Research Essay 3000 words
Globalisation presents significant opportunities and challenges for business around the world. Are the environmental challenges and ethical dilemmas Fisher & Paykel currently face outsourcing manufacturing to a developing country beneficial to Australia?
Globalisation can be described as the intertwining processes of the world. It is not only an economic process, which involves rising communication and integration of all countries’ economies through the growth in international trade and investment, but also the rapid cultural, social, technological and industrial exchange between nations (IYP, 2002, p. 11). Globalisation presents significant opportunities, as well as many challenges, for business around the globe. Many companies are currently making the decision to move production offshore to lower expenditure and increase profits. However, there are numerous environmental challenges, as well as ethical dilemmas involved with outsourcing. Throughout this essay I will show how globalisation is connected with the present issue of New Zealand’s ‘Fisher & Paykel’ (F&P) Brisbane plant outsourcing manufacturing of their whitegoods to Thailand. Shown by exploring the reasons and challenges involved both in the business environment and ethical arena. Such ethical issues under scrutiny at present are the loss of Australian jobs and the replacement of low wage employment offshore. After the analysis of various sources of information, it will be clear that the move by Fisher & Paykel, to commence production offshore, is in fact beneficial to the Australian economy.
Globalisation is not a new process, but rather the result of human modernisation and advancement, and, industrial and technological development. Although the term ‘globalisation’ is widely used there is no clear or universally accepted definition. For the purposes of this essay, in the context of international business, ‘economic globalisation’ is the key focus, being ‘the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labour) and knowledge/IP Intellectual Property (technology) across international borders’ (IMF Staff, 2002). Today commerce and financial services are far more developed than they once were, resulting in advantages in the integration of financial markets, made possible by modern electronic communication – internet, mobile phones, etc. Globalisation speaks of the process change and the factors driving that change. There are key driving forces that often cause companies to globalise their operations, those being, political and technological forces, market and cost concerns, and competition (Ball, McCulloch, Geringer, Minor, & McNett, 2008, pp. 13-15). Throughout this essay each of these areas will be discussed in more detail in regards to the company Fisher & Paykel.
Fisher & Paykel Appliances, design, manufacture and market household white goods, priding themselves in their innovative designs and use of technology, as well as environmental awareness (Fisher & Paykel Appliances Limited, 2007). F&P are a perfect example of a global business, with production sites located in Auckland and Dunedin, New Zealand; Brisbane, Australia; Huntington Beach, California; Clyde, Ohio, USA and in Italy (Fisher & Paykel Appliances Limited, 2007). However, F&P have recently joined the global rush to manufacture white goods in low-cost economies with its decision in April of this year (2008) to axe 740 jobs in Australia and New Zealand (Elks, 2008), closing down both the Brisbane and Auckland plants. F&P claim that rising manufacturing costs are the reason for forcing the shift of its only Australian plant offshore (Saggin, 2008). We will look at this soon, but first it is important to know some background information on this multinational corporation.
Two friends, Woolf Fisher and Maurice Paykel, formed Fisher & Paykel in 1934, after success in selling a surplus of products ordered by Paykel’s family company. Their success ignited personal desires to own their own business. However, according to the University of Auckland, after four successful years, import and foreign exchange restrictions forced F&P to consider manufacturing (2005). This decision, to begin manufacturing in New Zealand, proved extremely advantageous to the pair, as during the war, laws against closure protected the company, allowing manufacturing to continue. As a result, in 1949 the company was producing ‘600 washing machines, 500 refrigerators, and 700 vacuum cleaners per month and struggling to keep pace with orders from retailers’ (The University of Auckland Business School, 2005). The friends continued to expand their business to accommodate the growing supply needs, and during the late 1960s turned their attention towards exporting. By selling to countries such as ‘Australia, Hong Kong, Singapore, and Japan, the annual export income rose from $500,000 to $2.4m between 1967 and 1971’(The University of Auckland Business School, 2005). F&P continued to improve and create new innovative designs, leading the market in more economical variations of products. After 70 years of existence, ‘revenue from appliance exports had increased to 71 percent of total revenue, with the firm exporting to 80 countries worldwide’ (The University of Auckland Business School, 2005). A quote from the F&P website states that ‘the pioneering spirit established by the founders encouraged a culture that challenged conventional appliance design and production systems’ (Fisher & Paykel Appliances Limited, 2007). Perhaps it is this pioneering spirit that has led F&P to relinquish jobs in Australia and New Zealand through its decision to move production offshore
Many an academic paper, as well as magazine and newspaper article has been published in the past decade analyzing, criticizing, or praising the effects of companies moving production offshore. But what is exactly meant by the terms ‘outsourcing’ or ‘offshoring’? Alan Deardorff of The University of Michigan states outsourcing as a ‘performance outside a firm or plant of a production activity that was previously done inside, or the manufacture of inputs to a production process, or a part of a process, in another location, especially in another country’ (2001). Very similar in meaning, and often used interchangeably, offshoring, as referred to by Ball et al. is ‘relocating some or all of a businesses activities or processes to a foreign location’ (2008, p. 507). When companies decide to source internationally management generally ‘set up their own facilities or outsource the production to other companies’ (Ball, McCulloch, Geringer, Minor, & McNett, 2008, p. 507). There are many reasons for the decision to move production offshore, with the main benefits lying in 1) reduced costs and capital investments, 2) improved flexibility and speed of response, 3) enhanced quality and 4) to facilitate change (Ball, McCulloch, Geringer, Minor, & McNett, 2008, p. 507).
Within the scope of International Business there are different environmental forces that influence and affect the life and overall development of companies. Such environmental forces are generally external, meaning that management has no ‘direct control, although it can exert an influence’ (Ball, McCulloch, Geringer, Minor, & McNett, 2008, p. 20). These forces include competition, distribution, economic, socioeconomic, financial, legal, physical, political, sociocultural, labour and technological forces (Ball, McCulloch, Geringer, Minor, & McNett, 2008, p. 20). Apart from these uncontrollable forces, management of companies also experience internal forces, which they ‘administer to adapt to changes in the uncontrollable forces’ (Ball, McCulloch, Geringer, Minor, & McNett, 2008, p. 21). These are factors such as production, raw materials and people, as well as the activities of the organisation, including finance and marketing.
As Ball et al. suggests, as firms continue to enter global markets, global competition increases, as does the effect of the above environmental forces. This often results in the forcing of management to search for ways to ‘lower costs while improving their products or services in order to remain competitive’ (Ball, McCulloch, Geringer, Minor, & McNett, 2008, p. 505). One option in dealing with such pressure involves outsourcing offshore. As mentioned earlier, offshore sourcing is simply moving production to a foreign international destination. Referring back to the original case of this essay, Fisher & Paykel, this is exactly what they are scheduling to do, starting new production line in Thailand, as early as March 2009(Phillips, 2008).
In April of this year, 2008, Chief Executive for F&P, Mr Bongard, attributed the decision to globalisation – stating that developed countries struggle to compete with low labour costs available in developing countries, along with other local factors (AAP, 2008). The company seems to be able to justify their move, with the new plant being ‘substantially funded from the sale of what will become surplus property in New Zealand and Australia’, with an estimated net of NZ$84 million (Elks, 2008).
Australia has an aging population, and according to CEDA- Committee for Economic Development of Australia, the proportion of the population aged 65 years and over is projected to rise from a current 13 percent to between 27 percent and 30 percent by 2051(2004, p. 1). This has grave implications for companies that are labour intensive, such as the F&P factory in Brisbane, as it will become increasingly difficult to find adequate employees. The aging of the population is one of the major transformations currently experienced within society and is a focus for both economic and social policy making (ABS, 2007). These policies are only extra work and money for companies such as F&P to accommodate and work around, giving further support to the decision to move production offshore. Ball et al. further supports this trend stating that ‘an aging population in most of the developed countries will have important implications for the labour force size and skill, for economic growth, and for a range of political issues related to pension plans, health care, and other key social, economic, and political factors in those nations’ (2008, p. 326).
Apart from the age distribution of Australia Mr Bongard suggested that there were numerous reasons for the decision, including New Zealand and Australia’s rising dollar, ‘complex and expensive compliance costs in manufacturing in Australia and New Zealand’ as well as recent free trade agreements with China and Thailand (Elks, 2008). With the rise in the dollar, almost equal with the US dollar at 96AUcents(Yahoo Finance, 2008), imports become cheaper (Ferguson, 2008, p. 82). This explains why so many companies are making the move internationally. As imports become cheaper because of our high dollar, finance writer for The Australian, Adele Ferguson, states that our strong dollar is also to blame for the difficulty local producers are having trying to export. ‘A strong currency makes the price of Australian products sold overseas more expensive’ (Ferguson, 2008, p. 82) and therefore less desirable and attainable. In the business world moving offshore is a valid decision, however, there are many ethical concerns that need to be analysed.
With the loss of 430 workers in New Zealand and 310 workers from the Brisbane plant in Australia (AAP, 2008) the question arises, what will happen to these unemployed workers. Three hundred and ten skilled citizens in the northeast city of Brisbane will all be seeking new employment at the same time. To compensate Fisher and Paykel will offer staff counselling and other employment opportunities within the company (Phillips, 2008), however this will not appease the needs of all the workers. Ethical issues such as seeking new employment, providing finance for themselves as well as supporting families whilst unemployed as well as facing the scenario of having to move interstate or even overseas to find new employment where their skills are required. These are all real situations that will be upon these some 310 workers in the not so distant future. F&P stated that the Australian operation would continue to employ 330 workers, to continue the design and engineer processes of their refrigeration products. Only the assembly of components will be moved offshore (Brisbane Times, 2008).
Thomas Friedman shows yet another reason as to why so many companies are so easily making the move offshore, stating that ‘today’s era of globalisation is built around falling telecommunications costs – thanks to microchips, satellites, fibre optics and the Internet. These new technologies are able to weave the world together even tighter’ (1999, p. xiv).
Communication between towns, cities, states and ultimately, nations of the world are only a microsecond away. Telephones and mobile phones were once a superfluous commodity but today without the use of this technological communication our world would be lost. However, to further these technological advancements, the email and use of the Internet has revolutionised business, education and everyday living. It is possible to email anyone anywhere in the world where the Internet is available. Instant messages are sent at the click of a button from devices that are portable and easily used anywhere; leaving ‘snail mail’, hand posted letters, in the dust. Communication and information technology feed globalisation, and just as equally, globalisation continues to affect the way people do business and communicate using these new technologies.
It is for these reasons that companies, like F&P, can move operations offshore without need for great worry or concern. Video conferencing can easily be setup, as can constant communication between factories and head offices through email, fax and phone. Along with the current ease of travel, representatives can make frequent business trips to the factories offshore to assess the productivity and generally running of the off shore plant.
As well as increasing communication, travel and competition, the global economy has also increased the standard of living for many people, pushing equality, allowing people to feel connected with one another around the world on a common level. This can be seen all throughout Asia. The impact of globalisation in Asia represents the promise of increasing economic wealth. It differs quite significantly between the south and the north; however, globalisation has facilitated the integration of international companies, spread western cultural practices, and uncovered local economies to the global market place. This has provided the opportunity and prospect of economic growth within communities, technological advancement, as I mentioned previously (IYP, 2002, p. 36). All of these positive impacts are direct results of globalisation.
However there have also been negative effects of globalisation on the Asian continent. The governments have failed to adequately address many of the social and community policies designed to alleviate inequality. This has directly affected factory workers, farmers, students (IYP, 2002, p. 36) and the poverty stricken. Therefore, the issue needs to be addressed and analysed as to whether F&P’s operational move to Thailand is at all beneficial to the Thai economy and community.
Thailand has a reputation as a low cost regional hub, which has led to investment by many New Zealand and Australian companies in recent years, including F&P. There are also a number of joint ventures or representative offices of New Zealand in Thailand. A small portion include Air New Zealand (TT Aviation Co Ltd); Australia and New Zealand Banking Group Ltd (ANZ); New Zealand Tourism Board; Pacific Aerospace Corporation Limited; TENCO – NZ Co Ltd.
According to the New Zealand Ministry of Foreign Trade and Affairs, ‘the New Zealand Thai Chamber of Commerce, inaugurated in 1996 in Bangkok, is willing to assist New Zealand commercial interests' (Ministry of Foreign Affairs & Trade, 2008). They do this by facilitating the move in setting up offshore manufacturing and business services.
Over recent years Thailand has made numerous steps forward in attempting to standardise living and working conditions for its citizens. It is a constitutional monarchy, which has helped to provide political stability, despite ‘frequent periods of government instability and military coups’ (Economist Intelligence Unit, 2008). According to the Economist Newspaper Limited, ‘before the 1997-98 Asian financial and economic crisis Thailand enjoyed a long period of rapid economic growth, supported by high levels of foreign investment’ (2008, p. 2). However, after many structural adjustments, Thailand has regained its growth, with the GDP recovered and increasing, averaging 5.6% in 2003-07(Economist Intelligence Unit, 2008).
The legal minimum age for employment is now 15 years of age and the law permits the employment of children between the ages of 15 and 18 on a policy known as ‘light work’, where, according to the US Department of State, ‘the lifting of heavy loads and exposure to toxic materials or dangerous equipment or situations is restricted’ (Bureau of East Asian and Pacific Affairs, 2008). However, the extent to which these laws are adhered to is controversial. With some National Government Organisations reporting that, '2 to 4 percent of children between the ages of 6 and 14 years of age worked illegally in urban areas’ (US Department of State, 2004).
Many companies move production offshore because of the revenue made from employing low-wage workers. In 2004, according to the Bureau of Democracy, Human Rights, and Labour, the minimum Thai wage ranged from US$3.32 to US$4.20 (133 baht to 168 baht) per day, depending on the cost of living in various provinces. ‘Minimum wages were set by provincial committees that sometimes included only employer representatives’ (US Department of State, 2004). It is clear to see that this wage is not adequate in providing a decent standard of living for a worker and family, even when extended family members make financial contributions, it barely provides adequate living standards. Academics also estimated that 1/3 of the formal sector of workers received less than this proposed minimum wage (US Department of State, 2004). They also reported, however, that child labour was not so evident in larger foreign-owned or domestic export-oriented factories (US Department of State, 2004). Is it ethical that companies such as F&P take advantage of these workers who are desperate for employment in order to support themselves and families, only having to accept labour based jobs with poor working conditions and wage exploitation? Perhaps the prospect of a job, whatever the pay rate, is more appealing than unemployment to a Thai trying to make a living.
In conclusion, the reasons and results of F&P’s decision to move production offshore go beyond the surface value of quoting the term ‘globalisation’. Economic globalisation plays an important role in companies’ decision-making processes, but many other external and internal forces also play major roles. Among the external reasons are the value of a country’s dollar, global competition, and the age distribution of the population. Internal reasons include production costs including labour, sourcing raw materials and marketing as well as tariffs and trade agreements.
F&P’s move offshore is positive for both Australia and Thailand. Although jobs were lost in Brisbane the Australian Workers Assistance Program is active in ensuring all staff receive appropriate entitlements, counselling and up skilling if needed to find alternative employment (Sandy, 2008). It has been stated that the Queensland Governments Workers Assistance Program will provide up to ‘$2000 per worker, covering $1000 for job preparation and $1000 for training’ (Sandy, 2008). Although this may seem like a mere compensation, it in fact is quite beneficial to the Australian economy. These decisions, as well as the ever-increasing trade agreements, may drive Australia to continue to become more competitive in the global market and become more innovative, with smarter manufacturing technologies from our retrained and re-skilled workforce. Thailand will also benefit from F&P’s move. Although many believe that the use of low-wage workers is exploitation, after much analysis of date from the US Department of State, it can be seen that a job with a foreign company is much better than no job at all. Thailand has put in place laws that protect their workers, such as the Labour Protection Act, and when adhered to, citizens are treated fairly.
The reason for relocating offshore shows the potential savings in cost while retaining acceptable products. Of course there are ethical issues that arise, however the move of F&P offshore should be viewed as beneficial to Australia’s workforce and economy long-term, as well as creating positive opportunities for the Thai economy and working community.
Word count – 3 162

Bibliography

AAP. (2008, April 17). Fisher Paykel does not fear backlash after job cuts. Retrieved May 16, 2008, from News Limited: http://www.news.com.au/business/story/0,23636,23554201-31037,00.html
ABS. (2007, September 25). Scenarios for Australia's aging population. Retrieved June 1, 2008, from Australian Bureau of Statistics: http://www.abs.gov.au/Ausstats/abs@.nsf/0/95560B5D7449B135CA256E9E001FD879?opendocument
Ball, D. A., McCulloch, W. H., Geringer, J. M., Minor, M. S., & McNett, J. M. (2008). International Business, The Challenge of Global Competition (11e ed.). New York, USA: McGraw-Hill/Irwin.
Brisbane Times. (2008, April 17). Fisher & Paykel to close Brisbane factory . Retrieved June 2, 2008, from Brisbane Times: http://www.brisbanetimes.com.au/articles/2008/04/17/1208025336674.html
CEDA. (2004, March). CEDA Australia’s Ageing Population: Meeting the Challenge. Retrieved June 1, 2008, from CEDA publication: Australia’s Ageing Population: Fiscal, Labour Market and Social Implications: ceda.com.au/public/publications/policy/docs/ageing_policy_statement.pdf
Deardorff, A. V. (2001). University of Michigan - Alan Deardorff's Home Page. Retrieved May 25, 2008, from Deardorff's Glossary of International Economics.: http://www-personal.umich.edu/~alandear/glossary/o.html
Economist Intelligence Unit. (2008, May 16). Country Briefings - Thailand. Retrieved June 10, 2008, from Economist.com: http://www.economist.com/countries/Thailand/profile.cfm?folder=Profile-FactSheet
Elks, S. (2008, April 17). Fisher and Paykel doesn't fear backlash. Retrieved May 16, 2008, from The Australian: http://www.theaustralian.news.com.au/story/0,25197,23554553-2702,00.html
Ferguson, A. (2008, May 4). Our dollar a boomer...but wait for the bang when Australia's debt hits home. Sunday Mail . Adelaide, SA, Australia: The Advertiser.
Fisher & Paykel Appliances Limited. (2007). Our Heritage. Retrieved May 19, 2008, from Fisher & Paykel Innovative Living.
Fisher & Paykel Appliances Limited. (2007). Who we are. Retrieved from Fisher and Paykel - Innovative Living: http://www.fisherpaykel.com/global/about-us/who-we-are.cfm
Gaston, N. (2001). The Impact of International Trade and Protection on Australian Manufacturing Employment. In D. Greenaway, & D. R. Nelson, Globalisation and Labour Markets (Vol. 2, pp. 173-190). Cheltenham, UK: Edward Elgar Publishing Limited.
IYP. (2002). The Youth Guide to Globalisation. Oxfam Community Aid Abroad. p.11 p.36
Ministry of Foreign Affairs & Trade. (2008, April 30). Kingdom of Thailand. Retrieved June 10, 2008, from New Zealand Ministry of Foreign Affairs and Trade : http://www.mfat.govt.nz/Countries/Asia-South-and-Southeast/Thailand.php#Business
Phillips, T. (2008, April 17). Fisher and Paykel to close Australian base. Retrieved May 25, 2008, from ABC Radio: http://www.radioaustralia.net.au/news/stories/200804/s2220267.htm
Saggin, G. (2008, April 17). Fisher and Paykel to shut Aust operations. Retrieved May 21, 2008, from ABC NEWS: http://www.abc.net.au/news/stories/2008/04/17/2219626.htm
Sandy, A. (2008, April 17). Fisher & Paykel factory workers hope for reprieve. Retrieved May 25, 2008, from Courier Mail: http://www.news.com.au/couriermail/story/0,23739,23551411-3102,00.html
The University of Auckland Business School. (2005). Fisher & Paykel Company Profile. Retrieved May 15, 2008, from The University of Auckland Business History Project: http://www.businesshistory.auckland.ac.nz/fisher_paykel/company_profile.html
Thomas Friedman, The Lexus and the Olive Tree, New York, Farrar, Straus and Giroux, 1999, p.xiv
US Department of State. (2008, March). Bureau of East Asian and Pacific Affairs. Retrieved June 10, 2008, from US Department of State: http://www.state.gov/r/pa/ei/bgn/2814.htm
US Department of State. (2004, February 25). Country Reports on Human Rights Practices. Retrieved June 10, 2008, from US Department of State: http://www.state.gov/g/drl/rls/hrrpt/2003/27790.htm
Yahoo Finance. (2008, May 26). World Currency Converter. Retrieved May 26, 2008, from Yahoo Finance: http://finance.yahoo.com/