KEY POINTS:
Fisher & Paykel Appliances expects to reap annual savings of $50 million from its new manufacturing strategy.
The company believes the full benefits will be felt within two years.
The whiteware manufacturer yesterday announced that it was closing its manufacturing operations in Dunedin, Brisbane and California - resulting in more than 1000 job losses - and moving them to a combination of existing sites in Thailand and Italy, and a newly purchased fridge factory in Mexico.
The market saw the company's move positively, with F&P's shares surging 34c to close at $2.54, representing the company's biggest single-day gain on the New Zealand stock exchange since its 2001 listing.
The Mexican factory in Reynosa, purchased from rival manufacturer Whirlpool Corporation, is expected to begin production for the burgeoning North American market as soon as July.
Existing cooking and dishwashing production in Dunedin, along with the refrigerator plant in Brisbane and the stove factory in California, will all be relocated over the next 12 to 18 months.
Forsyth Barr analyst Guy Hallwright said it was a necessary move for the company to remain competitive, as costs soared in New Zealand.
He did not expect the move to hurt the brand's image in what is still its biggest market, Australasia.
"It's basically not seen as an Australian brand in Australia anyway. It's either seen as a global brand, or it's seen as a New Zealand brand."
The impact on the New Zealand market would only affect the "die-hard buy-made-in-New Zealand people", he said.
Chief executive John Bongard said ongoing manufacturing cost escalations, particularly in New Zealand and Australia, were the main drivers behind the move.
"We have been faced for many years with an extremely unhelpful exchange rate fuelled by high interest rates. Increasingly complex and costly compliance costs of manufacturing in our home countries have not assisted.
"On top of these factors, free trade agreements with low-cost labour countries like China and Thailand have created a playing field we are unable to compete in.
"All of our competitors globally are currently manufacturing in low-cost labour countries. Our products are innovative and high end, but unless we can reduce some of the cost disparities in the manufacturing process, particularly the cost of labour, we will not be able to continue to provide an adequate return to our shareholders."
The company estimates relocation will incur a one-off cost of approximately $50 million, with capital expenditure estimated at $100 million - expenses which will be substantially funded from the sale of factory sites in Dunedin and Brisbane.
The US$33 million ($41.8 million) purchase of the Reynosa plant will be paid for in four equal instalments over four years, and includes land, buildings and equipment.
Bongard said manufacturing in Mexico essentially gave the company duty free access into the North American market, with substantial savings in freight and labour, which is around one-sixth that of New Zealand's.
He said the company had tried hard to hang on to the Dunedin plant, but as it manufactured for the North American market locational issues made the case for shifting production quite compelling.
The closure of Dunedin leaves Fisher & Paykel with around 1600 staff in New Zealand, down from a peak of around 3000 five years ago. Some 450 jobs have already been lost through the shift of its Auckland laundry and electronic manufacturing to Thailand last year.
Other businesses to have shifted production offshore last year include outdoor clothing company Norsewear, shoe manufacturer Kumfs and plumbing supplies manufacturer Dux Industries.
Bruce Goldsworthy, of the Employers and Manufacturers Association, described the move as the "passing of an era".
"We shouldn't be surprised, because we expect our top New Zealand companies to be international players.
"It's an international company that's responding to global market forces - it's moving its production to where its biggest markets are and where it's going to be most competitive operating from.
"If the company is going to continue to be a success, and that's the responsibility that it has to its shareholders - and a lot of them are New Zealanders - it has to operate where it can be most efficient, effective and profitable."
Fisher & Paykel's remaining production facilities in Auckland, Ohio and Borso del Grappa in Italy will continue to operate, although Bongard could not rule out any more plant closures.
"Every plant around our business has to stack up on its own merits.
"We've got to continue to keep costs down ... but if at the end of the day, the macro circumstances in New Zealand and any other country that we manufacture [in] make it impossible to carry on then we have to be able to take those tough decisions."
"This is a very emotional day for the company. We have been a substantial manufacturer in New Zealand for almost 70 years and a producer in Australia for nearly 20 years. It is with real regret that we are forced to make these relocation announcements, even though they are commercial imperatives for the business."
New base is boom city
Big global appliance firms have in the past few years been flooding into Reynosa, Fisher & Paykel's new Mexican base.
The fast-growing city on the Texas border already has LG and Maytag established there.
With a population of between 500,000 and 700,000, it is the third-largest city in the United States-Mexico border area and boasts good road links with its northern neighbour.
Fisher & Paykel's Reynosa workers will be paid on average between US$3 and US$3.50 an hour - much less than the average New Zealand rate. A CB Richard Ellis report says the labour climate in Reynosa is favourable to industry.
"Relations between unions and management are peaceful and harmonious."
Key industries include electronics, medical, automotive parts and consumer appliances.
The report says Reynosa is established in the top tier of manufacturing locations in Mexico, has a growing labour pool with an increasing skill level and strong links to one of the United States' fastest- growing cities, McAllen, just across the border.
