Opinion: Technology companies returning to radar screens

By Catherine Harris of NZPA

Sunday 25th June 2006

Since the Nasdaq bubble burst six years ago, technology companies have had a hard row to hoe.

Suddenly, listed companies which sold on the whiff of a good idea, were in many cases deserted by investors, and fledgling companies trying to get started were greeted with extra suspicion.

Added to that were the (largely) uniquely New Zealand factors - the scarcity of venture capital, high R&D costs, high freight costs and the fickle exchange rate.

However, a new study shows the local tech sector regaining ground - or least the top 100 of them.

The list, compiled by the Technology Investment Network or TIN, shows the Top 100 earn roughly $4.7 billion and employ 19,000 people.

Many are not well known because they are private. A number, including Navman, have been snapped up by foreign owners.

They span a wide range of criteria: from the high technology of Navman and Tait Electonics, to the biotechnology of Douglas Pharmaceuticals, the IT of Datacom and the digital media wizardry of Weta Workshop.

While the sector is as prone or more prone to failure as any other, success stories are encouraging.

A quick survey of the last fortnight's headlines includes:-

Market applause for Fisher & Paykel Appliances' expansion in Europe via Italian cookware company Elba

The sale of successful Auckland-based Douglas Pharmaceuticals' Australian distribution business for $70 million

A state grant of more than $500,000 to help Christchurch company Nano Cluster Devices Ltd commercialise a promising nanotechnology product.

Biotechnology and life sciences have long been vaunted as the Next Big Thing for land-based New Zealand but commercially it is still a small player, accounting for just 6% of the TIN 100 revenue.

High technology still dominates the technology landscape, accounting for 70% of total revenue and IT generates less than 25%.

Whatever they do, the most successful technology companies, according to TIN, have the same common factors: Strong, experienced leaders, and hard-won critical mass through offshore marketing and distribution.

They then use their channels to distribute new innovative products (think Fisher & Paykel Appliances spinning off its respiratory products under Healthcare).

The problem, says TIN's managing director Greg Shanahan, is that it can take 20 years to develop.

Fisher & Paykel Appliances, which has become New Zealand's first billion-dollar technology company, began diversifying its products in the 1960s.

In the 90s, a Pharmac decision found Douglas Pharmaceuticals without half its business and was forced to turn to the export market.

Even GPS componentry maker Rakon, which had investors clamouring for shares when it listed on the AX last month, had a 30 year track record to draw on.

That, says Navman founder Peter Maire, is what makes normally venture-capital shy Kiwis put their money on the line.

But after the big players are counted, Maire says he cannot think of too many other technology companies which have the critical mass needed to go public.

Their focus is of necessity on offshore markets, they're capital-hungry and more likely to do a private sale.

Maire is one person putting his expertise and money to work in other companies.

Having sold Navman to a US company last year, he advises the Government and is using his investment company to plunge money into a string of companies.

He knows that he could go to Singapore with any of his fledgling interests and get a raft of incentives - including a tax holiday, a $10m grant, a company tax of 20% and all sorts of R&D help.

He doesn't because "I've had a good run here. It's a great place, I love it, I've invested back in a few technology companies and I want to see them do better in New Zealand".

So who will be the next big players?

Some have suggested there are rich pickings in the Government's State Owned Enterprises.

The Business Roundtable, led by Roger Kerr, has heaped scorn on minister Trevor Mallard's suggestion SOEs expand their business interests.

This, says Kerr, would be risky to the taxpayer and encroach on an area which the private sector has been proven to do much better.

It seems unlikely the Government will heed that advice, but if the Roundtable's estimates are right, SOEs contain $1 billion a year in potential spinoffs.

Waiting for them will be the stock exchange, which has lost many listings through takeovers recently and is openly touting for business.

In March the NZX started a "SciTech" index with 23 stocks, including Rakon.

Interestingly, three technology companies bypassed the NZX stock exchange completely when they listed last year.

Observers say that is because London or Sydney have more comparable companies and a greater depth of specialised investment houses and analysts to draw on.

It's not all bad here.

As Maire points out, US investors did not abandon Fisher & Paykel Healthcare when it decided to decamp from the Nasdaq a few years ago and concentrate on its listing here.

The business environment here will never be perfect, but observers say there have been some sea changes in the technology scene lately.

For a start, it's much more competitive. The Internet, cheap air travel and the emergence of China have shrunk the world and global consolidation is rife.

"It's twice as competitive doing business in a technology business this year as it was say three years ago," Maire says.

"If Navman were doing today what we were doing five years ago, it would be impossible. Margins have halved in three years in that area, it's very, very difficult to be a player."

The growth of the Venture Investment Funds (VIF) has also been very positive, he says, with the Government sharing the risk with private venture capital firms to encourage slightly riskier investments.

However, Maire believes there are some cultural issues here that make it hard for technology.

New Zealanders still tend to put their money into real estate, and the Reserve Bank still tends to raise interest rates to bring housing into line, sending the exchange rate upwards, Maire says.

New Zealanders also fail to celebrate business success, and our companies find it hard to network, venturing into exporting by trial and error.

And, says the Navman founder, New Zealanders battle with a cultural reluctance to hand over a share of their companies in order to fund growth.

"If you look at the history of Navman, we spent 10 years basically bootstrap growing the company and in 10 years, we only got sales to like $5m but then it took us only another $6m (investment) to get to $250m in sales.

"The reason for that was we finally decided to bring equity investment into the company. You have to reach that decision where you say it's better to own 10% of an elephant than 80% of a mouse."

The key, says both Peter Maire and Greg Shanahan, is not money but good management and good venture capitalists can be invaluable. So are good leaders.

"If you look at, say, Douglas Pharmaceuticals, they're growing like crazy. So how many people are asking Graham Douglas what he's doing in terms of trying to learn from that," he said.

"What you need to do is try and pull the average Kiwi who's got a few spare dollars and get him to stop buying commercial buildings and rental houses and get him to put that money into funding technology companies.

"The way to do that is to give him some incentive to do it."

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