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Andrea Scown. Photo / Dean Purcell
CEOs are moving to address heightened sensitivities to key international risks that led to a fall in their confidence in the global economy this year.
Four out of five respondents to the 2022 Mood of
They were asked to say how they were dealing with five particular risks: cybersecurity, modern slavery in supply chains, probity relating to investments and partnerships, the Russian sanctions and the impact of an escalation in tensions between China and Taiwan.
When it comes to specific risks, some 69 per cent of CEOs report they have plans in place to counter cybersecurity attacks. Government agencies have spent considerable time privately briefing executives on New Zealand’s increased vulnerability to cyber incursions.
And when it comes to assessing the probity of investments and scrutinising partnerships, a majority of CEO respondents are either assessing risks or have plans in place.
There are reputational reasons to do so; a notable example is how Air New Zealand found itself in the Government’s sights after revelations of a third-party contract to supply the Saudi military were published.
Exporters and importers — some 28 per cent of respondents — also report they have plans in place to address modern slavery in supply chains.
A further 20 per cent have been impacted by Russian sanctions.
When it comes to China, CEOs have largely discounted the risk of an escalation in tensions with Taiwan, which US President Joe Biden has pledged to defend in the advent of a Chinese invasion.
Just 3 per cent say they have plans in place to counter disruption.
From a private equity boss: “We now need a deep understanding of China. The press reports are no longer sufficient. China expertise needs to be outsourced.”
“China, in particular, is a real focus both in terms of direct impact but also indirect impacts through supply chains,” said a tourism chair.
CEOs report that other risks include biosecurity where an outbreak of foot and mouth disease in Indonesia is providing an opportunity to refine business crisis plans.
“Assessment, mitigation and TCFD reporting on climate change is a big focus for the next 12 months,” says independent director Craig Stobo.
“We take a ‘bow tie’ approach to managing the key risks that we identify,” says Beca executive chair David Carter. “However there will always be surprises; surrounding ourselves with competent people and remaining agile remains a key strategy”
“The world in 2022 is not 2019,” said an aviation boss.
CEOs have backed moves to increase trade ties with the US. New Zealand has joined negotiations with 13 nations to form an Indo-Pacific Economic Framework (IPEF) spearheaded by the US. But the US will not offer preferential market access to NZ businesses under IPEF.
Some 32 per cent of respondents thought it was worthwhile pursuing IPEF (“For a small country at the end of the world, keep everything on the table,” said a banker); 12 per cent believed we should hold out for a meaningful bilateral free trade deal, and 51 per cent said to do both.
“With rising geopolitical tensions, New Zealand needs to be friends with the US. Perhaps even more than we need better market access,” said chair of the NZ Initiative, Roger Partridge.
From a private equity boss: “We should explore all avenues to retain a US alliance despite current political shortcomings there.”
“There is no upside for the US in an FTA with NZ alone,” cautioned a wine exporter.
Stephen Jacobi, who heads the NZ International Business Forum said, “if there is value to be found in IPEF, the US can rely on NZ to help find it. Without market access, I suspect the direct commercial value will be limited. And IPEF comes at a price — cutting out China and Latin America runs against our future integration in the region.”
There are four pillars to the negotiations: trade; supply chain resilience; clean energy decarbonisation and infrastructure; and tax and anti-corruption.
Some 48 per cent of CEOs support New Zealand joining Aukus; a trilateral security pact between Australia, the UK and US.
Dentons Kensington Swan chair Hayden Wilson said, “New Zealand’s role in Five Eyes is essential to our international position and a key aspect of managing our geopolitical risk.
New Zealand must be seen to be relevant and to be doing its part.”
“The world is geopolitically risky now,” said a tourism chair. “Small countries in the Pacific need friends.”
Twenty-three per cent were against joining Aukus, typically observing this would undermine New Zealand’s independent foreign policy; 28 per cent were unsure.
“It would require a commitment to a defence spend well above what we have traditionally been able to politically deliver (or need),” said a tertiary education CEO.
From Stobo, “Aukus assists Australia with submarine procurement and presupposes China’s aggression in the Pacific. Both are weak reasons for New Zealand to join. Think we stay close to Australia, play our part in Five Eyes, and continue to remain constructive with China.”
New Zealand should definitely not join Aukus,” cautioned Jacobi. “It would run counter to our independent foreign policy and the spirit and possibly the letter of the anti-nuclear legislation. It would position us as a future enemy of China and imperil the economic relationship. It would also likely put us offside with South Pacific partners.”
“Aukus is driven by a strong and unreasonable desire to keep China in its box,” concluded a banker.
Nearly 40 per cent of those respondents who are doing business with China either have plans to diversify into more markets or have already done so.
The Government has urged New Zealand exporters to pursue market diversification to reduce over-reliance on a single market — known commonly as the “China and” policy.
Some 9 per cent have reduced business, but no survey respondent said they have pulled out.
Major agribusiness exporters report they have maintained or increased their business with China as well as forging new markets.
Tourism and education sector CEOs are also looking to reignite business as China loosens further its MIQ restrictions. “Simple to say diversify!,” said a manufacturer. “Not easy to achieve when in some cases, China is a large part of Asian growth and they can afford to pay.”
“While the theory is straightforward, diversification is not as easy as making the observation that businesses should,” said Thomas Pippos, chair of Deloitte.
Said Jacobi: “Careful management of the relationship is absolutely critical for New Zealand’s prosperity in the near future. While we can and do look for options for our trade, there is simply no replacing the China market.
“In view of growing geo-political risk, and the possibility of unforeseen events, exporters need to strengthen key relationships in China, diversify their offerings in the market and press the Government to stick with ongoing careful management of the relationship, which enables us to have our say on critical issues while maintaining positive relations.”
A professional firm boss said they were maintaining focus on the China relationship but actively developing and enhancing relationships with Southeast Asian countries and the US. “Maintain in China, grow elsewhere,” was the maxim from a trade boss.
CEOs report supply chain difficulties are continuing to exacerbate inflation by pushing up the price of imported goods, increasing costs to businesses.
They ranked price escalation at 6.56/10 on a scale of 1-10 where 1 equals not affected at all, and 10 is extremely affected. Rising freight costs, international supply chain bottlenecks, shipping delays, delays at ports and driver shortages all fell within a 6.37/10-5.46/10 band.
The boss of a major construction firm says “these have all been a major impact but are all easing now — expect the outlook to be mostly resolved through the first half of FY23.”
“The bottlenecks are also causing delays in fulfilling claims with customers waiting months for a new car or to get back into their homes,” said Tower CEO Blair Turnbull. “It’s frustrating for everyone involved.
From a property CEO: “Project management and logistics are the new superpowers needed to get anything done, from installing a dishwasher to building a multi-level residential development.
“The tiniest random thing often holds up a project — a lack of hooks, for example, because everyone’s supply of hooks is in a container that’s been in Australia for six months trying to get on a boat.”
“It’s simply not viable to build alternate sourcing solutions in the medium term, as China is the powerhouse of manufacturing for the globe. The NZ Government must amp up diplomatic relations to uphold the decades of successful globalisation.
“Nationalism will only set the world back, reducing the GDP of many countries around the world.
“It is futile to believe there are solid alternatives to China manufacture in the short to medium term. The globe, including the US, is as reliant on that nation as New Zealand is. We are manufacturing elsewhere in Asia, however, the factory owners are still frequently Chinese nationals, the raw materials are usually ex-China, and the local infrastructure is on Chinese (often US$) lending bases.
“Globalisation has seen China become the powerhouse of manufacturing in the world. We are better to pursue improved diplomatic ties and strong business relationships with China than fear them.”
• Andrea Scown Mitre 10.
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