Manufacturers tool up for tough market

Agricultural equipment manufacturer Tru Test recorded over $100 million in revenue in 2012 for the first time since 2005.

And it wasn't just Tru Test's top line that outperformed. All metrics improved, with earnings before interest, tax, depreciation and amortisation up 63 per cent at $5.9m from $3.6m in 2011. Net profit from continuing operations for the group before tax was $2.9m, compared with $1.3m in 2011. Gross margins also improved to 39 per cent from 37 per cent in 2011.

So what gives? Aren't local manufacturers supposed to be doing it tough? Isn't the high Kiwi dollar killing local exporters?

A comparison of the Trade Weighted Index and manufacturing confidence over the last decade (see charts) indicates we have a problem. As the value of the dollar has climbed, manufacturing confidence has sagged.

However, for the past three years the BNZ-BusinessNZ Performance of Manufacturing Index has at least remained positive, at over 50, indicating manufacturing expansion. The monthly index, which has been tracking below 50 for the past four months, hit expansion territory again in October, registering 50.5.

BusinessNZ's executive director for manufacturing, Catherine Beard, said that any return to expansion is positive, but no one should think this is the immediate start of better times for the sector.

"Looking at the history of the survey, we've just come out of the longest consecutive period of contraction since 2009," Beard said of the result. "On the plus side, an improvement in production and a sharp rise in the number of positive comments by manufacturers are welcome. However, new orders remain historically low, while those employed in manufacturing have been in decline for five consecutive months."

While the exchange rate is not helpful, say manufacturers, the real impact depends on what you make, how you make it and how and where you sell it.

"You need to segment the market," said Tru Test chief executive Greg Muir. "Smaller, more bespoke, tightly targeted companies are fine as long as they are innovating and working on their distribution channels.

"It's tough for ‘me-too' products and longer runs. The competition is tough." Muir said Kiwi manufacturers are trying to find niches and how they can be special in their markets.

Tru Test commented in its annual report, filed with the Companies Office last week, that the improved results were pleasing "in the context of difficult trading and exchange-rate conditions".

That's because a 10 per cent strengthening of the NZ dollar against the currencies Tru Test trades in decreases earnings before interest and tax (ebit) by $1.06m, a similar weakening increases it the same amount.

For Tru Test, that is significant. It may even make the difference between paying a dividend or not. Tru Test chose not to do so in 2012.

The reasons some manufacturers are struggling vary widely. The highly valued kiwi dollar is one factor, but not the only one. Bri-Ski Propellers has seen its export markets all but disappear as the result of the global financial crisis. Bri-Ski's propellers are cast in Takapuna and machined at owner Brent Crawford's factory in Maramarua. It makes customised boat propellers from 10-inch diameter to 50 inches. Founded in 1970, it used to export 250 propellers a year. Now it is lucky to export 20. It's been a couple of tough years. Why? Because many overseas boatbuilders went out of business, or shifted manufacturing or sourcing to China.

"They tend to go for the cheapest price," said Crawford, who bought the business four years ago, having worked for it for nearly 30 years. Bri-Ski used to have eight employees, now there are two plus himself.

It isn't only the export market that is challenging. It is now easy for local boat owners and, importantly, engineers, to source propellers from overseas online, Crawford said. Add to that the ever-increasing cost of raw materials and Bri-Ski has had to hold its prices to be competitive.

"It's very tough," Crawford said.

Bri-Ski wins most of its business now through long-term relationships with local diesel engineers who use the company to source high-quality custom-made blades for customers. Manufacturing a propeller is simple, but sizing it, shaping it and ensuring it is right to do the job the boat owner wants it to do is a different matter, he added.

The advantage of using Bri-Ski is still clear, he said: You aren't buying off-the-shelf. If a prop isn't exactly right, Bri-Ski will fix it.

Crawford said he thinks the export market will come back, "but it won't be any time soon". As for the local market, there aren't that many boats being built here right now either, he said.

Nuplex, which began as an Auckland-based tile and flooring company in 1952, turned to producing resins because it found difficulty in sourcing the product. Nuplex's resins and polymers are used within the coatings and paints for motor vehicles, tractors, trains, household paint and floors.

Traditionally the group has made the majority of its revenue from Australia and New Zealand, but with a shift to Asia and Europe, Australia and New Zealand, revenue is expected to contract from 58 per cent in 2008-09 to 37 per cent in 2014-15.

Chief executive Emery Severin told the Australian Financial Review last week that Nuplex will maintain its manufacturing presence in Australia and New Zealand, albeit as a more

streamlined operation.

"Our focus here is about being competitive. Returning above cost of capital returns," he said.

Severin said the manufacturing industry struggled the past few years with persistently strong dollars in Australia and New Zealand and cyclically low construction activity, and is tipping manufacturing consolidation.

"If it is small and labour intensive, it's going to be tough. If it is a business that is specialised and bulky, then it may be better off," he said. "I think it is certainly going to be smaller than what it was. How much? I won't hazard a guess at that."

In April, the Green Party highlighted data from Statistics NZ that showed 46 per cent of businesses surveyed saw the high exchange rate or exchange rate volatility as a major barrier to growth, while the NZ Manufacturers and Exporters Association (NZMEA) in September said an overvalued kiwi cost exporters $10.4 billion the past three-and-a-half years.

The sensitivity of many manufacturing and exporting businesses to the exchange rate has driven some, including the Greens, to call for intervention.

NZMEA boss John Walley recently lent his support to a Green Party proposal for "quantitative easing", the printing of more money to bring the exchange rate down. He said a debate on its use was needed.

"It is clear that New Zealand's exchange rate is the key problem behind our poor export performance, and the resulting job losses," he said.

While an overvalued currency might deliver "cheap imports and offshore holidays", that doesn't matter if you don't have a job. "There is a reason that the jobs are uneconomic - our policy settings overvalue our currency, and encourage consumption and investment in real estate over investment in productive industries that create growth."

But the Government is having none of such plans. In fact, Prime Minister John Key dismissed the proposal as "pretty wacky" on TVNZ's Breakfast last month, describing it as dangerous.

"If printing money made you rich, Zimbabwe would be the richest country on the planet, and it's not," he said.

Tru Test's Muir concedes the exchange rate is a challenge, but it's important for manufacturers to focus on the things they can control, he said. That means customers, products and the supply chain. The exchange rate does come up in internal discussions, he said, mainly around hedging arrangements. But it doesn't exercise management time day to day.

This year, Tru Test reported the local market was the standout performer, with 42 per cent revenue growth, with overall revenue up 22 per cent. Exporting, clearly, was tougher. Their results also highlight the centrality of innovation and continual process improvement.

One new product has gone gangbusters, Muir said. It is an RFID (radio-frequency identification) Stick Reader, a portable device to read tags on stock. This capability is now required as part of New Zealand's once controversial National Animal Identification and Tracing scheme (NAIT).

While NAIT was perceived simply as a compliance cost by some farmers when first announced, many now see it as a productivity tool, Muir said, helping to manage stock better and improve production and farm returns by understanding animals at an individual level.

NZ farmers are adopting electronic tracing at a much faster rate than farmers elsewhere.

He added that Lean, a continuous improvement technique, is a critical component of Tru Test's competitiveness.

That, and some good fortune.

"We shouldn't be unkind to mother nature. It was an exceptional agricultural year last year, warm and wet."

Sunday Star Times