Brian Fallow: Workhorse needs a jockey

The formation of a new Government is an opportunity to bring more focus and commitment to the issues bedevilling that taken-for-granted workhorse of the economy, the manufacturing sector.

When the new Cabinet is named maybe there should be, as the Council of Trade Unions suggests, a Minister of Manufacturing to run a "user-friendly" agency advocating for the sector within the Government and making itself useful to manufacturers.

After all, there is a Minister of Agriculture, of Forests, Fisheries, Tourism, Communications, even a Minister for Racing. You name it, it has a minister. But not manufacturing.

The omission is conspicuous considering that manufacturing provides about one-seventh of the economy's output and a similar proportion of its jobs.

It is sobering that the CTU and Business New Zealand feel it necessary to combat the notion that manufacturing is a sunset industry in this country.

"There seems to be an argument around that says New Zealand will do the design work, keep some of the intellectual property and a few high-paid science and management jobs, but all the manufacturing will be done elsewhere," the CTU says in a booklet for delegates to its conference next week.

You might call it the Bendon model: design in New Zealand, manufacture in China and sell in third countries. It works for that company.

But there is also the Fisher & Paykel model: "Every worker is regarded as part of the design team. Design has a close proximity geographically to the manufacturing workforce."

Innovation and productivity are both enhanced, the CTU argues, by involving those who do the work.

Manufacturers have found the going heavy in recent years. Unlike farmers, they have not had the buffer of high export prices to offset a high exchange rate.

And like their counterparts worldwide, they have the challenge of competing with China in export and home markets.

The Institute of Economic Research's quarterly survey of business opinion released on Tuesday illustrates the point. Manufacturing firms on balance reported falling output, exports, new orders and employment, steeply rising costs and steeply falling profitability.

The longer-term trends are more encouraging, fortunately.

Manufacturing output grew 22 per cent between 1988 and last year. But as a share of GDP, manufacturing has declined 2.6 per cent since 1978.

Some of that is down to the economic reforms of the 1980s, which removed the high tariffs and import quotas that protected globally uncompetitive industries.

But as Business NZ points out, this is a smaller decline than in the United States, Japan, Britain, France or Australia.

In part that reflects technological progress and productivity gains that have reduced the cost of manufactured goods.

Also, many manufacturing firms now outsource functions such as transport, accounting, maintenance, cleaning and human resources.

And the growth of tourism and leisure have helped the services sector grow faster than manufacturing.

In 1990, exports of "elaborately transformed manufactures" (as distinct from processed commodities such as milk powder or manufactured commodities like tanned leather) were worth $2.8 billion, or 19 per cent of all exports.

Last year, they were worth $8.8 billion, or 30 per cent of all exports.

Exports of elaborately transformed manufactures are dwarfed by imports, of course. We export $22.90 worth of such goods for every $100 imported. But that is significantly higher than in Australia, where the corresponding figure is $14.

Business NZ argues that the low level of exports from some manufacturing industries, rather than being a sign of poor international competitiveness, may be happening because their products are inputs to other domestic manufacturers or the construction sector (such as packaging or aluminium joinery), or perishable (bread), or bulky in relation to their value (paint etc).

The CTU complains that trade policy seems to be biased towards commodity exports such as meat and dairy products, reflecting a simplistic adherence to the idea that countries have different comparative advantages and should stick to them.

"In developed economies, most of the profits in trade come from intra-industry trade in manufactured products," says the CTU.

"This means that instead of a model where one country is the farm and another is the factory - which is a crude version of the comparative advantage model - both countries specialise in a range of differentiated products within the same industries.

"'For instance, under a comparative advantage model New Zealand would not be seen as a good place to make dishwashers. Under a differentiated intra-industry trade model, there is no reason why New Zealand could not both export and import elaborately transformed manufactured goods - which we do."

Australia is the main market for manufactured exports but even with Closer Economic Relations, Business NZ says local manufacturers often do not get a fair go across the Tasman. Rules of origin, which specify the minimum local content needed to qualify for tariff-fee access, are too restrictive, it says.

And federal or state government support in several industries gives Australian firms an advantage.

New Zealand manufacturers need to be internationally competitive because the domestic market is so small and larger markets so far away, making transport costs a barrier even if tariffs are not.

High on Business NZ's list of concerns about impediments to that competitiveness is the state of key infrastructure, especially Auckland's roads and the electricity supply.

They want a lower company tax rate and write-offs of more than 100 per cent for spending on research and development.

They want an overhaul of the Resource Management Act, more spending on industry training and an immigration policy geared to bringing in migrants with the skills that manufacturers need.

And they want more flexibility in the labour market, for example, probationary periods for new employees before personal grievance protections apply.

The CTU's prescription is, naturally, somewhat different.

Productivity gains delivered simply by attacking workers' conditions and paying lower wages cannot be sustained long term, it says.

"Unions completely reject the low road that focuses just on costs, attacks union involvement, deregulates the labour market, promotes casualisation and contracting out, and removes support for skill development. That approach has done a lot of damage."

They favour investment, skills development and collaboration between employers and staff.

"In China, there is sophisticated technology, low cost of capital, highly skilled engineers as well as relatively low labour costs.

"Their Government is driving a growth agenda that aims to leave no stone unturned."

Some sign over the next two week of a similar commitment here would be welcome.