Hi-tech Holds the Secrets to Success

Secrets to Success

Which is more Kiwi? Sauvignon blanc and pinot noir, or respiratory humidifiers and sleep apnoea breathing masks? One is a $1 billion industry that has been carpeting hillsides in stubby ranks of vines for the past 30 years and successfully lowering the nation’s average wage through its employment of unskilled Tongans, Thais and Brazilians.

The other is a single company, Fisher & Paykel Healthcare, which exists almost invisibly in a South Auckland factory zone and alone earns New Zealand around half what our wine exports make.

The problem, says Sir Paul Callaghan, Victoria University professor of physics and the 2011 New Zealander of the Year, is Kiwis don’t actually know what success looks like. We talk about catching up with Australia, but think that means more mining, dairying or tourism. However, hi-tech is where it is at. It is the only way New Zealand can be rich again, while still having the environment we love.

And if that is true for the country, then it is especially true for Canterbury and Christchurch, trying to rebuild their economies after a shattering series of earthquakes. Which is why it is good news that this week, Christchurch City Council took a first step towards making an innovation campus a “hero project” for the new central business district.

Some 30 Christchurch small hi-tech businesses displaced from old buildings by the quakes have said they want to now cluster their activities all in the one shared part of town.

Led by Wil McLellan of games developer Stickmen Studios and Colin Andersen of corporate IT consultant Effectus, the group says a world-class technology campus of quality green buildings in a desirable part of the CBD would create an innovation ecosystem that generates ideas and start-ups, attracts youth and money.

Andersen says there are the international contacts to make it something special. Google’s director of global real estate, Christopher Coleman, who has built many of the search engine giant’s campuses, and Craig Nevill- Manning, a Canterbury University computer science graduate who founded Google’s New York software engineering centre, are just two who have offered to advise on the design.

If it comes together, says Andersen, the project could have a spectacular impact on Christchurch’s future. The earthquakes have thrown all the bits of the city up in the air. Now there is an opportunity to rearrange them to better advantage.

And a central city hi-tech hub would finally spell out for New Zealand what success in the modern world looks like.

People have been saying it for years, of course. New Zealand needs to catch the knowledge wave. Creative cities are the drivers of modern economies.

But speaking at Strategy NZ, a forum on New Zealand’s future direction held at Parliament earlier this year, Callaghan says while we know the story, we seem to have forgotten it, or decided it is too hard, because again the country has been drifting back into talk about the money- making potential of agriculture and the extractive industries. Water the Mackenzie country and grow cows. Bring in diggers to mine the conservation estate. The same old, same old.

Callaghan says this route just cannot work. In an assessment of the numbers, he says New Zealand was once rich. As measured in terms of gross domestic product (GDP) per head of population, we easily matched Australia in the mid- 1970s. And both countries were well above the international average.

But ever since, New Zealand has been sliding down the rankings. We now stand 35 per cent behind Australia and 20 per cent behind even the OECD developed nation average.

Worse still, we have become one of the most unequal countries – seventh from bottom of the 33 OECD nations – and one of the hardest working to boot.

Bringing up a chart, Callaghan says some countries like Spain and Greece are also low productivity like us, but at least they work shorter hours.

Pointing to France, he says the ideal situation would be to be like it, because they somehow – nobody is quite sure how – manage to be both a high output and low hours economy. France stands a whopping 45 per cent above the OECD average on productivity, yet works 75 per cent the usual hours.

New Zealand is then way across the other side of the chart, says Callaghan, working 12 per cent longer weeks for 20 per cent below OECD average results. And the reason is simple.

“We are poor because we chose to be poor. Our education system is as good as any – the French, the Danes – but we chose to work in low wage activities.”

Just to maintain our current dismal national performance, the average Kiwi worker needs to be producing $125,000 a year in business earnings. To match Australia, we would have to lift that productivity to $170,000.

Yet the wine industry, one of our recent proud successes, earns just $90,000 for every employee. So planting more vineyards is another way to impoverish ourselves further, to bring down our productivity average, says Callaghan.

The story is the same for other bright hopes like tourism.

“What does tourism earn? About $80,000 a job, about two-thirds of what we need. The more tourism, the poorer you get. Tourism is great for employing unskilled people; it is absolutely not a route to prosperity,” says Callaghan.

Callaghan says food production – farming and fishing – earns about exactly the $125,000 national average. No surprise as that sums up much of New Zealand’s economy.

But clicking to his next chart, Callaghan shows why we are currently willing to jump through nearly any hoop to get more cows on the land. When it comes to dairy and milk powder, the average income per worker shoots up to $350,000. “Without the dairy industry, New Zealand would be desperately poor,” he says.

The problem, says Callaghan, is that closing the gap with Australia would require we increase our exports by $45b a year. And we can’t do that through more dairy. There just is not the pasture or water for a quadrupling of the national herd. Which leaves hi-tech as the only realistic option for the country.

Technology businesses can produce extraordinary returns, says Callaghan. An Apple or Microsoft is making $2m per employee, a Nokia or a Samsung some $1.3m.

Despite the widespread belief that New Zealand is not really a manufacturing country, Callaghan says as a sector, it rivals dairy. And the average GDP per job is $240,000 – already pretty healthy. However, our successes are hidden.

Callaghan says the 10 top hi-tech firms earn a total of $3.9b a year. Yet because they seem rather a patternless crew, a random assortment of businesses, the country pays them little attention.

Top of the list is Fisher & Paykel Appliances, the maker of drawer dishwashers as well as traditional fridges and top-loader washing machines. At $1.1 billion in sales, the whiteware manufacturer is still hanging in there against stiff international competition.

Second is the payroll and IT services company Datacom, which earns $600m and employs some 3000 staff in New Zealand.

Then third is where it gets interesting, says Callaghan – F&P Healthcare, an off- shoot of Fisher & Paykel born way back in the 1960s when an Auckland Hospital intensive care specialist wanted a machine to warm and humidify the air for patients on life support machines.

A No 8 fencing wire solution involving a wet filament in an Agee preserving jar has since been developed into the world’s top-selling line of medical humidifiers. F&P Healthcare sells more than anyone else.

F&P Healthcare has then had a second success in the market for sleep apnoea breathing masks. With a new factory in Mexico and plans to boost its research and development (R&D) staff from 300 to 600 by 2015, the firm says there is little stopping it from doubling its sales over the next five years, then doubling them again in the five years after that.

Medical equipment is not as sexy as wine, but Callaghan says it’s a business that can keep growing. And at around $280,000 per employee, it is getting us into the “catching up with Australia” zone.

The rest of the top 10 list offer similarities. Most of the firms have roots going back quite a few years, so their success is not overnight. But there is little else that connects them.

The list includes Christchurch’s Tait Electronics, which specialises in emergency service radio systems, and oven-makers Moffat. There is NDA Engineering and Gallagher, which both do spin-off from agricultural origins in producing stainless steel tanks and electric fences respectively. But then there is steroid manufacturer Douglas Pharmaceutical and GPS chip-maker Rakon.

Callaghan says outside this top 10 are fast-growth names the public will barely recognise, let alone know what they do, like Allied Telesis, GlidePath, Navico, FrameCad, Endace and NextWindow.

It is critical to understand why there is this apparently random pattern to our successes, he says. New Zealand is small – just 0.2 per cent of the world economy. “So we’re not going to make flatscreen television sets, we’re not going to make computers.”

But by the same token, a hit product in some niche market, like fire service radios or intensive care humidifiers, comes with a built-in 500 times multiplier for us. The potential global market is 500 times larger.

So the natural strategy for New Zealand is to get good at dominating niches. It doesn’t really matter which. The most obscure kinds of businesses can still become our national champions, says Callaghan.

Callaghan says New Zealand must start spending more on R&D. At the moment, we could hardly be more cheapskate.

Israel invests 4.3 per cent of its GDP in R&D, the US 2.5 per cent. The OECD average is 2.1 per cent and Australia – getting by on its mining – is low at 1.6 per cent. But New Zealand is right at the banana republic level of 1 per cent.

To get the most from this meagre spend, Callaghan says governments have attempted to be too clever.

“They’ve said, we’ve got to play to our strengths. So what do we do? Oh we’re good at farming. Well maybe we ought to try biotechnology. That was the game 10 years ago.”

So whereas the US and other countries invested about 20 per cent of their research budget on biotech, Callaghan says New Zealand went overboard with 60 per cent.

“What did it result in? A great big zero.” And now, he says, the search is on for the next fad. “Wow, we’ve got a new thing. Maybe its clean tech. We’re clean and green, so let’s focus on that.”

But New Zealand has to expect success in niches, and those will be widely scattered, he says. So we need a broad base of R&D activity. And then an entrepreneurial ecosystem that will translate ideas into products.

The task is big. Callaghan says to catch up with Australia, we need 100 more companies doing as well as our current top 10. And this is another reason why we have to think past mining, dairy and the other obvious choices.

Callaghan says creative people always have a choice about where they live. So do they want to be in a country where the environment and scenery are busily being sold off? Where inequality and other social issues are not being addressed?

“A hundred inspired entrepreneurs could turn this place around. A hundred individuals could earn us $40b a year in exports and get our prosperity up with no environmental downside.

“And so the fundamental mission statement for us has to be ‘a country where talent wants to live’.”

Christchurch YikeBike creator Grant Ryan recently had a nice surprise. He bumped into a technology lecturer at Christchurch Polytechnic (CPIT), newly arrived from Canada.

“The guy said one of the reasons he moved to Christchurch was because of the YikeBike. He said if they’re doing that there, then maybe I’ll go work in Christchurch.”

Ryan, an entrepreneur behind a number of hi-tech ventures and keen backer of the new Enterprise Precinct and Innovation Campus (Epic) project, says this proves how creative people want to be where the ideas are happening.

And a technology hub of perhaps 50 or 60 small companies all in one corner of the CBD would put Christchurch on the world map.

“We want a cluster of people doing interesting things. It would be aspirational. If you’re good enough, you get to hang out with these other companies, which is kind of cool.”

Ryan says there is the idea it is about harnessing Kiwi ingenuity, local talent. But really the aim should be to attract the best overseas skills through the lifestyle on offer.

The YikeBike, a foldaway dwarf electric penny-farthing that made Time magazine’s cover as one of the 50 best inventions of 2009, has been developed by an international team, he says.

“Going round our office, we’ve got Americans, British, Portuguese, Dutch, German.

“The reason why Silicon Valley works is not because people from Silicon Valley are all smart. It’s because go to any meeting there and the people across the table will be from Brazil, Fiji, India, everywhere.”

The Enterprise Precinct and Innovation Campus is planned to come to fruition in four stages. The suggestion is for first some temporary offices in Manchester Street to build up a core of tenants before moving into a larger purpose-built campus in three or four years time. Ryan says SLI Systems, a search engine venture run by his brother Shaun Ryan, hopes to be an early anchor tenant, while YikeBike plans to join the second phase.

There is talk that Science Alive!, the children’s educational science attraction in the old Moorhouse Avenue railway station, would be part of the hub. “You could tie it in so kids see that there are these interesting, fun, jobs in town.”

The Canterbury Innovation Incubator, an existing centre for hi-tech start-ups that had been using another old building in Armagh Street, could be another natural partner, Ryan says.

Ryan says you can see how it would work. Christchurch has had a budding hi-tech scene for some time. There are all sorts that have been happening.

As well as the many web companies and games developers, don’t forget Christchurch’s Glenn Martin, whose Jetpack made Time’s top inventions list in 2010. Or Chris Bathurst, whose Solray Energy has been turning algal sludge into biofuel at the Bromley sewage ponds.

Like Callaghan says, there are many weird and wonderful niche businesses being explored. Now the earthquakes are a chance to showcase the city’s talent. People still might not recognise the names, but they would see that here was a place with a plan.

TOP 10 The top 10 NZ technology companies ($3.9b total annual earnings)

* Fisher &Paykel Appliances – whiteware
* Datacom – IT and payroll services
* F&P Healthcare – medical humidifiers
* NDA Engineering – stainless steel vats
* Tait Electronics – emergency radios
* Douglas Pharmaceutical – steroid medicines
* Temperzone – commercial air conditioning
* Gallagher – electric fences and security
* Rakon – quartz crystal oscillator chips
* Moffat – ovens and ranges

#SRC# Source: Technology Investment Network TIN100 report 2010

John McCrone

To find out how we can help you access R&D grants, contact Simon Lempriere of DynamicResources at simon@dynamicresources.co.nz or 09 236 0082 and 021 721156

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