Paul Clark, Industry Economist, Financial Markets, Westpac Institutional Bank

 It’s no secret that New Zealand’s manufacturing sector is struggling.  Sales adjusted for inflation have been in negative territory for a while, while the much-watched PMI suggests that sector very much in the “bust” part of the cycle.  And with the economy set to slow further, there are few signs of an imminent turnaround.

Manufacturers have responded by going back to what they know.  They’ve cut jobs, cut hours, frozen new hirings and clamped down on overheads.  Some have rationalised product lines and canned projects, especially those that don’t deliver immediate benefits.

Others have looked at how to retain their best customers, as well as coming up with ways to hold on to critical staff. 

These measures mostly represent a short-term fix.  They are critical for survival.

But they also ignore a fundamental problem facing the sector and that relates to its vulnerability to changes in the economic cycle.  Fixing that is about increasing the resilience of the sector.

There are two areas where manufacturers should focus on.  The first is boosting the resilience of their supply chain chains – if they stop working or are significantly disrupted, manufacturers are in big trouble.  The second is on operations – an inability to maximise operational efficiencies implies a loss of competitiveness which could prove terminal.

Thankfully, advances in digital technology offer a way forward.  That includes state-of-the-art software that allows for better communication, Cloud computing for more efficient data storage, artificial intelligence (AI), and data analytics to help make better decisions, as well as robotics, sensors, and Industry Internet of Things (Iiot) to automate processes.

These technologies are making it possible for manufacturers to see every part of the supply chain, and track products in real time as they progress along the value chain.  They allow manufacturers to not only have full visibility of their supplier’s suppliers and their customer’s customers, but also understand the inter-dependencies that exist between them.

But that is just the start.  They are also helping manufacturers move away from global procurement models.  Customer demands for more responsive services, rising wages in previously low wage economies and volatile freight transport costs are prompting a move -towards near-, friend and onshoring of productive capacity. 

At the same time, leading manufacturers are using digital technology to move from traditional linear supply chains to tech-driven supplier networks that incorporate an ever-larger number of supplier partners.

Diversification and building in contingency have become commonplace, evidenced by a shift away from “just-in-time” to “just-in-case” logistics.  Predictive analytics now inform how much inventory should be held.

And that’s not just happening overseas. According to a 2023 report by Sense partners, 23% of the nearly 100 New Zealand firms surveyed were preparing for shocks by diversifying their supply base, while 14% were in the process of onshoring and near-shoring.

The changes don’t stop there. Class leading manufacturers are also deploying digital technologies to make their supply chains smarter and faster. Automation, driven by AI, robotics, Iiot and sensor technology are transforming supply chains, with 45% predicted to be autonomous by 2035.

These same technologies are also changing how these manufacturers produce things.  The move is away from machine-based assembly lines towards smart factories that rely on digital technologies to automate the production process.

What counts here is how these technologies work together to reduce costs, improve quality, minimise negative externalities such as carbon emissions and waste, and increase the responsiveness of productive capacity to changing customer demands.

These shifts are already underway.  Smart factories are increasingly common in the US and Aisa Pacific regions. Europe follows some way behind.  According to Callaghan Innovation, New Zealand lags at least a decade behind Europe.

That’s not to say that manufacturers in New Zealand are not investing in digital technologies.  The larger ones are, although this tends to be more about achieving greater efficiencies from existing operating setups rather than using digital technologies to transform how they operate.  Very few firms in New Zealand have gone that far.

Indeed, the reality is that the majority of the 23,000 firms that call the manufacturing sector home, are reluctant adopters of digital technology. That reluctance is clearly reflected in the Stats NZ Business Operations survey, which shows that New Zealand’s manufacturers are using increasingly older equipment.

They are not just lagging their international peers in this regard; they are also falling behind other sectors in the New Zealand economy.

There are many reasons for this.  Finance is one, especially for smaller cashflow dependent firms.  It’s not just the cost of machinery that needs to be considered, but also the cost of lost output between its commissioning and putting it into production. Adopting new technologies is also disruptive, especially if it involves a new operating model.

A lack of wherewithal is another factor, with digital skills and competencies always in short supply.  Other manufacturers just cling to the tried and trusted.  That’s especially so for independent family-owned manufacturing operations.

Addressing these issues is key if the sector wants to build resilience and position itself for the upturn that will inevitably come.

To achieve that manufacturers should be looking to educate themselves about the benefits and opportunities that new digital technologies and smart factories can deliver.  They should also be getting an assessment of their digital readiness – these form the basis for transformation plans that close the gap to best practice.

The final step is to put these plans into action.  That will require investment, not just in digital infrastructure and machinery, but also in the workforce, which will have to come to terms with operating in an increasingly automated environment.

We hope many manufacturers will make the transition to a digital future, although it’s likely that some won’t.  Over time, these firms will lose competitiveness to manufacturers that have managed to transition. 

They will either fall to the wayside or be consumed by others looking to add competencies, skills, and capabilities to their existing repertoires.