New Zealand Country Analysis
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COUNTRY ANALYSIS REPORT
NEW ZEALAND
Prepared by:
Prepared for:
Rossignol Corporation
May 24, 2006
Introduction
Rossignol Company is a fully owned subsidiary of Quicksilver Corporation. (NYSE: ZQK) which produces snow sport equipment, apparel, and accessories. Currently Quicksilver is investigating additional manufacturing facilities in Asia to quickly capitalize on its newly entered market with the acquisition of Rossignol ski division. During the fiscal year of 2005, Rossignol manufactured the majority of its ski equipment at its facilities in France (Annual Report 2005 on Yahoo). The Harmonized System (HS) number for snow skis is 9506115000 (U.S. Census Bureau). This report discusses the costs and benefits of opening a ski manufacturing facility in New Zealand. It specifically analyzes the potential investment risk associated with that decision. This analysis on whether or not New Zealand is a suitable fit for a manufacturing facility under Rossignols business model will depend on the following factors:
Political, economic, and legal environment
Natural, physical, and human resources
Managing and culture
Political, Economic, and Legal Environment
Political Environment: New Zealand has a parliamentary system of government headed currently by Prime Minister Helen Clark. The long-term political environment of New Zealand is very stable and low-risk. According to the National Trade Data Bank (NTDB) 2005 Country Commercial Guide, foreign direct investment in New Zealand is normally welcomed and encouraged without discrimination. With a stable government that ranks third among the TI Corruption Index, meaning the third least corrupt country out of 159 others, New Zealand is considered a safe and reliable country to do business in (Internet Center for Corruption Research). Under the works is an agreement to be one of the first countries to have free trade with China. Currently New Zealand does have free trade agreements with Thailand, where 50% of exports are tariff free, Australia and Singapore (Economist Intelligence Unit). “Since 1984, government subsidies including agriculture were eliminated; import regulations liberalized; tariffs unilaterally slashed; exchange rates freely floated; controls on interest rates, wages, and prices removed; and marginal rates of taxation reduced. As a result New Zealand is now one of the most open economies in the world (IMF Country Reports).” Under a government that strides for free trade and an open economy, Rossignol would be able to implement the appropriate plan for efficient manufacturing and effective trade distribution channels.
Economic Environment: Cyclical slowing started in 2005 with real GDP rising at only 1.9% year over year (Economist Intelligence Unit). Despite this, real GDP is expected to continue growing at 3% per year in the medium term (OECD Executive Summary). GDP as of 2005 was 108 billion USD with trade exports accounting for 21.6 billion USD. New Zealand has a large enough economy to support a manufacturing facility and has the export strength to allow Rossignol to export to its main trading partners, the U.S, Japan, China, and Australia. Both the consumer price index and the current account deficit are expected to go down in 2007. “Along with high interest rates and still high petrol prices, together with a further fall in net inward migration, this will cause private consumption growth to decelerate from a brisk 4.5% in 2005 to around 1.4% in 2006 (Economist Intelligence Unit).” Due to the lack of consumption growth and the recent slow down in the economy Rossignol would likely have trouble selling its products locally. However, in the long run New Zealands economy has been prosperous and stable which would lead to a healthier consumer market.
In the past couple years there has been an increase in domestic spending, which has led to the increase in inflation. The high spending does reinforce the fact that New Zealanders would be willing to pay for this product in the future. The increase in inflation has led to a decrease in the New Zealands dollar value, which ultimately would help Rossignols exports. This decrease in currency value will give foreign consumers more purchasing power to help exports however it would also decrease the total amount earned when profits are exchanged back for USD.
Lastly, another factor thats has been driving real GDP growth is the “investment and tourism infrastructure that is dramatically increasing, as New Zealand is growing as a tourist destination.” (NTDB, New Zealand Country Commercial Guide) If Rossignol intends to sell its skis within New Zealand, this high level of tourism would suggest an increasing amount of skiers as New Zealand has some spectacular skiing resorts. Nevertheless, New Zealand has seen tourism taper off slightly with past SARS breakout, and could possibly be more threatened if there was an Avian Influenza crisis. Rossignol should realize there is a strong tourism industry that is greatly effected by would macroeconomic factors.
Currency, Inflation, and Interest Risks: Presently, the New Zealand dollar (NZD) is trading at 1.61841:1 with the U.S. dollar, and has been declining in value for over a year. (OANDA, 2006). A main concern for the New Zealand dollar is the current account deficit, which is at 9.2% of New Zealands GDP (Economist Intelligence Unit). This along with slowing economic growth has led to a weaker NZD. “In the past year the NZD has fallen 13% against the USD, making it the worlds worst-performing major currency (Bloomberg).” The New Zealand Central Bank is also expected to decrease interest rates throughout 2006, subsequently providing Rossignol the ability to enter into attractive financing agreements for investment in its manufacturing facilities. The combination of rising inflation, decreasing interest rates, and a current account deficit all lead to indication of continuation in the fall of the NZD. This provides an opportunity for Rossignol to have strong purchasing power to establish it manufacturing facility and continue to have strong export