Tuesday, March 9, 2010

The Country of Origin Debate

The scale of the ‘Country of Origin’ debate in New Zealand has recently sky rocketed to a nation wide discussion promoted and encouraged by some political leaders such as Green MP Sue Kedgley (Country of Origin Label, 2007). Country of origin has already begun to make a large impact in the economic and industrial sector. As the environment (primarily the consumers of the businesses product and their ideals and concerns) of the businesses operating in New Zealand changes, there are massive effects on production and consumption of particular goods and services. The country of origin debate is based on the idea of mandatory labelling of products (especially food products), stating where the product was manufactured and packaged. A move towards country of origin labelling would see the decrease in the consumption of products produced overseas, particularly in ‘third world countries’ known for child labour, and an increase in the goods consumed that are made on New Zealand soil. From these initial effects of the country of origin labelling several more run on effects could occur, including increase in the price of locally produced goods, decrease in the price overseas goods and a wave of growth through New Zealand businesses and organisations.

Overseas companies supplying New Zealand with goods, or New Zealand companies manufacturing goods overseas will be negatively impacted upon by country of origin labelling. A label stating that their good is produced in a country outside of New Zealand will deter the consumers from purchasing the product, and possibly all the other products under that companies name, whether or not they are produced inside or outside of New Zealand. This decrease in demand for the companies’ products will cause a drop in the revenue collected from overseas produced goods. The loss in revenue, and thus profit, may possibly even force some small companies and manufactures out of the New Zealand market. Leaving it to be dominated by New Zealand made commodities. The decrease in demand will result in an economic response by the strong overseas manufactures. In order to minimise their loss of the market share a company may reduce the prices of their goods. This reduction in price will bring the market back to equilibrium and eliminate any surplus production (Stiglitz & Walsh, 2006). The declining level of consumption due to the mandatory country of origin labelling, and the markets environment change, would force the overseas companies to resort to such measures as price war and aggressive marketing. This change is an illustration of how businesses must adapt constantly to accommodate the ever changing population and ideas in their market, one of the major contributors to the companies environment.

For large businesses, whether they have local or foreign ownership, the concept of outsourcing is quite common. Outsourcing is where a company will search for the cheapest resources in an overseas market and then move their production to that country (Samson & Daft, 2005). For example Nike is an American company who produces in Asia, because of the cheaper resources. This is outsourcing. Large New Zealand companies also outsource production because of the cost benefits in doing so. The idea of products being outsourced from New Zealand is the basis for the country of origin debate, with consumers demanding to know which country their food, and other products, was produced in. Watties (of Heinz Watties Ltd), however, does not outsource production but uses product from overseas to mix with their own product. This is also a concern established in the country of origin debate; that companies may produce a product that they can call “Kiwi Made” but contains ingredients brought at the cheapest possible prices from countries all over the world. Both these methods of outsourcing labour and production and importing cheap goods are methods of minimising the company’s production costs. A company producing in New Zealand will incur greater costs than one producing in, or importing goods from, countries similar to and including Indonesia or Malaysia; due to government measures such as taxation and minimum wage imposed in New Zealand, land costs for factories, the cost of raw materials and various other costs involved in production. However despite this move towards a more “Made in New Zealand” or “Kiwi Made” society, large companies and business, like Watties, still continue to produce their product overseas, or use overseas product in their production, due solely to the major cost advantages involved.

The country of origin debate is essentially a positive prospect for New Zealand companies and companies producing in New Zealand for the New Zealand market. As the concerns of their business/market environment increase and consumers want to have more and more purely New Zealand made goods the sales and revenue of New Zealand companies will increase, possibly dramatically. Several years ago the ‘Buy NZ’, campaign supported by the government as mentioned in a journal article by Ernie Newman (1988), had already considered country of origin labelling for food, clothing and most, if not all, other imported products (Newman 1988). By law in New Zealand, at the present time, producers do not need to label products stating where they were made, imported from or the origin of the ingredients; however consumers in the New Zealand market have indicated clearly that they want country of origin labels to be made compulsory (Schneider 2007). The country of origin is already a demand factor when consumers are purchasing a product from supermarket selves and other outlet stores, however due to the current law on country of origin labels it makes it almost impossible for a consumer to know whether the product they are holding was made in Indonesia, China, the Americas or New Zealand. This means the country of origin demand factor is rendered irrelevant. If the New Zealand government to make country of origin labelling compulsory by law there would be a great impact on the sales of New Zealand made/produced products. The country of origin demand factor will have a major effect on sales, boosting New Zealand made goods sales higher than ever before. This increase in turnover and sales will give New Zealand companies a larger market base and allow for profit increases through the ability to increase price with minimal, if any, loss in sales. New Zealand made goods will become inelastic goods (Stiglitz & Walsh, 2006).

Elasticity of Demand refers to the responsiveness in quantity demand of a product to a change in the price. An elastic good has a proportionate or greater change in quantity demanded to a change in the price of that good or service. An inelastic good however results in a less proportionate change in quantity demand to a change in price, thus the price of an inelastic good or service could theoretically increase by ten percent and have no change in the quantity demanded (Stiglitz & Walsh, 2006). Due to the inelastic nature of New Zealand made products, companies who produce these goods will be able to charge a higher price for each item than what an overseas business can. This is price advantage for New Zealand made goods and services will increase the revenue and profit made from each individual sale. The extra profit produced because of the country of origin demand factor is extremely positive for New Zealand business, as more revenue and profit is generated and returned into the business the company will be able to grow and expand out of being the ‘typically small New Zealand business’ to potentially large organisation that could venture overseas. The country of origin labelling would positively affect three New Zealand groups, the consumers, New Zealand businesses and the New Zealand government. The consumers are positively affected as they wish to be able to decide whether or not to by products from other countries. NZ businesses are positively affected by growth and income (as mentioned above) while the New Zealand government will be able to reduce subsidy spending on small New Zealand manufactures as they will no longer require the assistance; leaving money in the budget for other areas; the nation gross domestic product (GDP) will increase and money coming into the government in the form of company tax will also increase. In turn this money saved and acquired from the New Zealand business growth will aid the consumer once again, possibly even leading to individual tax reduction. In addition to this the growth of New Zealand manufactures will require new jobs to be filled and thus open job vacancies in New Zealand owned businesses; potentially reducing New Zealand unemployment rate.

The overseas producing companies who have outsourced or imported cheap overseas product have the cost advantage over New Zealand producing organisations with minimal monetary expenditure in the production of each product, however the New Zealand producing companies have the price advantage, with the ability to sell their product for a much higher price than the overseas producing companies without losing consumers.

The cost advantage held by the overseas producing companies is due to the ability to find the cheapest resources and utilise them outside of New Zealand. A company in this position may even outsource completely (if they are a New Zealand company producing with overseas products) to another country, most likely the country from which they can buy the cheapest resources. The factory and majority of staff may be situated in a country other than New Zealand, for example Indonesia, and the head office in New Zealand could import the cheaply made products into the New Zealand market. With country of origin labelling this product would have to state it was produced in Indonesia not New Zealand. The utilisation of the cheap materials and resources in countries outside of New Zealand by companies such as Watties allows for minimal cost expenditure giving the overseas producing companies a major advantage over New Zealand producers. NZ producers entail a much higher production cost due to the cost of raw materials and resources in New Zealand. However they are able to call their product “100% Kiwi”.

Although the cost advantage is on the side of the overseas producing companies the price advantage is given to the New Zealand companies. The pure, 100% Kiwi made image associated with the New Zealand made products give them an inelastic quality. This inelastic quality acquired by the New Zealand products enables the companies and organisations producing them to charge a much higher price per item than the overseas producers. The overseas producers, such as Watties, have an elastic quality with their products; in terms of the country of origin demand factor; due to the lack of the pure, 100% Kiwi made image. The elasticity of the overseas goods means that an increase in price will cause a decrease in the quantity demanded. If an overseas producer charged a high price for their products there will only a small amount of people will and able to purchase the products, thus the companies could potentially make a negative accounting and economic profit. However if the producer/company was to charge a lower price, possibly only slightly above cost, cutting the profit made on each individual commodity/good, they could continue making a stable profit from those unable to afford the more expensive, luxurious New Zealand made products. Therefore the New Zealand companies, producing in New Zealand, have the price advantage, controlling the ability to set the price of their goods.

The country of origin debate is not a new debate in New Zealand. Consumers showed concern for the origin of the products they were purchasing two decades ago, but recently with the help of campaigns led by political leaders such as Green MP Sue Kedgley, the country of origin debate has escalated to the point where consumers are beginning to demand that products, such as food and clothing, have country of origin labelling. Mandatory country of origin labelling will greatly affect New Zealand as a whole. The government would experience a rising gross domestic product and an increase in collected business tax. This would be due to the higher demand for New Zealand made products, and thus the growth of New Zealand businesses. Consumers would experience a higher quality product and a greater freedom of choice (a higher level of knowledge in the market) and New Zealand producing business will see a rise in sales and revenue and potentially profit leading to expansion and growth. Overall the idea of mandatory country of origin labelling would benefit the New Zealand community, business, government and consumer.

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References:

1) Country of Origin Labels (2007) Should All Food Have A Country of Origin Label?, New Zealand, The New Zealand Herald

2) Stiglitz J.E. & Walsh C.E. (2006) Principles of Micronomics (Fourth Edition), United States of America, New York, W. W. Norton & Company
3) Samson D. & Daft R.L. (2005) Management (Second Edition), Melbourne, Thomson Learning
4) Newman E. (1988) Buy NZ campaign needs country of origin labels, Auckland, Manufacturer Magazine
5) Schneider S. (2007) Label Lies, New Zealand, FitnessLife

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