australian competitors would prefer to supply the Australasian market out of New Zealand - the conclusion being that New Zealand was a better location for this type of business within the Australasian market than Australia.
Our interpretation from some of the interviews is that there are companies whose small size and location make it more difficult for them to build their export sales, especially in larger more developed economies. Their lack of credibility, both in terms of size and perceived ability to deliver from such a distance, do handicap their growth.
6.1 Investing in New Zealand
Six multinational manufacturers have invested in their New Zealand plants over the last four years primarily to expand capacity. A further six New Zealand-owned firms have invested, or are about to invest, in new manufacturing capacity or consolidating existing capacity. In some cases the new investment has (or will) result in a significant increase in production, all of which is destined for export markets. The fact that these decisions are being made and implemented suggests that distance from markets is not an insurmountable impediment to growth.
The rationale for investing or expanding here appears to revolve around at least five factors:
- The plant already exists with all of its attendant infrastructure and systems
- The owners live here
- New Zealand is a relatively low cost economy to operate in
- The financial and physical performance of the plants matches or is close to world benchmarks
- Unique production characteristics - highly flexible, short run manufacturing capabilities that help fill gaps in markets the international group is servicing
- There is valuable IP sitting in R&D units in some firms.
6.1.1 Value for Money R&D
There are at least four examples of firms in this study where foreign companies have invested here specifically to access the R&D, IP or product development capabilities of the target firm in New Zealand. In all four cases the new foreign owner has focused the New Zealand business on R&D and product development. Manufacturing has been either abandoned or downsized to concentrate on manufacturing prototypes of newly developed product.
Although the four companies do not provide a sound basis for drawing strong conclusions about New Zealand being a good location for R&D and related activities, the argument is supported by an increasing number of New Zealand owned firms concentrating on the same activities. The shift away from manufacturing amongst New Zealand firms is not confined to those in the clothing industry.
So what is the logic behind New Zealand being a preferred location for carrying out R&D, design and product development/prototyping work? For the firms at the heart of this issue the argument appears to rest on three main factors:
- R&D/design costs are lower in New Zealand than in most other developed economies, reflecting our relatively low per capita incomes generally.
- Multi-skilled people rather than pure experts commonly manage and staff New Zealand R&D operations. This tends to make them better at approaching and solving problems than their counterparts in say the United States, where there may well be a much greater depth of expertise but less ability to utilise it effectively in delivering required outputs.
- R&D teams tend to be more stable because there are few employment alternatives for such specialised individuals within a small economy - a perverse location advantage. Two companies observed that it was far easier for them to hang on to good R&D staff than was the case in the United States, and one firm noted that their United States parent was impressed with their ability to source specific inputs locally (one-off tooling, for example) compared to the experience in the United States. Again, small economy characteristics appear to provide specific benefits for some activities. Although specific engineers may be more difficult to attract to New Zealand businesses than European or United States companies, once they do accept employment here they tend to stay. The latter reflects fewer opportunities to switch employment in New Zealand and possibly the "quality of life" arguments often associated with living in New Zealand.
The second factor is particularly important because it is consistent with comments made by companies in previous studies and may well represent a more sustainable competitive advantage than simply lower salaries and a less fluid labour market. In simple terms New Zealand engineers and designers may be able to offer something valuable to the rest of the world, something foreign investors have shown an appetite for. The characteristics/ circumstances that appear to be important in terms of New Zealand's engineering and design abilities include:
- Living on the edge - several companies pointed out that being so distant from the major world markets meant designers and engineers were less cluttered in their thinking. They were more inclined to come up with fresh ideas that were genuinely new to the market. Space in terms of time and distance are arguably as important to feeding inspiration as being immersed in deep markets full of ideas.
- Being in a small, remote economy makes New Zealand engineers and designers conscious of the limited pool of knowledge and ideas they are exposed to locally, and encourages them to scan the international market for more. In contrast R&D engineers in larger and more advanced economies tend to think the pool of knowledge and ideas that exists in their economy marks the limits of what exists. Conventional wisdom is a more powerful constraint to thinking in advanced economies than perhaps it is in New Zealand, where engineers are less aware of what is apparently not possible. One company highlighted this issue with an anecdote about the use of a particular technology. The internationally accepted limit with respect to the technology tended to restrict its use to high volume network solutions. New Zealand engineers believed they could improve and adapt the technology for use in other parts of the network market. New Zealand engineers have proceeded with their work and have pushed the technology well beyond the perceived limits, thereby opening new commercial opportunities.
- New Zealand R&D operations are generally relatively small and highly focused making a strong team approach appropriate. These factors work in favour of smaller projects, which reinforce the value of multi-skilled engineers. Large, more complex projects, require greater structure and individual expertise and are therefore better suited to larger economies where the deep expertise is more readily available. Firms involved in larger scale research projects in New Zealand are far less convinced about New Zealand engineers and designers having any unique qualities. The interest in New Zealand R&D capabilities probably reflects the fact that New Zealand is well-suited for some R&D projects. A better understanding of why New Zealand is attracting foreign investment in R&D operations would seem an important aspect of trying to attract foreign investment.
The success of Team New Zealand's America's Cup campaigns highlights the potential of New Zealand's approach to R&D, design and product development and tends to emphasis many of the points outlined above.
The engineering and design characteristics discussed above are probably determined more by our economic and business climate than by individual New Zealanders. That follows from the fact that a significant proportion of people working in New Zealand R&D establishments are foreign born. Furthermore, R&D labs internationally would typically have a high mix of nationalities, reinforcing the idea that local "environmental" factors play a strong role in determining the characteristics discussed above.
6.2 Investing Offshore
The most obvious offshore investment New Zealand based companies make is in distribution facilities. We have observed in previous studies that a key part of the growth of manufacturing export companies is the decision to invest in their own distribution operations internationally. That process is continuing, with even relatively mature exporters still looking to expand their ownership of distribution. The stronger the distribution network, the more the company looks like a global player prepared to source product from around the world and send it through their sales network. The location of the original business becomes less and less relevant.
The other area of business where location may compel firms to invest offshore is manufacturing. At least four reasons might underpin such a decision:
- The pursuit of lower cost manufacturing - the clothing industry
- The logic of being close to key markets - low value product with high transport costs
- Tariffs make it sensible to manufacture inside the market
- Non-tariff barriers continue to be a significant factor for many exporters9
Only two or three companies directly own (or are likely to) offshore manufacturing capacity out of the 30 firms interviewed. It seems much more common for firms to contract out production to solve one or more of the above issues.
An important outcome of the shift away from local manufacture is the need to develop a whole new range of management skills:
- Negotiating contracts with offshore manufacturers
- Developing a clear strategy, or set of criteria, for attracting the right partners to undertake the manufacture of goods either under contract or via a licence agreement
- Setting up and managing the logistics required to co-ordinate inputs, manufacture, and delivery of product to distributors and in some cases final retailers (there are at least two firms in this study that exhibit the relevant skills)
- Developing tailored marketing and retail support for individual markets
At the core of these skills is the ability to manage relationships between independent but mutually dependent businesses rather than an ability to manage huge command and control conglomerates. The new global businesses are just as likely to be based around alliances that co-operate along a supply chain than single large-scale vertically integrated multinationals.
For most New Zealand firms their small size, lack of financial resource and distance from key markets encourage them down the relationships/alliances route to global growth. The emergence of the above skills is therefore a reassuring trend. It may also imply that New Zealand based business need not be particularly large in the conventional sense to be globally significant.
A growing number of companies in this study are developing the skills to build global businesses. They have clear strategies and procedures in place that are able to be replicated or expanded to underpin substantial growth. One company has refined its approach to finding businesses to manufacture its products under licence to the extent it has secured a major United States manufacturer and is looking to negotiate a European licence agreement. Another firm has a logistics system that enables it to restock retailers three times a week on the other side of the world, and another has developed a virtual distribution system that has gained it a reputation as a top-performing supplier to United Kingdom retailers.
6.3 Conclusion
New Zealand's time and distance from major export markets, plus the small size of the domestic economy, appear to make it a relatively unattractive location for a successful export business. Why, then, do global companies have any part of their business located in New Zealand? In most cases the answer can be traced back to the founder being a New Zealander. Several businesses are here because they started here for specific policy reasons - tariffs, and regional and business development grants.
The fact that a number of companies (including a number of foreign-owned firms) are continuing to expand their New Zealand operations suggests there are effective strategies the allow firms to get around location disadvantages. From the firms interviewed for this study there is no compelling evidence that the location of the business is a major impediment to their growth, although some companies have had to work hard to develop an effective response to the hurdles that do exist.
The array of responses include: concentrating on niche products and markets that are less sensitive to scale and location issues; developing sophisticated logistics/distribution systems to achieve world class delivery performance. Others firms have changed their business strategy to concentrate on specific activities such as product development/R&D that is less location or transport sensitive, while others have established strong relationships with large businesses within their key markets to give them a local presence and credibility.
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