Manufacturing Matters- Tuesday Top-Up 7

Recent key developments in MAKE│NZ

• Our History – Part 5:

• The significant change for the CMA during that period was that – for the first time – it was going to take a systematic approach to recruiting more members and running events outside of Canterbury. To signal that to the outside world, it changes its name to the New Zealand Manufacturers’ and Exporters’ Association [NZMEA], which remains as the legal entity behind the MAKE│NZ today.
• This period also covers the Global Financial Crisis of 2008/2009 – a crisis that disrupted manufacturing to a lesser degree than in some other economies and had a modest impact on manufacturing employment:

• Another major development during that time were, of course, the Canterbury earthquakes. These quakes severely damaged some factories and temporarily disrupted the transport infrastructure and local supply chains. Fortunately, though, a big part of Christchurch’s industrial areas lay outside of the worst earthquake zones, and factories destroyed we re-built or relocated remarkably quickly, so the overall impact was less than initially feared, as both industrial energy use and the Manufacturing PIM for the period show:

• The public debate about the impact of high electricity / energy prices on manufacturing continues, and so does our campaign through the Manufacturing Alliance: https://businessdesk.co.nz/article/opinion/govt-must-intervene-in-energy-crisis-now-demands-manufacturing-alliance

Two of our Alliance representatives will be having a further meeting with government tomorrow, this time with the Minister of Energy and Resources, the Hon. Simeon Brown. They will put forward our views on what can be done to alleviate the pain on manufacturers right now, but also make an offer to work with government on longer-term solutions (see also below).

• Many of you have told us that we’re not doing a good job with telling you about all the things we actually do. One way of fixing that is to put all of our activities on a map, which you can view Here.

Recent key developments in New Zealand

Returning to the electricity crisis, and thinking of its root causes, the public flogging of our electricity companies over their ‘mega profits’ does miss the point. It’s a cheap shot, and it ignores the fact that these companies act as they are expected to. Nor should the fact that the government has a major shareholding in most of these companies matter. Whether the electricity sector should have been privatised in the first place is a different question, and a moot one now.

The relationship between electricity prices, dividend payments, and re-investment of profits in our electricity industry is not straightforward. There is an excellent study that provides facts to fuel that debate (https://www.cac.org.nz/assets/Documents/NZIER-assessing-the-New-Zealand-wholesale-electricity-market.pdf ).

The more fundamental question is whether there are structural problems that require a higher level of regulatory intervention into the electricity market.
One of those fundamental questions, and one that is becoming more acute as we increase the share of electricity from renewable sources, relates to dealing with intermittent supply. With an increasing share of electricity generated from renewable sources, we need to establish a buffer to accommodate fluctuations in supply, with those fluctuations likely to become more pronounced with a growing amplitude of fluctuations in climatic conditions. That ‘buffer’ will on one side consist of a range of demand response mechanisms, from the deal with the NZAS to ripple control – and, in the current system, temporary price increases to reduce demand.
On the supply side, the ‘buffer’ will consist of a combination of energy storage, either actual (electricity in batteries) or potential (hydrogen, hydro water, etc.), and additional generation capacity that will constitute an oversupply when conditions are favourable. Such a buffer infrastructure, however, will be expensive to build and maintain, without providing acceptable commercial returns. In a system based on free- market principles, there is little incentive for companies to invest in such a buffer infrastructure, especially when they operate in a regulatory / political environment where conditions are likely to change every three years (gas exploration; Lake Onslow project).

In other words, there is a challenge. And since the response to this challenge, whatever it is, will take a long time to build, wouldn’t it be good to have a plan – a long-term plan? And since the answer is unlikely to come from ‘The Market’, wouldn’t it be the job of government to develop such a plan?
When it comes to that, the last time a New Zealand government published a strategy for the energy sector was in 2011, for the period to 2021, and a lot has changed since then. One would normally expect that work on updating a ten-year plan starts about half-way through that period, or, in this case, around 2018 at the latest. However, MBIE are only now working on a new strategy, which it has consulted on but still not finalised and published yet.
Yesterday, and in response to the current shortage of supply, the government announced “Urgent action taken to bolster energy security”, including “Improve electricity market regulation”. They didn’t call it ‘a plan’, nor did it warrant that description. To me, it does look like government – in the form of MBIE and the Electricity Authority, who are mandated to ensure that “energy supply is secure, resilient, and reliable throughout the transition [to renewable energy] and beyond” – has been caught napping at the wheel at great cost to industry and, as we shall see, consumers.

Recent key developments in the World

• Other than Lean and Toyota, we don’t often hear or talk about manufacturing in Japan. And yet, compared to New Zealand, it’s very much a manufacturing economy, with value-added manufacturing contributing around 20% of GDP, and agriculture around 1%. Those figures have largely been stable over the past 15 years and are slightly behind but in the same league as South Korea and Germany in that respect.

• Japan has been suffering from ‘negative demographics’ longer than other countries:

Japan’s population size peaked in 2008 at 128m people and has since declined to 123.3m, not helped by its rather restrictive immigration policies. In other words, it has lost a roughly New-Zealand-sized population within 15 years.
The reduction of the manufacturing labour force that results from this decline, combined with a rather unfavourable cost environment by international comparison, has helped to drive Japanese manufacturers to high levels of automation, a focus on very high-value-added products, and setting up manufacturing abroad, first and foremost in China. Japan’s direct investment in China in 2022 was USD9.2 billion) (2022), China is the 3rd largest investment destination country for Japan (after US and Australia), and Japan, as a country, is the third largest inward investor in China after Singapore and South Korea (all 2022 data).

• Japanese robot manufacturers have played a world-leading role for many years. As of 2022, 45% of all industrial robots in the world were originally produced or designed by companies in Japan.

36% of the Japanese exports of robotics and automation technology were destined for China. Like other international robot suppliers, Japanese manufacturers also serve the Chinese market directly from their factories in China.
• However, Japan’s manufacturers are no longer world leaders in the deployment of robots in their own factories. At 397 robots per 10,000 employees they are well-eclipsed by their neighbours in South Korea (1,012), as well as Singapore (730) and Germany (415), with China at 392 almost level (2024 data).