Making stuff matters

In the late 1970s, economists at a major US business seminar welcomed the transfer of American manufacturing overseas as a sign of the growing 'service economy'. What they failed to realise was that this manufacturing, far from representing antique industry that could easily be disposed of, was actually evolving into robotics-driven high-tech enterprise in places such as Hong Kong and Taiwan.

In the late 1970s, economists at a major US business seminar welcomed the transfer of American manufacturing overseas as a sign of the growing "service economy". What they failed to realise was that this manufacturing, far from representing antique industry that could easily be disposed of, was actually evolving into robotics-driven high-tech enterprise in places such as Hong Kong and Taiwan.

Today the manufacturing sector risks being similarly dismissed by growth in the service industries tied into the knowledge-based economy. But manufacturing is being reborn using IT. Encouraging it to depart these shores in pursuit of a new technological age will impoverish the country and build the economies of the lucky receivers.

A variety of factors are already pushing manufacturing overseas - to Australia for the business climate, and to Asia for labour costs. Stemming this trend is an issue for government, labour and business. The effects span from infrastructure to business processes - and everyone has an opinion.

Training minds

"The developing knowledge-based economy affects society in all aspects, not just the economy," says Council of Trade Unions economist Peter Conway. "In the economy, the key aspects we are looking at are how to increase industry training. We are supportive of greater resourcing there, and also of better clarification of qualifications. We support the modern apprenticeship model, of which there are several pilots." The CTU also supports policies aimed at reducing interest rates on tertiary loans, and lowering the cost of education. It is also concerned with improvement of working conditions as reorganisations take place and as organisational structures are flattened. "Another area of importance is how to improve the social capital in the workplace, as applies to all workers, particularly knowledge workers," says Conway. "We should be aiming at a work environment in which people do not need minute supervision."

A motivated, creative environment relying on good faith, trust and loyalty is the basis of the solid working relationship, he says. "There is a view that some of our low labour productivity is due to problems in social capital. Basically, we need to look at what sort of character a workplace should have in a technology age." The CTU is supportive of initiatives that attempt to benchmark standards in terms of minimum wage, health and safety and initiatives from Industry New Zealand, such as the grants scheme available for R&D. "There is a role for government in this area, assisting with startups. Although there will always be a failure rate, depending upon risk profile, we think there are grounds for government supporting innovation."

One key issue is that media attention on the new economy tends to highlight new technologies without understanding the changes which are taking place in existing industry. This is an important factor for all participants in the manufacturing sector. "We contend that the knowledge economy is not just young people in front of computer screens," says Conway. "It is, rather, applying all forms of technology, including micro applications to add value to areas that might be quite traditional. It includes new production processes, new development and new marketing techniques."

Skills and widgets

Manufacturing comprises a huge range of company size and activity, notes NZ Manufacturers Federation chief executive Simon Carlaw. "Some companies in this sector export 80% to 90% of their product, while others mainly supply the domestic market. So it's very difficult to generalise. In terms of the big picture, a key issue that manufacturing has had to come to terms with has been quality and demonstrable benchmarks for the global market." Carlaw says that open global markets make supply chain management critical, so management of suppliers and customers must be planned and controlled very carefully. "Improvements are coming from information processing, and in the process this creates new business. One important development is an increasing trend toward componentisation. Manufacturers are not producing a widget, but are only concerned with making a part of a widget for a manufacturer who assembles and makes more of the widget, and so on up the chain. The competition for this business is global and the parameters of quality time and price are universal. If the work is not properly completed, you don't get the business again. This type of development is at least as relevant to the manufacturing sector as events caused by e-business."

In research and development areas, the manufacturing sector has mixed requirements. In a pure manufacturing organisation, someone else has done the research. For companies that are both developing new products and building, R&D requirements are significant. "The present government's breaking of an election promise to allow R&D expensing in the year of expenditure has been a significant disappointment," says Carlaw. "It means a continuation of an unsatisfactory non-competitive set of tax laws, and it is a signal that support for the new knowledge economy is not being delivered."

Skills development is extremely important to the knowledge-based economy. "We are not developing the skills that we need," says Carlaw. "Deficiencies show up throughout the educational sector, with shortcomings particularly in literacy and numeracy. This shows up in any manufacturing plant where a school leaver is now asked to mind the computer that is minding the machine. Shortcomings are so grave that on-the-job training is needed, and this is extremely expensive, particularly in an economy where 90% of the enterprises have 15 or fewer employees." At the highly skilled engineering level, skill sets are now narrower than they were before, he says, and there is a shortfall in graduate and postgraduate engineers and scientists of global status. One remedy is to seek skills from abroad, but this has just about come to a halt, Carlaw says. "Communication can be a problem, since few New Zealand enterprises can afford highly skilled English speakers from overseas. Bringing in scarce global resources on the back of a cheap currency and low profit margins is not easy."

In moving to the next phase of development, the state of the current economy is vital. "Since mid-1999 we have had a commodity boom, which is affecting 60% of export production," says Carlaw. "This has fuelled export growth in commodities and basic commodity processing. The numbers show a slowing of the growth rate in high value additives, and a decline in number of manufacturers, against a backdrop that says we need at least 2% growth in export production to simply hold the current account deficit. Commodity booms bring better prices, to farm, logging, and dairy . but one characteristic is that it's short term, and when it drops off, we're probably just a

bit poorer. Very high value added exporters, including all the high profile exporters, are also making money because their products immune to price sensitivity. They can command a global price and are sold in a global marketplace. One of the growth markets has been the US, and export to Japan is also growing."

There are a variety of infrastructure issues which need to be addressed. "We are still waiting for second order results of restructuring in those areas, and more needs to come, particularly in the energy area," says Carlaw. "Deficiencies lie in questions as to reality of competition; and pricing is reflecting costs of inefficient restructuring. Energy costs to the consumer not as good as they might be."

Despite these problems, Carlaw sees a wide range of advantages in the developing knowledge based economy for New Zealand manufacturing. "Out front, there needs to be a clear vision as to what business New Zealand will be in," he says. "It is also important to accelerate high value added exports. There are a lot of priorities shuffling around political landscape, and New Zealanders are not being told that they are continuing to slide down the poverty stakes. This has been under both governments." The Manufacturers Federation has had a package of policies for 18 months developed in the course of a conference last April, he says. "On the top of that list is education. There is a strong need for a world-class, credible education system. That's first, second and third. Then there are other issues, such as fair and equitable tax system that is global competitive, free and fair trade. These are fundamental to high value added export growth. In manufacturing there was opportunity for the new government to identify where New Zealand should be going. There is a sense now that the government has focused on other priorities. In terms of having a consistent policy, this is no more evident with this administration than with previous administration."

Focusing on the basics

One pressing issue in the manufacturing sector is simply meeting basic literacy and numeracy requirements. According to an international literacy survey there are one million New Zealand adults below the literacy requirements for ordinary life and work. Of that million, 200,000 are at the lowest level; that is, they can't even read instructions on a medicine bottle. Some 160,000 of these are employed in New Zealand business.

Low literacy rates provide a number of difficulties for the knowledge economy, says Liz Moore, head of Workbase, the National Centre for Workplace Literacy & Language. Workbase is a charitable trust, partially funded by the government, which works with government, business and unions to increase literacy. "One effect of recent changes is that computers are now turning up in areas where manual checking was previously employed. This means the craftsman now needs to know how to use a computer."

Workbase has analysed results from a 1996 literacy survey report from the Ministry of Education. This suggests 19% of managers are below the minimum competence level for literacy. Managers rise because of technical skills and knowledge are are now stretched because and communications requirements are growing. Of all industry categories, manufacturing had the poorest literacy skills, with some 50% of employees below the minimum level of literacy competence.

"Businesses are driving decisions to the shop floor," says Moore. "The operator must now make notes and judge quality levels." Supervisors who did the reporting are being replaced at levels further down, she says, particularly with self-managing work teams. "Businesses want employees to contribute more, but there are issues about people's capacity to do that. Skill-based pay, for example, with low levels of literacy or non-English, can create an equity issue."

One problem is that the pace of change in the workplace is much faster than the pace of change in schools. The workforce replaces itself at 3% per year, so at this rate it will take 30 years to upskill if looking at schools alone. "With schools, the government has literacy and numeracy policies, including a stronger emphasis on teacher training, and initiatives looking at ways of switching kids on to reading and writing," says Moore.

"We also need to have more focus on integrated work opportunities for improvement in literacy and language skills. If kids realise these skills are important in the workplace, they will be motivated. School to work transition programs are also useful, where businesses have more contact with secondary schools."

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