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What do we do about manufacturing?

By Brett O’Riley, Chief Executive EMA 

Our manufacturing sector is struggling, and it pains me to say it. 

The release of this month’s Performance of Manufacturing Index (PMI), a global measure of manufacturing activity, shows manufacturing activity in New Zealand has been shrinking for the past 12 months. 

While this might not be a surprise given the global economic slowdown, what is concerning is that manufacturing in New Zealand is underperforming most other major economies. Other countries have taken very deliberate steps to modernise and strengthen their manufacturing sectors; from an aggressive Accelerated Depreciation business taxation regime for investing in new hardware and software in Singapore, to the massive Inflation Reduction Act in the United States. 

Manufacturing is critically important to the New Zealand economy, and it is important we get the sector functioning as effectively as possible. 

The sector contributes more than $23 billion to our economy, or about 10% of GDP. It accounts for 60% of our exports and employs 12% of our workforce, with the potential to grow those metrics. 

Manufactuing isn’t just concentrated in one part of the country. It plays a critical role in our regional economies, accounting for more than 10% of jobs in almost every part of the country.  Every day, more than 220,000 Kiwis go to work in manufacturing businesses in Te Tai Tokerau, Southland and everywhere in between. 

Therefore, it is no surprise that when manufacturing isn’t doing well, our economy doesn’t do well. 

This is demonstrated by the latest economic numbers, which saw the economy shrink off the back of a sharp fall in manufacturing activity. 

But it’s not all bad news. New Zealand has many innovative and dynamic manufacturing businesses producing high-quality goods that are being exported around the world.  

We just need to back them to succeed and expand the sector, and that means putting in place the right policies and creating the right incentives for our manufacturers to invest, grow and thrive. 

If we get it right, there is a real opportunity for manufacturing to drive our economic recovery, create higher wage jobs, and lift our living standards. 

This is because around the world, manufacturing is undergoing a profound transformation.  

New digital technologies, augmented reality, digital twins, enterprise resource planning, robots and AI are resulting in changes so significant that they have been labelled a fourth industrial revolution, or I4.0. 

The I4.0 future of manufacturing is not about access to cheap labour. It is about cutting-edge technology supported by a highly skilled workforce, while operating sustainably in carbon conscious supply chains. This latter area is becoming very important for manufacturers and their customers globally, and a key part of my sustainability and climate change trade policy work on the APEC Business Advisory Council. 

While all of this should provide New Zealand manufacturers with an opportunity, unfortunately this is also an area where we are falling behind. 

According to new research by Westpac, New Zealand manufacturers are reluctant adopters of digital technology. 

In fact, it is estimated that we are at least a decade behind many European countries, and Europe is behind both Asia and the US. 

A startling statistic is that in New Zealand there are only about 55 robots per 10,000 manufacturing workers. In Denmark, which has a similar population to New Zealand, there are 246. While in South Korea, there are a staggering 946 robots per 10,000 manufacturing workers. 

So, what do we do? 

The appointment of a Minister of Manufacturing, Andrew Bayly, is a promising start and a sign that the new Government places a high emphasis on manufacturing. Early meetings with Minister Bayly indicate he is very focused on actions to help the sector recover and grow. 

These actions need to be immediate and targeted if we are to achieve goals like doubling our exports as a country. 

First up is introducing policies that create the right incentives for manufacturers to invest in digital technology, for example Accelerated Depreciation. 

According to the Stats NZ Business Operations Survey, the manufacturing sector uses older equipment than any other sector in the New Zealand economy.  

Worse, the percentage of New Zealand manufacturers that use equipment with the latest technology is trending down, and those that use equipment with technology that is more than a decade old has increased. 

This is not surprising. We have many small manufacturers for whom introducing new technology is not only costly but also disruptive and can result in lost production. And Kiwi businesses know how to “sweat” assets to prolong their economic life! 

Many firms lack the financial resources that they need to invest in robotics, AI and other game-changing technology, and raising debt in the current economic environment can be tricky. 

Improving our R&D tax credit system and introducing more rapid rates of depreciation would help alleviate some of this cost and incentivise investment by reducing tax liabilities. 

A bolder approach would be the establishment of some form of investment fund that could co-invest alongside manufacturers, helping them overcome some of the financial barriers. 

The Australian government has launched a $15 billion National Reconstruction Fund, which is aimed at diversifying and transforming Australian industry. In New Zealand, the government’s fiscal position might mean encouraging more foreign direct investment into our sector, potentially matching government funding. 

We also need to continue supporting manufacturers to understand the benefits that new advanced manufacturing technologies can deliver. 

An example of how this can be done is the work the EMA has been doing with Callaghan Innovation, BECA and LMAC, delivering the Industry 4.0 Demonstration Network.  

This programme provides a “hands on” opportunity for manufacturers to see the latest technology in action and learn how it can be applied to their manufacturing processes. 

We know from first-hand experience that these types of programmes make a difference. Once manufacturers see how the latest technology can be used to improve their productivity, they are more likely to invest in it. 

Finally, we need to ensure manufacturers have access to the skilled workers they need when they adopt these technologies. 

That means reorientating our education system so that it is preparing young people for the jobs of tomorrow, and introducing programmes that help upskill workers to operate in a highly digital environment. 

If we get this right, there is no reason we can’t unleash the potential of our manufacturing sector and deliver an economic uplift for our employers, their workers and communities right across the motu. 

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