Steven Holden examines the opportunities and challenges facing New Zealand’s manufacturing sector and what a post-Covid world could look like for this sector.
With global economists predicting the best and worst case post-Covid scenarios daily, it’s clear that the world economy has completely changed – and not immediately for the better.
New Zealand is facing a tripling of unemployment to 11 percent, which means hundreds of thousands less people spending in the economy, and a heavy contraction of -10 percent GDP. We are indeed in uncharted waters.
Covid-19 has seen severe stress on inbound tourism, leisure, retail, hospitality, education and commercial sectors, and understandably we focus on those hit hardest. However, like most trades in life, there are winners and losers and there are nearly as many opportunities in other sectors, like export-led primary industries, healthcare, specialist retail, infrastructure, construction and manufacturing.
Our manufacturing sector
A vital part of our economy, the New Zealand manufacturing sector contributes 12 percent to GDP and employs nearly 300,000 Kiwis. However, it’s no surprise that both domestic and export manufacturers have seen it tough over the last while with a significant drop in demand. And on the other side of the fence, suppliers and supply chain infrastructure like transportation and logistics have too been dislocated and disrupted.
Sadly, we are already witnessing notable receiverships, a flurry of debt restructuring from existing lenders and multiple equity raises in both private and public markets.
Smart leadership teams are making sure they have the right amounts of equity and various flavours of debt, all from the right investors that will continue to support them. This is critical to weather the coming storm and to also defend their company from future demand and supply shocks, bank lender enforcement and any takeovers.
In addition, this balance sheet optimisation process ensures businesses are best positioned to take advantage of growth opportunities cheaply, such as buying competitors, vertically integrating supply chains, horizontally integrating companies, as well as geographic and product range expansion. This is most definitely a buyers market, but only if you have the cash to do so.
But for the manufacturing industry in particular, things could quickly be on the up with some notable advantages amongst the chaos:
- Mini Economy. It’s a fact of life that for the foreseeable future we won’t be making money the way we used to. As the dust settles, new mergers happen, good companies are born and economies start to recover, New Zealand is in a position to form part of ‘a mini economy’ made up of countries that reacted quickly to the pandemic, excluding Europe and the US.
- Trans-Tasman bubble. With Australia buying 45 percent of our exported manufactured goods, a shared bubble would certainly be a prosperous thing. While staying on the right side of the US and Japan is essential.
- Focusing on our strengths. New Zealand produces around 10 times as much food as we consume. Primary industry exports, especially value added exports assisted by Ag Tech, and Food Tech should continue and expand.
- More Value-Added products. The continued progress towards a greater proportion of more value-added products should be prioritised and ramped up. The likes of finished products versus bulk raw or close-to-raw materials.
- More R&D. Despite the obvious short-term pressure to reduce opex, more needs to be spent on R&D in this sector. While NZ$182m annually is invested in manufacturing R&D, this is quite modest given the NZ$23B GDP the sector contributes. In addition to innovative new products, increased R&D investment will assist in moving towards more value-added products.
- Buy NZ Made – revamped. Perhaps we’ll see a return of Buy NZ Made, though this time it would benefit from better narrative – around higher prices, better quality, New Zealand manufacturers, employing New Zealanders – which resonates locally and internationally.
- Buy ANZAC Made. Perhaps we’ll see a Buy ANZAC Made and we’ll get closer to our Aussie counterparts than ever.
- New Zealand advantages of biosecurity and safety. There’s a real opportunity for food manufacturers to make the most of our natural island advantages like border security and room innovation in food manufacturing technology, to embed provenance, safety and eco credentials to exported products.
- Government support. Government support could help the sector by refreshing its domestic policies to fuel manufacturing productivity. With New Zealand’s location disadvantage, being further from export markets, taking on higher transport costs, duties, currency risks, and delays, having smarter tax, compliance, resource management and labour policies could help save costs and regulatory burdens placed on the sector.
- Sector certification. Let’s revisit study in a post-Covid world! Polytechnic, technical college and apprentice structures provided fantastic certification options in the past and there are other credited education options to provide the skills for more manufacturing workforce.
The future is bright
Manufacturing is a capital intensive industry, requiring substantially more capital expenditure than many other sectors. But this crisis has demonstrated that maintaining and growing a vibrant, well targeted and resourced manufacturing sector is crucial to the New Zealand economy.
I don’t think anyone’s suggesting we start designing LED TVs in New Zealand but there are many areas where Kiwis could make and consume locally, along with our healthy export market, that are worth exploring.
Actually making stuff in the ‘land of the long white cloud’ might be a brilliant antidote to the troubled sectors, and a major growth lever for New Zealand business and the economy.
Manufacturers’ being proactive in maintaining optimal business financial health and protecting their assets will guarantee an exciting future for the sector.
Steven Holden is director of Neu Capital NZ, a financial investor network which specialises in the manufacturing sector
