It’s not the unions - it’s the dollar

It’s not the unions. It’s the dollar.

In December 2007 when the Hobbit was announced we all celebrated quietly. We assumed it would be business as usual for Peter Jackson and New Zealand. Why wouldn't Warners spend their US dollars here?

Perhaps we should have asked: why would they? There are only four reasons for large overseas corporates to invest in New Zealand.

1. Access to raw materials (land, water, minerals, food etc)
2. Access to low cost labour,
3. Access to unique intellectual property
4. Access to our tiny 4 million person market.

We can assume Warners weren’t after access to our tiny market nor were they really after access to unique intellectual property. After all, they can get Jackson to work elsewhere and Weta Digital already does work for off-shore projects from its New Zealand base. Of the remaining drivers, access to raw materials -in this case our scenery - is secondary since there are many other scenic places in the world. That leaves access to low labour costs as the big deal maker back in December 2007.

At that time the global film industry was in good shape; work was plentiful and people charged accordingly. Even though our dollar was high then, I'm sure the producers factored in a lowering of our dollar over time to get a cost model they were happy with. However since March 2008 the exchange rate has been near one way traffic to over US75 cents.

When you are competing on price it’s never in isolation. Others want the business as well. Now the world is a very different place and our dollar is no longer enough to sway the decision as the competition globally for such work has sharpened.
So we now have the negotiations with the government and tax breaks to try and swing the business our way. Why?

We have an edge with vertical integration of Peter Jackson, Weta and our scenery, that Warners no doubt find very attractive but ultimately it’s still about cost in USD and that's about our exchange rate.

The two parts of the Hobbit are each budgeted at US$250 million, for a total US$500 million cost. However, the fluctuations in our exchange rate means the cost over the last two years to make the movie here has varied by 50 percent and with our no intervention policy and the US printing money (quantitive easing) the producers know it’s likely to go higher still, costing them more money. It’s that potential variation in cost that is the real issue here.

So Warners are trying to mitigate the risk of that by off loading responsibility for the exchange rate risk to the government - by seeking additional tax breaks and so would I if I could.

What the public needs to understand is that New Zealand is losing this amount of work from our exporters every day while the exchange rate sits at US75 cents compared to it being at say US65 cents. No one other than the exporters being crunched appear to notice or care. Our exporters certainly do not get emergency meetings with the government and talk of changes to legislation and compensation.

The irony is that while the Hobbit debacle has gained a level of visibility for a problem that hard working New Zealand exporters have failed to achieve, it is for all the wrong reasons. The media are portraying this as dispute born from the actors’ actions. It’s not. The industrial dispute may have been a catalyst, but the real issue is the dollar. Our dollar.

Key will sweeten the pot as this has become a political not economic issue. But given the potential lift in the NZ dollar with no intervention from the Reserve Bank it will need to be a big sweetener.

I would not like to be the PM that does that for $500 million in export earnings and not the other $40 billion in exports. If he is prepared to change New Zealand employment Law on the fly to comply with a US corporate’s demands and throw tax payer dollars at an exchange rate issue then the race to the bottom is truly on, with John Key leading the way.

ENDS

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