Cover story: Made in New Zealand. Innovation nation. Myth or reality?

Stories of NZ enterprise success
This is the second article in major new eight-part NZ Management series: Stories of NZ enterprise success. Leading New Zealand business journalist Vicki Jayne conducts sector-by-sector review of the underlying drivers of success in key parts of New Zealand’s economy. Next month: The primary sector.

It accounts for nearly half our exports and around 12 percent of our GDP but New Zealand’s manufacturing sector is no place for the faint hearted. An ability to make stuff – even good and useful stuff – barely gets you to the start line when investment capital is in short supply. Scaling up to compete globally is whole other level of challenge.
Entrepreneurial flair is paramount – but it ain’t enough, notes business leader Sir Ken Stevens.
“It’s not just about coming up with better mousetrap but better marketing, branding, R&D – the whole ball of cheese. There’s lot of competition out there.”
As founder and chair of baggage-handling equipment specialist Glidepath, he’s had decades of experience competing globally, chairs Export NZ and is board member and trustee of the Asia New Zealand Foundation. And he reckons it’s tougher than ever.
“Markets are depressed. There are some glimmers of optimism in the software industry but manufacturing is dead – and that’s the case even in China, comparatively speaking. So that’s challenge.”
Kiwi companies are up against countries with bigger populations, deeper pockets and centuries of tough trading knowhow – and that’s before they start to deal with depressed markets and margin-decimating currency fluctuations.
But it’s not all bad. Against the odds, local manufacturers are adapting, evolving, building market share in global niches and growing exciting new business opportunities.
As Deloitte/Management magazine’s Top 200 data reveals, our more established manufacturers are global players whose product expertise ranges from food and fertiliser to resins and rubber. While it’s sector still playing to traditional strengths in land-based industries – food, drink, wool, wood – it also embraces high-tech, value-add offerings from frequency control solutions (Rakon) to health products (Fisher & Paykel Healthcare). Some Kiwi manufacturers are dominant players in their global niche.
And coming up fast behind the more established players are bunch of rapid growth operators whose expertise ranges from radio equipment and electromagnets to plastic containers. But is that all enough to put “a bit of welly” behind this country’s languishing GDP growth? Is the sector functioning in top gear or could it do better? What are some of the secrets to manufacturing success?

Fleeing the fortress
Innovation often born from necessity was trademark of early manufacturing in New Zealand. People like Henry Shacklock (stoves) and Thomas Edmond (baking powder) shifted the market game with new inventions. Factories were mostly small, though Chelsea Sugar – established in 1884 and still thriving in the same site on Auckland’s North Shore – employed more than 200 workers.
By the mid-1900s, import substitution ruled and fortress New Zealand mentality helped featherbed local manufacturing by whacking hefty tariffs on imported goods. But when protectionist policies were lopped from geopolitical lexicons in the last two decades of the 1900s, the sector took major hit.
Under regime of economic liberalism, New Zealand rapidly opened its doors to offshore competition – and factories started closing. Some regions were particularly hard hit – Wairarapa lost 25 percent of its manufacturing capacity, Central Otago 35 percent.
A wide range of cheap imported goods appeared; jobs disappeared. Big chunks of our manufacturing capacity moved offshore to take advantage of cheaper labour in places like Fiji, Vietnam and China. There were fears core manufacturing skills were also being lost.
But many companies continued to thrive. Fisher & Paykel Appliances has successfully morphed from local to global player. The company that started life in retail before gaining kick-start in manufacturing during the 1940s’ import substitution heydays now has manufacturing sites in Italy, Thailand and Mexico as well as Auckland.
The early embrace of R&D as driver for expansion paid off in terms of market penetration and by the time the company celebrated 70 years in business in 2004, appliance exports comprised 71 percent of total revenue.
“It has been impressive in terms of how it has internationalised itself in the past five years,” notes business commentator Rod Oram.
However, as our Top 200 stats over the past decade highlight, growth for many of our larger manufacturers over the past decade is often neither fast nor steady. After splitting from separately listed F&P Healthcare in 2001, F&P Appliances’ after-tax profits have generally fluctuated around the $50-$70 million mark on revenues peaking at around $1.5 billion in 2007. It seems case of running hard out just to stay in much the same place.

Challenges
Added to New Zealand’s natural disadvantages of size and distance over the past decade have been volatile exchange rates – and an inflating Kiwi dollar. Adapting to the vagaries of foreign exchange has been big learning curve. But the squeals of terror once heard as an inflating Kiwi hit the US$0.60 mark are now reduced to muted moans as it seesaws around the US$0.80 mark.
Numbed to the pain, perhaps – but local manufacturers are not only more au fait with financial instruments that help hedge against the vagaries of currency movements, they’ve also adapted their business models.
The sector has learned how to tough it out, says BusinessNZ’s executive director for manufacturing Catherine Beard. She talks about building exchange rate resilience – not through financial tools but by moving up the value chain to the premium end of the market where price point matters lot less than design flair, innovation and quality.
“Talking to different manufacturers, I think there is reasonable resilience in the sector. With tariffs phased out, they have to compete in global marketplace and the ones that are surviving and thriving have figured out the recipe for success.”
That recipe, she says, tends to be focusing on “short-run, bespoke, tailor-made solutions for clients”. Flexibility and customer responsiveness offer useful hedge against the world’s long-run mass producers.
“The companies investing in R&D to keep ahead of competition are doing best and there are some that actually dominate their global niche.”
She points to Gallagher Group, which started from farming roots with its electric fencing then diversified into security and high-tech farming systems to help build its dominant role in specialised market. Ballance Agri-Nutrients offers another example of building offshore clout from Kiwi farmer needs.
The bent for innovation that has trademarked Kiwi products from the early days of manufacturing is today also being realised in unexpected areas – like plastic storage boxes (see “Boxing champions” on page 26) But ongoing, well-targeted investment in R&D is something Kiwi companies don’t do as well as they could.

Innovation
“Powering Innovation”, report commissioned by the Ministry of Science and Technology and released last year, points out that our overall expenditure on R&D as percentage of GDP in 2010 was just 1.30 percent – well behind the OECD average of 2.33 percent and considerably less than in economies similar to New Zealand. Not only are we not investing enough but the links between industry and research establishments are patchy both in terms of information and personnel flow.
There is no overarching vision or direction and we lag behind OECD countries such as Finland or Denmark in terms of improving coordination and integration of R&D effort and investment. That is glaring capability gap given clear evidence of link between R&D and company profitability.
As IRL’s C

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