4. Case Studies
[Released under the Official Information Act]
4.1 Executive Summary
The objective of the case study work reported in this paper was to provide some detailed insights to how firms had responded to tariff changes over the past decade or so and also to seek responses to possible future tariff changes. The case studies help tease out the responses from the mail survey and also provide a practical understanding of the changes that lie behind the scenarios generated by the general equilibrium modelling work.
- The reduction of tariffs over the past 15 years has been a factor in the decline and transformation of many previously highly protected manufacturing industries. Tariffs, however, have not been the only change in the economic environment facing businesses. And New Zealand firms have not been alone in having to deal with new economic rules that have threatened the survival of many companies.
- One of the most dramatic changes has been the sharp decline in the rate of inflation from 9.8%pa over the 1980s to just 1.7% over the 1990s. The shift from a cost-plus business approach to a cost-down imperative was forced by a combination of lower tariffs, increased competition, high real interest rates, a floating exchange rate, tight spending control and business failures. Tariff reductions were an important part of the process but were by no means the sole factor in squeezing inflation out of the economy.
- Changes in labour market conditions, and a no-cost-increase mentality allowed and compelled firms to change their business practices.
- It is difficult to quantify the role of tariff reductions in driving the changes that have occurred within the manufacturing industry in New Zealand over the past 15 years. From an economy-wide perspective, the effect on overall GDP of reducing tariffs appears relatively small. General equilibrium modelling work undertaken as part of this review of tariffs shows that GDP would be less than 0.1% lower over a ten year period if current tariffs were reduced to zero immediately.
- The New Zealand Institute of Economic Research has estimated that tariff reductions between 1987 and 1998 raised average household spending power by $22 per week (1998 prices) compared to a no-change scenario.9
- Of the 26 firms interviewed we would classify at least three firms as being subsistence businesses - they provide a cash surplus, they have some valuable assets on their balance sheets (mainly buildings), but they are vulnerable to imports eating away at what is left of their customer base.
- There are around four or five firms that are indifferent to what happens to tariffs. Their businesses are financially sound and they have product that would continue to compete effectively with lower priced imports. Quality, customisation, speed, design, and a significant level of natural protection are important ingredients to the commercial robustness of these businesses.
- The small size of New Zealand and its distance from major competitors, as well as specific customer demands (the shape and size of New Zealanders) create some useful barriers to import competition. Firms have been forced to discover and play to these natural areas of protection.
- The majority of firms occupy the middle ground on tariffs. They benefit from their existence but would survive or adapt to the introduction of lower tariffs.
- The main focus of future tariff changes, according to the firms interviewed should be as follows:
- Reciprocity
- Certainty - spell out that intended path of tariff changes over the following five years and ideally beyond 2010
- Time - businesses need time to adjust so the time over which changes will occur should reflect the significance of the intended changes
- Harmonisation with Australia
- Simplification/ consolidation
- The tariff freeze is generally regarded as a helpful pause in the steady squeeze on margins that firms have had to manage as tariffs have been reduced over the past decade or more. A number of firms made the point that a period of stability has been very valuable in allowing/ encouraging them to think longer term. The increased certainty has led some firms to undertake investment and expansion they probably would not otherwise have embarked on. Two companies, were critical of the sudden nature of the change in tariff strategy. One had placed orders and written contracts on the basis that tariffs were to decline in line with the 1998 statements, and the freeze meant they were having to pay the higher tariff rates out of their profits. This simply emphasises the need to provide businesses with clear and long-term commitments to tariff rates.
4.2 Textile Clothing and Footwear
This case study covers the textile, clothing and footwear industry commonly referred to as the TCF industry/sector. Sixteen companies were interviewed as input to this case study. It also draws on the results of consultations with individual companies undertaken by the Ministry of Economic Development, and output from the TCF sector strategy work.
| | Clothing | Textiles (maximum) | Footwear |
|---|
| Current tariff: | (1999) | 19.0% | 12.5% | 19.0% |
| | 1995 | 32.5% | 21.0% | 35.0% |
| 1990 | 40.0% | 25.5% | 37.0% |
| 1987 | 65-40.0% | 40.0% | 43.0% |
4.2.1 Industry Characteristics
The industry covers a wide range of manufacturing/ business activities:
- the manufacture of inputs to the TCF sector - components, fabrics, etc,
- the manufacture of final consumer goods,
- the manufacture and retailing of final consumer goods,
- the management of the design, sourcing and distribution of final goods to retailers here and in Australia and further afield, without owning manufacturing capacity, or retail outlets.
A general observation is that the segmentation of the industry reflects the ongoing specialisation required to survive in a market where competition has intensified. That competition and free access to the Australian market has encouraged many businesses in this sector to develop export sales.
Several strategies have been adopted to achieve the competitiveness required to survive and to establish successful export operations. The most common has been the outsourcing of activities. Probably the most obvious has been the resort to contracting-out manufacturing operations to cheaper countries. In one case, getting the necessary volume from New Zealand manufacturers was also raised as a reason to produce off shore. Fiji was initially a popular source of cheap manufacturing capacity, but Asia now dominates.
The outsourcing of specific functions and components is also occurring between independent New Zealand firms. A number of the companies interviewed confirmed that they had outsourced some of their activities to local providers, including manufacture of specific components/garments and in one case design functions were being contracted out. At the core of the new strategies is the need to be cost competitive, but another important aspect appears to be that by being able to contract out activities firms have been able to continually strengthen their focus on what they are best at doing.
From the firms interviewed for this study as well as other work Infometrics10 has undertaken we suggest that this business distillation process is leading to a new business model. It is essentially a virtual business (solution provider) that pulls together a host of different activities along the value chain to deliver finished product to customers, either using their own brand, or under some third party brand. By combining large run low cost manufacturing in Asia with small run fast turnaround local manufacturers this business model can provide a highly flexible, customised and low cost service to retail chains and brand owners. There were at least four companies in this study that we would regard as good examples of this new business model. Issues relating to the above points are discussed in more detail below.
Key statistics:11
| | 1986 | 1996 | 2001 |
|---|
| Weekly hours worked (000s) | 1705 | 954 | 731 |
| | 1989 | 1996 | 2001 |
|---|
| Exports $m (HS 57-64) | 171 | 314 | 375 |
| Number of enterprises | | 2412 | 2154 |
4.2.1.1 Tariff Freeze
The tariff freeze has been crucial to some firms, and useful for others. It has provided some firms with the breathing space to reorient their business. (One firm argued that it was imperative that the tariff freeze remain beyond 2005 so that it could complete the re-structuring of its business. This comes close to the infant-industry argument for tariff protection.)
4.2.2 Current Strategy
The strategy most common throughout the TCF companies interviewed was the ongoing shift away from manufacturing to design, logistics and marketing. Management focus has shifted from manufacturing to sales. In some cases firms have abandoned, or contracted-out, manufacturing. Although we tend to think of TCF businesses as being part of the manufacturing industry, the actual manufacturing process is a diminishing part of the industry's overall value added.
The emphasis is on developing strong relationships with key customers and suppliers -
- provide solutions for retailers and brand owners
- create value package for retailers
- business to business sales
- target quality rather than quantity of customers
For three companies the primary strategy remains survival, highlighting the fact that there is still a significant number of businesses in the TCF sector that are marginally profitable and therefore remain vulnerable not just to tariff reductions but to a host of other business pressures.
Few, if any, New Zealand TCF firms are able to compete on price with imported product from Asia. They have concentrated on service, in terms of small runs, fast turnaround, as well as quality, design and fit of the product. These strategies build on the areas of natural protection available to New Zealand firms - distance from competitors; small scale of demand; and cultural/market specific factors.
TCF firms are currently in the process of developing a sector strategy. An important element of the strategy they are likely to settle on will relate to exporting. The growth of the sector will depend heavily on developing export markets (we discuss exports in more detail below).
4.2.3 Response to Tariff Changes
Over the first five to seven years of tariff reduction firms in this study tended to make relatively incremental changes to their business although the changes were not always made purely as a response to falling tariff rates.
In many cases, the focus was on survival and so strategies tended to be relatively short-term with cost reduction being the most obvious and popular. In many cases this resulted in businesses shrinking (considerably in some cases), as product lines were abandoned, staff laid off and activities were out-sourced.
A number of factors conspired to provide businesses in the TCF sector with sufficient breathing space to develop more sophisticated strategies that offered more than simply survival. These factors included:
- A fall in the currency between 1990 and 1993
- Lower interest rates
- A more flexible labour market
- Strengthening domestic demand from 1992 through to 1996
- A more mature customer base - retailers and consumers - that could distinguish between price and value. Quick-response, locally manufactured goods could compete against cheaper but less customised imports.
- Increased specialisation within the industry that enabled firms to create competitive solution to retailers.
Firms have steadily built relationships and contracts with other players in the industry, both here and internationally in order to put together supply chains that can meet retailers' requirements.
By no means all firms have developed deeper strategies. Based on the interviews for this work there is still a number of firms in the TCF sector that remain basically subsistence businesses - providing sufficient income for the owner and employees. There is no capital surplus or vision to help plug the firm into any sort of growth strategy. That means there will be more business closures - tariff reduction from here would simply accelerate this process rather than trigger it.
There are some key areas of business that are relevant to how firms have responded to tariff reduction over the past 15 years. We discuss them under their own headings below.
4.2.4 Exporting
Although a significant number of the firms interviewed had been exporting for at least ten years, Australia remains virtually the sole export market. That reflects free access (margin preference) to that market and the relatively similar consumer taste/style.
The Australian market, however, is becoming more competitive as Asian firms increasingly target a small but rich market. Although tariffs are currently frozen, they have declined over the past decade, thus adding to the attraction of the market.
Furthermore, the Australian retailing industry is becoming more concentrated - fewer chains with strong buying power. They are looking for fewer suppliers, so New Zealand TCF firms either have to get bigger or pool their resources such as manufacturing capacity, skills (design, logistics) and product lines. At least one company interviewed was focused on co-ordinating the relevant functions from a range of individual companies to deliver an attractive solution to Australian retail chains. In this sense the company was acting as a catalyst for a potential cluster.
The percentage of sales exported ranged from virtually zero to 75%. Four firms exported 50% or more of their output, with the ratio of exports generally rising as the firm increased in size.
Figure 4.1: Textile Clothing Footwear Exports
4.2.5 Importing / Contracting Out
A logical response to the removal of protection would have been to change the whole nature of the business away from domestic manufacturing to importing and distributing product. A significant proportion of TCF businesses have undoubtedly done so. Almost all the companies that underpin this case study, though, still directly or indirectly retain some domestic manufacturing capacity.
There are few, if any, TCF companies that remain solely focused on domestic manufacturing (although some still manufacture a greater than 50% proportion of their goods here) - some portion of the range of final goods they sell is imported. In many instances the imported products are made under contract for the New Zealand company (in some cases in New Zealand). In this way the firm maintains tight control of its product range and brand and protects its customer base to some degree.
Probably more common amongst TCF firms has been the contracting out of specific tasks or inputs. Footwear companies, for instance, have moved to import key components from Asia, or from specialist New Zealand businesses, rather than try and manufacture them in-house. This outsourcing has been an essential part of reducing costs and remaining competitive.
A reasonable proportion of all TCF imports come via local manufacturing businesses - in other words they control these imports in the context of their overall business. The bulk of imports, though, are determined by independent importers or retailers with no investment in local manufacturing.
Most firms interviewed faced competition from imported product. The most common strategy being used to confront this competition is to provide local customers with just-in-time delivery and product back-up so that retail customers are able to reduce stock levels and their working capital requirements. For weakly capitalised retailers this is an attractive option.
4.2.6 Industry Infrastructure
A strongly held view within this and other industries affected by tariff reductions is that the infrastructure required to sustain growing companies has withered as the level of domestic production has shrunk.
In the TCF sector the lack of machinists is often identified as a constraint to growth. Or that there are too few specialist machine maintenance people.
Of the sixteen companies interviewed there was surprisingly little concern about the thinning infrastructure. The dwindling pool of skilled labour was commented on by a number of companies, but many saw it as being a result, rather than a cause, of the decline in manufacturing in New Zealand. As one or two companies pointed out, they were looking to reduce staff numbers rather than increase them.
Some argued that when the industry stabilised at some new, lower, level it would be easier to attract people into the industry, because they could offer potential employees a positive future. Others argued that while they could get machinists they could not get enough people with machine skills as well as an ability to supervise others. The most impressive companies appeared to be investing in training staff to meet their particular requirements.
In summary, the loss of infrastructure has been a logical outcome of the steady reduction in domestic manufacturing. But segmentation and specialisation have helped slow, and in some cases halt, the decline of local infrastructure. And, where appropriate, firms have turned to imports for key components. The ease with which product can be sourced from abroad means that it has become a cost-effective substitute for local suppliers/ infrastructure.
4.2.7 Product Range
As competition intensifies we would normally expect firms to narrow their product range so that they can concentrate on their strengths. From the firms interviewed there is clear evidence that some companies have indeed narrowed the range of goods they manufacture. However, this response was not as emphatic or widespread as might have been anticipated.
Some companies deliberately expanded their product range in order to survive (maintain factory throughput). Others may have narrowed the range of products they produce, but as a business they have extended their product range using imports. This has been particularly important for garment producers. To maintain strong commercial relationships with retailers, firms have had to be able to deliver a full range of products.
Brand or business credibility is important in being able to expand the range of goods offered. The more successful a firm is the greater the opportunity there appears to be to add new products to their range. This becomes a virtuous cycle because as the range of products is expanded unit overhead costs (logistics, distribution, administration) falls making the company more competitive and reinforcing the company's profile.
4.2.8 Future Tariff Changes
All the firms interviewed were aware that tariff protection existed for their products. In this sense tariffs are an important issue for these companies, although by no means an overwhelming one.
A clear majority of those TCF companies interviewed accepted that further tariff reductions would occur and some were happy to see tariffs removed altogether. Three companies argued that any reduction in tariffs post 2005 would jeopardise their business.
At least two firms with substantial exports to Australia suggested that tariff reductions should pay heed to the Australian regime. They and others exporting to Australia have to contend with different tariff regimes unnecessarily complicating their businesses. Therefore greater harmonisation would be a useful outcome of any tariff review.
In addition to harmonisation with Australia, simplification of the tariff structure would also help streamline business operations. Consolidation of (TCF) tariffs at 15% was regarded by some as an acceptable first move.
Two companies involved in the manufacture of fabrics for the TCF sector were far less concerned about tariffs on fabrics than they were about tariffs on clothing. The real threat to their business was the possibility that lower tariffs on garments would force some of their local customers out of business.
The fact that there are some TCF companies that export at least some of their output beyond Australia suggests that some companies are becoming internationally competitive. (Bear in mind, though that the vast majority of exports are to Australia where there is a 25% tariff on third country imports.) The more internationally competitive firms become the more likely they are to withstand and accept lower tariffs because they are competing on brand rather than price. This is true for three or four companies in this study.
Most companies saw tariffs as just one of a number of government-related issues they would need to pay heed to over the next few years.
Many companies argued that compliance costs were a bigger concern than the prospect of lower tariffs. One company that has suffered more than most as a result of tariff reductions employed a significant number of low paid workers who were entitled to various benefits. The company had to employ someone full-time to liaise with the welfare agencies - it was acting as an unpaid welfare administrator. If these and other costs associated with complying with government regulations were eliminated then tariffs at zero would not be a problem. But since this was not going to happen tariffs would remain important to the viability of the business.
4.3 Plastics
| Current tariff: | (1999) | 6.5/7% |
| | 1995 | 13% |
| 1990 | 18% |
| 1987 | 23.5% |
Two companies were interviewed - one in Auckland and the other in Christchurch.
4.3.1 Industry Characteristics
There are four relatively distinct categories of plastics manufacture:
- Technical plastics
- Film
- Packaging
- Pipe
Film accounts for around 30% of industry output and has undergone some of the most dramatic changes including increased foreign ownership and loss of employment. New Zealand was once close to the leading edge of plastic film manufacture. That lead has disappeared as local companies have either sold out to foreigners or been squeezed out of business as tariffs have been reduced.
One company argued that the diverse nature of the industry means that a uniform tariff is not appropriate. Within the industry margins, markets, competition and ownership vary significantly. Even within firms different product lines can face very different market conditions.
Plastic companies are generally domestically oriented, partly because they enjoy a degree of natural protection (small, remote market for products with high freight cost component). Film products face the biggest threat from imports. However, plastic products often end up as part of some other company's exports. It is an automated and capital intensive business working well beyond the standard 40-50 hour operating week.
Key demographics:
| | 1986 | 1996 | 2001 |
|---|
| Weekly hours worked (000s) | 328 | 327 | 334 |
| | 1989 | 1996 | 2001 |
|---|
| Exports $m (HS 39) | 132 | 259 | 401 |
| Number of enterprises | | 560 | 545 |
4.3.1.1 Tariff Freeze
The freezing of tariffs from 1999 through to 2005 has provided greater stability/ certainty in the industry and, as one company argued, may have been a factor in encouraging a lift in capital spending in the plastics industry over 2001.
4.3.2 Current Strategy
Based on the two business interviewed the broad strategy is:
- to invest in good equipment, design and technical development
- try to sell on attributes other than price, for example, delivery, quality, innovation, service
- develop new products, areas of business
- develop export markets to deliver more rapid growth than is available from the domestic market.
4.3.3 Response to Past Tariff Reductions
The two companies interviewed represent almost the two extremes within the response range. One [Text deleted due to confidentiality] reacted to the new circumstances by cutting costs [Text deleted due to confidentiality], restructuring product range as various lines became uneconomic. The other company could see the changes coming and prepared the company - they narrowed the product range, developed new products (and are still doing so) and established export markets.
The main common response has been a strong focus on new, specialised products. Research and product development are important aspects of both businesses today by comparison to ten years ago.
Although lower tariff protection has clearly squeezed already thin returns in other parts of the plastics industry, these two companies appear to have been left relatively unaffected in terms of their profits, and growth.
Neither company has been persuaded thus far to maintain or expand its range by importing product for sale through their New Zealand distribution channel.
4.3.4 Future Tariff Changes
The current low rate of tariff on plastics leaves little protection for domestic plastic manufacturers and is probably critical to those business making plastic film products. The two companies interviewed were not particularly concerned about tariffs being reduced or eliminated - one was not aware that a tariff still existed for the products they manufacture.
Cost of sale, capacity utilisation, the cost of raw materials, stability of customer base, technological change are all more important to these businesses than the level of the tariff.
However, for those plastics businesses operating with relatively thin margins - less than 10% - any reduction in tariffs is potentially critical. The most vulnerable part of the plastics business on this count would be the film category, which has been the most traumatised by falling tariffs over the past 15 years. The relatively high level of foreign ownership in this area of the plastics industry has two interesting implications for future tariff policy:
- Foreign owners are financially better equipped to ride financial stress imposed by institutional changes
- Partly because of their greater financial depth foreigners are more prepared to take big decisions such as shutting down manufacturing capacity in New Zealand and importing product to meet local demand.
4.4 Metal Products
| Current tariff: | (1999) | 6.5% |
| | 1995 | 10% |
| 1990 | 15% |
| 1987 | 25% |
Three companies were interviewed [Text deleted due to confidentiality] one was privately owned and independently managed, while the third was small and owner operated.
4.4.1 Industry Characteristics
The metal products industry is diverse with a number of separately identifiable sub industries:
- iron and steel basic products, forgings, castings
- non-ferrous metal basic products, forgings and castings
- furniture and fixtures primarily of metal - joinery, fixtures and fittings
- sheet metal roofing and related products
- structural steel fabricating and plate metal and boiler shop products
- manufacture of household and kitchen utensils, general hardware and fabricated metal products (except machinery and equipment) nec
- wireworking, nails and fasteners
Key demographics:
| | 1986 | 1996 | 2001 |
|---|
| Weekly hours worked (000s) | 1571 | 1160 | 1140 |
| | 1989 | 1996 | 2001 |
|---|
| Exports $m (HS 73-83) | 982 | 1201 | 1737 |
| Number of enterprises12 | | 3030 | 3493 |
4.4.1.1 Tariff Freeze
The tariff freeze has not been particularly important to these businesses (useful according to one). Although it has slowed the encroachment of cheap imports, tariffs have been well down the list of management priorities within these firms.
4.4.2 Current Strategy
Because tariffs are a relatively minor issue for the companies interviewed in this industry they do not feature as a factor in current strategies.
The dominant strategy appears to be to make niche products that incorporate difficult to replicate design and manufacturing techniques. In one case the business was persuading downstream users to redesign their products to meet the requirements of the component being supplied by the New Zealand business.
Exports are an important component of growth for two of the companies. The weight and relatively low value of metal products gives them a degree of natural protection. However, these factors also work against exporting the product and fast growing companies in this industry are likely to develop new production offshore to reduce transport costs.
4.4.3 Response to Past Tariff Reductions
Rather than try to generalise about businesses' responses across the metal products industry based on these three firms it seems more appropriate to highlight a particular response relevant to examining the firm-level effects of tariff changes.
A firm with a relatively wide range of products adopted a strategy of not attempting to match the price of imported product. In this sense it did not allow imports to erode its margins. The market was left to decide whether it would pay more for the local product. If it did not then the product was phased out.
So rather than proactively determine which product lines to concentrate on this business used the market to make these decisions. Such an approach may well have maximised the firm's revenue. Certainly any production that occurred was almost invariably sold at a reasonable margin.
In practice the range of products in this company has narrowed significantly, and turnover and employment is well down on the levels prevailing at the beginning of the 1990s.
Although tariff reductions were not seen by two companies as being relevant to how their companies developed over the past decade or so, for one company the impacts have been obvious. Whole product lines have been taken out by imports and overall production is just 30% of what it was in the mid-1980s.
Take-overs and the consolidation of production and product lines have occurred in this industry. They probably have not been driven by tariff reductions but rather the general rationalisation of activity as commercial pressures intensify.
4.4.4 Future Tariff Changes
All three companies interviewed were not particularly concerned about tariffs. The view was that there were more important issues confronting their businesses that are directly related to government policy than tariffs.
Policies such as:
- Accident insurance - premiums do not reflect the performance of individual businesses; no premium reduction for having a good accident record.
- Health and safety requirements - they are being changed and the company is having to review all its procedures to ensure they conform.
- Business assistance - find it difficult to qualify for assistance packages because they undertake technical development work rather than formal R&D, and the rest of the assistance appears to be very consultant intensive - little actual money to do things.
- Jury service - disruptive to a factory that is trying to be as efficient as possible.
- New apprenticeship scheme, TradeNZ and Biz Info - all regarded as valuable to business.
4.5 Food Products
| Current tariffs | (1999) | 7% |
| | 1995 | 13% |
| 1990 | 20% |
| 1987 | 30% |
Two food related companies were interviewed for this case study.
The food products industry encompasses a wide range of grocery items. Fruit and vegetable preparation have generally faced a slightly lower rate of tariff protection since 1987 when their rate was 20% compared to 40% for breakfast cereals. The two rates are now 7% and 6.5% (fruit and vegetable preparations).
4.5.1 Industry Characteristics
The food processing industry is dominated by big players in the dairy, meat and horticultural industries. In many cases there is no tariff protection for the products produced by these multi-million dollar turnover businesses, many of which are overwhelmingly export oriented.
Given the small size of the market and the relatively large supply of basic food ingredients in New Zealand we would expect even niche producers to be looking to exports for growth relatively early in their development.
Key demographics:
| | 1986 | 1996 | 2001 |
|---|
| Weekly hours worked (000s) | 3063 | 2269 | 2353 |
| | 1989 | 1996 | 2001 |
|---|
| Exports $m13 | 1371 | 2027 | 3292 |
| Enterprises (other food manufacturers) | | 1669 | 1892 |
4.5.1.1 Tariff Freeze
The tariff freeze was not regarded as relevant to the businesses interviewed, and we doubt it would feature as a significant benefit for most food manufacturers. The rate of protection is low and food manufacturers are generally well placed to compete against imports of the same product. Import competition is not a big issue in this industry.
4.5.2 Current Strategy
The main aspect of strategy occupying the two firms interviewed was the issue of scaling up their businesses to fulfil demand as they successfully expanded their share of the domestic market.
Quality and building personal loyalty to the product were also important facets of the companies' strategies. They were competing against much larger players in their particular markets, but differentiating their product and investing in their brand they are able to build a valuable market for themselves.
4.5.3 Response to Past Tariff Reductions
Tariff protection has not been a significant factor in how these businesses have been run over the past five or so years. The level of tariff protection is relatively low and despite parts of this market being very price sensitive, neither company was concerned about tariffs being eliminated.
An important point that emerged from one company was that the business would never have become established without the removal of import licensing, reductions to tariffs on key inputs and a number of other changes to the economic environment.
The ability to import key ingredients at reasonable prices as well as specific capital equipment to perform to the standards required in the food industry opened up the opportunity to start the business. Conditions have become easier as tariff protection has been lowered on key inputs to the business.
The competitiveness of the two businesses interviewed rested heavily on the brand. Building the brand and tailoring it to specific segments of their markets helped reduce the importance of price. And although the firms did not have a free hand in setting prices they were high enough to produce adequate to good margins.
4.5.4 Future Tariff Changes
Tariffs are positioned down the management priority list for both companies and this probably reflects the view of a majority of New Zealand food manufacturers. One argued, though, that any tariff reduction should pay regard to reciprocity issues.
The company that was most likely to be affected by a reduction in tariffs claimed that the exchange rate and tax treatment of local competitors were more important to it than possible tariff reductions. Results from the mail survey suggest this view is common across a wide range of companies.
4.6 Automotive Components
| Current tariffs | (1999) | 10% |
| | 1996 | 11.5% |
| 1991 | 25% |
| 1987 | 40% |
The following comments/observations are based on three companies manufacturing product (generally replacement equipment) for the automotive industry.
The industry currently enjoys tariff protection of around 10%. That rate was around 35% in 1987 (some individual rates were as high as 40%) and fell to 25% in 1991 and 12.5% by 1996.
4.6.1 Industry Characteristics
The industry has undergone massive change as the local vehicle assembly industry has been steadily scaled back and finally shut down over 1998/1999. The changes have forced the surviving component manufacturers to reduce costs dramatically and to develop export markets for their products. Each of the companies interviewed now has significant export sales [Text deleted due to confidentiality].
Foreigners, with internationally recognised brands own most of the remaining automotive component businesses in New Zealand.
Key demographics:
| | 1986 | 1996 | 2001 |
|---|
| Weekly hours worked (000s) | 889 | 563 | 485 |
| | 1989 | 1996 | 2001 |
|---|
| Exports $m (HS 87) | 57 | 74 | 195 |
| Enterprises | | 1146 | 1254 |
4.6.2 Strategy
Quality and price are givens in the automotive market. All three companies regarded quality as crucial. Product performance as well as the degree of innovation embodied in the product were seen as important factors in maintaining the value of their brands, and giving the companies a competitive edge.
[Text deleted due to confidentiality].
Other important aspects of company strategy include a focus on efficiency of converting raw materials into finished products, rapid/ just-in-time delivery, and providing a wide range of product.
4.6.3 Response to Past Tariff Reductions
One company enjoyed a "stroke of luck" by having a breakthrough product around the time tariffs began to fall rapidly. The product enabled it to compete effectively with cheaper imported product and therefore the decline in tariffs and demise of the vehicle assembly market have not been particularly significant for the business.
The other two companies undertook a mix of radical and incremental changes. The most obvious response to lower tariffs have been:
- The development of export sales
- Restructuring of the business to take costs out/ boost productivity
- Change the range of products - in one case expand the range to cover the market, and in the other the manufacturing plant has become more specialised, though the business imports a wide range of product
- The development of new products controls
- Keeping real downward pressure on suppliers
General economic reforms have been helpful in achieving some of the changes the company was compelled to make. The Employment Contracts Act was particularly helpful in achieving the required restructuring.
One company claimed that it was reasonably well prepared for the fall in tariffs. It started changing its operations in the late 1980s when it was obvious the business climate was going to change.
4.6.4 Future Tariff Changes
One company was completely indifferent to what happened to tariffs because the effect of lower, or no, tariffs would be insignificant for the business. This company enjoyed good margins on its product and an impressive return on capital. Its parent regarded the New Zealand operation as one of its investment jewels.
The other two companies were far more sensitive about further tariff reductions, with one arguing for the current tariff rate remaining in place while the other argued for slow and well-signalled change to enable the company to adjust. Both companies face clear competition from imports, and price is therefore a major determinant of the companies' profitability. One faces high fixed costs so throughput is critical to overall profitability.
The competitiveness of the two companies is vulnerable to a number of adverse events besides any further reduction or elimination of tariffs. The most obvious and potentially most potent threat to the two businesses is a further rise in the exchange rate.
The currency is important to the profitability of the two businesses, especially as the proportion of exports grows. One would be struggling to justify manufacturing in New Zealand if the exchange rate rose to more than 50c US.
4.6.4.1 [Text deleted due to confidentiality]
[Text deleted due to confidentiality].
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4.7 Interview Guide
Company details:
4.7.1.1 Nature of Your Business (10 Minutes)
What are the core activities of your business?
Is this a fully integrated business or a small component of a larger supply chain?
Are you an owner-operated business, public company, foreign owned?
4.7.1.2 Turnover Now, Five Years Ago, Ten Years Ago (10 Minutes)
Do you export any of your production?
If so when did you begin exporting (since 1990?)
What % of your turnover do you export?
Are imports a major share of your total sales - details?
Employment - how many people do you employ? (10 minutes)
Is your labour force 10% bigger/smaller than five years ago?
What are your most critical skill requirements?
Are you experiencing any significant skill/labour requirements?
4.7.1.3 Strategy (10 Minutes)
What is your current business strategy?
What are the key determinants of your business's competitiveness - price, quality, technology, etc?
4.7.1.4 Response to Tariff Changes (30 Minutes)
Provide details of tariff changes relevant for this particular business
How well prepared for the tariff changes was your business?
Did you make small/incremental changes to your business or did you change your strategy radically?
Identify the key changes in strategy that occurred as a result of reducing tariffs. These might include:
- Narrowing the product range - developing a niche
- Develop new products/ adopt new technology
- Importing finished product
- Move in to exporting to gain economies of scale with narrower range of products
- Focusing on importing distribution and retailing
- Contracting out manufacturing to lower cost countries
- Radically restructuring production to cut costs
- Drive to increase productivity (capital and labour)
- Major changes in management/ ownership
- Put real pressure on suppliers for better prices and performance
- Buy out local competitors
What tariff/ non-tariff barriers do you face in your export markets?
4.7.1.5 Response to Possible Future Tariff Changes (20 Minutes)
Are you affected by tariffs on any of your current inputs - elaborate
What are the factors that most affect your company's gross earnings:
- Volume of sales/ demand
- Exchange rate - changes the prices we can charge
- Competitor behaviour (related to the above two)
- Cost of sale - distribution, retailers' margins
At what level of the currency would your business become uneconomic (the higher the currency the less viable local production becomes)?
How profitable is your business (some idea of return on capital)?
What is the company's ratio of debt to equity (rounded to the nearest 10%)?
Outline possible scenarios -
- Tariffs remain the same
- Current tariff is halved? Cut by a third?
- Tariffs are consolidated around several key rates
Would you change your strategy as a result of a 20% reduction in your current rate of tariff?
If so, how would you change your strategy?
Obtain some idea about the relative significance of a 20% cut in tariffs versus say a 10% lift in the currency, a cut in the company tax rate and rise in interest rates.
Are you more concerned about the speed of possible changes in tariffs the extent of any potential change?
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