The big question: Are added supply-chain costs here forever?
There’s a big question the Productivity Commission should ask, in its inquiry into New Zealand’s economic resilience to supply chain disruption. And that’s whether costs have now been “baked in”, permanently pushing up the cost of living.
That is the recommendation of supply chain consultancy TMX Global, which said its analysis shows supply chain delays caused by Covid lockdowns, climate change and the war in Ukraine are costing the New Zealand economy $1.7 billion a year in lost revenue.
Asked about the potential value of the Government-funded inquiry, TMX’s New Zealand general manager Caleb Nicolson said supply chain turmoil had come in many forms, including the Suez Canal blockage, vehicle, factory shutdowns due to microchip shortages, poor weather, power shortages in Chinese factories, labour shortages and higher energy and food prices globally caused by the war.
“The big question is whether these pressures fall away in New Zealand in the next few years as the global supply chain adapts, or whether the costs will be forever baked into the transport expenses of companies worldwide, pushing up our cost of living in New Zealand permanently.
“The Productivity Commission inquiry should examine these questions, and ultimately provide some recommendations about how New Zealand businesses, big and small, can overcome them.”
TMX is among supply chain stakeholders welcoming the commission inquiry, which gets under way with the February 28 online launch of an issues paper for public consultation. The paper will outline the commission’s current thinking on supply chains and economic resilience at home and overseas. It will highlight areas for further investigation and ask questions to guide engagement with supply chain stakeholders.
A draft report on the inquiry findings will be released in August, with the commission due to make a final report in February next year.
While there is “study fatigue” in the transport and logistics sector due to the sheer number of costly studies and reports involving the industry — 25 and counting, and yet to drive any discernible action — the New Zealand Port Companies CEO Group thinks this inquiry will be different.
It should be “broader” than previous work, said the group’s independent chair Charles Finny.
“It’s looking at things like dependency on a narrow range of import and export markets and dependency on particular factories or companies around the world which supply key components. That’s something that certainly came to the fore in the early stages of Covid.
“It’s good that is going to be considered.”
Finny said the group would be “very active” participants in the inquiry.
Commission chair Dr Ganesh Nana said that with the aim of enhancing the resilience of the economy to external shocks, the commission would probe factors that make the economy vulnerable to supply chain disruptions, taking into account increasing risks and the pandemic experience.
It would also investigate vulnerabilities from importers and exporters being dependent on global supply chains and the drivers of variation in business, sector and community resilience to disruption.
“We can no longer take supply chains for granted,” Nana told the Weekend Herald.
“Some people may not like the metaphor but it’s like the plumbing. You assume it’s there and it usually functions, but when it breaks down it has a big impact and everyone notices. That’s what’s happened here.
“We had for quite a long time been in a situation where supply chains functioned quite well both internally and externally but recently they have broken down.”
The inquiry would not comment on the location of ports, where rail lines are needed or medical supply networks highlighted during the pandemic vaccine response. Nor would it focus on longer-term physical infrastructure needs around transport networks. Other government agencies were looking into those areas.
“[It will] put a microscope on the structure of the economy and the potential vulnerability we need to think about, recognising that resilience is now of concern whereas in the past . . . we have focused on building trade networks and ensuring we deliver new products and services to new export markets.
“Now, while we still have to do that, we also have to focus on how we protect ourselves from our potential vulnerability in resilience. So it’s not just about our efficiency in terms of resource allocation and getting products and services at a competitive price across the border and bringing in imports — is there something we can do about it without impacting on efficiency?”
Nana said New Zealand couldn’t protect itself from all shocks but there was “now a question mark whether we should be anticipating supply chain disruptions”.
He said the inquiry would “take on board” freight forwarding sector frustrations that supply chain infrastructure is slow to learn from highly costly shipping experiences in the pandemic. An example being the current empty container logjam at North Island drop-off depots, which is costing importers and exporters penalties from shipping companies because they can’t “dehire” containers by a contracted date. There was a similar depot crush early in the pandemic. The Customs Brokers and Freight Forwarders Federation (CBAFF) has expressed frustration that judging from the latest issue, no relief infrastructure has been put in place since that first experience.
Nana said the commission would take that example on board.
“I can understand people’s frustrations but people need to recognise we are not out of Covid yet. We have a lot to learn from it. It’s frustrating we can’t work [to correct issues] quicker, but we need to recognise these challenges are over a longer period of time, whether we’re talking about the supply chain or structures of the economy or market destinations. We can’t change them overnight.”
The inquiry will cost about $2 million-plus, judging from the commission’s usual annual spend.
Nana said it usually undertook two full-time inquiries a year and the total cost last year was $4.5m. This included some other work.
The inquiry would employ up to seven people full-time. The commission would also use the resources of other government agencies and organisations as necessary.
Given that a swag of previous official reports involving the supply chain are gathering dust, the Weekend Herald asked Nana how this one will be any different. “It’s a bit of a crystal ball. The commission and economists and the public service in general recognise that resilience is now an important topic and not something we can put in the ‘nice to have’ basket.
“It’s a cliche I know, but the world has changed significantly and not because of Covid. We cannot take for granted our export markets and export and import connections. There is a lot of work going on out in the public service and in the business community, whether on the supply chain or the labour market.”
Previous commission recommendations had been picked up by the Government, he said.
“It’s an extremely important piece of work in the context of other work that is happening out there.”
CBAFF president Rachel Madden said it would be concerning if the inquiry “just became another government study that gathers dust”.
“It is important the issues we are facing in the supply chain are understood and real change is made by government to enable greater productivity and efficiency.”
TMX Global’s Nicolson said the New Zealand economy was worth $360 billion a year, and with supply chain unreliability costing companies around the world an average of 0.47 per cent of their revenue, New Zealand companies were forfeiting $1.69b a year in sales.
“Any measures that can improve this situation will lead to more income for New Zealand businesses, more jobs for those currently out of work and more taxation revenue for the government. New Zealand is a trading nation with high proportions of both exports and imports.
“The . . . inquiry is an important opportunity to examine the primary causes of New Zealand’s supply chain challenges, focusing on what can be improved and what cannot,” said Nicolson.
TMX, a supply chain adviser to large companies including Bunnings, Kmart, Coca-Cola Japan, Asahi, Maersk and Coolpak, hoped the inquiry would “listen to experts and make bold recommendations about how New Zealanders can more efficiently trade with the world”.
“What is at stake is the quality of life for all New Zealanders.”
Air New Zealand said it would review the issues paper and “ensure it addresses some of the key risks to our operation, including adequate jet fuel reserves, resilient and efficient airports and progressive investment into the decarbonisation of the supply chain”.
New Zealand’s biggest port, Port of Tauranga, had communicated its strong wish to be involved in the inquiry, said chief executive Leonard Sampson.
“Understanding and addressing resilience in the supply chain is a key concern for New Zealand importers and exporters and our strong view is that there needs to be greater resilience in the ports sector.”
Auckland Council-owned Ports of Auckland, which had problems handling shipping pressure at the height of the pandemic, said recent years showed how important a resilient supply chain was. Chief executive Roger Gray would be active in the inquiry.
Some people may not like the metaphor but it’s like the plumbing. You assume it’s there and it usually functions, but when it breaks down it has a big impact and everyone notices. Ganesh Nana, Productivity Commission (above)