How to catch the wave

Wednesday 1st August 2001

Everyone's talking about the knowledge economy. Enough of talk. Plenty of companies are already carving up the knowledge wave. In the next installment of the "This way up" series, Rod Oram finds seven ways Kiwi companies are doing, not talking.

Peter Maire, technologist and entrepreneur, thinks it's time to do the next big thing. He's calling it Phase Three. After 13 years in business, the founder of Auckland manufacturing firm Talon Technology, says: "We're still an ant. We're one grain of sand on the 90-mile beach of the world market. To survive, we've got to go to the market as fast as possible and as large as possible. It's time for an all-out, worldwide strategy."

This is no rush of blood to his brains. It's a campaign carefully crafted from the outset in 1988. Talon Technology began by designing instruments for recreational boats, subcontracting manufacture to companies in Singapore and later Auckland. Phase two saw Talon manufacturing here but selling under the brands of big distributors, then through global consumer names such as Motorola. Not a bad business, but not good enough for Maire. He has now triggered Phase Three, setting up marketing companies in the UK and US to sell Talon's GPS, navigational and other instruments under its own brand.

Soon the name Talon will go, replaced by the Navman brand. Again this is no flash in the pan. He bought the name for $1 in 1995 from a European company. He licensed it back to the company, which has spent the last six years building the brand up for him in Europe. "Navman's a killer name for a company that has a development strategy like ours," says Maire.

What's the hurry? To keep up with his foreign competitors, Maire needs more of everything: feedback from the marketplace; relationships upstream with suppliers and downstream with customers; and more cashflow to fund ever-more research and development. The last thing he needs is to give away a chunk of his margin to a mega-brand owner to secure distribution. He's ready to go solo, big time.

New Zealand needs more Maires, badly. Our exports are a mere 35% of GDP, a paltry figure for a small island economy at the far end of the world, dependent on trading for a living. By comparison, Ireland's exports equal roughly 80% of GDP. Game over? No.

Consider this important fact: Ireland's success is not really by its own hand. Foreign multinationals account for 88% of Ireland's exports of goods. Worse, they account for 96% of its exports of services, the really knowledge-rich end of trade. The secret is out. The Irish themselves aren't very good exporters. And now that their country's a relatively expensive place to do business, they're dead worried that multinationals will move on to lower-cost countries in, say, eastern Europe. So they're scrambling to lock in the multinationals, fast-forward science, technology, research and development, and make entrepreneurs out of the indigenous Irish.

Our problems are worse - we'd dance in the streets if we scored a single big exporting plant from a multinational or could afford educational funding of Irish proportions. But we've got a few things the Irish don't have: a culture of innovation, some strengths in entrepreneurship and a lot of exporting experience. Some 75% of our exports of goods and 90% of our exports of services are by indigenous New Zealand companies. That is a great start.

Trouble is, like Talon, the country needs more of everything, and we won't find it at home. We have to earn it or attract it from abroad. But how? We're so short of human and financial capital. The answer ? Knowledge, stupid.

A number of great Kiwi companies are already out there, successfully surfing the knowledge wave. Here are seven knowledge-rich and cunning strategies to take on the world:

1. Be a gorilla

Like their African namesakes, these beasts command large shares of the regional jungle or, at best, the world. Clout counts, giving them the financial, human and technological resources they need to remain dominant. Homegrown gorillas are particularly desirable. They generate big benefits for their own countries: research and development; manufacturing; employment; exports; and a rich network of suppliers, scientists and spin-off companies.

Some of Finland's fastest growing companies are suppliers to its homegrown gorilla Nokia; some of its most interesting high-tech start-ups were hatched by Nokia alumni. We have a smallish native New Zealand gorilla - the new Global Dairy Company, which is teetering on the edge of greater success, depending on first smoothly merging the Dairy Board, Dairy Group and Kiwi Co-op. But it's the only one.

Our dairy industry already has a 35% share of the world's free trade in dairy products. Making really big money will hinge on two key areas of knowledge: first, about value-added products, markets, distribution and marketing; and second, about biotechnology. Global Dairy needs plenty more knowledge of both areas, and robust cashflow to fund them.

We'll have an inkling a year from now if Global Dairy has what it takes for granddaddy gorilla steps. By then it will have to operate as a seamless business on its present model (commodity and semi-value-added products). It will also need comprehensive plans in place for biotechnology and the first draft of a strategy to conquer the world. Global Dairy can give a lot to New Zealand, but it will also rightly demand a lot: an excellent educational system, practical regulation for biotechnology and genetic modification, and a supportive business environment.

2. Become the child of gorilla

We don't have the natural advantages to breed many more native gorillas, so we must foster children of foreign gorillas. New Zealand subsidiaries of multinationals can play big roles in their parent's regional or global strategies, generating economic benefits here. We have only a handful of such strapping children because most local operations serve only this market. Two welcome exceptions: Carter Holt Harvey in forestry, child of US-based International Paper, and Comalco New Zealand in aluminium, child of international mining giant Rio Tinto.

Carter Holt works on two geographic fronts: building out its Australasian base and expanding in Asia. Earlier this year, for example, it partnered with its parent, with each buying 25% of Pacific Millennium Paper Group, a Chinese-based distributor serving China, Hong Kong, Japan, Korea and Southeast Asian markets. It certainly has to do something. A towering mountain of wood coming up to harvesting age confronts our forestry industry. If the industry gets its investment in processing and marketing right, it believes it can vault from 19th among world forestry industries to fifth by 2025.

"Radiata pine lends itself to international markets in pulp and paper," says Chris Liddell, Carter Holt's chief executive. "That's not sexy, but we're targeting the fastest growing markets in the world." And some of the hardest. In the past, the company was production driven. Now it's driven by knowledge of its markets. But it's hard to learn the distribution channels around a network of Asian cities or to understand what packaging we can supply to a Chinese manufacturer wanting to ship televisions to the US. Some of Carter Holt's regional payback could be driven by globalisation. For example, International Paper aspires to be a worldwide sup-plier of packaging to fast food chain McDonald's, with Carter Holt covering Australasia.

Can we foster more children? Yes, if we think laterally. Classically, multinationals farm out their manufacturing children to low-cost, low-wage, low-tax economies. Ireland is beginning to discover the downside as some plants relocate to lower-cost countries. Thankfully, we're so far away from major markets that's not our problem.

Large-scale manufacturing in New Zealand only makes sense for a few multinationals, like International Paper, where there is a clear natural advantage. But what does make sense is for more multinationals to site research, development and small-scale manufacture in New Zealand. In other words, ride our brains not our brawn. Trouble is, we're not too good at thumping our chests and pitching for the job, and we haven't got our act together. We need to get real with more and better scientists, lower taxes, and a truly welcoming business environment. That said, a few smart companies are succeeding as the gorilla's brains.

3. Be the gorilla's brains

These New Zealand subsidiaries of major multinationals feed great ideas, products, skills, services and yes, people, into their parents' global organisations. We Kiwis are valued for our creativity, problem-solving ability, teamwork and tenacity.

But we're not just good. We're also cheap. Here are three examples:

• Saatchi & Saatchi New Zealand is regularly sent knotty advertising problems from the agency's global network.

• Around the world, professional services firm KPMG is implementing a system for managing relationships with clients. It was developed by Peter Lemon of its Wellington office, now responsible for the global rollout of the process.

• Carter Holt has set up a subsidiary to handle global licensing of its innovations in packaging and other areas. It is one of the 33 entrepreneurial mini-companies the group has split itself into. "We're encouraging International Paper to think of us as a test bed in innovation and business organisation design," says Liddell.

4. Be a gorilla's friend

To help them conquer the world, each gorilla relies on a troop of suppliers and mates. Signing up with one is a great way for small exporters to plug into the world. Native gorillas tend to favour native mates, so it's easier to link with them than a foreign multinational. Our potential one and only, Global Dairy, has 14,000 farmers in its troop, not to mention a host of suppliers such as Amcor and Carter Holt on packaging. Unfortunately, some chunks of the dairy industry's inputs have already fallen into foreign hands. It imports virtually all its machinery, for example, ranging from tractors to milking machines. Gallagher's electric fencing is an honourable exception.

Theoretically, the industry is large enough to stimulate clusters of domestic software and biotech businesses - the new frontier of dairying - around it. Here lies bad news and good news. The Dairy Board recently ran a global tender for an internet tool to allow its worldwide employees to search unstructured databases with the organisation. It was a local job, with the software to be installed in two New Zealand computer centres, but it was also a superb global showcase. Software from five vendors was analysed before the Dairy Board chose Autonomy, a UK product sold in New Zealand by local company, Gen-i. The Dairy Board won't say if a New Zealand software company was on the shortlist.

Maybe a Kiwi company couldn't have done the job. But as a country are we doing our damnedest to give each other a chance, or do we believe the best, by definition, inevitably comes from overseas?

The good news is that Kiwi Co-op's web service, Fencepost.com, has developed some nifty software to allow farmers to track and analyse their cows' performance online, offering suggested remedies for problems. The company is in discussions with a major software company about introducing the software in the US market.

Relationships like that are beginning to spring up with other multinationals. Intel is working closely with a number of New Zealand companies to spur applications of products and services for its latest microprocessors. Two examples involve Intel's StrongARM chip: Talon is building it into its latest in-car GPS navigator, and start-up Electronic Data Holdings is using it for a rugged handheld livestock data logger that can read and write information to a tag in each animal's ear. "We're drawing on Intel's worldwide technical expertise and they're working hard to make the chips commercially attractive to us," says Douglas Irving of EDH. Once manufacture of the devices starts next year, EDH expects to deepen its relationship with Intel.

Intel is putting marketing money and other forms of support behind Right Hemisphere, the Auckland developer of world leading 3D-artwork and animation software which run on Intel chips. The US multinational can escalate its involvement in companies by taking an observer seat on boards, putting in venture capital funds or, ultimately, buying them. It has yet to do any of these in New Zealand although two years ago it acquired Dialogic, a US developer of telephony software, picking up its New Zealand research centre in the process.

"We're not altruistic. We're focused on building our business," says David Bolt, Intel's Australasia general manager. He has three staff members handling relations with the likes of EDH and Talon. One role is to "help them through the maze of dealing with a large company".

In a globalising world, multinationals get ever bigger and less nimble. Smart ones recognise this trap and voraciously seek out innovators and entrepreneurs who can enhance their businesses. New Zealand companies are not yet good at playing in that space, but there's clearly rich potential for them, particularly in IT and biotechnology.

5. Be a salami slicer

These are the real heroes: New Zealand companies that have carved themselves a very large piece of a very thin regional or world market. It takes vision and innovation, played out with great determination and confidence through a long-term strategy. Salami slicing is an excellent way for small companies to develop a world presence. The niche might be so small that success fails to attract competitors, but there is an ever-present risk that the market will suddenly disappear because of, for example, a radical technological change.

Each salami slicer has its own story about how it developed such an envious position. A common theme, though, is the entrepreneurial vision. Even the greatest natural advantage languishes unless somebody has the nerve to grab and run with it. Here's one inspiring example of a New Zealand salami slicer:

Auckland electronics company Rakon makes quartz crystals used for the frequency control devices which are at the heart of Global Positioning Satellite (GPS), mobile phones and other electronic equipment. Founded in 1967 in anticipation of surging demand for crystals, the company took a big leap in the 1980s when the development of mobile phones triggered demand for higher tolerances. Rakon responded by inventing its own technology and manufacturing processes. Then, GPS required even better crystals. Today, Rakon has a 50% share of the world market for the GPS critical component and a big market share in mobile phones, all supplied from Mount Wellington.

Rakon likes to keep a low profile. On its website, the company says because it is relatively isolated in New Zealand, it hasn't had the luxury of a support industry offering the services and equipment used in other quartz crystal manufacturing factories. "This has forced Rakon to develop a lot of manufacturing equipment from the ground up, giving an intimate knowledge of the manufacturing process that harvests high performance products and excellent yields." It appears to have paid off, with Rakon saying its revenue has doubled in the past three years.

6. Be a Gemini

These are partnerships in which a company here "twins" with one abroad. This goes beyond collaboration or joint ventures. It is a true, complementary sharing of expertise and opportunities. One of the best examples is Galloway.

Galloway has linked with SPI of Canada to create Galloway SPI Asia Pacific. The Auckland company brings world leading technology in rotational moulding and a New Zealand design aesthetic to -products such as recreational boats and children's playgrounds for McDonald's worldwide. SPI brings North American and UK market knowledge.

7. Be a Netizen

A netizen is a NZ citizen of the worldwide web who uses the internet for export, but hardly ever travels abroad to push their sales. Call it exporting without jet lag or deep vein thrombosis, if you like. Their motto is, "Put the product on your website and they will buy". Unlimited features an example in this month's Transformer - Queensberry, the Waitakere maker of upmarket albums for professional photographers.

And how's this for a quirky one? Carrie and Jeff Evans began roasting coffee in Tauranga seven years ago. They realised people wanted to be educated about making good coffee, so they built a website. Even though it was designed purely for information, it started getting hits from people abroad who wanted to buy the Evans' brand of Excelso Coffee. They had found the site through search engines. "I ran down to the bank and asked them how I could take money over the internet," Carrie says. "That's how we started e-commerce." Today, Excelso is exporting roasted coffee made from imported beans to Russia and other countries. Even more remarkably, it is exporting imported Italian espresso machines to Indonesia, via Australia. (Perhaps one day the Italians will figure out they can cut out the middlewoman in Tauranga.) Meanwhile, the Evanses are profitable netizens.

So, armed with seven sensational strategies we can conquer the world? Not yet. We've got to ramp up the resources to do so, although to a large extent we can earn or attract them through our gorillas and salami slicers. That's providing we develop the right mindset. "We're nowhere near international enough in our outlook or aspiration," says Andrew Grant, head of the New Zealand arm of international management consultant McKinsey.

It's an issue Maire of Talon understands completely. He's hailed as a New Zealand success story, but only by comparison with other Kiwi companies. He prefers a far tougher benchmark, his world competitors. Take US company Garmin. It does its R&D in the US, is domiciled in the Cayman Island's tax haven and manufactures in Taiwan where it has a five-year tax holiday. This year, Garmin's sales will be about $US450 million, some 45 times Talon's. And the two companies started life around the same time. That's why Peter Maire is in such a hurry. If Talon doesn't quickly trade up to being a bigger, smarter, faster company, its competitors will leave it for dust. For Talon, read New Zealand. And there's a dire warning in the story.

Maire struggles with three big handicaps: a serious shortage of engineers and other skilled staff; a high tax rate compared with, for example, Hong Kong (where his competitors pay 16%); and great distance from market. The first two can be fixed to counteract the third. And to some extent the third could be mitigated further if the country was gripped by an international, export-oriented mindset. As Maire sees it, time is running out for New Zealand. "Five years from now Talon will not look much different to what it is today. Our sales, however, will be five times bigger and we will have a lot of offshore operations. The head office will not be in New Zealand."

Rod Oram
oram@clear.net.nz

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