Outsourcing jobs – whats the issue?

Yesterday we had the dual announcements of both Fisher and Paykel and ANZ moving work overseas.

The Standard has taken issue with this activity. Particularly, two posts at the Standard lamented the “exploitation” of foreign workers and stated that consumers should stand up to protect domestic jobs.

On a separate note we have seen the closure of a Dunedin knitwear company at the same time, while the D&B payment survey shows that manufacturers are taking a long time to pay their bills, taking 53.6 days on average (can only find old one 😛 ):

What do these stories have in common other than the sad fact of job losses? What do these stories tell us about the New Zealand economy?

I’ll look at this situation with ANZ removed. These jobs are an outsourcing of office work, something that is becoming increasingly prevalent among banks. Furthermore, there is no direct reduction in the number of ANZ employees – the reduction comes from a lower level of additional employment in NZ in the future.

So looking at the other stories we have a picture of manufacturing. Immediately everyone will jump on the exchange rate and interest rates – stating that they are killing our manufacturing industry. However, I’d say something a little different – our manufacturing industry is shrinking because large parts of it involve areas where we don’t have a comparative advantage.

Notice that Fisher and Paykel said (amongst a tirade of excuses) that they were moving because labour is cheaper overseas. Now either this will be an area where countries overseas have a true comparative advantage, or as firms move overseas, the wage rate overseas will increase to remove this incentive for firms in the future. Notice, this isn’t exploitation. As long as there are appropriate social structures (something that is improving all the time in developing countries) demand for labour will lead to higher wages for these people – why are we criticising movements that will help people that are truly poor?

Furthermore, the upside from this cost cutting will be lower appliance prices for consumers, something that is good for everyone.

As New Zealand is at a comparative disadvantage in many types of manufacturing activities, the allocation of resources into these industries is inefficient. This might sound cold, but surely the ultimate goal is for workers and our other resources to flow into industries that give us the highest return. By using resources efficiently, we increase national income, give the government more money to spend on improvements, and give people more life options.

Now I realise that the people that lose their jobs won’t give a crap about this – and everyone here feels bad for them. But this is where the government can truly help the labour market, by helping to match employers and employees and aiding the appropriate training to get people back into the workforce. Although some of the regulatory burden is an issue for NZ’s competitiveness It is a credit to the current government that they have introduced labour market policies that try to solve these problems (although some commentators seem to want to give them all the blame).

What about the short term?

Moving back to a short-term focus, the loss of jobs in Otago – a region that was already slowing will be a great concern to this region. Furthermore, the indication that the “high exchange rate” (we are at about average against the Aussie dollar, where a lot of our exports go – so this is a weakish argument), high interest rates, and lack of domestic demand are starting to impact on manufacturers debt payment schedule is concerning.

As long as businesses can remain in business the upcoming slowdown (so as long as firms aren’t too liquidity constrained) will fundamentally be a period of weak growth. If businesses can’t balance the balance sheet anymore and people exiting industries become prevalent then we are likely to see a sharper deterioration in activity. Government policy to increase the burden on businesses is concerning here – as it appears to be one of the main factors that could turn a cyclical slowdown into something more sinister. Lets just hope commodity prices stay strong.

  • Gotta get to work but:

    1. You’re wrong about Aussie – F&P’s main market is the states and we all know what has happend to their dollar.

    and 2. New Zealand businesses need to take some responsibility – they’ve had a very good growth cycle and not used it to invest in capital to increase productivity. If they are smart they will have held back capital to invest in productive capital more cheaply in the coming downturn but I doubt they have planned that far ahead (Kiwi management doesn’t seem to be able to see past the next quarter).

  • “You’re wrong about Aussie – F&P’s main market is the states and we all know what has happend to their dollar.”

    Yes, but when I mentioned the exchange rate I was talking about general “manufacturing” and its short term prospects not F&P – ergo why I mentioned Aussie where a significant amount of our manufactured goods head.

    “New Zealand businesses need to take some responsibility – they’ve had a very good growth cycle and not used it to invest in capital to increase productivity”

    This is where I get confused. Businesses did invest in capital, intensely, over 2003-2005. However, labour productivity has barely moved (I guess this has more to do with the fact that employment has risen so markedly). I agree that capital investment is shallow in NZ, however the key to fixing that isn’t to blame businesses, its to work with businesses to reduce some of the costs associated with investing in capital. I think firms are interested in productivity as well.

    “If they are smart they will have held back capital to invest in productive capital more cheaply in the coming downturn”

    I don’t know, business margins have been exceptionally tight over the last few years. With the capital markets closing up I don’t think NZ firms will have much ability to invest sadly.

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  • Steve Pierson

    “Government policy to increase the burden on businesses is concerning here”

    I’m just not sure that the statement is based in fact. International surveys consistently rate New Zealand one of the easiest places in the world to do business, the business tax rate just came down, and the Government reduced compliance costs by $2 billion back in 2004 (I think).

    And you don’t go to the expense and risk of moving countries over a few percent of government-related costs. It’s the huge savings in laoubr that attract them

    F & P and ANZ are going offshore because people offshore will work for cheaper. In an ideal world, cost cutting would mean a more efficent allocation of the world’s resources to producing wealth but the wage differences between countries drastically distort things. Rather than compete on who has the best natural advantages, the most skilled workforce, and the best infrastructure (physical, social, and legal), countries are forced into a competition of who can offer the lowest wages. That’s not a good outcome economically or, more importantly, socially but it is a reality of globalised capital and competing nation-states.

  • Hi Steve, thanks for your comments

    “International surveys consistently rate New Zealand one of the easiest places in the world to do business”

    That is true, but it is important to realise that I was talking about these costs at the margin. Additional cost on the construction of buildings and the introduction of Kiwisaver have increased compliance costs from where they were – by changing the playing field some businesses will be knocked out.

    “And you don’t go to the expense and risk of moving countries over a few percent of government-related costs.”

    I agree with this though – I think the labour matching work is a bigger net plus than some of the compliance cost issues are a net negative. However, you just have to talk to accountants to realise that compliance issues are very important – and they can be enough to push businesses over the edge.

    “Rather than compete on who has the best natural advantages, the most skilled workforce, and the best infrastructure (physical, social, and legal), countries are forced into a competition of who can offer the lowest wages”

    Not entirely. FIrm’s want the cheapest effective labour units. If staff in one country are only half the price but produce only a third of the stuff than staff in NZ, the firm will stay in NZ.

    The good thing about this type of globalisation is that it will lift wages for people in poor countries by increasing demand for labour – we are already seeing that in China.

    The best thing the government can do in this situation is make sure that we have stability, strong social institutions, and help provide labour matching. As the global economy evolves, the make-up of our national product will change – this is a good thing, but the government definitely has a role to limit the costs associated with this change (eg again, labour matching).

  • It has obviously been uneconomic for a very long time for F&P to manufacture in NZ. the dolar going from a sustainable 50-60 c up to 80 must be killing them. The offset is the political price they pay for being just another mfg co.

    whiteware is a high transport cost low margin business. their domestic base must have protected them. but cullen/bollards nonsensical high interest high exchange policy in the face of fundamentals indicating that was totally out of whack must finally have convinced F&P that mfg was just pointless charity.

    the fact their share price went up 15% indicates the market understands they have finally got real. mfg is dead in NZ now. F&P will design in nz and manufacture close to market.
    cullen does not understand what he has done but it is the way the world is moving.

    If you think F&P will pass on cost savings to the nz customer you are on drugs. they have a price point here. they have a good product and will maintain that price point. extra profit will be used to expand overseas. which is a good thing. after 15 years in many countries i still think an F&P washing machine and dishmaster are better than anything else on the market. They solve the european hard water problem and they will be very successful as a design contract manufacture company.

    they did their best to stay in nz but this decision was long overdue

  • “If you think F&P will pass on cost savings to the nz customer you are on drugs”

    I don’t think I’m on drugs – although doing economics could be like crack 😛

    Unless demand in completely unresponsive to the price of a F&P item, lowering the cost of production will lead to a reduction in price/price growth – as the return on each unit they sell will be higher but the cost of reducing sales (in terms of forgone revenue) will be the same.

    They have a good product which implies that they sell a heterogeneous good – it does not change the fact that lower costs will be partially passed on to consumers, but it does influence how much of the cost decrease gets passed on.

    Other than that I agree with many of your points (except the thing about interest rates – but debating that is not the purpose of this post so I will just leave it).

  • I’m with you on the trade theory. In theory it’s actually good that these jobs have gone overseas. NZ consumers get cheaper washing machines, and those who lost their jobs can move on to something more productive. Everyone wins.

    Of course the reality is not so frictionless … there will be adjustment costs for those involved. And the costs and benefits are unevenly distributed across different people.

    So anyway I thought it would be highly interesting to take an example like this as a case study and follow the workers involved in detail to see what happens to them. How long does it take them to get another job? How does the new job compare to the old one? Etc.

  • “Of course the reality is not so frictionless … there will be adjustment costs for those involved”

    That is why I gave a heads up to government policy – labour matching program etc help to reduce these adjustment costs, which I think is a useful intervention by government.

    “I thought it would be highly interesting to take an example like this as a case study and follow the workers involved in detail to see what happens to them”

    I agree with you that it would be very useful to have some sort of longitudinal study would be very useful – that is what they are doing with immigration:

    http://www.immigration.govt.nz/migrant/general/generalinformation/research/lisnz/

    Being able to quantify and explain these costs would given government a clearer idea about how it can help minimise the costs and improve outcomes.

  • All this talk about manufacturing being a high transport costs, low margin industry just reminded me of David Skilling (spelling?) going on about how New Zealand needs to transform it self into a weightless economy given our geographic isolation 🙂

    Maybe we do need fibre to the home/microwave/lawn mower/dishwasher 🙂

  • “All this talk about manufacturing being a high transport costs, low margin industry”

    No-one actually said that 😉

    “Maybe we do need fibre to the home/microwave/lawn mower/dishwasher”

    I said comparative advantage – debating the worth of David Skillings policy suggestions should be the issue for a different post *wink* *wink*

  • now I’m not one to troll, but

    “whiteware is a high transport cost low margin business. their domestic base must have protected them”

    from sagenz’s post 🙂

    I reckon David Skilling would run fibre to my tea kettle if he had the chance, now that would transform the economy!

    That said, I do find it interesting that a country like india (which has plenty of other problems) have transformed itself into an outsourcing centers. A friend of mine works for a large multinational consulting company that has outsourced all of their research to india. If he needs some research done on a topic he just sends an email to India. I wish I could do that.

  • “from sagenz’s post”

    Damn 😛

    “If he needs some research done on a topic he just sends an email to India”

    That does sound hot.

  • Let’s not forget tax. Changes to the tax regime will mean that F&P’s income from overseas assets will not attract the same tax as if the production were in NZ.

    I have just heard on the radio someone saying they would not buy F&P products. That is his perogative as a consumer just as much as it is my perogative to buy goods based on what I think is the best value (as I perceive it) for money.

    Now I can understand if people rail against firms relocating overseas if they are using sweatshop labour. Just look at what happened to Nike. But given the level of complexity involved in the manufacture of whiteware, we are talking about jobs that are at least semi-skilled. Are Mexicans going to be exploited by F&P? I rather doubt it. I also rather doubt that this is the actual beef.

    The beef is that people lose their jobs in NZ.

    But is this enough to say something should be done? Suppose there is a global decline in demand for something we export and the industry here has to rationalise. Is there a sound basis for doing something about it? Now suppose instead our hypothetical exporter is undercut by its competitors. This is effectively the same thing as a reduction in demand for the exporter’s product.

    What seems to be coming through in all the criticism of F&P is that the interests of the shareholders are being ignored. If the critics expect F&P to stick it out in NZ and face an even greater squeeze on their margins then they are saying that the shareholders should bear the burden. Not many shareholders will do that. Instead, they are likely to sell. The question becomes then to whom? Assuming everyone has the same information, it would have to be to someone who wants to take the company in a different (more profitable) direction – selling the assets and possibly moving the intangible assets overseas as well.

    I know from sources that the F&P management are as about proud to be Kiwi as any other company in NZ. However, they have been under financial pressure for a long time and there comes a time when one has to say that the future cost is too much. Indeed, many of the staff have been commenting that they knew the shift overseas was coming, just that they didn’t expect it to be so soon.

  • matt – apology for the drugs reference, late night post pub blogging has the effect of making one a little excitable. no harm done I see. Economics like crack? interesting concept.

    you should do another interest rates post so I can argue that point. maybe I will just thread hack a related post 🙂 . “Target Rate…” that looks close enough

  • oh and for the record “whiteware” and “manufacturing” are not quite one and the same 🙂

  • “apology for the drugs reference”

    No need to apologise I realised it was just a light-hearted off-hand comment. Economists get far worse things said about them 😉

    “you should do another interest rates post so I can argue that point”

    I’ll see what I can do, maybe in a few weeks – I have a bit of a backlog of posts at the moment 🙂

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