Absolutely positively in decline

By Rod Oram

Sunday 1st December 2002

They count Coke cans in Masterton. No, not the local Boy Scouts collecting aluminium, but a multimillion-dollar virtual stocktaking operation that services 35,000 vending machines across New Zealand, Australia, the US, the UK and Northern Ireland.

Unique technology invented and manufactured in the Wairarapa town lets the vending machines dial up and download details of how many cans they've sold. The data is then aggregated and analysed by computers at Marconi Online in Masterton, and pumped back overseas so bottlers can organise their delivery trucks.

What is this multinational wonder in the shadow of the Tararuas? Local electronics engineer Peter Munn founded the company in 1991 as Harvest Electronics. Having developed and proved the technology, then hooked Coca-Cola and Nestlé, he sold the company in 2000 to UK telecommunications giant Marconi.

Although Marconi is now in deep financial strife, the Masterton operation flourishes. It is researching applications like remote monitoring of a new generation of eco-friendly soft drink refrigerators, says software development manager Geoff Lawson. A refugee from Wellington five years ago, Lawson says he wouldn't swap his Wairarapa work and lifestyle to go back to the capital.

Imagine if Harvest/Marconi Online was just another everyday story of the new New Zealand economy: great technology, exceptional creativity, global relationships and well-rewarded serial entrepreneurs - all in a gorgeous rural environment to keep techies mellow and productive.

That's the vision some people have across the bottom of the North Island - and they have to make it happen because their region is struggling. For nearly two decades, the south of the North Island - from Wanganui to the Wairarapa, from Palmerston North to Wellington - has been losing the businesses that built its communities. Manufacturers, rural support services, financial services, headquarters, regional offices and big chunks of government have shrunk dramatically or moved out altogether. In October, WestpacTrust was only the latest financial services company to shift its national headquarters from Wellington to Auckland, taking 65 jobs with it.

Lots of people have gone too. Wanganui's population dropped 3.9% between 1996 and 2001. Palmerston North shrank by 1.5%. Wellington region's population barely tracked the national growth while hot towns like Hamilton put on 6%.

Rather than wring its hands, Wellington plunged into reinventing itself. Unlike other regions that will prosper from doing better what they do now - Waikato will have millions of cows for years to come - the south of the north can't make a future by revitalising what's left. It has to develop whole new sectors. It has to take some nifty specialities such as earthquake-proofing, films, museums, creative industries, optics and information and communications technology and build them into big new businesses.

The process has started. The region has spent 10 years turning itself from a rather dull place of government bureaucracies and heavy manufacturing (remember the Holden and Mitsubishi plants?) into the national capital for culture, creativity and cool.

It works for the domestic market and there's still some upside. Tourism accounts for almost 10% of the local economy and is the fastest growing sector, says Tim Cossar, chief executive of Totally Wellington, the tourism promotion agency. But 65% of that tourism traffic is domestic and very, very competitive.

So hip won't make it rich unless Wellington turns its new niche enterprises into global businesses. Only if the capital can internationalise its new industries will it have a secure future. It's a towering challenge. As Wellington's Regional Economic Development Agency (Reda) says: "Some of the newer businesses are extremely fragile and will require nurturing if they are to achieve their full potential."

Living in Cin

What's to be done? Call it the Cin strategy: clusters, incubators and networks. There's nothing new in this. Every regional economic development strategy is peppered with the words. In some places, there's even real substance to the aspirations, notably in Canterbury's well-established electronics and software clusters. But Wellington is trying a different tack.

Wellington has many more clusters, in many more new industries - even chairs. There are Formway chairs for the office; Racetech's for race cars and Metallion's for stadiums. While the G-forces on typists, race car drivers and rugby fans aren't the same, the companies are finding synergy. They are collaborating on a 3D printer, a tool for rapid prototyping, at local polytechnic WelTel. Victoria and Massey universities' design schools are involved, too.

All the clusters are desperately trying to be world class and worldly-wise. Creative Capital, for example, is a consortium of more than 30 companies in the creative arts. Last year, it pulled a number of members together to pitch for the development of a new national museum in Singapore. A useful card to play was the stunning success Te Papa has had in redefining the notion of a national museum.

The consortium narrowly lost out to a New York company but picked up several million dollars' worth of projects from Singapore's History Museum. Meanwhile, the cluster is still pursuing its big goal of whole-of-museum developments in a number of countries, says cluster co-chair Emily Loughnan. Five years from now, she believes it could be a big export earner.

Obviously, The Lord of the Rings is the biggest opportunity in international creative media. Peter Jackson's success is far more than an international film triumph. It is one of New Zealand's greatest entrepreneurial feats. By persuading Hollywood moguls he could do here something they had never dared try there - simultaneously shoot a whole trilogy - he landed one of New Zealand's largest foreign direct investments ever. The total sum has never been revealed but just the domestic spending on the project in the four years to mid-2002 was more than $350 million.

The capability developed by Jackson's company, Three Foot Six Productions, and its partners like Weta in special effects and digital production is awesome and the envy of Hollywood. But how can the sector build on it? There's no doubting the richness of creativity and technology in Wellington. What's missing, though, say film insiders, are other New Zealand producers who can stride like Jackson through Hollywood's corridors.

Without such deal-makers, New Zealand might never develop beyond a low-cost production centre for other people's films. It would be a living, but not one that would commercialise New Zealand's unique creative strengths, project New Zealand to the world or fulfil the ambitions for the sector articulated in the government's growth through innovation strategy.

Verdict: Clustering, particularly with strong international links, takes years to develop. Wellington has only just begun. It needs to rapidly increase scale, speed and capability and cultivate more heavy hitters like Jackson.

Incubating growth

Take the cable car up to the botanical gardens and you'll find a building that once housed Geological and Nuclear Science, the Crown Research Institute. Since 1998, though, it has been home to an organisation that claims to be New Zealand's first company incubator.

Innovation Greenhouse acts as mentor for people trying to commercialise bright ideas in information and communications technology. As a software developer, incubator chief executive Rob Acton practises off-site what he preaches on-site. With a staff of two, the Greenhouse is currently fostering 11 businesses, ranging from In the Know, which produces technology for Vodafone, to SpeechLab, a speech recognition software developer.

SpeechLab director Mark Forsyth says the Greenhouse offers a supportive and collaborative environment. Working with similar businesses to take care of the nitty gritty, such as negotiating with internet providers, frees up time and energy to spend on core strategic planning.

Part of the appeal is the tree-lined path to work every morning, Forsyth says. And when he needs peace and quiet, he retreats to the tranquillity of a nearby stream. But life for the incubator is hardly a bed of roses: it has to retain $95,000 of annual support from Industry New Zealand. It's a goal Acton is amped for. He provides the government with quarterly updates on the businesses' progress. While there are no guarantees, Acton is confident the government will continue to see the incubator as a valuable component of regional economic development.

Verdict: Even if incubators master their tricky art, their tiny graduates often find the outside world too hostile for growth. Wellington's best hope is to develop tight links between incubators and clusters. Then fledgling companies can get support and experience on the international stage.

Working networks

The third tool is networks - the real and virtual kind. CityLink has wired the CBD for broadband and CafeNet is setting up wireless broadband throughout downtown. The key market? The double-Java junkies: café-goers Googling while they gulp.

One creative form of people networking is Unlimited Potential (no relation), an organisation of some 500 young IT professionals. Their aim is to help each other and to promote Wellington as a hotbed of innovation.

But one kind of networking is proving more elusive: getting tertiary institutions and government-owned Crown Research Institutes to talk more to each other and to private sector companies. Wellington is well endowed with researchers but they are weak at commercialising.

On the positive side, new international links are developing. An optics cluster, for example, is part of the regional development strategy thanks to some strong core members such as Vega Industries, the Porirua exporter of navigation lights. To help get the cluster up and running, the founders have reached out to the University of Arizona, which has helped get similar initiatives off the ground in scores of other countries. No university here offers a degree in optics so one idea under discussion is distance learning, linking New Zealand students with academics in Arizona.

Verdict: Hooray for happy hours! But networking's real grunt comes from doggedly building and capitalising on commercial relationships - particularly abroad. Heavy-duty commercial connectivity in the region is still a long way off.

Still, some companies are getting connected. The power of internationalisation is evident at Interlock, the Wellington-based maker of window locks and accessories and a stalwart among local manufacturers. A long-established exporter to the UK, the US, Australia, Japan and other Asian countries, Interlock was bought in 2001 by Assa Abloy, the world's leading lockmaker group.

Interlock is now starting to reap the benefits, such as new capital and global advice on technology and machinery. The 130 companies in the group, including 75 manufacturers, are benchmarked monthly and Interlock's ultra-lean operations are consistently among the top 10 on issues such as on-time deliveries and cost of materials as a percentage of sales.

"We're a bit of a fascination for them," says Interlock chairman and chief executive Tony Gledhill. Even though the New Zealanders account for less than 1.8% of the group's $NZ5 billion of sales and 25,000 employees, colleagues visit in droves. In October, the Assa Alboy president, chief executive and four vice-presidents turned up. Next year, Interlock is running a management programme for 50 senior people from around the world.

But huge challenges loom. Interlock is likely to one day bow to pressure from US customers to manufacture over there to reduce lead times. And at home, despite making Wellington its sole research and development site so researchers can work alongside marketers, the company finds it hard to attract good staff to the Wellington operations compared with the plant in Albany. The latter benefits from the much larger Auckland labour pool. Another tough issue is the steady loss of local suppliers. In some cases, expertise is no longer available anywhere in the country. Some machinery, for example, is serviced from Sydney.

The growing internationalisation of business is apparent across the south of the North Island. Porirua is the perfect example. The town boomed in the 1960s and 70s thanks to manufacturers protected by import licences and high tariffs. Perhaps the zenith was 1975 when Prime Minister Bill Rowling opened the extensive Mitsubishi car plant. And just across the street, AWA, founded in 1913, was manufacturing televisions and other consumer products.

But free trade killed AWA a decade ago and the car plant by the late 1990s. Today, Radiola, a management buyout of a chunk of AWA, occupies part of the old Mitsubishi building. Among other things, it installs, services and calibrates foreign-made navigation equipment in aircraft, airports and airways. One big current contract is for re-equipping Moroccan airspace and it beat three European bidders to get the job. Turnover this year will be about $60 million, up from $34 million two years ago. "We don't think there are any handbrakes on the business," says managing director Brent Albiston.

An old AWA plant now houses Exicom, which makes radio equipment to connect remote phones to public phone systems. It exports to more than 70 countries. "We do everything Motorola does but with 75 people," says chief executive David Haynes. Exicom was also a management buyout, a phoenix from the ashes of AWA.

Vega Industries, a near neighbour, is equally upbeat. "In five years we'll double or treble the company," says marketing director Martyn Cook. Its LED-powered marine navigation lights are state-of-the art, satisfying demanding customers such as the US Coastguard.

Vega is deeply committed to building up New Zealand expertise. "We can't survive unless we have a raft of other companies around us," Cook says. "We work with them, sometimes paying a few dollars more than we would offshore. But if we bought offshore, we'd be feeding somebody else's economy and robbing our own." This is the litmus test: "If you're not a sustainable, globally competitive business, you're not even on the map and you're not helping to grow the region or the economy."

Verdict: Stars like these Porirua companies are role models for others in the region and the nation. But this is real missionary work. Amazingly, a mere 9029 companies in the entire country exported last year, according to Statistics New Zealand.

Structural support

Trying to do business at home is tough enough, let alone abroad. So how conducive is the local culture? Thankfully, it's taking a turn for the better, as Porirua shows. Recognising that being a seriously under-performing city in an under-performing region was a recipe for disaster, local leaders have embarked on a broad strategy to deal with the city's economic, social, image and other issues. "Porirua feels better about itself than five or six years ago," says Exicom's Haynes.

On the other side of the Wellington region, Hutt City is also working on a renaissance. The previous city leadership had done a good job of tackling the city's high debt, a legacy of some ill-conceived projects like a shopping centre, says Rik Hart, who came in as chief executive two years ago. The old administration had also streamlined processes, making Hutt City an easy council to deal with. For example, Hart says, it is one of the fastest Resource Management Act consent processors in the country according to national benchmarks.

The task now is to encourage the private sector to build on that. Hart, a New Zealander, had a successful career in economic development of a more interventionist style with the Victoria state government before moving to the Hutt.

One element of Hutt City's revitalisation is the saving of the Dowse Art Museum. Four years ago, it was under threat of closure. Then Tim Walker came in as the new director, charged with the mission to make the Dowse more relevant to the community. He did so by broadening the role of the museum to incorporate Hutt City's industries. One plan is for seminars coupled with an upcoming contemporary industrial design show. And next year, the museum will stage a New Zealand animation industry show.

As a result, the museum has grown from 72,000 visitors a year to more than 100,000 and is now seen as an integral part of the city's economy. The city council earlier this year agreed to fund a $1 million expansion of the Dowse that will open in 2004.

Embracing the Hutt's reputation as a science base and home to the likes of CRI Industrial Research, the Dowse is also working to facilitate the first annual artist/scientist residency.

That's a nice piece of local collaboration. But the danger is a plethora of "we're here to help you" agencies tripping over each other. This is not a problem unique to the region; it is one that is starting to surface across the country.

Wellington offers one telling example. Like any organisation trying to show it is customer-focused and performance-driven, Reda has drawn up key performance indicators. One measures how many local companies it has helped get grants from the likes of Industry New Zealand.

That's crazy. You shouldn't need one government agency to help get funds from another. If Industry New Zealand and agencies like it aren't easy enough for anyone to access via PC in 10 minutes, they're failing. Moreover, the sums they hand out are so small, there is no room for even a sliver of bureaucratic overhead.

Verdict: Economic development will only work if everybody plays a lean, focused part. Councils and agencies in the south of the north are starting to walk the talk but they aren't as switched on as, for example, Venture Taranaki.

Palmy gets it wrong ... and right

If building new businesses and forging new international relationships are to be the saviours of the economy across the bottom of the North Island, no community should be better placed than Palmerston North. Home to Massey University, major military bases, some big businesses and a rich agricultural hinterland, it should be booming.

But it's not. Its population has fallen during the past five years and it lags the country as a whole on many other economic measures.

For a regional centre, it is also imbalanced: agriculture, retailing and health services are disproportionately large compared with the national profile, while manufacturing, business services and education (even with Massey) are smaller.

Initially, the response to these problems was slow. Vision Manawatu, the local organisation tasked with developing a revival strategy, disappeared down a dead end for a couple of years. Under previous leadership, it had a single, myopic preoccupation with trying to make Palmerston North the "cargo hub" to the lower North Island.

"In the past, everybody came to meetings with their set-piece reflecting their position," says John Heng, who took over as chair of Vision Manawatu earlier this year. "They didn't come to listen or with a blank sheet of paper. We've changed that now. We're open and honest with the whole community to get buy-in for a strategy."

In its strategy document in April, the organisation finally showed some vision. It was also very blunt about a central problem. The campus at Massey, Palmerston North's university, "is isolated and lacks integration with the community - this is a key barrier for the region's growth."

Biotechnology, in particular, should be a mainstay for the local economy given Massey's strengths in agriculture. To achieve that, nothing less is required than "reinvigorating the science and research faculties at Massey and the [local] Crown Research Institutes around a new sense of purpose and commitment to the region ... Without [this], parts of the research establishment will migrate from the Manawatu."

Progress remains painfully slow. University and town have yet to agree, for example, on where to site a "technology transfer centre" to bring business and academics together in commercialisation projects. A symptom, perhaps, of the road bridge linking the two communities. It curves sharply as it crosses the Manawatu River. Come at it from either direction and you can't see the other end.

But blame is due both sides of the river, suggests one local business leader. "The city has a group of privately owned, very traditional companies that have done really well on the national scene. They are the dominant employers in the city and they give a great deal to it. They are exceedingly generous and they live real triple-bottom-line management. But they are slow adopters of new technology and are not in high-value-added businesses."

There are, though, two hopeful examples of the sort of corporate and academic ventures on which the future of Palmerston North, and indeed the bottom of the North Island, depend.

Click Clack is a design-led, high-value exporter with sales of more than $50 million a year and an R&D spend approaching $5 million. Its high-quality plastic food and beverage containers sell through major retail chains in the US and elsewhere. It is the largest single user of polycarbonate plastic resin in Australasia. It also makes brushes, mostly for industrial use.

"With 360 employees, we're a very, very small global manufacturer," says John Heng, chief executive and chair of Vision Manawatu. And it's truly international. It runs the same CAD-CAM software as Boeing, with one difference: it has four ProEngineer terminals while the world's largest aircraft-maker has 2400. When Click Clack recently advertised on the internet for a ProEngineer designer to work in Palmerston North, it had 73 applications from around the world.

One of Massey University's best bets is its Institute of Veterinary, Animal and Biomedical Sciences. Building on its excellent reputation, it has worked hard to gain accreditation for its degrees from the American Veterinary Medical Association. The process was time-consuming and cost over $1 million in direct and building costs, says Grant Guilford, head of the institute. But finally in March it got its accreditation, becoming only the fifth vet school outside the US so recognised. The recognition has brought a lot of interest from overseas students, academics and researchers keen to work with it, Guilford says. It has also raised morale at Massey.

And the institute is pushing harder to commercialise more of its activities - such as Professor Roger Morris's EpiCentre, the world leader in animal epidemiology tracking dreaded diseases such as foot and mouth and BSE (bovine spongiform encephalopathy, or mad cow disease) in the UK (see "Money from mad cows page 54"). But the efforts are proceeding very slowly. Juxta Enterprises, the institute's commercialisation arm, was set up in late 2000. It is so low-key, some of the leaders of the region's economic development strategy haven't heard of it. It has looked at some 30 ideas so far but has yet to do a major deal.

That's light-speed compared with others on campus. Landcare, an on-site CRI, admits it has scientists that have spent a decade studying the fungus that causes botrytis on grapes. But it was only this year that it signed a joint venture with Genesis Research and Development in Auckland to try to commercialise the work. Botrytis plagues viticulture worldwide and a cure would have huge commercial value, not to mention expanding New Zealand's reputation for great grape-growing and wine-making into highly respected viticulture science. Taking more than 10 years to even think about commercialisation is a scandal.

Verdict: As with vines, so with the lower North Island economy. Tender shoots of new industries are tentatively reaching out to the world, searching for colleagues and customers. But they need to discover an antidote to small scale and slow growth, the botrytis of the knowledge economy. If they don't, they will wither.

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