How can New Zealand accelerate nationwide wealth through industrial output?

This is the final instalment in our three-part thought leadership series on New Zealand’s path through energy transition. Here, Nick Cozens, Beca Technical Director – Energy and Infrastructure shares his ideas on the third core tenet of a functioning economy: industrial output.

By conceptualising and adopting modern and highly competitive business models, New Zealand has a chance to enhance nationwide industrial generated wealth. If we succeed, we can improve our balance of payments, our international investment proposition and domestic economic prosperity. 

Persistent trade imbalances and relatively low productivity in both the primary and secondary (tradeable) sectors reflect years of growing structural challenges. The profitability of our carbon intensive export sector and therefore much of our economic health depends on these slim competitive advantages being maintained – or diversified.

Addressing the challenge

While newer industries in the globally expanding tertiary sector are emerging in New Zealand, the performance of our tradeable sectors remains an antecedent indicator of our economic health. It is though, showing signs of ill health. The threat of further decline, resource and manufacturing offshoring is real. A coordinated approach is required to recover nationwide industrial enterprise. Carefully considering the significant benefits circular economics can bring, while phasing out of wasteful linear business models, will not be easy. Financiers will continue to ask if the by-products of unsustainable economic activity, the damaging effects of unpredictable changes in weather patterns and social inequity, could ultimately threaten financial stability.

The first step to enhancing the odds of success is by identifying all known and suspected impediments to sustainable progress.  Energy input, human capital and increasingly so, insurance are placing upward pressure on cost.  Harder still is accurate quantification of anticipated Carbon Border Mechanism costs or measuring the consequences lingering supply chain delays present.  Moreover, growing acceptance of the triple bottom line concept is rightfully extending these challenges beyond business-as-usual approaches.  A strategic solution to these challenges is required.

Centered on private sector leadership, participating interests are beginning to form clusters. 

What a successful cluster looks like

Taranaki is a well-established, but linear in nature, energy cluster. However, the region is looking beyond oil and gas to emerging offshore energy technologies. Importantly, there remains for now a highly skilled workforce, visible routes to capital and a cascade of industrial and manufacturing interdependencies now facing greater uncertainty. Acknowledging these pressures are compounding, the Taranaki tradeable sector would certainly benefit, through application of reemergent clusters of higher value commerce. As found globally, examples in China, France and the United States have joined the World Economic Forum’s Transitioning Industrial Cluster initiative. Could Taranaki one day join this or similar initiatives? 

Successful clusters tend to exhibit several key features:

1. Strong private sector leadership. Successful initiatives need internal champions who can align respective participants. 
2. Shared participant vision – sometimes the unlikeliest of participants create extraordinary outcomes (e.g. Uber and Spotify, BMW and Louis Vuitton, Walmart and EDF).
3. Integrated approach – synchronising existing business drivers, while collectively identifying emerging possibilities.

The Taranaki example

Success of a Taranaki industrial cluster will be determined by:

1. Geographic proximity – being physically close binds participants together and facilitates local leadership aimed at establishing   appropriate metrics for competing and complementary interests.
2. Utilising specialist skills – maximising the degree of established interoperability that already exists in the region. 
3. Pricing capital accurately – the cost of capital rarely reflects the true costs of business activities across equity, debt, environment and insurance. 
4. Logistical optimisation - regional supply chains can be shortened through means of improved cooperation.
5. Coordination with supporting institutions – stakeholders and shareholders alike have much to offer - and gain from collective wisdom and strategy. 
6. Economic benefits – by broadening their expectations for capital growth, investors can reward clusters for incorporating longer term risk and value creation in adaptive business models.

The bottom line

There is a concerning gap forming in the industrial and manufactured fabric of the regional New Zealand. While not unique to Taranaki, the health of our tradeable sector, if not addressed in the short term, will inevitably face continued decline. While linear economic models have served this country very well, it is clear we face new challenges. This means rethinking how we use our assets, resources, skills, and organisation structures to maintain and improve prosperity.

 

Read the other articles in this series:

• Part one - Can history guide New Zealand’s path through energy transition? 
• Part two – Energy infrastructure at a crossroad