Lance Gush has worked at New Zealand Steel’s pipe and hollows plant for the past 15 years, and has spent all his working life in manufacturing.
But he says the industry has become a noticeably tougher place to be in recent decades.
“Competitive is the word that springs to mind. How do we compete with something that can be landed cheaper than we can make a product?”
He said manufacturing in New Zealand seemed to be on a steady decline as local companies struggled to hold their own against cheap imports. “People can get it online in bulk and have it landed. It’s very much price-driven.”
READ MORE:
* Tesla gigafactory or another smelter among ideas floated for Tiwai Point
* More infrastructure spending is nearly always a good idea
* Manufacturers plea for Government to start enforcing standards
The plant is going through a restructuring process that could result in the loss of 60 jobs.
NZ Steel and the union are working through options for redeployment for workers but Gush said it seemed now that “someone with foresight” would be looking to get into a different industry. “It doesn’t seem to have a future.”
Commentators say moves such as NZ Steel’s, and the closure of Tiwai Point (barring a deal being done between owners Rio Tinto and Meridian Energy) are a sign of a wider shift, and acceleration of a push away from industry as part of New Zealand’s economic DNA. Refining NZ has also mooted ending refinery at Marsden Point.
Decades on from the manufacturing heyday when New Zealand would even roll out locally produced cars, appliances and mass-market clothing, is it becoming just too hard to compete with international producers who offer their wares to New Zealand households at the click of a smartphone button?
Goods-producing businesses, including manufacturing alongside things such as construction and infrastructure, make up about 20 per cent of the economy, compared to 7 per cent for the primary sector and 65 per cent for service industries – businesses such as your local hairdresser.
Taxes are 9 per cent. Manufacturing itself is about 12 per cent. About 233,000 people are employed directly in manufacturing, or roughly 10 per cent of the workforce.
Manufacturing provides a similar proportion of the country’s gross domestic product (GDP) to United States manufacturing, and even more than in the so-called lucky country, Australia.
But it’s an unavoidable fact that New Zealand’s manufacturing base has shrunk. In 1992, goods-producing was 35 per cent of GDP and service industries 52 per cent.
The Ministry of Business, Innovation and Employment (MBIE) points out that a large part of manufacturing in New Zealand – as is the case in most developed economies – is now focused on the production of low and medium-low technology goods, such as food and beverage.
E Tu union negotiator Joe Gallagher said urgent action was needed. “We’ve got a major issue in New Zealand.”
The country could not afford to lose $400 million overnight from the Southland economy due to the exit of Tiwai, he said, nor $180m out of the Waiuku economy if NZ Steel pulled out.
Most of the 60,000 people in Invercargill would be affected in some way by the smelter closure, he said, because of the flow-on effects of employment there to the wider economy.
Infometrics economists estimated food manufacturing companies made profits of $2.9 billion in 2019, and non-food $4.8b. Five years earlier, food manufacturing was worth $408 million and non-food $3b.
Manufacturing workers earn an average of $63,000 a year, 15 per cent higher than the New Zealand average. However, they work the highest average hours per week to earn it, MBIE data shows.
Gallagher said New Zealand needed to “turn in on itself” to get through.
Attention needed to be paid to what the Government could do to help manufacturers become more competitive. New Zealand manufacturers were the only ones in the OECD that were not protected by import trade tariffs, he said.
“There has to be something that levels the playing field.”
New Zealanders could “put ourselves first”, he said, shoring up the economy through patriotic support for those who were investing profits back into the local communities.
He said that in the case of NZ Steel, of every $100 it cost to make steel in New Zealand, $80 went into the economy. But only $5 of every imported tonne remained in New Zealand.
NZ Steel has been approached for comment.
A long-term plan was needed, Gallagher said. Some parts of the country, such as Northland, were still affected by reforms of the 1990s that had meant job losses and intergenerational unemployment. There was a chance to opt for a sustainable economic rebuilding out of this recession to stop that happening again, he said.
“We’ve saved our health and now it’s time to save the economy.”
Jeff Douglas is managing director of Douglas Pharmaceuticals, which has been manufacturing since the 1980s and employs about 700 people.
He said the company’s decision to remain based in New Zealand was not an economic one.
“The majority of our business is offshore, it gives us the challenge of freighting. However, we like New Zealand and like living here, we’re not going to move out of the country.”
He said labour rates in New Zealand were “reasonable”, and rejected the suggestion the industry had a productivity problem.
The sector had labour productivity growth of 0.2 per cent a year between 2005 and 2015, MBIE data showed, below the already-low New Zealand average of 1 per cent.
Drew Muirhead, chief executive at Sistema, said his company had invested significant amounts of money into automation processes to boost productivity. He said some manufacturers got stuck on improving their products to make them better or cheaper but businesses could also succeed by looking at their people and processes and determining ways to make manufacture more efficient and cost-effective.
Douglas said there were no Government incentives offered to support manufacturers, beyond funding for research and development.
But Douglas said he would rather see export incentives than tariffs, as Gallagher had flagged.
Manufacturers supplying the local market could be given incentives to increase their production runs to export some of their product, he said.
That would keep prices down for the local market because the volume of manufacturing would be so much larger, giving economies of scale.
“If you’re only manufacturing for 5 million people your economies of scale are small.”
The experience of Covid-19 had highlighted New Zealand had too much reliance on overseas-manufactured goods, which could be a risk when supply chains were disrupted, Douglas said.
That’s a view shared by Ben Kepes, owner of Cactus Outdoor, which is the country’s largest clothing maker. He said New Zealand was left vulnerable to problems internationally disrupting the flow of goods to this country.
New Zealand manufacturing had been decimated over the past 20 or 30 years, he said. Systems thinking was needed.
“The business I own makes all the uniforms for the police, army and navy … we rely on an offshore supplier for the raw material. Imagine if [Regional Economic Development Minister] Shane Jones took some of the Provincial Growth Fund money and said ‘I’m going to build a fabric factory in Northland’.”
Kepes said that would be a 10-to-one return to New Zealand Inc in terms of reduced unemployment, better social outcomes and money flowing through the system.
Dominick Stephens, Westpac chief economists, said the economy would “absolutely” look different in the future.
“Our economy has been restructuring away from manufacturing for decades. The loss of Tiwai is just one more, very big, step in that long process,” Stephens said.
New Zealand had not been able to keep up with the scale that manufacturers could achieve in other countries, and the lower costs, he said.
“Covid-19 is going to accelerate the transformation of our economy. Disruptive events like this tend to accelerate trends that are already in place.”
There was a clear trend towards New Zealand becoming a more digital economy, he said, with a focus on “weightless” export services, such as products delivered online.
But Paul Blair, chief executive of Infrastructure New Zealand, said the Tiwai move was an individual business decision. While it would be “hard on the people of Southland” at least at first, he said, from a New Zealand Inc perspective, it could be a good move over the medium term.
The importing of raw materials and export of aluminium by a company with a foreign owner had a more limited net contribution to New Zealand than other business activities, he said.
Because the smelter had paid a relatively low power price, and was using green energy to produce a commodity, that could be redirected into other things, such as green hydrogen, a data centre or niche manufacturing.
“In terms of infrastructure, if you had 12 per cent of the electricity supply at that cheap rate spread across the country that’s potentially a really good opportunity. Tiwai is exporting green electricity in the form of aluminium, is there a better use of this very cheap, green electricity than to export it in commodity form?”
Milk factories in the South Island were using coal for production, and could potentially use renewable energy, or the power could be used as part of electrifying the country’s vehicle fleet.
Kirk Hope, chief executive of BusinessNZ, said industry would continue in New Zealand but its nature would change over time.
“The costs related to traditional industrial production processes are increasing.”
He said New Zealanders did not see the large numbers of medium-sized businesses involved in manufacturing as part of global supply chains. The future could involve more businesses making components rather than complete products.
“One of the things we do have is high levels of renewable electricity. That could provide us with a competitive advantage.”
Manufactured goods exports earned $36b in the year to the end of June 2017, making up over half of New Zealand’s exports.
Hope said the country needed to make sure it was in a position to take opportunities as they arose.
Economist Tony Alexander said Tiwai had always been an outlier, and the production of aluminium an oddity in the New Zealand economic mix. But he said manufacturing had been on a downward trend since the 1980s and had “fallen away” since the global financial crisis.
He said regional and central government had had years to come up with a plan for after the smelter closed, but there did not seem to be one.
As much as 5000 gigawatt hours of renewable energy will be freed up but so far there is no clear idea of what it could be used for instead. It has been suggested it could be anything from a gigafactory to a data centre or a solar panel factory.
“The fact there seems to be no plan suggests there has never been a plan for something that could replace the smelter. The non-existence of a plan suggests there was no expectation it could be replaced with something viable.”
Catherine Beard, chief executive of ExportNZ, agreed. “Everybody has known this was coming for a long time. Where’s the plan? Talking about the plan now looks a bit irresponsible.”
But she rejected any suggestion of a sector in crisis and said manufacturing was under no more pressure than any other sector recovering from the Covid-19 lockdown.
The latest BNZ–BusinessNZ Performance of Manufacturing Index (PMI) showed expansion for the first time since February.
The seasonally adjusted PMI for June was 56.3. A PMI reading above 50 indicates that manufacturing is generally expanding; below 50.0 that it is declining. This was up 16.5 points from May, and the highest result since April 2018.
“Leading the way were the key indices of production and new orders (both at 58.6). Like the main result, these were at the highest level of expansion since April 2018,” Beard said.
“Overall, we should remain cautious that one expansionary result does not represent a trend given ongoing offshore uncertainty around Covid-19. A consistent trail of new orders over the coming months would go a long way towards ensuring the second half of 2020 is better than the first.”
The last major period of difficulty had been after the global financial crisis, she said, when it took about five years for things to get back to normal. But the manufacturers that survived were resilient.
New Zealand manufacturers did not tend to try to compete with big volume manufacturers in China, she said.
“The ones that are successful tend to find a niche. They do more bespoke, short-run … more on the quality and innovation side, they don’t try to compete with cheap.”
What is a small market for an international firm can be a large one for a New Zealand manufacturer.
MBIE said examples of New Zealand firms dominating global niches included Enatel (power solutions), South Fence Machinery (fence machinery) and Buckley Systems (electromagnets).
New Zealand’s small domestic market meant that customers could require very short runs or bespoke solutions that might be inefficient for large-scale international manufacturers to produce, the ministry said.
Beard said the industry would need to ensure that it continued to be able to operate on a level playing field.
There was a risk that as countries recovered from Covid-19 they supported their own companies by putting up tariffs or trade barriers on imports.
“If other countries have that, it’s challenging for us. But if we go down the same route you end up back in the days of who can subsidise their businesses more, and it wouldn’t be a small economy.”
In Auckland, Gush said the Government could help by making a pledge to source steel for its infrastructure from local suppliers.
He and Gallagher said many highly experienced production workers did not have skills that would easily transfer to other roles.
Without intervention, he said, there were some big questions ahead over what someone like him could do instead to support his family and make a contribution to society.
“Everyone thought it would be climate that brought on this change but Covid seems to have played a substantial part already.”
© 2022 Stuff Limited