GUEST BLOG: Rod Oram – NZ in Internationalised supply chains

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The second panel at the hui in October 2018 on What an Alternative and Progressive Trade Strategy for New Zealand Should Look Like was on the Internationalised Economy.  This contribution is from Rod Oram.

Researcher, business journalist, columnist, author, commentator, public speaker. Rod has previously worked with The Financial Times in Europe, North America and Asia.

 

Of all the issues in trade, I’m most fascinated by supply chains and value chains, and what that means to economies. I’m going to start with a quote from the introduction to the annual report from UNCTAD, which just came out a couple of weeks ago. This is what the Secretary General of UNCTAD said at one stage: “Asymmetric power is not unique to financial markets. The global trade landscape is also dominated by big players. The ability of lead firms in global production networks to capture most of the value added has led to unequal trading relations even as developing countries have deepened their participation in global trade.” Interestingly the report is entitled: Power, Platforms and the Free Trade Illusion.

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I am going to start with an international story, and how this relates to us in NZ, and then end with a NZ story. But I want to stress that I really don’t know what the answers are to these complex and important challenges.

 

There is a northwest corner of South Carolina, around the city of Greenville, that was a booming manufacturing area for textiles and carpets between the two world wars and into the 1980s and 1990s. Then the area began to decline, particularly as textiles and clothing manufacturing moved overseas. In order to turn that around, less than 20 years ago, they headhunted very hard to find a European carmaker who was prepared to build an assembly plant there.  BMW responded, building its first US plant there. Over time some 200 companies from 24 countries, all parts of BMW supply chain, located nearby. So today that plant is BMWs largest manufacturing plant in the world. Even more fascinating, it’s the largest exporter of US made cars, which may be a shock to US car makers.

 

But because of what Trump’s been up to on trade, those plants and supply chains have been substantially disrupted. BMW has substantially reduced its exports of SUVs that were going to China, because the tariffs Trump has imposed on steel and other items has substantially pushed up the cost of making vehicles.  In response, BMW is now sourcing some of those SUVs it sells in China from its South African plant, not the US plant. Meanwhile, it’s building up investment in China, which is now on track to become its largest manufacturing complex in the world.

 

So increasingly the real power of trade lies in the ability of major multinationals to create and drive their deeply integrated supply and value chains. Trump’s efforts to try to break those down and to increase manufacturing in the US pose a crucial question: is that a move for good or ill? There are lots of key examples not just across the motor vehicle sector but also crucially in consumer electronics and food too.

 

The next factor is that China’s role in this is changing fundamentally. There are some great studies on this. Not the least is one by Standard Chartered Bank some three years ago. China is moving incredibly fast, from being a source of low-cost components for other people’s value chains to being a relatively high cost country. For example, it’s far more expensive to manufacture something in Shanghai than it is in Michigan. So they are moving very fast to build up their own value and supply chains around the world, of which the high value part of the chain is in China. Surrounding countries like Vietnam become the low-cost suppliers. It is interesting to see the US starting to articulate how it’s trying to do bilaterals with the likes of Vietnam to try to disrupt that process. Clearly, this asymmetry of supply chains, whereby greater benefit flows to a few players and less to the rest, is becoming a more marked feature of international trade.

 

I would add one other aspect to this in terms of the asymmetry, and it’s a really important example about what we export. We want to be able to export the most valuable things that not only generate maximum income for us, but would be less subject to commodity price swings, and other vagaries of markets. Maximising our export earnings is crucial because we need to import the very best of things and be able to pay for them. That’s going to be increasingly important as we push very hard for a low emissions economy, because a lot of that technology is going to be coming from overseas.


Where does NZ stand on this? There are great data about where we sit in these value chains that comes from the World Economic Forum’s global competitiveness report. One of the measures is a country’s comparative advantage on a scale of 1, which is low cost labour or natural resources, to 7, which is unique products or services. In its most recent report NZ scored 4.4, ranking us 31st in the world. In other words, we are quite a long way down that measure.

 

Our biggest weakness is limited not just to that point, but is also reflected in where we stand in global value chains. Again, the WEF has a scale of 1, from being narrow so you are primarily involved in individual steps like resource extraction, such as shipping logs overseas, to 7 where you are present across the entire value chain, including design, production, marketing, distribution, and increasingly these days in the non-physical after sales and servicing of that. NZ did worse on that: our score is 4.4 and our ranking is 37th.

 

A third measure is an attempt to judge our control of distribution. We ranked relatively well, at 28th. The last measure I’ll offer is particularly difficult for us, which is cluster development. How do you get a whole cluster of companies, as in the North Carolina BMW example, which becomes more sophisticated and innovative in aggregate, and thus globally competitive? On that we ranked 44th in the world. No surprise because the scale of our industry is so small with few competitors within each sector.

 

Let me apply some of those principles to two examples. The first is about logs. For many years we’ve had a boom in log exports, which account for the vast majority of volume and value of exports from our forest sector. But 75% of those logs are bought by Chinese companies and there is increasing evidence – and I’m working on a story on this for Newsroom – that one organisation in particular seems to be lying behind that and driving up those prices. That makes it virtually impossible for NZ companies to access those logs at a price they can do something more valuable with them.

 

The other example is milk powder and particularly infant formula, which remains a very small percentage of our dairy exports. The sales of ingredients for infant formula are very big, but a high proportion goes overseas to be mixed into formula so the value is created over there rather than here. Let me give an example of what’s going on. Over the last few years, just over the Bombay Hills from Auckland, a large factory has been built. It is the Yashili infant formula plant, with Yashili being one of China’s major dairy companies. I was always fascinated why the ‘goods inward’ bay was so big, and it was only when I went there a few years ago I understood why. At that time they were buying whole milk from the West coast, which has been dried and packaged into 50kg sacks and then shipped to Auckland, stored there and used through the year.  They open the sacks, add water back in (not as much as originally) to then refractionate the milk powder to get the high value ingredients for infant formula they want. This was working so well that Synlait Milk, which is controlled by Bright Dairies of Shanghai, is now building a companion plant next door.

 

It is fascinating going to the Yashili website and on the first page it says ‘Why did we choose NZ?’. They launch into this lyrical thing about cows in NZ that makes the case for NZ milk better than any NZ companies I’ve seen try. Such lines as “The most pristine place on earth, one of the best dairy resources of origin around the world.” Then you flick through the attributes, and this is the one I love best – “where each cow has on average 300 square metres of space each”. Well this led me to do a Google search about the size of the average apartment in Shanghai  – it is 71.04 square metres. The consumer in Shanghai is seeing that one cow in NZ has the space of more than 4 Shanghai apartments to roam around. So we treat our cows even better than the little emperor or empress in a Shanghai one child family might experience.

 

The point is that less value is sticking to the ribs of the New Zealand economy from the milk powder used in Yashili’s plant than if it was used in an NZ-owned plant.

 

So how do you push back against these things and redress some of this great asymmetry? It’s obviously far easier to build a single plant in NZ than it is for a NZ exporter to create a multifaceted distribution network overseas. That’s a very serious imbalance.  These are very complicated issues but ones we have got to get right. And I don’t have the answers.

 

Barry: If NZ has been relegated to this raw materials producing role within international supply chains and/or a being host to foreign investors who are capturing most of the value added, if that occurs, what’s the role for government policy and particularly vis a vis trade agreements on trying to move us up this value added chain and capture some of those opportunities?

 

Rod: The first point I want to make is that I am a big fan of Foreign Direct Investment as long as it helps us do something that we couldn’t do ourselves, so there is real co-benefit. The Overseas Investment Act has long had some provisions that require some measurement of benefit to the NZ economy. Those rules are rather weakly drawn and have been much reduced in terms of some approvals that have been made. The current government is planning to use those more effectively. I think those are important and it’s incredibly crucial that we still have the right to do that in trade agreements.

 

Another example of flexibility is that in British Columbia, where they had a real problem of log exports, they instituted a system whereby any logs harvested have to be offered to domestic processors first in an auction and only the ones they can’t use are then exported. So that makes the log price more dependent on the supply and demand side domestically rather than the demand side overseas. I don’t know how well that’s worked, but from the little I know it seems that’s a help. However, any conventional old style ways of addressing such issues tend to be very prescriptive about what can and can’t happen in a country. Attempts to try to erect barriers against that sort of extraction is I think a 20th century model. I struggle to be at all articulate about how a 21st century trade agreement might be more help in that.

 

Barry: It is interesting on your point that government policy is still going in the opposite direction that as far as the TPP clone, the CPTPP, we increased the level at which foreign investment did not require any screening from $100 million to $200 million, so rather than exercising more discretion over foreign investment, this government has actually gone in the other direction.

 

Rod: Yes, and in NZ terms $200 million is a big slug of investment.

 

8 COMMENTS

  1. The only effective strategy for dealing with the Chinese dictatorship is to have as little to do with it as possible, preferably nothing. With a ‘friend’ like the ethno-nationalist, expansionist Chinese dictatorship, who needs enemies, or even a country for that matter? Open your eyes… welcome to No Zealand 😉

  2. Great article especially how China has gone from a low value supply chain to a high value supply chain while NZ seems to have gone in the opposite direction!

    The rest of the world must be trying hard to keep a straight face as NZ officials rush around the world proclaiming how great free trade is for small countries (Jacinda now being a new wonderful ambassador for free trade with real child in tow to take away from the reality and keep the questions about marriage proposals and child rearing!).

    The reality is that NZ has gone backwards in living standards for many people, poverty and inequality is increasing through poor decisions of naive, ignorant or bought politicians both Labour and National.

    You can even buy a place as a list MP for $100k. Pakeha need not apply, and Indian’s are not as desirable as Chinese or Filipinos. What a bargain!

    What a screw up NZ is, no wonder the MSM are so concerned about a bit of litter, poo smells and stolen drinks from some tourist Brits and rush to ‘prove’ we are still able to put out a (in my view questionable) deportation order! Must be a slow news day as it made international news.

    Love how Goff who is unable to say anything against real corruption and poor council practices but managed to call the British tourists arseholes. Go Phil! This bullying attitude is everywhere in NZ. Don’t worry about running the council or your own responsibilities but feel free to bully some low level, pointless, populist politics that everyone with a brain can see through!

    Meanwhile the billions stolen from NZ government and councils in real terms go unnoticed while those in charge are calling nobodies ‘arseholes’.

    Why would MSM care, they profit from globalism and get paid to promote what ever the highest bidder wants… and not sure the highest bidders are from NZ, but luckily it is easy for crooks to obtain quick residency here (4 of China’s most wanted already have residency here, go figure and one managed to put $500 million+ through gambling at Sky city but his 4 month detention in his pent house in Auckland, was eventually negotiated as another ‘sweet’ deal!).

    • We are now really just a pastoral and horticultural country now and a just a shallow producer of our former self sadly.

      One day china will own NZ entirely and run it for their people not ours.

  3. While there is no carbon tax at the border, all supply chains have an incentive to produce where cheap carbon power is available (especially in nations not bound by the Paris Accord), and this makes global action against carbon use ineffective and unpopular because the first world nations required to take action have growing inequality as a consequence of the global market.

  4. Thank you Rod. This has given me new insight into how supply chains work. I’ve been concerned about exporting raw materials for many years with no action from govt to help local industry add value. I have to wonder whether MBIE or any MP understands or have thought about what you discuss here. The end result of any govt policy should be about lifting our standard of living at least back to what it was prior to neoliberal ideology as we’ve lost out over and over. I’ve always blamed FTA’s, international investment into NZ, and selling goods without added value as most of these appear to take profits out of the country and we are all poorer for it. I recall the time when we owned everything, all the companies, the state assets and our standard of living was the envy of the world.

  5. All nice and good, Rod, it is nothing much knew to me, as I have had some exposure to logistics and trade.

    Questions that need asking are:
    1. How will those supply chains function without the use of fossil fuel energy (using what kinds of alternatives at the same or ideally lower costs, if that is possible)?
    2. How will those supply chains adjust to the inevitable results from climate change, once it gets more out of control, for instance sea level rises, extreme weather events disrupting production, transport and so forth?
    3. How will human populations survive with serious disruption of these complex supply chains, mostly reliant on cheap enough fossil fuels to power production, transport, distribution?

    Resources are finite, we see few if any nations will deliver on the Paris Climate Agreement goals set by various countries as they saw fit, and climate is getting seriously out of control, as humans do generally just carry on wasting and polluting, and using fossil fuels, more and more CO2 and methane and so forth ending up in the atmosphere.

    I think Rob is busy studying in his silo of economics and is struggling to reach silo ecology somehow, thus disconnected from the real sad state of affairs, where we simply cannot carry on with the economics we have as per usual.

    Prepare for the worst, I tell people, prepare for chaos, disruption, crisis, starvation, lack of affordable energy and more.

  6. We are now really just a pastoral and horticultural country now and a just a shallow producer of our former self sadly.

    One day china will own NZ entirely and run it for their people not ours.

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