Feature: PNG'S MANUFACTURERS seize the moment

(Reproduced from our recent edition of Made in PNG 2011)

'We have experienced a growth rate of about 15% per annum over the past five years,' says Michael Kingston, General Manager of manufacturing firm, K K Kingston. 'As a result, we are now bursting at the seams and so have purchased 10 hectares of land to build a new production and distribution centre.'

K K Kingston may be one of the resounding success stories of PNG's manufacturing sector, but in many ways it is also highly representative. The company, set up in 1972, shares traits with many of PNG's larger manufacturers. It is based in PNG's industrial capital of Lae (with a smaller production site in Port Moresby), is comparatively diversified and supplies predominantly the domestic market.

The company is not unique in its commitment to a major expansion program. When it completes its relocation to Kamkumung on the outskirts of Lae, K K Kingston will become neighbours with the Lae Biscuit Company that inaugurated its new facility in April 2010.

Spreading their wings
Lae Biscuit's K65 million factory represents a landmark for the company.

'It has enabled us to double our Lae workforce as well as improve the quality of our product,' explains Chief Executive Officer Ian Chow. 'We're also planning to expand our Port Moresby facility where we currently employ another 200 or so people.'

PNG's manufacturers are certainly spreading their wings. S P Brewery, which dominates the PNG beer market, is close to completing a K94 million expansion program, including a new brewing facility in Lae, while Coca-Cola Amatil has invested more than K4 million in a CO2 plant in Lae and will be spending over K30 million on a state-of-the-art production facility and supporting renovations in Port Moresby.

Paradise Foods has aggressive plans for further expansion and extensions to their wide product range. The manufacturer of biscuits, snack food, corn chips and noodles is PNG's oldest food manufacturing business and is 100% nationally owned.

Wave of investment
This wave of investment is being underwritten by an array of blue-chip institutions. S P Brewery's largest shareholder is multinational Asia Pacific Breweries, while its largest local shareholder is one of PNG's two powerful superannuation funds, Nambawan Super, which also owns 80% of Paradise Foods. Meanwhile, major agribusiness company Mainland Holdings has just sold a substantial stake to PNG's other superannuation company, NASFUND.

As for K K Kingston, its growth is being underpinned by significant investments it recently received from the regional Kula Fund and the private sector arm of the World Bank (the IFC).

Most remarkably of all, New Britain Palm Oil Limited, the star of PNG's agribusiness sector, completed a suitably stellar IPO on the London Stock Exchange (it is also listed on Port Moresby's stock exchange) in 2008 before acquiring a controlling stake in PNG's major sugar and beef producer, Ramu Agri Industries.

This kind of blue-chip international interest in PNG's productive sectors could scarcely have been imagined even a decade ago. If it is a measure of how far the country in general and the sector in particular have come, it also implies a widespread belief that strong growth will be maintained in the long term.

Industrial parks
'There has been a significant shift of economy over the past seven or eight years, with annual GDP growth in excess of 5%,' says S P Brewery's General Manager Stan Joyce. 'We see continued growth in the beer market for the next 10 years and we believe that the LNG project will, not so much directly but indirectly through the flows that it creates here, be quite strong.'

Of course, PNG is very much a developing economy. Viewed through the lens of a beer glass, that equates to a per capita beer consumption of just 10 litres per year compared with 20 litres in South East Asia and 75 litres in Australia.

PNG's manufacturing sector reportedly employs around a quarter of the formal workforce and is responsible for anything between 6% and 11.5% of GDP. This provides the PNG Government with a strong incentive to protect and develop this sector. It is also keen to encourage import substitution to improve its balance of trade position.

Indeed, its Medium Term Development Strategy prioritises the need to develop the country's downstream processing industries and identifies industrial parks as a central plank of the strategy by which this will be achieved. However, its goodwill is tempered somewhat by political forces: external pressure to liberalise international trade and internal pressure to keep the cost of living down and keep the lid on PNG's galloping inflation rate.

Logistical challenges
Despite the flurry of investment from existing manufacturers, there has been a conspicuous lack of foreign investment in new operations (with the exception of PNG's fisheries sector), although as we went to press a Chinese firm announced its intention to invest US$27 million in a footware factory in Port Moresby.

As one executive at another multinational manufacturer in PNG pointed out, PNG can be a formidably expensive place to set up a manufacturing business at present. For a start, land is at a premium in Port Moresby and Lae. Rents in the capital are sky-high by any standards and are said to have doubled in Lae in the past two years.

Also, PNG's productive sectors present a very tough operating environment even for those who know the market inside out. Even the best resourced firms must pick their way through a minefield of logistical challenges daily, pushing up costs and reducing efficiency.

'A significant expense in doing business in PNG is security and vehicle repair and maintenance,' says Coca-Cola Amatil General Manager Colin McVea. 'Fluctuations in power supply and at times regular power cuts require heavy investment in backup generators to run our manufacturing facility.'

Water supply is also erratic, as even guests at Lae's business hotels can testify. What is an inconvenience for a hotel guest, however, is downtime for most manufacturers.

'We go through about 30,000 litres a day of water, and we had no option but to invest in a back-up supply system even though it represented a big investment,' says K K Kingston's Michael Kingston.

Positive note
On a positive note, a range of infrastructure projects are in the pipeline, including one to increase the capacity of PNG's largest port of Lae (see page 9). For the time being, however, severe congestion there means that manufacturers need to stock excessive quantities of raw materials to ensure their production output can be maintained.

Michael Kingston puts this in perspective:

'When I talk to people internationally, they can't believe the volumes of stock we have to hold. Ten stock-turns a year might be conservative; we are currently working on just four.'

This situation also encourages manufacturers to be as self-sufficient as possible.

'We try to produce all of our packaging onshore,' says Ben Frame of diversified manufacturers Laga Industries. The Lae-based company, which is majority owned by PNG conglomerate Steamships, is in the process of installing new equipment to produce plastic in-house, as well as a plastic bottle producing facility, as part of its entry into the unlabelled bottled water market.

Demand for skills
If PNG's mining and petroleum boom is a major factor in the revival of its manufacturing base, the interests of the two sectors do not always coincide. One example is that manufacturing firms are losing skilled workers to the resources sector.

'The mining companies are sucking up some of our best workers,' concedes Ian Chow of Lae Biscuit Co. 'Although some of them do come back again after realising they don't like living in the bush.'

Naturally, increased demand for skills is also pushing up wages.

'We're under no illusions about salaries in the current environment,' one manufacturing executive told Business Advantage, 'we stay competitive or we lose our staff.'

Further wage pressure was applied in 2009 when, in a controversial move, the PNG Government more than doubled the country's minimum wage to K2.29 an hour. While an increase was long overdue, employers criticised its scale as being too sudden and unaffordable.

Nearly two years later, the consensus among the manufacturers we spoke to was that it had simply encouraged them to increase the level of automation of the production lines to the detriment of local employment.

Quality products
These factors also make PNG's manufactured goods less competitive internationally. However, progress is being made in the export arena, primarily within PNG's own region. As MCPNG President Murray Woo explains, 'Given that PNG has the largest domestic market in the Pacific region, its manufacturing sector enjoys certain economies of scale that provide opportunities for our manufacturers to export products to smaller markets in the region.'

In particular, the neighbouring Solomon Islands represents a quasi-domestic market for PNG goods.

But such a high-cost environment also begs the question why foreign firms elect to produce onshore for the PNG market rather than simply exporting to PNG, and how locally owned producers fare against imported goods.

Japanese-owned PNG Taiheiyo Cement has operated PNG's only cement plant since 2000. Makoto Kagamida explains that it is precisely the combination of raw materials imported from Japan and a strong local manufacturing presence that enables his firm to provide the best possible quality of product to its customers.

'We put extensive effort into quality assurance beyond anything a cement importer could do,' he says.

Customer service
Global paint manufacturer Dulux has maintained a manufacturing presence in PNG for more than four decades. National Sales Manager Doug Bell says that around 80% of what they sell in PNG is produced onshore. He has no hesitation in identifying speed to market as a key benefit:

'We get a lot of customised orders for larger projects and need to be able to produce on-demand with a short lead-time.'

Customer service is also cited by Mal Lewis, CEO of Hornibrook NGI, as a selling point for his fabricated steel business.

'If someone sources from offshore but an error occurs, perhaps in the drawings, what happens then? We can easily intervene to fix the problem. In one case, I am sure we made more money fixing the string of problems that arose from a job that was done offshore than we would have if we'd done the work in the first place.'

Of course, local manufacturers are also protected by tariffs on certain imported goods. However, these have dropped considerably since PNG's accession to the World Trade Organisation in 1996.

According to Chey Scovell of MCPNG, 'PNG presently ranks in the top 10% worldwide for low tariffs, an anomaly considering our state of development.'

The MCPNG's position is that further tariff reductions should be linked to the amelioration of the high-cost environment in which local manufacturers operate. This wish was granted, temporarily at least, in the 2009 national budget when a moratorium on tariff reductions was imposed. However, negotiations underway for a new PACER Plus trade agreement, to underpin trade between the Pacific Islands, Australia and New Zealand, could put pressure on the moratorium to be lifted.

Major challenge
Unsurprisingly, the low-tariff environment provides a major challenge for local manufacturers, especially when non-compliance is factored in.

'We struggle with parallel importing in PNG, where cheap imports enter from Asia,' says Colin McVea of Coca-Cola Amatil. 'The established duty should apply, however we have found that sometimes goods are under-declared. We employ over 800 people directly and source some raw materials locally and as such, we'd like to see more done to support local industry.'

The MCPNG recently revved up its 'PNG Made' promotional campaign to promote quality local goods.

So what is the attitude of PNG consumers towards locally produced products?

'We have had an established "PNG Made" campaign for several years now and I believe we are succeeding in creating a "PNG Made" identity,' says Colin McVea. 'There is support for what we are doing and the reasons behind it. Papua New Guineans are very proud of their country and what they have done over the years. They are quite parochial about "PNG Made". I don't think we realise how powerful the brand and logo really is.'

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