How Alan Bollard’s jacket may help teach NZ how to be a service economy in the Asia-Pacific

Oliver Hartwich*

For years, we have been warned that New Zealand is facing a manufacturing crisis. The Kiwi dollar’s high exchange rate would hurt exporters and drive industrial activities out of New Zealand.

This story has always been exaggerated, and in the light of actual increases in manufacturing activity such as the 1.0 percent growth reported for the last quarter, it looked more like a manufactured crisis than a manufacturing crisis.

Irrespective of such semantics, perhaps we should not even talk about manufacturing as much anymore and shift our focus to things that matter more. Alan Bollard’s jacket for example.

The former governor of the Reserve Bank and current executive director of APEC, gave a talk to The New Zealand Initiative in Wellington last Thursday. In his speech he highlighted the opportunities that an ever more integrated world economy brings, particularly as it is happening in New Zealand’s Asia-Pacific neighbourhood. However, Bollard also had some sobering warnings for his audience: If New Zealand wants to benefit from Asia’s rise, it needs to rethink its business model.

If you now wonder what Bollard’s jacket has to do with it, it is not actually his jacket but an example he used in his speech to visualise how much the world economy has changed – and how much production processes with it.

Citing research by the FMG Institute, Bollard revealed how much of the retail price of a mid-market suit jacket is explained by manufacturing activities and how much by everything else. The answer is surprising. Everything physical about the jacket (all the labour that went into its production, the shell fabric, lining, interlining, buttons, sleeve heads, shoulder pads, labels and hangtags) accounts for a total of just 9 percent of the jacket’s price.

The remaining 91 percent are what Bollard calls “invisible payments.” They consist of a wide range of services for retail, logistics, banking, marketing and other activities as well as payments for intellectual property and, of course, profits.

As Bollard asked his Wellington audience, “Do we really want to have the 9 percent of the value chain here in New Zealand – or would we not rather want to have a slice of the 91 percent?”

To ask this question is to answer it. And yet, it is not enough to intellectually understand that the bulk of value added does not happen in physical production but in the services that surround it.

For economists, this is a challenge in any case. Economics has traditionally focussed its production theory on physical production processes. This is unsurprising given that economics was formed in an age that was first shaped by agriculture and then industrialisation – both of which deal with visible, physical outputs. The insights from the 18th and 19th century are still valid, of course, but they do not capture the rise of the services economy which started in the 20th century and is dominating the 21st.

You could argue that in modern, developed economies, services are the most important component of economic activity as well as the least understood. Just assuming production functions and firms, as economics often does, does not get us far in really understanding the services economy we are dealing with today.

For New Zealand to tap into the wealth that is generated in a fast-developing Asia-Pacific, it needs to tap into the value added by the services economy, Bollard argued. But which services? Well, he gave his audience some ideas:

“Research & development, design, concept, market research, branding, marketing, logistics, business services, e-commerce, certification, quality control, transportation, packaging, retailing, advertising, after-sales, warehouse services, financial services, environmental services, rental & leasing, maintenance & repair, management consulting, intellectual property, legal services, accounting, computer services, human resources, training, security, printing & publishing, courier services, telecommunications, insurance, travel agency, cargo-handling, feeder services, single customs windows, authorised economic operators, electronic-warehousing, e-billing, data trading, data privacy, standards conformance, financial advice, regulatory conformance.”

The list is long enough but it probably is not even exhaustive. This is where New Zealand should seek to make its money in the future, Bollard argued and not just in primary activities. Though the case for a shift to services sounds plausible, it is certainly not straightforward.

For example, what would it mean for a New Zealand dairy company that is seeking to do increase its business in Asian markets? They might be aware that the return on assets is only 7 percent for farming, 9 percent for powder plants whereas it is 17 percent for marketing and even 29 percent for R&D and processing (according to figures presented by Dr Bollard).

But how would a New Zealand-based company be able to develop a marketing campaign for Asian consumers that are far away and about whose preferences it knows little?

The geographical and cultural distance from its Asian customers makes it hard for New Zealand businesses to move up the value chain and tap into the value added in product-related services. It is a challenge that Bollard realises all too well and for which there is no easy answer.

The best chance New Zealand might have to get its share of the 91 percent is to understand its Asian markets better. This would include both greater outward direct investment by Kiwi companies in Asia, and Fonterra is doing it already. It would also mean a greater openness to Asian foreign direct investment in New Zealand. Both would link the economies better and open a door for New Zealand to make more money based on the products it grows, manufactures or designs.

We may have believed that New Zealand was a rock star economy, but even rock stars have to learn new tunes every now and then. Learning how to be a service economy in the Asia-Pacific may be New Zealand’s next big challenge.

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*Oliver Hartwich is the Executive Director of The New Zealand Initiative.

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7 Comments

Anything new?
 
How come business from the US and the EU are doing great biz with China but have the same cultural gap as NZ does.
 
NZ is too small and too far away.

My Father-in-law used to do business with China no problems for 20+ years, but  he learned Mandarin, both spoken and written. My brother-in-law on the other hand couldnt be bothered, took him < decade to successfully run his dad's company into the ground.
 
 
 
 
 

For example, what would it mean for a New Zealand dairy company that is seeking to do increase its business in Asian markets? They might be aware that the return on assets is only 7 percent for farming, 9 percent for powder plants whereas it is 17 percent for marketing and even 29 percent for R&D and processing (according to figures presented by Dr Bollard).
But how would a New Zealand-based company be able to develop a marketing campaign for Asian consumers that are far away and about whose preferences it knows little?
 
It might demand a change in the prime minister's office protocol that directs our spying services to faciltate, rather than hinder business in Asian spheres of influence.
 
China has placed on the record - ever so diplomatically - its displeasure at the latest Edward Snowden revelations that suggest New Zealand "collects data on communications" from China on behalf of the Five Eyes alliance.
It's notable that the official Chinese response runs counter to attempts by Prime Minister John Key - who has strenuously sought to discredit the Snowden allegations - to downplay the Herald revelations. Despite the Prime Minister's flannelling, Beijing has made an official comment on what it euphemistically terms a "cyber security" issue.
"China is concerned about relevant report" was how the Chinese Ministry of Foreign Affairs prefaced its comment that same day the Herald story broke.
But instead of publicly bawling New Zealand out over alleged "spying" on a prime trading partner, China has cleverly shifted its concern to cyber security. Read more
 
Furthermore , it may demand an end to nonsensical politician's statements related to evasive behavioural rhetoric.
 
Revelations that New Zealand spies targeted aides and confidants of the Prime Minister of the Solomon Islands are unlikely to damage diplomatic relations, Foreign Minister Murray McCully says.
"I'm sure that politicians in the Solomon Islands, as elsewhere in the Pacific, are smart enough not to believe what they read in New Zealand newspapers. Read more

"economics was formed in an age that was first shaped by agriculture and then industrialisation – both of which deal with visible, physical outputs. The insights from the 18th and 19th century are still valid, of course, but they do not capture the rise of the services economy which started in the 20th century and is dominating the 21st."
That i will agree with and more people need to realise this.
 
But as for production being 9% of the total cost that is due, in part, to the slave child labour in some countries that the big corporations exploit.
 
The value added economy
“Research & development, design, concept, market research, branding, marketing, logistics, business services, e-commerce.......................................................
That is the short term future
The real future wealth is in science. Things like nanotechnology and this requires a good education system
 
"The best chance New Zealand might have to get its share of the 91 percent is to understand its Asian markets better"
This is complete nonesence. From the 1950's on the Japanese dominated world markets with many products because they produced what the world wanted and at a cost the world wanted. They did not need "Free trade deals" to dominate world markets.
If we want a share of the 91% then we have to do what the Japanese did "Give them what they want at a price they want" Distance from Japan to Europe made no diffenence.
 
I will conceed that one of the big differences today that businesses have to overcome and that is "corporate dominance"
 
"The best chance New Zealand might have to get its share of the 91 percent is to understand its Asian markets better. This would include both greater outward direct investment by Kiwi companies in Asia, and Fonterra is doing it already"
 
Eventually the Japanese had to build factories in America and Europe as we will eventually have to move our dairy into Asia
Bye, Bye NZ the money is all in Asia.
 

Wow, so farmers, the ppl who are making a good get 9% and the "middle men" (and Govn) get the 91%  Somehow that just seems screwy.

Bollards article is economic incompetence at its worse!!!!!!  No wonder Bollard allowed house prices and inflation to escalate wildly during his term as Governor!!!   Does he even know what value added is meant to mean. Value added is to give a product or service an enhancement of some sort before offering it to the customer......Bollard list is not adding value it is adding costs!!!!! And those added costs that get dumped onto the product or service have to compete against other countries who can provide them cheaper.
 
Marketing can not occur without a product......this is a cart before the horse scenario......so........No product = no 17% Allan Bollard........
 
And has Bollard thought about what happens if NZ is to add value in the way he prescribes but the rest of the world is doing it cheaper.......but leaving NZ'ers in a vulnerable situation appears to be what RBNZ Governors has been all about.
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Bollards jacket will soon rip with the 91% dragging on the tails