Man­u­fac­tur­ers look to the fu­ture

Made in PNG - - CONTENTS -

While 2013 was a quiet year for most of Pa­pua New Guinea’s man­u­fac­tur­ers, they re­main pos­i­tive about fu­ture prospects, as Made in PNG’s ex­clu­sive sur­vey of the sec­tor re­veals.

While 2013 was a quiet year for most of Pa­pua New Guinea’s man­u­fac­tur­ers, they re­main pos­i­tive about fu­ture prospects, as Made in PNG’s ex­clu­sive sur­vey of the sec­tor re­veals.

There is no ques­tion that Pa­pua New Guinea’s man­u­fac­tur­ers— which ac­count for about 9% of the coun­try’s GDP—have been caught up in the gen­eral down­turn in the coun­try’s econ­omy, with a com­bi­na­tion of lower in­vest­ment in the min­ing and petroleum sec­tors, lower com­mod­ity prices and a stronger cur­rency slow­ing growth and re­duc­ing do­mes­tic de­mand.

‘Business and de­mand across our man­u­fac­tured prod­ucts and im­ported in­dus­trial equip­ment is sig­nif­i­cantly down on pre­vi­ous years,’ Michael Kingston, Gen­eral Man­ager of Lae-based K K Kingston tells Made in PNG. Jaime Martinez, Gen­eral Man­ager of Coca-Cola Amatil in PNG, also re­ports that over­all de­mand is down, ‘in part due to the econ­omy and in part due to com­pe­ti­tion.’

‘We’ve seen a flat­ten­ing off of rice im­ports over the last four months,’ ob­served Gregory Wor­thing­ton-Eyre, Chief Ex­ec­u­tive Of­fi­cer of Trukai In­dus­tries, at the end of 2013, although he noted it’s ‘still 30% up on what it was five years ago.’

Con­fi­dence re­mains

So, after five years of un­prece­dented growth, driven in part by the con­struc­tion phase of the mas­sive ExxonMo­bil-led PNG LNG pro­ject (now close to com­ple­tion), PNG’s man­u­fac­tur­ers are look­ing for­ward to more mod­est rates of re­turn.

How­ever, as the im­pres­sive lev­els of in­vest­ment fea­tured on pages 12 to 16 of this pub­li­ca­tion in­di­cate, there is cer­tainly still

sig­nif­i­cant con­fi­dence in the econ­omy’s prospects.

‘We re­main con­fi­dent that there are growth op­por­tu­ni­ties in the mar­ket, but they will not be as sig­nif­i­cant as they were over the last five or six years,’ says Stan Joyce, Gen­eral Man­ager of the coun­try’s main brewer, S P Brew­ery, echo­ing the com­ments of many. He notes a slow­ing down in the de­mand for pre­mium prod­ucts—a sign that Pa­pua New Guineans are tight­en­ing their belts in the short term and re­turn­ing to sta­ples.

That’s cer­tainly the ob­ser­va­tion of Peter Tan­nahill, Gen­eral Man­ager in PNG for flour milling com­pany Goodman Fielder.

‘We’re prob­a­bly hold­ing up not too badly, to be hon­est,’ he ad­mits. ‘We’re closer than many other food man­u­fac­tur­ers to be­ing a ba­sic com­mod­ity—rice and flour would be seen as part of the sta­ple diet of the Pa­pua New Guinean pop­u­la­tion. So, we prob­a­bly haven’t seen the real ex­tra­or­di­nary spikes or peaks that some of the more dis­cre­tionary prod­ucts have had when there’s been a bit more dis­pos­able in­come around.’

‘We are highly re­liant on com­mod­ity prices,’ ex­plains David Peate, Man­ag­ing Di­rec­tor of snack food man­u­fac­turer Par­adise Foods. ‘Our cus­tomers are ru­ral peo­ple who get their money from cash crops and we only have ac­cess to their dis­pos­able in­come. So, when com­mod­ity prices are down, dis­pos­able in­come is af­fected and gets smaller and smaller. So, there’s less money to be spent on lux­ury goods like pro­cessed food.’

High costs

With rev­enues lower, there has been re­newed fo­cus on the high costs associated with man­u­fac­tur­ing.

‘Do­ing business in PNG is ex­pen­sive,’ says Par­adise Foods’ David Peate. ‘For ex­am­ple, we have ex­pen­sive and un­re­li­able util­i­ties, which force com­pa­nies to pro­vide their own backup sys­tems, and se­cu­rity costs are high. In ad­di­tion to this, in­gre­di­ents and in­put cost are high.’

The cost of mov­ing goods around a coun­try is also a ma­jor im­post, with roads of­ten in poor re­pair.

‘The High­lands is our sec­ond ma­jor mar­ket after Port Moresby and trans­port com­pa­nies are hav­ing to in­crease prices in or­der to re­cover the in­creased costs to them for run­ning trucks up and down the High­lands High­way,’ notes Coca-Cola Amatil’s Jaime Martinez.

‘The cost of lo­gis­tics and the time it takes to move prod­uct around this coun­try, and Lae, is far too high,’ agrees Trukai’s Gregory Wor­thing­ton-Eyre.

It’s not just goods that need to be moved around ei­ther; the poor road net­work is also used by work­ers try­ing to get to work each day—one rea­son many com­pa­nies pro­vide their own trans­port to and from work.

Man­u­fac­tur­ers also note the hid­den cost of em­ploy­ing work­ers who lack the nec­es­sary skills.

‘Skill short­ages, specif­i­cally a lack of qual­i­fied trades­men, is a big is­sue for us,’ says K K Kingston’s Michael Kingston.

Fall­ing kina

With many in­puts im­ported from over­seas, the de­cline in the value of the kina in the sec­ond half of 2013 has only in­creased many man­u­fac­tur­ers’ costs. In­deed, Man­u­fac­tur­ers Coun­cil of PNG Chief Ex­ec­u­tive Of­fi­cer Chey Scov­ell has de­scribed the weaker kina as a ‘real kick in the guts’ for lo­cal man­u­fac­tur­ers.

On the other hand, man­u­fac­tur­ers that rely on lo­cal pro­duce for their in­puts have ac­tu­ally seen their pro­duce be­come more com­pet­i­tively priced in re­cent months.

Man­u­fac­tur­ers are also ner­vously watch­ing the out­come of de­lib­er­a­tions to de­cide a new min­i­mum wage in PNG—de­lib­er­a­tions that, at the time of writ­ing, were still in process. Cur­rently just K2.29 an hour, an in­crease in the min­i­mum wage will di­rectly af­fect bot­tom lines at a time when rev­enues are fall­ing and costs are al­ready high.

‘Re­duce the cost of do­ing business and then we can af­ford a wage rise,’ says Man­u­fac­tur­ers Coun­cil Chair­man Murray Woo.

Fall­ing tar­iffs

One thing most man­u­fac­tur­ers agree on is the need to main­tain

cur­rent im­port tar­iffs. These have al­ready fallen by around 80% since the 1980s as PNG has tried to meet its World Trade Or­ga­ni­za­tion and other trade treaty obli­ga­tions. APEC’s stated aim of abol­ish­ing all tar­iffs by 2020 is a fur­ther dark cloud on the hori­zon.

‘If the mar­ket was open slather, I don’t know how many lo­cal busi­nesses would sur­vive,’ says Par­adise Foods’ David Peate.

‘We don’t want tar­iffs to come down any­more,’ states Murray Woo, Chair­man of the Man­u­fac­tur­ers Coun­cil. A com­pro­mise, he sug­gests, might be to re­duce only tar­iffs on goods PNG does not pro­duce it­self.

Flow–on ben­e­fits

Many man­u­fac­tur­ers would like to see gov­ern­ment do more to al­le­vi­ate the many chal­lenges they face, em­pha­sis­ing the tremen­dous ben­e­fits a lo­cal value-adding sec­tor pro­vides to the coun­try.

Em­ploy­ment is just the start, as Trukai’s Gregory Wor­thing­tonEyre ex­plains:

‘We em­ploy 1000 peo­ple. You have the wan­tok sys­tem in PNG, where there’s a stan­dard of one per­son sup­port­ing ten peo­ple. So, there’s 10,000 peo­ple that rely just on Trukai. If you take all the ser­vices and the dis­tri­bu­tion, ship­ping, steve­dor­ing, pack­ag­ing, trans­port, ware­hous­ing ... there are tens of thou­sands, prob­a­bly 40,000 to 50,000 peo­ple that would rely on us.’ Viewed in this way, the ef­fect of hav­ing ma­jor em­ploy­ers such as S P Brew­ery, Coca-Cola Amatil, Nestlé, Lae Bis­cuit Com­pany, Ak­soNo­bel and Goodman Fielder in the coun­try is all the more sig­nif­i­cant.

Then there’s the other con­tri­bu­tions em­ploy­ers make: on-site skills de­vel­op­ment, train­ing and ed­u­ca­tion, health­care, com­mu­nity pro­grams. Lae Bis­cuit Com­pany, in com­mon with many man­u­fac­tur­ers, sup­ports a num­ber

of com­mu­nity and sport­ing groups. And then there’s the sup­port for small lo­cal busi­nesses, which sup­ply goods and ser­vices to man­u­fac­tur­ing op­er­a­tions.

‘Wher­ever pos­si­ble, we source locally,’ says Laga In­dus­tries Paul Robin­son. There’s also the is­sue of food se­cu­rity. ‘If we don’t have the proper man­u­fac­tur­ing fa­cil­i­ties here in the coun­try, it’s a big risk for the pop­u­la­tion,’ says Prima’s Adrian Chow. ‘You have to have di­ver­sity of sup­ply.’

S P Brew­ery’s Stan Joyce sums up nicely why PNG needs a man­u­fac­tur­ing sec­tor more than ever.

‘If you didn’t have a man­u­fac­tur­ing sec­tor in Pa­pua New Guinea, what would we look like? Ob­vi­ously, if you just had a sales of­fice here, you wouldn’t have the 400 em­ploy­ees that we have now. And they wouldn’t be spend­ing money in the com­mu­nity.’

Work­ers in Lae pack­ag­ing rice for the do­mes­tic mar­ket.

S P Brew­ery’s Stan Joyce

K K Kingston’s Michael Kingston

PNG’s de­mand­ing roads have cre­ated a man­u­fac­tur­ing op­por­tu­nity for PNG Spring­smiths Ltd. The only spring man­u­fac­turer in the coun­try, the com­pany pro­duces coil and leaf springs for ve­hi­cles from 4WDs all the way up to mas­sive high­way trucks. The springs pic­tured were man­u­fac­tured for a con­struc­tion com­pany in the south­ern High­lands—a typ­i­cal job in a coun­try where bro­ken equip­ment can other­wise re­sult in ma­jor de­lays while parts are brought in from over­seas.

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