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Recent key developments in MAKE│NZ
Productivity and remuneration. Two recurring and often linked topics. We’ve had fireside chats on the topic and further down you’ll be reading about wages, GDP, and labour productivity. So this week, the question for you is: what’s worked?
In your operation, what have you found that helped boost productivity? We’ll be taking the responses anonymously (as usual) and will be back next week to share what your fellow manufacturers stand by and what they’re advise skipping.
If you ticked “Something not mentioned” please reach out to the MAKE│NZ team (sabine@makenz.org) to share your thoughts.
Recent key developments in New Zealand
•In a recent conversation with Andrew Barclay, MD of WYMA Solutions, we discussed relative labour costs in manufacturing in New Zealand and selected European countries. WYMA has its own manufacturing operation in the Czech Republic. Here is the data for New Zealand:
These figures from Statistics NZ appear to be at odds with data from other sources. Seek, based on salaries advertised for Production Workers over the past 24 months provides a range of $55,000 to $65,000. Using the MBIE Employee Cost Calculator, the hourly rate for a factory worker in manufacturing (specialised machinery and equipment) is $31.25 ($67,379 p.a. incl. 3.7% non-wage costs) or $28.00 ($64,810 p.a. incl. 4.4% non-wage costs) for a factory worker in manufacturing (metal products), “based on industry averages”.
And here the EU data for comparison, including 2023 Purchasing Power Parity [PPP] data from the OECD. NZ data is based on the Statistics NZ figure quoted above:
n.b. ‘Industry’ in the EU statistics includes sectors beyond manufacturing (“Mining and quarrying; Manufacturing; Electricity, gas, steam & air conditioning supply; and Water supply, sewerage, waste management & remediation activities”), but where manufacturing is still the predominant activity.
When comparing wage costs across countries, one also has to look at outputs – how much value was created in an hour worked. Keeping in mind that the two are not directly linked, but – hopefully – correlated …
Unfortunately, we couldn’t find labour productivity data for manufacturing for all the countries included in the comparison, but the graph below shows aggregate OECD data across the entire economy:
So, what does all of this mean? Labour cost and labour productivity will play a part in determining how attractive New Zealand is / will be as a place for investing in manufacturing. However, with increasing automation and (steep) increases in the cost of other inputs, like energy, the relative share of the labour cost component is quite low for many manufacturers already, and likely to diminish further.
Moreover, the most likely investment alternative for (most) New Zealand manufacturers would be Australia – or, based on recent developments, the US for those for whom that is an important market.
For Australia, again the average hourly wage provided by the Australian Bureau of Statistics at AUD43 which is significantly higher than information provided by recruitment agencies. There is also major variation between locations (States), with Victoria (Melbourne) being the highest. Add to that an 11% contribution to Superannuation and Workers’ Compensation Insurance, which varies between States.
As for labour productivity in manufacturing, there have been direct comparisons between Australia and New Zealand, but none of them recently (last ≥ 10 years). The information provided from a range of sources differs in absolute terms, but all agrees that labour productivity in manufacturing is significantly lower in New Zealand – as it is in most other parts of the economy.
For the US, national data make even less sense than in Australia, given the wide range of conditions across the nation. Excellent information is available through the Federal Reserve Bank of St. Louis and – while it lasts – the US Bureau of Labour Statistics.
•A couple of comments on comparing (labour) productivity figures between countries
– Apart from working harder and, preferably smarter, there is another important way to improve productivity: capital investment. Buying a better CNC machine, or an automatic loader, for example. It’s called ‘capital deepening’, and, alas, New Zealand hasn’t been particularly good at it. May have something to do with what we really love to invest in as a country …. Note – the data below shows the annual change in the contribution of capital to productivity improvements. It is thus just an indirect measure of capital deepening but, again, hopefully will be strongly correlated. The data clearly reflects a periods of economic downturn:
– A point of view sometimes proffered in New Zealand: “Of course productivity is higher in other countries. The value of their output (products) is so much higher than ours. A worker in a Mercedes factory, for example.”
Not quite. The calculation of GDP is based on value added, at least in the most common, the Production Method (GDP(P)). For manufacturing, for example, GDP is calculated as total output (revenue) minus its intermediate consumption (goods and services they used to make their products). GDP(P) also includes the net taxes on production (such as import duties and GST) which are not paid by producers.
A worker installing the engine in a Mercedes isn’t primarily adding more value per hour worked than a sheet metal factory worker in New Zealand. If at all, the higher productivity is more likely to be due to the higher efficiency of factory processes.
Recent key developments in the World
•Another little snapshot from the latest GALLUP poll:
•A couple of graphs showing what’s happening in the global economy at the moment. First, this from The Economist:
And not only is China turning away from the US market, or forced to do so, it’s also turning away from transacting its sales in the US dollar:
•Along similar lines, “A friend in Need is a Friend Indeed”, attributed to the Roman poet Quintus Ennius (3rd century BC). A US Treasury bill (T-bill) is a short-term U.S. government debt obligation with terms ranging from four to 52 weeks. T-bills are bought at a discount to face value and receive the full-face amount at maturity; the difference constitutes your return (they don’t pay periodic interest). T-bills are traded in huge volumes and countries use them extensively as part of their foreign exchange reserves because they are highly liquid, secure, and widely recognised as the world’s safest financial instruments. Except, it looks like some countries seem to deem them maybe less secure, others even more so. The table below shows recent changes in Treasury Bill holdings by selected countries:
What, then, are countries – especially the ones showing less trust is US securities – using as their reserve?
India, for example:
•Returning to the question of cost competitiveness and where to manufacture, you may remember a recent article about the financial strife the iconic motorcycle brand KTM got itself into and was about to be bailed out by the Indian Bajaj Auto. That has happened, and now the CEO of Bajaj Auto, Rajiv Bajaj, has shared his views about why they bought KTM in the first place, and what they intend to do with it. First is “to restore the KTM brand”, which in his assessment has been diluted by creating too many SKUs (models) and the cost burden associated with that. Second, and related, is to “reset the costs for the KTM brand. To put it very simply and bluntly, Europe and manufacturing is dead. I think the auto industry, and the car industry, understands that. Now, there would have to be political, social and other compulsions why they could not move everything out of Europe to somewhere in Asia to produce more competitively …While KTM struggles in Europe, the KTMs we make in India and export to different parts of the world bring us an EBITDA margin of over 30%. The main reason for that is the great cost competitiveness that India and the Indian supply chain and our excellent suppliers offer.”
It’ll be interesting to see how much longer KTM models are going to be made in Austria. In the interview, Rajiv Bajaj also mentioned Triumph, with whom they have a ‘non-equity strategic partnership’, and who decided 15 years ago to shift all of their production to Thailand, and now also India. There was a clear implicit message in the interview that KTM – sooner or later – would go the same way.
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