The ugly truth about regional manufacturing - and a solution

ANZ Solaris Paper and Cottonsoft CEO Steve Nicholson

New Zealand manufacturers are increasingly moving offshore to stay afloat, but there are other options, says Cottonsoft chief executive Steve Nicholson.

When we announced some good news about our manufacturing plant in Dunedin recently, even we were surprised at the enthusiasm of the response. After several years of debating whether we could maintain the viability of our original plant in the face of the GFC and its aftermath, we were able to negotiate a multi-year lease extension, purchase new embossing rollers and, for the first time in several years, make new hires. As a result, we can now supply the entire South Island, eliminating the need for shipping from our other plant in Auckland.

It is something of a point of pride that we have not only preserved our 25-year-old Dunedin business but expanded it. Today, we are the only company in our sector with a South Island manufacturing operation, and one of only two companies to convert all its toilet tissue retail brands locally. One major supplier imports 100% of its toilet tissue as finished, retail-ready product. I don't make these points to criticize or boast: the sad truth is that centralizing operations and even moving offshore is the only way many companies can survive.

In our case, it was somewhat by chance that the business modelling worked in our favour, because the plant equipment was in place and had fully depreciated over its years of life. We also had the support of our supplier, APP, to maintain our existing footprint.

For any new players, or existing businesses wanting to get established in the South Island, it's unfeasible, because the scale of economies is working against them. Capital is very hard to come by, and companies are not being incentivized to move into the provinces and make the investments that create jobs and reverse stagnation and decline.

But why can't they be encouraged to do so? Auckland's housing crisis is already an exhausted topic, and the predicted one million extra people are yet to arrive. What if we gave new migrants a reason to venture further south - or north - on arrival, and made sure there were jobs to be found when they got there?

If it sounds like a flight of fancy, a recent article by Don Blair, an American economist and now New Zealand resident, offered evidence that it can be done.

He presented the concept of 'enterprise zones', designated geographic areas where incentives are provided for companies to expand or locate new operations, creating jobs and other opportunities for locals. In the US, Blair wrote, "enterprise zones have long served as valuable tools for economic stimulation, spurring investment and job opportunities."

It seems to me that the immediate problem around manufacturing is two-fold: Auckland is over-full, unable to meet the current demands of industry and its population, let alone those of a new wave of residents. Meanwhile, many provinces and centres are slowly strangling from lack of growth, and job losses in manufacturing are becoming routine. In just the past 18 months the list of companies to announce sweeping cuts includes Rio Tinto, Solid Energy at Spring Creek mine, Nuplex and KiwiRail, and the latest and perhaps least surprising is NZ Post.

In some respects the New Zealand economy is thriving by OECD indicators, but in others it is dangerously out of balance. Incentives such as Blair suggests could alleviate both problems: based on successful initiatives in Illinois and other parts of the US, he proposes GST abatements and investment tax credits for hiring people with fewer job skills who are located in disadvantaged areas, and income tax deductions for approved projects within the designated zone.

In Melbourne, first-time home construction credits are on offer.

Similar programmes could be tested in Whangarei and Hamilton initially to ease the pressure on Auckland; while central government invests in job creation to lure people away from Auckland, it also ensures there is affordable housing when they get there.