Papua New Guinea’s manufacturers experienced difficult conditions in 2015 and many are concerned that things will get worse before they get better. David James talks to some of the key figures from the sector to find out how they are coping with the tough market circumstances.

SP Brewery’s Port Moresby plant. Source: Business Advantage International

The strategies business leaders adopt in difficult economic circumstances determine the company’s capacity to survive and its ability to benefit when the economy improves.

Many of Papua New Guinea’s manufacturers are facing just such a period in which they have to make difficult choices. Some are employing highly defensive strategies; others are more prospective.

‘You are just more conservative,’ says Stan Joyce Managing Director of SP Brewery, PNG’s largest brewer.

‘A number of manufacturers have wound back their operations simply due to the fact they can’t source their inputs.’

‘You protect what you have got, which is still a lot more than what we had before we started out on this wonderful journey. We will wait for the next wave to come through.’

Commodity prices

Manufacturing accounts for about 7 per cent of PNG’s GDP, according to the International Monetary Fund. The economy’s heavy dependence on resources industries means that the fate of manufacturers is heavily affected by what happens in the global commodity markets.

The Manufacturers Council’s Chey Scovell

Nowhere is this more evident than in the availability of foreign exchange. Chey Scovell, Chief Executive of the Manufacturers Council of PNG says many PNG manufacturers are struggling.

‘A number of manufacturers have wound back their operations simply due to the fact they can’t source their inputs,’ he says.

Michael Kingston, Chief Executive of KK Kingston says getting foreign currency is the number one issue. ‘The biggest challenge on everyone’s lips, and we are no different, is foreign exchange—obtaining sufficient foreign currency to pay our raw materials suppliers,’ he says.

‘We are a fairly diverse company so there is quite a long list. It includes things like palm oil, plastics, chemicals, paper. We are not just grinning and bearing it, we are trying to find solutions to make the situation a bit more bearable.’

‘We have to follow the kina down and it has affected the margins—Ruben.’

Pete Celso, Managing Director of R D Tuna Canners in Madang says the company does not have a problem sourcing goods ‘but sometimes we have to wait and line up for foreign currency.’

The kina

AkzoNobel’s Mikael Ruben

A second problem, related to the shortage of foreign exchange, is the level of the kina. Mikael Ruben, Managing Director at AkzoNobel PNG, says it affects his company’s profit margins. ‘We pay in US dollars, so of course that means that everything will become much more expensive,’ he says.

‘We have several expats working in the company who get paid in foreign currency, so of course if the kina weakens that is also an additional operational cost.’

Joyce says one response is to move to local suppliers when possible. ‘There is no doubt we are doing that, you can do those things to mitigate it.’

Infrastructure

The quality of infrastructure is an area of great concern to manufacturers, although Scovell says there have been many advances, especially with the roads. He says the government has invested in infrastructure ‘really for the first time since independence’.

The approaches of PNG’s manufacturers differ depending on the nature of their business and their position in the market.

Ruben says the problems are nevertheless ongoing. ‘We have all the infrastructure matters: power cuts, water shortages, and high operational costs, shipping around the country to our customers,’ he says. ‘That impacts on all the operational challenges of the company.’

Mud slide on the Highlands Highway. Courtesy: Peter Korugi

Joyce agrees, pointing especially to the high cost of the internet and the lack of consistent power. ‘There are always logistical challenges. The Highlands highway is another one.’

Celso says R D Tuna Canners has to take on the cost of its own infrastructure needs, due to a dearth of local competitors.

This includes power plant, ice making plant and refrigeration plant. ‘We have the number one cold storage facility in PNG.’

Different strategies

The approaches of PNG’s manufacturers differ depending on the nature of their business and their position in the market. Jean-Michel Lejeune, General Manager at Goodman Fielder PNG says the company is taking a long term view and embracing a counter-cyclical approach.

Ruben says AkzoNobel, which makes paint, is looking to regain market share that it lost during the construction of the PNG LNG project, when other competitors entered the market.

‘Many manufacturers developed inefficiencies during the boom, which they are now addressing.’

Celso says R D Tuna Canners is expanding in an effort to achieve greater scale and efficiency. ‘The only way we can survive is to reduce our costs,’ he says.

Kingston says KK Kingston’s mix of offerings provides a ‘useful hedge’. ‘When mining is down, fortunately our exposure to the more general consumer market and the general commercial industrial markets acts as a nice buffer against the downturn in the mining sector.

K K Kingston’s Michael Kingston

‘That said, when there is a downturn in the mining sector it eventually flows through to the consumer sector and the commercial and industrial sector as well.’

Productivity

Scovell says many manufacturers developed inefficiencies during the boom, which they are now addressing. ‘It revved up so fast and was so big a lot of companies just threw money and people at problems.

‘This downturn has put them in a position where they have had to maximize all their efficiencies—invest a little bit more in upskilling some of their people so they can improve their productivity a little bit.’

Scovell says manufacturers should ‘batten down the hatches’ and not expect a turnaround until the end of 2018. ‘What most businesses are really interested in now is how they are going to manage out of the bottom, when we take another fall down.