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AUG 13

Success has many fathers.

I like a party as much as the next man but there is a dark side, there is the morning after and possibly a false conviction that all is well because, after all, we had a party. In the case of awards, the dark side extends to convincing onlookers that all is well. Worse, it gives permission for politicians to sit back; assured they have nothing extra to do. This extension is the big worry, especially when our policy makers are the ones who tend to lean on the implicit assurance that all is well.

I call this the “star quality fallacy”, the idea that because firm A or firm B are doing well, all similar firms are fine. The focus of real growth should fall not on the winners or runners-up in the beauty contest but the other end of the spectrum, the marginal players who operate just above the threshold of failure. Not sexy, not even attractive but much more important. The natural focus on success is a distortion; it is almost an aesthetic that masks the pain of failure, or if all else fails it makes the failure, from a policy standpoint, someone else’s problem.

A success focus is like a recurring revenue business focusing only on sales and giving no attention to churn. It costs more to get new customers than to the keep the ones you have.

We see this in practice often enough, by Government and industry groups who want to advocate the status quo. This argument became particularly popular during the Manufacturing Inquiry, which aimed to speak with those operating in the manufacturing sector everyday; perhaps the ones most qualified to judge the general health of their sector. Those against the Inquiry used these star performers as their reason for dismissal, pointing out that as these firms are successful under current settings, what is the problem? Anyone who points at the stars and says all is well, would do well to look at events and consequences around the failure threshold, it is unpleasant to look where the pain is, but it is much more instructive for policy.

When looking to the health of the manufacturing sector as a whole and assessing how policy can be more supportive for jobs and sales, we must look at marginal firms, not the stars who win industry awards. What helps those marginal firms will help all, the opposite is not true and as firms fail we are all the poorer.

The nature of New Zealand manufacturing firms, particularly high value manufacturers is they inherently produce niche products. This means the challenges they face are very different and firms are not directly comparable in terms of products, development process, and markets, to name a few. So reasons for success by one firm may not have the same outcome for another. That said, operating in New Zealand comes with challenges that have a significant effect on all exporting firms: our policy settings.

For an exporting firm, even with hedging, the exchange rate is an unavoidable issue. This can result in good margins with a low dollar, but disastrous effects in times of currency appreciation. These are areas which can be targeted and can bring benefits to all manufacturers and exporters, the “stars” on down.

As a country we need to look to all our manufacturing firms, look beyond the “stars” if you like and get down to earth. It is important that we celebrate those who succeed and do extraordinary things, but we cannot measure the health of the manufacturing sector by those at the top. The belief that star quality will be our salvation and that failures at the margin are the sole responsibility of those failing, results in poor policy and as a result firm failures and job loses that could be avoided. 

tags: exports, awards, manufacturing, manufacturing inquiry, policy
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