The speed of the slowest quintile

Every so often there is a shock-horror probe into bear farming in China. And every so often there is a shock-horror probe into New Zealand pig farmers emulating the Chinese bear farmers.

Both are obeying the biblical injunction to humans to exert “dominion” over all the earth and all living things. Some interpret “dominion” as stewardship, which implies respect. Others read it as totalitarian domination: bears in cages in pain and pigs de-pigged in crates.

This is in part the syndrome of the slowest, or lowest, quintile. Pig farmers are changing but the worst will drag their feet and drag down the industry’s reputation, just as bear farmers besmirch China’s.

According to a new book* — as reviewed in The Economist magazine — Chinese companies achieved profitable low-price competitiveness by “cutting costs, often in ways that range from unsavoury to dangerous. Packaging is cheapened, chemical formulations altered, sanitary standards curtailed and on and on”. They also outsource work to “smaller, grittier facilities” which can skirt environmental and safety standards.

Fonterra learnt a version of that lesson the hard way. It did not do due diligence on who supplied what to whom and how. Children died. In other earlier incidents involving Chinese medicines and food people and pets died round the world.

Over time China will change, as other industrialising economies before them changed to become less exploitative and unscrupulous, in part because governments intervened. China’s top quintile of manufacturers are up with the world’s best. It is the lower quintiles that are trashing its reputation.

Lower quintiles are also usually the slowest quintiles to change (if at all). That is a rule of reform.

In the 1980s, when first a National government (hesitantly and tentatively), then a Labour government (in the manner of Huns and Visigoths) eased, then ripped away manufacturers’ protections, it was the manufacturers with least potential or wit to adapt who made the most noise.

The Manufacturers Federation could move publicly only at the speed of that slowest quintile, one of its advisers said at the time. It was thus cast always as an opponent of reform. Eventually, of course, the slowest quintile became the slowest decile and the federation joined the pack.

Federated Farmers is like that now. A growing number of pastoral farmers have grasped the value of the good-environmentalist brand. A large number have yet to.

Look over the fence at the wine industry. Unlike in Australia, where too much of the industry went for quantity, a low-quintile approach, New Zealand pulled its muller-thurgau vines in the early 1980s and went for varietals with merit. The result is a niche at the top of the London market.

Look over the other fence at motels and tour companies. Our tourism industry is like Australia’s wine industry: a strategy that talks up quality and some world-class experiences in the top decile but for the most part a settling for quantity.

John Key is Minister of Tourism. His challenge is push the industry from quantity to quality. Poorly treated Chinese tourists are not good advertising in China. Thursday’s budget will be a first real test of whether he will get off his bike.

More broadly, the slowest-quintile syndrome poses three issues for Bill English.

One is the government departments. They were required to deliver for this budget some “low-hanging fruit”, as Treasury Secretary John Whitehead put it on May 15.

More important, they were required to make a start (with help from “purchase advisers” in some ministers’ offices) on ranking their activities by cost-benefit and achievability. Dumping lower-ranked activities is a critical element in English’s returning the budget to balance sometime.

Some departments are into that second stage. Others have struggled with the first stage. In departments, as elsewhere, there are upper quintiles and lower quintiles.

The second issue is firms’ performance. Now that the economy is running budget deficits, external deficits are longer sustainable. Running the economy primarily on firms which don’t have to compete with foreigners is low-quintile economics.

So English needs firms which export or compete with imports to do a lot more of the business. That is top-quintile economics — not just more milk but high-margin niche-market, innovation. Watch the budget to see whether he puts real weight behind and drive into that shift from local to international.

The third issue is the public. English wants to reform. He knows he can’t do that in the late 1980s/early 1990s “crash-through-or-crash” style because our society cannot sustain similar collateral damage now.

Yet he has to get the public to accept another round of reforms. This budget will at most be a small start. And when he gets going in earnest, he will need years to get the slowest quintile on board.

* Paul Midler, Poorly Made in China: An Insider’s Account of the Tactics Behind China’s Production Game