Michael Barnett: Metalwork migration will hurt large firms

In the last year about 50 Auckland small-medium light manufacturing firms have closed or relocated overseas, mainly to China.

Some firms have merged with larger businesses in England, Australia and America, taking innovative production capability away from Auckland.

It is not just young graduates who are among the 800 or so leaving New Zealand every week but also experienced and highly skilled tradespeople and entrepreneurial manufacturers.

The situation has crept up barely noticed. So far this year, around 1500 metalworking jobs have disappeared, mainly from firms employing between 20 and 30 staff.

Two common factors stand out. Firstly, the businesses tend to be small metal component manufacturing firms which supply larger Auckland manufacturing assembly businesses - firms where 80 per cent to 90 per cent of their business is sourced from two or three larger manufacturers.

When the larger firm finds they can get the same items supplied from China for less than half the price offered by their local supplier, what choice do they have?

Secondly, wage rates of Auckland metal production and component firms are uncompetitive. In China, wages for equivalent jobs are at least 50 per cent lower. There is no way that even the most highly skilled value-added Auckland business can compete when "New Zealand labour" is the difference.

Put the two factors together and what you have in Auckland is a developing trend for many of our small component-making businesses being forced to lay off staff.

If components for assembled items like a washing machine or a lawn mower can now be made in China for less than half the price here, will Auckland's major assembly manufacturers be next?

Imagine Auckland without top Kiwi brand-named manufacturers like Fisher & Paykel, Masport and wholesale-retail product stores which source components from hundreds of Auckland SME component manufacturers?

Not only will these smaller firms and many jobs be threatened, but the strategic risk of larger manufacturers shifting offshore will also increase. Pressure will increase for the major assembly firms to locate closer to their Asian-based component suppliers; the small businesses producing thousands of component items from screws, brackets, taps, hoses, blades that are then assembled to make a washing machine, fridge or lawn mower.

This will save transport costs as well as give access to train assemblers for jobs paying much lower than those here.

In the 1980s, 60,000 jobs disappeared as Auckland switched from dependence on unskilled, manual employment at freezing works, wool stores, car assembly and basic manufacturing.

But many more skilled jobs were created in information technology, software development, food processing and marine industries.

As China, India and other larger nations start to rewrite the world's mass employment jobs, we may not yet be through our 1980s transition from an economy based on routine production of basic items for traditional customers to one where businesses are constantly fine-tuning to meet emerging market threats.AS THE China syndrome spreads, another tier of Auckland businesses seems to be heading for some nasty shocks - unless we find the political will to implement a range of potential solutions.

The next six months will be critical for Auckland's dwindling group of metal component manufacturers. Most have lost core business in the past year, resulting in reduced turnover of up to 90 per cent - although the average is 40 per cent to 50 per cent - and taking many close to marginal profitability.

Most have made strenuous efforts to find new clients, diversify into new component products, especially high quality "one-off" creative items that cannot be undercut by cheaper mass production.

However, the test of whether smaller component firms survive will come in the three months from December, when overheads and staff wages continue, but revenues will disappear as their key larger customer businesses close for Christmas-New Year.

In a series of briefings by the industry, the picture that has emerged is one of creeping paralysis.

The transition by China has been predicted for many years, but has impacted on the global economy only in the past 12-to-18 months. So what are our options? It is easy to say we need to define our own vision and then action it with ruthless dedication and energy. The problem is that words are easy - turning them into action is where we have traditionally run into problems.

Businesses which decide to stay in New Zealand need to be supported to the hilt. We need to start a campaign to praise and encourage wealth-creators. The global market may be cut-throat but there are rules of trade we can apply and there is practical support we can put in place.

One response for the metal trades is to offset the polarising tendencies of the new global economy through a truly progressive support structure. The industry itself has put forward a raft of suggestions - from applying safety standards to imports, protecting our intellectual property, providing better research and development allowances, improving the export support schemes for small-medium businesses, making taxes and compliance costs competitive at least with Australia.

These will all help, but in the long term we need to redefine our vision of the nation and the Auckland we want our businesses to be part of.

A key response to the increasing competition is to see what we can do to match them: we can't possibly - and should not want to - beat them by offering cheap wages. But we could embark on programmes of education, research, infrastructure and on-the-job training, all designed to retain - and over time enlarge - our small pool of highly skilled, creative metal industry businesses.

* Michael Barnett is chief executive of the Auckland Chamber of Commerce.