12 October 2013

Importers Profit From Exchange Rate?

When the NZ dollar goes up a notch, two things happen: (1) some exporters complain and (2) importers are accused of profiteering. That is understandable, as a higher dollar makes exports more expensive and imports cheaper. Understandable, but not necessarily right. Importers who see their costs reduced when the currency goes up, would love to increase their profits by keeping their prices at the same level. In that respect, they are no different from school teachers, firemen, stevedores and all the other folk who would like to have higher incomes. The problem is that, when their costs go down, so do their competitors’. If they fail to meet the competition’s price reductions, they lose sales, pure and simple. So, when their costs go down, so do their prices, much as they would love them to stay the same. The final consumer is the winner, both directly in the form of lower prices and indirectly in the form of lower inflation. Without the downwards pressure of import prices, the Reserve Bank would have to increase interest rates.

Things are not that simple either, when it comes to exports. Many exporters of manufactured goods import components and raw materials denominated in US dollars but export most of their wares to Australia. When the NZ dollar rises against the US dollar but stays down against the Australian dollar (as happened in recent times), those manufacturers get a double dose of good news: their inputs are cheaper and their finished products remain competitive in the Australian market. Other exporters, such as primary producers, are not so fortunate, as they have a relatively lower level of imported inputs and sell their produce in US dollar markets.

International traders, be they importers, exporters or both, operate in a regime of perennial volatility. In a small country like New Zealand, the currency bobs up and down like a cork in the ocean. It is little more than a waste of effort to complain. It is an even bigger waste of time to pretend that a country like New Zealand can do anything useful about the value of its currency. To attempt to do so would be much like trying to soak up the incoming tide with a beach towel.

Every time some wise guy intones gravely “the New Zealand dollar is over-valued”, we wonder where that superior wisdom comes from. The dollar is always valued at the exact amount that someone is prepared to pay for it, from one minute to the next. No country has ever devalued its currency to prosperity, otherwise Zimbabwe would be richer than Switzerland. When people clamour for a lower dollar, they are in effect asking for a reduction in other people’s salaries, as most of what we consume in New Zealand is imported.

Australians Miss Out on China Free Trade Agreement

New Zealand and China have a free trade agreement (FTA). For most items of clothing imported from China to New Zealand, the current duty rate is 6.3%, reducing to 4.2% in January 2014, 2.1% in 2015 and zero in 2016. However, if those items are imported from a third country – even if made in China – then the duty rate that applies is 10%.

This affects mainly Australian retailers with stores in this country, who source their goods from China for both countries and then sort them for distribution in their Australian DC. Chinese garments shipped from Melbourne to Auckland end up paying a duty of 10%, losing the benefit of the FTA preferential rates. The only solution to this problem is to have the New Zealand requirements shipped here direct from China.

Customs Fees Increased

Customs have increased their ‘transaction fees’ from $38.07 to $46.89 (+23.17%) for imports and from $14.56 to $17.94 (+23.21%) for exports. The department clips this ticket for most shipments with a value of over $1,000 that come in to or out of this country. The Customs fees were introduced by former Minister Jim Anderton. Until then, the costs of operating what is basically a law enforcement service were met from general taxation. Paying Customs a transaction fee makes as much sense as paying the Police a fee when you report a theft. It now costs importers about the same to file an entry as it costs them to produce it in the first place. Customs are providing a service to the community at large, not to the individual importers and exporters who are obliged to file entries with that department.

09 October 2013

Reshoring: Buzzword or Reality?

Reshoring is jargon for bringing manufacturing back from China. It is happening in the US, driven by a combination of higher labour costs in China and lower domestic energy costs from fracking. Intangibles, like the efficiencies from having design and production in the same facility and lower costs of automation, also have a bearing. IKEA has recently opened a factory in North America, to cut its delivery costs to that market.

In our own area of third-party logistics (3PL), we are finding that doing pick-and-pack in Auckland is now costing not much more than doing it in Shanghai. We expect the Chinese cost advantage to disappear altogether before long, as their labour costs continue to increase in double digit annual percentages. The transit time from our distribution centre (DC) in Shanghai to retail stores in New Zealand is counted in weeks, while that from the Auckland DC is counted in hours. The best solution is to operate a mixed service, where some base lines are packed in China while others, more time-sensitive, are stored at destination for rapid fulfilment.

Speed to market is becoming increasingly important. Zara, a giant Spanish clothing retailer, spent a lot of time and money setting up a system to attach security tags in the DC, as the normal practise of having that task done by employees in the stores added a few intolerable hours to final availability. Their garments are, in the main, put through a steam tunnel and shipped in hanging bags, ready for retail on arrival. This method is now used by most large European retailers, as the mall rents are too high to waste precious floor space preparing garments for sale. This trend is also developing in New Zealand.