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PM Speech To Canterbury Manufacturers' Assn

Rt Hon Helen Clark Prime Minister Address to Canterbury Manufacturers’ Association President's Function Mancan House 1st Floor, 253 Cambridge Terrace, Christchurch 6.30 pm Tuesday 6 May 2008.

Thank you for the invitation to speak at this annual President’s Function. I last spoke at the President’s Function in 2005, and it is a pleasure to be here again.

I am here at a time of concern in the business and wider community about the economic outlook. There is no doubt that our economy is facing a slower period in the immediate future than has been the norm during our government’s time in office.

International pressures are the key factor behind the slowdown. Disruption in offshore financial markets has seen funding costs rise and credit conditions tighten in New Zealand. Rising international oil and food prices are also impacting on New Zealand households and businesses. And the higher dairy prices our farmers have been receiving are being offset to some extent by the drought which has affected much of the country until recently – and is still affecting parts of the South Island.

Lack of rain also affects the ability of our power system to supply electricity at lower cost. That, plus the “stronger for longer” dollar and a tight labour market putting pressure on wages, adds to the pressures manufacturers are feeling.

This is impacting on manufacturing export values - they were down by roughly 6% in the first quarter of this year. It's also impacting on manufacturer and exporter confidence, as is reflected in the survey released by the New Zealand Manufacturers' and Exporters' Association released today.

This slower period comes after what has been the longest period of economic growth in New Zealand since World War II. Household incomes rose in real terms by over 25 per cent in our first eight years in office; the economy generated 360,000 more jobs, and unemployment is among the lowest levels in the OECD.

Reserve Bank Governor Alan Bollard remarked recently that the NZ economy is fundamentally sound and its growth prospects remain positive. I agree.

The consensus amongst economists is for the economy to pick up in the year to March 2010. It will return to higher levels of growth because it rests on strong fundamentals, such as the very low levels of government debt, which make it more resilient to external challenges.

While the US market is currently weak, growth is strong in Australia and Asia – particularly in China, with whom we are forging a long term strategic economic relationship. The signing of the FTA was greeted with considerable enthusiasm through much of the business community.

There is a place in the China market for our SMEs as well as our large companies. An NZTE roadshow promoting the opportunities for New Zealand business in China is coming to Christchurch in the next few weeks. Overall we anticipate increased returns to New Zealand from our exports to China of between $US180 and $280 per annum.

Our government sees manufacturing continuing to play a very important role in the economy. The Manufacturing Plus report issued in November 2006 found that manufactured products (including those processing meat and dairy) account for 63 per cent of our exports. I agree with the report’s conclusion that a vibrant and advanced manufacturing sector is a strategic imperative for New Zealand.

Of course our manufacturing sector faces many challenges. We are a long way from offshore markets; we are a first world country paying first world wages; and there is constant pressure from international factors out of our control – not least currency fluctuations.

Not withstanding these challenges, the number of manufacturing firms operating in our economy increased seven per cent in the 2000 – 2006 period. It may be that the sector is shifting to areas where we have a comparative advantage.

That advantage will lie in our ability to innovate and to design, brand, and market world class products. That’s the direction in which our government’s Economic Transformation Strategy aims to lead the whole economy.

To achieve that we’ve launched a range of initiatives to boost infrastructure, skills in the workforce, and exporting.

We are investing at historically high levels in the transport infrastructure to facilitate the movement of people and freight, and to make it more environmentally sustainable.

Yesterday we announced the purchase of Toll New Zealand’s rail and ferry business. Rail is a vital component of sustainable transport systems worldwide. Since we purchased the rail track five years ago, we’ve been making major investments in it. Now our focus broadens to upgrades of the rolling stock, and promotion of rail as a transport mode.

Air New Zealand has never looked back since our Government bought back in as the dominant shareholder. In the 21st century, the state expects its investments to be run commercially and well managed. The same standards will be applied to rail.

In the road transport sector, fuel costs have been rising fast.

In New Zealand dollars, West Texas intermediate crude oil prices rose 10.4 per cent per annum on average from the March quarter of 2002 to that of 2007.

But in the year to March 2008, those prices rose 48.1 per cent.

Those huge increases fed through to the petrol and diesel pumps in New Zealand. From the March '02 to the March '07 quarter, petrol prices in the CPI rose by 7.9 per cent per annum. From the March '07 to the March '08 quarter they soared by 20.9 per cent.

That is impacting on the amount of fuel we consume. The latest forecast I have seen projects a nil growth rate in petrol demand over our first Kyoto commitment period, from 2008 to 2012.

This development and the government’s desire to ease the cost pressures of high fuel prices on businesses and households has led to the announcement of two key initiatives this week.

The first is that we propose to defer the introduction of petrol and diesel into the Emissions Trading Scheme for two years, until 1 January 2011. The fact is that right now the steep spike in prices is doing the Emissions Trading Scheme’s job for it.

The second is that we have made it clear that the regional fuel taxes provided for in legislation currently before Parliament would have to be phased in over a period of time. That too is designed to ease fuel price pressures on businesses and households. Both these moves may also support an easing of monetary policy.

The power infrastructure and power prices and supply are also of critical interest to our government as they are to manufacturers.

Currently hydro levels are low, and the Electricity Industry Group, led by Transpower, is putting in place contingency planning to ensure security of supply through the winter.

As Transpower’s Chief Executive, noted last week, the power system can manage with lower than average rainfall. Action has been taken by the generators to conserve water in the hydro-systems. In the North Island, thermal generation is running more intensively, and there is a greater southbound flow across the HVDC inter-island electricity link.

All generating companies are also ensuring that their own plant is fully available where possible, and that there are no problems with thermal fuel supplies. Should the dry weather continue, contingency measures will escalate.

Looking to the longer-term the government through the Energy Strategy is working to diversify the sources of our country’s energy supply. We see wind and geothermal energy providing significant new generation capacity in the future.

Already nearly 750 megawatts of geothermal or wind energy generation are under construction, or have received planning consent. Consent applications for another 1700 megawatts of wind generation have been lodged. We want additional energy generation to be renewable, except where security of supply needs dictate otherwise.

Earlier this afternoon I opened the new wind turbine production plant for Windflow Technology in Riccarton. It has orders for more than sixty new turbines, and contracts for more are being negotiated. The company says its target for sales and production growth would enable it in four years time to meet half New Zealand’s expected growth in electricity supply, if it can persuade the generator companies to purchase their turbines !

The government's emphasis on renewable energy resources is part of our broader drive to make New Zealand more sustainable.

We think there are substantial economic opportunities available to New Zealand business from incorporating sustainability into their processes and brand. There are also the substantial economic risks of inaction to be considered. We are trading into a world where increasingly consumers want to know about the carbon footprint of the goods and services they are buying. Our country’s clean and green image is a precious asset to which we must give substance. New Zealand business can leverage off our nation's strong brand.

All this means that New Zealand must play its part in working to reduce emissions of greenhouse gases.

The Emissions Trading Scheme currently before Parliament is an important part of our response to that challenge.

When the proposed scheme was launched last September, we invited input from businesses and other stakeholders into its detailed design.

The Climate Change Leadership Group, led by Stephen Tindall, has worked closely with us.

A change to the Bill which the government will be advocating to the select committee is to delay the beginning of the phase out of free allocations of emissions units by five years from 2013 to 2018, giving trade-exposed businesses at competitive risk more time to adapt to a price on greenhouse gas emissions.

This decision along with the deferral of the entry of petrol and diesel into the scheme will help ensure a smooth transition for businesses.

Already factors such as higher oil prices, slower growth and the package of climate change policies introduced by the government have led to a 52 per cent drop in New Zealand’s projected liabilities during the first commitment period of the Kyoto Protocol, from $1 billion to $481.6 million.

A third area of infrastructure I wish to comment on briefly is telecommunications, and broadband services in particular. Broadband has the capacity to drive productivity improvements and transform the way in which we do business. Our telco deregulation legislation has already made services more competitive. Now we must stimulate greater investment in the broadband infrastructure.

In the upcoming Budget there will be important announcements about our plans to drive further investment in broadband. The government’s investment will be designed both to leverage significant private sector investment and to encourage vigorous competition in the market. We believe the plan announced by our opponents does neither.

Let me now focus briefly on other key aspects of our Economic Transformation Agenda.

As a government we have put a huge emphasis on developing a skilled workforce in partnership with industry. We’ve doubled the government investment in skills training – and together we've doubled the numbers of people involved. The 15,000th Modern Apprentice began their training a few months ago. In 2007 more than 185,000 workers nationwide participated in industry training.

Now in partnership with Business New Zealand, the New Zealand Council of Trade Unions, and the Industry Training Federation, we have launched consultation on a Unified Skills Strategy to upskill the existing workforce. Consultation is happening from now until early June, and we would like to hear from the Canterbury Manufacturers’ Association.

As well, we are keen to have industry involved in development of our major new initiative in education : Schools Plus.

The aim is to have young people involved in education or some form of skills training until the age of eighteen. At ages sixteen and seventeen, they may be at school or at work, but some form of learning must continue.

We are introducing youth apprenticeships in school for students from around Year Ten to capture the interest of students who would otherwise be looking to leave school early.

We aim to have teenagers achieving more, and being more employable when they emerge in the labour market.

The investment both industry and government are making in skills needs to be matched by investment in innovation.

Last year’s Budget introduced the fifteen per cent tax credit for private sector investment in R & D. Inland Revenue estimates that up to $260 million will be foregone in tax revenue as a result – but that’s $260 million more spent on innovation.

The cut in the business tax rate from 33 cents to 30 cents in the dollar is also helpful to business investment in innovation, including in design.

And that’s the focus of an important NZTE programme – “Better by Design” – which has enthusiastic private sector champions. Lifting our design capacity is critical to lifting the value of the manufacturing sector.

Two weeks ago the Minister for Economic Development, Pete Hodgson, announced in principle government support for an Applied Design Research Centre in Dunedin to retain and build project design capability in the region.

It will be industry focused; devoted to solving design issues for industry and transferring research into an applied environment.

The Centre’s establishment would be timely, given the announced closure of Fisher & Paykel’s manufacturing plant at Mosgiel, but also the possibility of the company retaining design capacity locally.

Creating value also comes from connecting with global networks, being close to customers and having clear information on their needs. Last year’s Budget provided funding to expand the government’s Market Development Assistance Scheme and successful Beachheads programme which are run by NZTE. These popular schemes help New Zealand firms, including manufacturers, to develop new markets and deepen others.

New products are now being offered by the Export Credit Office. It has already supported Tait Electronics and Connectionz locally, and is having in depth discussions with others as its new products come on stream.

In conclusion, I want to emphasise that the government is well aware of the stress which global pressures and globalisation put on New Zealand manufacturing.

Our job is through a mix of policies to support upskilling, innovation, exporting, and the infrastructure needed for a progressive growing economy. I have no doubt that manufacturing has a critical part to play in that economy.


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