The after-shock of Multinational Capital Disinvestment

A study into the effect of the production capital equipment and process being removed from New Zealand manufacturing sub-divisions of Multinational companies
 
 
 Executive Summary

New Zealand’s remote geographic position and historically repressive trade tariffs led to a period of Foreign Direct Investment (FDI) within manufacturing enterprises within this country. Unlike many of the present commodity based FDI initiatives, the historical FDI pattern was one of world class companies either establishing manufacturing plants within New Zealand or else buying into already established organisations and importing the brand name. Consequently, many of New Zealand’s most well known manufacturing companies are owned, in full, from abroad. As a result, corporate decisions can be made for the benefit of the company which may not benefit the New Zealand economy quite as well.

As a direct corollary to FDI, there has arisen a situation over the last few years where FDI is occurring in reverse. Multi National Companies (MNCs) are now finding reasons to move the manufacturing capital away from New Zealand. They are taking advantage of features such as economies of scale, cheaper Asian manufacturing capacity and reduced foreign labour costs to reduce their manufacturing costs and thus improve their level of profitability. This has been further exacerbated within New Zealand by the removal of many of the tariff barriers which once severely constrained imports of finished goods into this country. The result has been that companies are now able to service the New Zealand market by importing their products from abroad more cheaply.

This paper attempts to study the ability of these companies to support their market once the manufacturing capacity was removed. The hypothesis of the paper is that the actual process of disinvestment is damaging to the company and the result may not necessarily be what the company expected. Economies of scale and effective utilisation of under committed plant are significant factors within an MNC’s overall "Big Picture". However, the New Zealand market is parochial and increasingly demanding of flexibility. Thus, the paper seeks to find out whether those companies who went down this particular route have managed to retain their customer base.

In undertaking this study, the top one hundred foreign owned manufacturers within New Zealand were approached to identify those who had undergone such a change. These were asked to define, in a series of scaled qualitative measurements, 10 key indicators of their business’s health in a series of timeframe snapshots following the actual disinvestment process. These key indicators, along with further qualitative and quantitative measurements were firstly used to plot the company’s progress over time. They were then used to ascertain whether the disinvestment had affected their ability to support their customer base once they had lost the flexibility of having a manufacturing process on-hand.

Although almost all of the responders indicated that they were happy with the disinvestment action that they had taken. They also stated that they were successfully maintaining their business position, the key indicator show that the companies had, in the main, only improved half to one point over their original pre-disinvestment position. Furthermore, in a number of cases, the pain that the company had had to undergo had severely stretched their ability to survive and certain major rationalisations had been the only option available to them.

Thus, from a reported management perceptive, the move to disinvestment has been successful with companies reporting a lowering of costs, improved stockholding levels and the like. However, when the key indicators of the company’s performance are analysed, they numerics show that the change has not been as successful as management would have their shareholders believe. The purpose of the disinvestment was to maintain or improve the trading position without the physical baggage of a manufacturing facility. What has happened has been that, in many cases, the market share has fallen or only remained extant, the levels of stockholding have improved marginally and the company makes a slightly improved return. Thus the question for the next study into this subject must therefore be (with apologies to Jane Fonda) – was it worth the pain for the size of the gain
 
 

Conclusions And Implications

Introduction

The objective of this study were to examine the after affects of MNCs within New Zealand which chose to use manufacturing capital divestment as an integral aspect of corporate restructuring strategy. The companies reviewed did not choose to actually leave the New Zealand market, but rather chose to support their New Zealand customer base from abroad, where once they manufactured. The approach taken was to survey the Chief Executives of foreign owned companies which appeared in the top 500 listing of companies within New Zealand. The survey asked for the reasons why they chose to disinvest and attempted to produce a series of performance indicator snapshots of the companies performance in the period following the disinvestment decision. This chapter presents an overall summary of the research dissertation. The chapter’s sections undertake the following:

a. Summarise the empirical findings of this study,

b. Discuss the limitations underlying the study,

c. Identify implications of this research,

d. Outlines some suggestions for future research

e. Provides some concluding remarks to this chapter.

Chow's study in 1991 indicated five motives that were important in explaining the divestment activities of the firms surveyed. These motives for divestment are:

a. To discard undesired / unprofitable unit(s),-

b. To focus on core activities,

c. Meeting a corporate liquidity requirement;

d. Gaining a good price offered for unit(s) divested;

e To shift resources into units with greater growth or opportunity.

 To a large extent, senior executives in that survey had utilised divestment as a 'house-cleaning' tool during the financial years between the start of deregulation and the date of the survey . At the same time FDI within New Zealand continued to grow at an ever increasing rate, but frequently in those areas of commodity products such as forestry, land and tourist hotels. The industrial heart of New Zealand manufacturing underwent a significant change which continues to this day. Well established manufacturing companies such as Ajax Fasteners, Watties, Griffins foods, and the motor assembly plants of Honda, Toyota, Mitsubishi etc all maintain a marketing presence within New Zealand but all have ceased, or are ceasing manufacturing within a period of less than 3 years.

Review and Limitations of the Research Dissertation

Any interpretations of this study should be constrained by an acknowledgement of its limitations. In general, it must be acknowledged that scope exists for improving the research design and methodology on several fronts:

Only large companies, specifically those in the New Zealand Top 500 companies list at time of survey, were used in this study. However, many smaller companies have undergone a similar experience in the last few years. However, data on this subject is extraordinarily hard to come by, thus, by using listed companies represent a good sized grouping of those organisations who have been down this particular track. It may well be that smaller companies had a different experience in their disinvestment path and this certainly gives rise to future study possibilities.

As with any questionnaire study, issues of non-response and responses bias arise in interpreting the relative importance and rankings of the executives' responses on divestment motives and resultant market support activities. Given the additional factor that the overall level of completed response was extremely low any conclusions reached have to be tempered with the possibility that they are not totally representative of the whole market.

A large-scale empirical study aims to capture broad and generalisable patterns in the data. As such, many subtleties may have had to be sacrificed. This was further exacerbated by the need to reduce the question structure of the questionnaire in an effort to gain further responses from those executives not totally swamped in research questionnaires. Thus, it is certainly the case that those divestment motives and factors that were statistically insignificant have been largely ignored. A clinical approach, coupled to the existing methodology, could perhaps enrich the results of such an enquiry.

 Implications of the Research Dissertation

The results of this study have significant implications for senior corporate executives about to undertake a rationalisation of their New Zealand operation. Moreover, the implications for the New Zealand economy of this form of corporate rationalisation are immense. The reverse manufacturing FDI taking place in New Zealand is of critical significance to the economy. Incoming FDI in commodities does not match the social cost of moving the production capital out of the economy, especially if that capital is replaced by an import led process to maintain the market share. Again, here is another possibility for future development of this research area.

In a general sense, the research findings are useful for corporate policy makers in that they highlight the importance of strength and stability within the New Zealand market before such a move is undertaken. It is obvious that certain of the disinvesting companies who replied to the questionnaire were in a state of ill health when the decision was made to move. Instead of the firm then gaining from economies of scale, it instead suffered a major customer withdrawal at its weakest moment thus jeopardising the companies entire New Zealand market share. Another research possibility lies in thus determining how many companies have tried this manoeuvre and the damage caused was so great that they have failed completely and gone out of business. It is critical that corporate executives appreciate the effect that various factors had on others and their motives for divestment in the past. By recognising these factors, they may be better able to appraise the presence of those factors which are pertinent to the divestment decision making of their firms and protect against any detrimental effect those factors may have on their decisions. At the minimum, early recognition of divestment criticality’s could make the planners seriously consider the risks associated with the move and perhaps reconsider their actions.

In addition, the influence that some factors were reported to have on divestment decisions indicates that it would be appropriate for managers to give those factors due consideration in the design of their formal management system. As noted, Chow noted, poor performance and "lack of fit' were frequently mentioned as leading to the divestment of certain units. It appears that a sizeable proportion of firms is not giving adequate attention to such issues in their diversification, acquisition or expansion decision-making. Therefore, these firms are running a business with less than thorough analysis of the fit of that business within their portfolio of other assets. Moreover, it is possible that the type of management skills required to maintain those businesses have been ignored. Thus the possible effect that those businesses may have on the overall diversity of the firm as a whole is not taken into account. This has been especially so in New Zealand where the protection afforded by tariff barriers may well have hidden the position of the operation within the overall schematic of the company. In addition, the contribution of the New Zealand operation to the organisation as a whole may well have been missed, or, more likely, over emphasised.

In viewing the company as a portfolio of assets which must be continually reviewed, augmented and pruned, executives need to develop systems and techniques that permit dynamic assessment of the operations and performance of the corporate portfolio mix. However, within this dynamic mix the role of the small geographically constrained New Zealand operation should not be minimised. The reason for the creation of the subsidiary some years ago may have ceased to exist. However, for the sake of the New Zealand workforce and economy as a whole, it is important that the executives ask the question whether the removal of the New Zealand operation will significantly effect the organisation’s overall profit. Interestingly, in his 91 paper Chow states that the empirical evidence from his study suggests that:

Divestment had been approached by firms in a rational manner and on average it had been value-creating or efficiency enhancing. Thus, it logically followed that any attempt to regulate divestment activities or structural restructuring of firms in a wider sense would seem to be counterintuitive. For such a policy not only increases the costs of adjustment,, which in turn limits the behaviour of firms, but it may also result in a,'welfare loss' to society as a whole because firms would be handicapped in any attempt to channel the limited resources to more efficient users. Governments Research

Contrary to that view, this study found that whilst firms believe that they have undertaken a disinvestment a structured and logical appraisal, government’s research into the social affects of the move is minimal. The amount of published research within New Zealand on this subject is scant. Furthermore, organisations such as the Manufacturers federation also seem to have very little to say on the subject. at the same time, pressure groups such as Unions, and the "Campaign against foreign investment in Aotearoa" all make broad sweeping statements but fail to back up the work with concrete evidence. To critically comment on the social effect of these actions, work such as that done by Professor Barbro Anell of the Umeå School of Business and Economics, Umeå University in Sweden, needs to be carried out (28). Professor Anell’s research has concerned disinvestment processes in companies, what a manager does and should do in such situation, and what happens to the employees, the company and the surrounding community when disinvestment occurs. The organisation will always, logically, do what is best for the organisation. Whether this is best for the overall economy of New Zealand is a different question which needs serious study with the high levels of capital disinvestment that would appear to be taking place in New Zealand today.

Future Research Directions

It would be presumptuous of this study to say that it has served as a major step in developing a strategy to explain whether disinvestment is a good idea in a company trying to maintain its market position within New Zealand. It is certainly true that all of the responders to the survey stated that in summation, "they would do it again". However, before this is taken as a positive vote for wholesale disinvestment to happen it must be recognised that many questions remain unanswered. These include:

a. Limitations in the numbers of responses,

b. The lack of general knowledge as to who has, and who has not, undertaken this activity,

c. The "missing" data from those firms who tried and failed, and

d. The reticence of any CEO to admit to failure
 

 In addition, there is the overall level of success of the operation. Whilst two of the responders make claim for massive improvements in overall turnaround, the rest of the companies are only slightly better off in terms of the performance indicators used. There has not been a major turnaround of fortunes but rather a level of status quo maintenance which does not sound entirely convincing. The Chi test data shows that the closest match of current data and the pre-disinvestment data is the maintenance of this status quo.

The already cited limitations of this research suggest a number of directions. More research needs to be carried out in the physical after affects of such actions to determine whether, for New Zealand’s sake the free market approach is the correct move to take. Moreover, Government may need to look at the direction of FDI in this country and ascertain whether they should not be actively encouraging investment in manufacturing rather than simple commodity source purchasing. One possibility would be to use field research or case study and personal interview methodology to uncover the many subtleties that have been sacrificed in this study. Since this study has identified important factors that individually are influential, further study of those factors should be pursued to determine their inter-relationship and relative impact on firms' divestment motives. A closer examination of those elements not divested by firms might be useful especially if there are examples within a company of disinvested and non-disinvest operations. The scope of such a study would need to review the organisations complete international perspective as the factors surrounding the disinvested company may be totally different to those surrounding the aspects that remain.

Tuzzolino (1987, p. 98), (29) stated that "researchers have not directed enough attention to the nature of divestment". Whilst this study would concur that statement, it does believe that there are two types of disinvestment in the New Zealand case. One of these, the non-classical disinvestment where the company still wishes to retain a market presence in New Zealand has a long way to go. It is not possible to study disinvestment in New Zealand as a homogeneous case, and in this factor, we have to question Chow’s 91 paper that all such activity can be bundled together. Disinvestment is a tool of the organisation and as such can be used to fix a number of ills, be they actual or perceived.

Summary

Overall, this study has done little more than uncover a possible "can of worms". Disinvestment is a major corporate strategy and the diverse set of conditions and factors that underlie divestment decisions are more than just simply one to rid a firm of an encumbrance. The possible effects upon the New Zealand economy mean that future study in this area should encompass virtually the whole of both the "Social Sciences" and "Business" Schools of academia. For, without a closer understanding of the implications for New Zealand, it is possible that what may be "right" for the organisation may not be right for New Zealand.
 
 

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