Manufacturers short of finance

Press, 31 August 1977, Page 31

Manufacturers short of finance

We are at this time as a nation, facing many problems — economic and social — with our international trade, international relations, industrial relations, one of the highest inflation rates in the Western-type countries, tight money, weakening consumer demand; the list could go on and on. While I am not despondent about the longer term future of New Zealand, the immediate future has all the indications of being extremely difficult. At the present time, manufacturers are short of finance in three broad areas. First, for working capital. An increasing proportion of manufacturers’ financial resources are being devoted to working capital needs. We have evidence of debenture issues about to be made almost solely for working capital purposes.

Second, for investment: It is critical that as a nation we increase productivity. This can only happen if manufacturers are able to replace and expand productive assets.

Restrain investment and we reduce future output, limit future employment, inflat future prices — and stifle future exports.

Some manufacturers are in a position of disinvestment in that they are having difficulty replacing existing capacity. This is extremely serious. The third area of shortage is in export finance. Manufacturers have reported difficulties in discounting export bills of exchange. A major cause of these problems has been attitudes within the banking fraternity. There did appear to be some reluctance by trading banks to accept export bills as additional security and as a basis for increased lending to the exporter. If exporters are to remain competitive they must have finance on terms at least equal to those available to overseas competitors. Those able and willing to pay the highest interest rates are not

necessarily the most efficient. Exporters tend to suffer because of the difficulties they have in passing costs on.

Our federation made those views known to the Government, and as a result the Reserve Bank increased the maximum qualifying amount of bills • that can be discounted at any one time from $1 million to $2 million. The Government also announced an E.X.G.O. 100 per cent unconditional bank guarantee in the 1977 Budget. Bankers’ attitudes have also changed, but the five trading banks must be prepared to offer special terms for exporters who use the E.X.G.O. guarantee.

To understand the solution to problems relating to working capital and in-

vestment finance it is necessary to spell out why these problems have occurred.

The main reason of course is inflation, which has placed tremendous Upward pressure on the cost of replacing current and fixed assets. Inflation has led to an increasing divergence between paper profits and real profits to the extent that many companies which appear to be reasonably healthy in terms of declared money profits are in fact making substantial losses, paying dividends out of capital and in effect reducing their equity base. Furthermore, these companies pay taxes on paper profits. In effect, they are paying taxes out of capital. The worst side effect of the move to a more flexible interest rate structure has been the decline in the attractiveness of equity investment. Scarce savings have' been attracted out of equity investment towards fixed-interest, short-term securities.

Manufacturers need a greater degree of permanence in their finance. The equity base in manufacturing must be strengthened, thereby providing a more secure platform for borrowing.

The most critical factor affecting the financial abilities of a company, however, is its profitability. The return to free wage bargaining and the maintenance of rigid price control is an extremely serious threat to the very existence of many manufacturers. Unless some relief is given then not only will investment programmes be curtailed, but there will be increased unemployment, and business failures.

The biggest disappointment with the Budget was its failure to encourage investment, particularly equity investment, in the manufacturing sector. The Budget, quite rightly, had quite a lot to say about energy. Let us be under no delusion on this question of energy. The world can no longer go on squandering its fossil fuels. Alternatives must be found, quickly, to petroleum as a primary energy source if the world is not to grind to a halt within the lifetime of our present younger generation. New Zealand of course is doubly disadvantaged not only because of its heavy reliance on imported fuels (which will continue unless we find oil or massive gas fields within our territorial waters) but also because many of the raw materials we have to import are energy-intensive. However, leaving the materials aside, let me quote some rather startling figures:

In 1973 our oil bill was $76 million and it took 4 per cent of our exports to pay for it. Now, in 1977, our oil bill is $550 million, and that will take 17 per cent of our export income. The cost escalation between those two points is more than the total exports of our dairy industry.

Specially written for "The Press” by Mr Lloyd Brown, President New Zealand Manufacturers’ Federation.