The Covid-19 reset: What now for business in the 'nice, kind, hermit kingdom'?

Tuesday, 16 March 2021

For years, we’ve been taking ever-more desperate measures to put New Zealand on the map through everything from cringe-inducing American talk show appearances to endless Hobbit sequels.

In the end all it took was for us to shut ourselves off.

While the pandemic raged across the globe, supply chain disruptions caused some large companies in the United States to get on the phone to Resilinc chief executive, Bindiya Vakil, to see if a remote, far off set of islands in the South Pacific would be a good place to relocate manufacturing during the pandemic.

Resilinc is a US-based international supply chain consultancy providing information and analysis of supply chain risk to major multinational manufacturers in the hi-tech, automotive, and pharmaceutical sectors.

“We were looking at New Zealand and how it compares against some of the other countries in Asia as a manufacturing hub in terms of salaries, the population, the level of unemployment, those types of things,” Vakil tells Stuff's The Monitor via videolink.

“You guys are the template or the formula for the world on how to do this stuff, right? You have a phenomenal and charismatic prime minister there, but the problem are the constraints.

“You simply don’t have enough people. We were looking at some of the numbers. If you take all of the unemployed people in New Zealand that’s fewer people than you would find in one FoxConn factory, and they're spread out over a whole country, not in one factory.”

Before the pandemic, New Zealand’s largest export industries were tourism, education and primary industries like agriculture and horticulture. All of them were reliant on customers or workers being able to travel across borders. Now they have to survive on a limited quarantining capacity of a few hundred people a day.

In January of last year more people entered than left: 741,574 people came in to the country and 699,466 flew out. A year later this trend reversed with more people leaving the country than entering it. We have gone from adding 42,000 more people in January last year to losing 853 people in January this year.

Going “cold turkey” on migration and travel has been good for some as businesses have moved to adapt to the new normal. Ngāti Whātua Ōrākei deputy chairman Ngarimu Blair says a lack of international travel and immigration has had major environmental benefits, while Ngāti Pāhauwera trustee Toro Waaka says the horticulture industry in the Hawke’s Bay hiked pay rates and employed more members of his iwi because there were fewer backpackers and seasonal workers around.

Ākina Foundation chief executive Louise Aitken says the tighter labour market has also made companies pay more attention to the way they treat their staff along with their company’s culture and values. It’s easier to convince people to work in a company they are proud of than one they are not.

However, there has also been a growing sense of unease in corporate boardrooms about how long borders are likely to be closed and what this might mean for the country’s place in the global economy.

Infrastructure Commission chairman Alan Bollard summed it up like this at the NZ Economics Forum this month: “We don’t want to be the nice, kind hermit kingdom, and we’ll need to open up at some stage.”

Institute of Directors chief executive Kirsten Patterson says a purely-domestic labour pool is not sustainable in the long-term, but companies are trying to see if they can fill labour shortages with investments in technology.

Those shortages are not only in labour-intensive areas like fruit-picking, but in white-collar industries too.

“The accounting industry, for example, normally relies in audit season on secondments coming in from overseas,” Patterson says.

“We are a small nation and we’ve been lucky enough to have reasonably low levels of unemployment and we have relied very heavily on being able to bring in additional labour.”

The technology companies which could help with that task are also suffering from labour constraints. They don’t have the political clout of primary industries like horticulture, dairy or film, but Rush Digital founder and chief technology officer, Danushka Abeysuriya says highly-skilled technology workers could add a lot more individually to economic output than a fruit-picker might.

He says it is taking longer to find highly-skilled technology job candidates, there is more competition between firms for workers and there is a decline in the quality of candidates applying too.

“Everything is back to being constrained. When globalisation happened the constraints were removed the shackles were undone … now we’ve got our constraints back on.”

Technology itself is another area where the economy remains vulnerable to change. Vakil says we might be able to feed ourselves, but we are very reliant on international markets for other essential technology items like telecommunication equipment.

“These are critical industries for New Zealand as a country to keep your quality of life, and life as you know it, running.

“Puerto Rico is a great example of how a country surrounded by ocean on all sides can really struggle to get help and critical supplies during the aftermath of a massive disruption.”

The pandemic has led to more corporate boards discussing risks like these in a way they have not before. Patterson says many are now realising there are many risks they just can’t predict and that they have to be ready to move quickly when they arise.

“What we’ve seen during Covid is a greater awareness of uncertain risk.

“So many of our risk registers were heavy with natural disasters as opposed to some of the uncertain risks … the whole community is having to get much more comfortable with uncertainty.”

Strategy and risk consultant Raf Manji says the past year has also made people like him nervous about cybersecurity risks. The NZX sharemarket went offline for several days last year and this year the Reserve Bank of New Zealand was also hacked.

“Your stock exchange is very important and your banking system is very important,” Manji says.

“We’re totally relying on digital transactions so that system better stand up to any kind of scrutiny.”

However, the other shift in the boardroom has not just come in the way people talk about economic risk, but in how they talk about environmental, social and governance (ESG) risks including issues related to gender, race and climate change.

Aitken says she has fielded a huge amount of interest from directors and chief executives who, after Covid-19, are suddenly concerned about the impact their businesses are having on society and the environment.

She puts the shift down to four factors: the threat of government regulation, investor concern, employee demand and greater consumer awareness.

One major risk directors had to grapple with last year was the wage subsidy and whether they should pay it back. In many cases companies took it quickly fearing doom and gloom, but when the economy rebounded found out they didn’t actually need the money.

The $16.6 billion taxpayer injection through wage subsidies allowed business deposits to grow by $21.7b last year. Pressure mounted on companies that paid dividends to shareholders, but took millions of dollars in wage subsidies at the same time.

Only 4.6 per cent of wage subsidy money had been repaid as of March 5, but regardless of the outcome Aitken says many boardrooms still discussed it and those discussions prompted companies and directors to think about the wider impact their decision might have.

“It’s not just what’s my risk from a reputation standpoint it’s also what will it mean if I pay it back what will it mean if I don’t pay it back, and taking more than just profit into account when making that decision.”

Investors are also asking more questions of directors around a broader range of risks. They want to know what the climate and social risks of different companies are. This is being led by the greater role institutional investors like pension funds are playing in the market, Aitken says.

“I don’t think it’s happening as quickly as I would like it to, but it’s certainly happening.”

Patterson says huge social shifts have accompanied the pandemic including social movements based around hashtags like #MeToo and #BlackLivesMatter which are forcing boards to discuss issues like gender and race in ways they had not in the past.

“Connected media has obviously had that playing out in a pretty colourful way for us in some areas,” she says.

“Those are governance issues now, absolutely, so the boards of today have to be focused on a broader understanding of purpose, a broader understanding of their place in the community and what that means for their stakeholders.”

People have been looking for corporates to drive social change and in some cases are demanding they take the lead on these issues ahead of the Government.

She says boards have to consider these questions now as they look beyond today’s stock price and try to build long-term value for shareholders.

“To do that you have to be a good corporate citizen, you have to be a good employer, you’ve got to be a good person to do business with from a customer perspective.”

Amidst all of this chaos Abeysuriya sees the potential for us to explore investing in industries like digital services which can weather both a pandemic and a supply chain shutdown.

New Zealand has no national digital investment strategy, and it needs one to make sure we have enough attention on ramping up digital investment where output per worker is higher than in some of our favourite pre-pandemic industries like tourism.

The government could play a key role in procuring more digital services and ensuring more of its own operations are “digital first”, he says.

A low exchange rate is a key advantage for IT industry players selling services across borders, and the advantage may remain in place if interest rates stay low or turn negative.

We could carve out some valuable niche markets currently being ignored by larger digital players overseas if we followed the late Sir Paul Callaghan’s call to focus on the ‘weird stuff', Abeysuriya says.

“You can just walk into a niche and own it, because no one else is playing in the space, or you’ve got one or two competitors in that market and they’re not particularly sophisticated.

“What other conditions to win do you want?”

Because while there is a lot of risk for New Zealand companies and entrepreneurs in the current environment there are also a lot of opportunity, Abeysuriya says.

Vakil says opportunities in digital services could come from becoming a hub for the delivery of back office services across borders like graphic design, coding, legal and accounting services in the way India is currently.

“You’re more expensive than someone like India might be, but you certainly have a certain edge over India in terms of cultural familiarity with the US or European countries.”

She also highlights an opportunity for us to be a backup manufacturing hub for certain types of products which are high-value, could find a market in Australia or South East Asia, but which you don’t need a large labour force.

Pharmaceutical manufacturing is one potential industry fitting these criteria because production lines for it are automated and the items produced are more commonly flown out rather than shipped.

However, for entrepreneurs to build more manufacturing industries or backup capacity here they will require encouragement and support from the Government.

Vakil says there will always be cheaper manufacturing options than New Zealand. South East Asia is right on our doorstep and has a large highly skilled workforce who also generally work for lower wages.

“Without the Government making this a mandate or making some local sourcing as a compliance requirement you can't find entrepreneurs who will just willingly do it because they will not be able to compete with those countries.”

Manji is a champion of the idea of encouraging companies to make New Zealand a backup hub. He would even add semi-conductors to the list of products we could look at becoming a backup hub for.

Such a move would have spin-off benefits for the country during times of crisis including keeping us on the radar in terms of international shipping routes and ensuring we have secure supplies of strategic products.

All of which would be a big shift from how New Zealand (its governments and private companies) have operated in the past, but then Manji is one of those who thinks the current pandemic is signalling the start of a new era.

The last shift of this kind happened in the 1980s, which was itself a massive shift from the post-war era.

Now we’re at the “tipping point” of another 30 to 35 year cycle. A shift which is part generational, but also based on a whole set of risks which will emerge in the coming years including changes in society, the financial markets, supply chains, and climate change.

All of which will require us to price things we never might have thought about pricing in previous eras.

“The world is shifting, and it's not just applicable to New Zealand. We're going through a major cyclical change, and that's always a period of uncertainty, always a period of great opportunity, and always a period of great threats.

“Those companies that are thinking about that are probably going to do a little bit better than those who are not thinking about it, or don't even know that it's happening.”