The new mantra: think many not big

NZ manufacturing is in trouble, barely able to support the infrastructure essential to its survival. But Business Herald editor ROD ORAM says the ingenuity and enterprise of many producers give cause for hope.

SUDDENLY in the middle of last year, exports of manufactured goods took off. At last the sector seemed to be regaining vitality after a patchy performance through 15 years of economic reform.

For the first time in years, manufactured exports boomed while commodities slumped. Some industries posted spectacular gains: exports of forgings and castings had doubled in a year, office and computer equipment were up 74 per cent, jewellery 32 per cent, scientific equipment 31 per cent and yachts and boats 22 per cent.

But how robust was the rebound? Were New Zealand manufacturers really conquering the world? Or were they just enjoying a brief recovery driven by a low dollar?
To discover the true health and prospects of New Zealand manufacturing, the Business Herald embarked on this special report. Our journalists talked to many companies across a wide range of industries throughout the country and to industry, academic and Government experts.

Our main conclusion is stark. New Zealand manufacturing is struggling to pull its weight, to keep up with foreign competition, in our economy and the world's. As a result, New Zealand's manufacturing base is now barely large enough to support the infrastructure essential to its survival. In some fields critical to our core industries - such as biotechnology in agriculture - we are already also-rans.

Yes, there are pockets of high success and deep expertise throughout the country. But they are the exceptions, not the rule. Unless we find ways to develop more and better manufacturers, this key sector responsible for 15 per cent of GDP will wither through lack of critical mass.

The meagre manufacturing base will fail to support sufficient skilled employees, capable managers, modern technology, component makers and service providers, training and research establishments, venture capitalists and a host of other people and activities vital to its existence.

In fact, the problem is larger. To justify its existence, that infrastructure requires an expanding base of manufacturing customers. For example, new technologies and globalising trade increase the investment and risk that component makers and service suppliers have to shoulder.

Underpinning this overall conclusion are these key findings:

* Manufacturing today makes at best a similar contribution to economic output, exports and employment as it did in 1985, pre-reforms.

* Who made what changed dramatically once the cosy economy was opened up to the icy blast of global competition. Some protected industries such as car assembly inevitably died, but some such as clothing are struggling more than they should because too few companies have adapted adequately to competition.

* Worse, we have stopped making things which arguably we should still be able to make. Our distance from foreign plants is a natural advantage we fail to exploit at home. Two factors appear to be at work: Government policies such as onerous testing regulations that make it easier to import a product than to manufacture it here; and a lack of help to make small-scale manufacturers as good as they need to be.

* New niche manufacturers have sprung up to replace the dead. Some are based on natural economic advantages such as designing and building high-tech processing plants for the dairy industry. But what of the future? If weak biotechnology leaves our dairy farmers behind the game, the next generation of even bigger plants or plants for making products more sophisticated than butter or milk powder are more likely to be built abroad than here.

* Other new (and old) players have prospered simply because of the ingenuity and enterprise of their owners and employees. There is no other way to explain, for example, how Greens Industries can make domestic taps in Hamilton that beat the competition in European and US markets.

* Even the winners are hobbled by inadequacies in industrial infrastructure and Government policy. Issues range from meagre research and development to unsophisticated financial institutions and counter-productive regulations.

* It is not what you make but how you make it, as Greens shows. Yet, relatively few manufacturers have the skills of design, technology, manufacturing, marketing and distribution to compete against foreigners at home and abroad. New Zealand lacks a culture or system to disseminate those skills to the majority of manufacturers.

* We should not be dazzled by the bright hopes of New Zealand manufacturing. In their shadow is an army of strugglers. They are vulnerable to many factors: the vagaries of markets at home and abroad; stunted growth or short life typical of small, proprietor-owned enterprises; or a lack of skills and resources, to name a few.

Some would argue that none of this matters. They would say that sophisticated economies are moving away from manufacturing to knowledge and service industries.

But that is misleading. Knowledge and service industries support ever more sophisticated manufacturing, which in turn creates employment, exports and wealth.

Manufacturing in other developed economies has evolved fast into high-technology products (and high-technology manufacture of low-value products).

Three-quarters of the United States' economic growth comes from industries that did not exist 10 years ago, according to the Economist.

In contrast, New Zealand has stuck to a worrying extent to its traditional industries and skills. The triumph of economic reform was to make those industries more efficient or, if they failed, to let consumers benefit through imports, albeit to the detriment of our current account.

The disaster of reform was the failure to push harder the migration to more sophisticated technologies and skills in existing industries or to new industries.

Reform theory told us that immaculate macroeconomic policies would unleash the potential of this economy, attracting foreign investors galore. All we had to do was fix the big picture. That was tough but achieved in large measure. Monetary and fiscal policy are reasonably sound, for example.

But over the 15 years we have pursued reform, we have fallen behind economic best practice as it has evolved elsewhere in the world.

Many in Wellington - lobbyists, politicians and civil servants - are still using the old macro prescriptions to try to cure today's ills.

Meanwhile, in other capitals, more enlightened political Establishments have come to appreciate the value of microeconomic policies. These are the tools that help individuals, companies and organisations do their job better.

Some microeconomic policies get the Government out of the way, others give it an active role. If the Government is involved, particularly spending taxpayers' money, the benefits are measured to justify the activity.

To use a simple analogy, New Zealand's macroeconomic reforms have built a reasonably good rugby pitch. But this Government is slow to invest in enhancements such as better drainage or floodlights. And it is very reluctant to use microeconomic policies to develop the skills of the players, the quality of their team work or the effectiveness of the rugby unions.

The prevailing economic orthodoxy has taken its toll on manufacturers. Reformers have brow-beaten them into believing the Government has no constructive role to play in their lives. Judging by our interviews with them, manufacturers have largely given up on expecting much help from political masters or civil servants.

Perhaps manufacturers should think of political parties as their subcontractors.
In business they would play off one supplier against the other to get the best product, service and terms to ensure that their own end product was the best it could be. Good policy and government is no different.

This, being an election year, is an ideal time for manufacturers to push both main parties for the very best industrial policy.

We have steered clear in this report of writing an "ideal" industrial policy. We have attempted instead to identify key weaknesses in manufacturing and to propose some broad remedies. How these remedies could be designed, implemented and monitored requires study and public debate far beyond the scope of this report.

Moreover, we decided not to profile big, successful manufacturers such as Fisher & Paykel. They are the true anomalies of our economy. The reality is the thousands of small manufactures that make up our industrial sector. From those, we chose eight good ones - some known outside their industry, others not - which we hope will inspire others to excellence.

And lastly, a small story to underscore why all this matters.

As Indonesia's economy collapsed last year, sales of New Zealand milk powder plummeted. Consumers could not scrape together enough money to buy the big standard tins.

The Dairy Board responded fast. Its solution was to offer much smaller plastic packages the Indonesians could afford. Moreover, the lighter packaging was cheaper and less voluminous so more milk powder could be crammed in shipping containers, further reducing the consumer price.

It gave the packaging problem to Ashton Group, a machinery manufacturer we profile in this report. It quickly developed machinery and packaging, drawing on its network of component and service suppliers around its Manukau City factory.

The small consumer packs were a hit in Indonesia, helping the Dairy Board to rebuild its sales and New Zealand farmers' incomes. But if the board had not had an Ashton to turn to, or Ashton had not had an industrial infrastructure to draw on, Indonesian sales would have been lost.

There is a real risk that this industrial infrastructure will atrophy or fail to keep up with the world. The best way to prevent that disaster is to ensure that New Zealand has a vibrant manufacturing sector.

For industry and Government, the only way forward is to play to the inherent small-scale and innovative character of New Zealand manufacturing.
Once the mantra was Think Big. Now it must be Think Many.