Industry concentrations, and the fall of Think Big?

The COVID-19 pandemic has had major ramifications for the New Zealand economy and put a spotlight on the structure of local economies. One of the key determinants of how regional economies are performing is how much of a focus they have on either of the tourism or primary sectors. But a bigger issue looms for some areas, with some key industrial players rapidly reassessing their future, which could remove a substantial chunk of activity from some local economies.

Infometrics has previously written about structural economic differences and economic diversification, and this article provides updated analysis on some defining characteristics of New Zealand’s local economies.

End of an era for anchor Think Big projects

Anchor industries, some of which sprung up in the 1980s during Muldoon’s Think Big process, are now seriously considering, or have announced, closure or significant reconfigurations. It would be unfair to solely attribute the cause of these changes to COVID-19, but the pandemic has certainly exacerbated and accelerated issues already being faced for some areas.

  • The Marsden Point Oil Refinery, operated by Refining NZ, was expanded as a Think Big project between 1981 and 1986 to assist with domestic fuel supply. However, the cheap supply of fuel from offshore means that Refining NZ is now considering turning the refinery into a fuel import terminal only.
  • The Glenbrook steel mill, operated by BlueScope Steel, was expanded as a Think Big project to assist with steel manufacturing production. Various price and cost pressures have seen the mill struggle, with BlueScope now readying to lay off staff, downsize, and possibly cease operations.
  • The Tiwai Point Aluminium Smelter, operated by the New Zealand Aluminium Smelters (NZAS) Limited joint venture, had a third production line added in the early 1980s. Operations were kept going thanks to a government subsidy in 2013, but high energy costs and lower aluminium prices have now led to the major shareholder 
     the wind down and closure of operations.
  • Methanex, which includes plants at Waitara and Motunui that were both constructed as Think Big projects, has also cut production and signalled a tough road ahead.

These large industrial employers are important for local economies. Marsden Point contributes 11% of Whāngārei’s GDP, Glenbrook represents 7.5% of Franklin Local Board’s GDP, and Tiwai accounts for 4.0% to Invercargill’s GDP. Together, between 2,300 and 5,500 jobs could be lost from these three major employers if all operations were to cease.

These concentrations highlight a need to understand other concentrations across New Zealand.

Industry concentrations: same, same, but different 

The industry concentrations across local economies show some interesting similarities and differences. One way to examine concentrations is to look at the largest industry in an area. Performing this analysis yields Chart 1, with several economies showing similar industry concentrations.

Broken down by GDP, 20% of all local economies have dairy cattle farming as their largest industry, with 17% having a health care and social assistance focus, and 11% concentrated on sheep, beef cattle, and grain farming. Employment also shows similar focuses, with 41% of local economies having health care and social assistance as their largest employer, followed by 12% with dairy cattle farming, another 12% with sheep, beef cattle, and grain farming, and 11% with accommodation and food services.

These areas with similar industry focuses are likely to be affected together by changes in economic conditions. However, other areas, with more unique industry concentrations, are more exposed to specific events and downturns that could disproportionally affect them.

The COVID-19 pandemic has highlighted this fact, with the seven local economies with accommodation and food services as their largest industry being hit hardest by New Zealand’s border closures and travel restrictions.

Just how overexposed might some regional economies be?

The number of areas with the same largest industry don’t always tell us the full story when it comes to evaluating how exposed some economies might be to an industry. In an update of our 2013 analysis, we have also examined the level of overexposure of each local economy, based on local economic concentrations relative to the national average. Essentially, a local economy that has a high concentration in an industry that makes up a much smaller proportion of the national economy is more exposed to the fortunes of that industry. Chart 2 shows the level of exposure on an employment basis, in keeping with our 2013 analysis.

Some areas haven’t seen a substantial increase in their exposure between 2013 and 2019. Indeed, some South Island economies have seen a reduction in their relative exposure, with Buller and Gore shifting from high to moderate exposure. However, several North Island economies have seen their relative exposure increase in health and administration areas.

Tourism concentrations can also be easily identified, with Kaikōura, Mackenzie, Queenstown-Lakes, and Westland all having a much larger share of local employment in accommodation and food service jobs.

Something to fix, or something to be aware of?

It is important for local decision makers, businesses, and the public to be aware of local economic concentrations – indeed, these insights will be of no surprise to many. However, this analysis doesn’t necessarily mean that things need to change, nor that they should. As we outlined in 2013, often these concentrations are based on natural endowments, previous investment decisions, and other factors.

But we do need to keep these local economic concentrations, and the exposure they can bring, in mind as we react to the COVID-19 pandemic. Preparing plans to diversify local economies to reduce exposure invariably leads to a focus on a new industry, which is too close to our fear of “picking winners” that can lead to path dependence for local economies. The fact that the closure of 1980s-era Think Big projects is now posing significant risks to some regional economies highlights the difficulties that can be created by subsidised or government-mandated investment in specific industries.

Given the risks surrounding the 1980s-era Think Big projects, it will be important to prepare support for these local economies to cope with any closure-induced upheaval. Having visibility over how these concentrations could affect a local economy means that decision makers are starting on the front foot when issues emerge, rather than scrambling to understand the size of the problem.

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