Fuelling the export high-fliers

How many globally competitive companies do we have? How many more do we need? How do we help them become so?

Those are the three critical questions at the heart of our economic challenge to earn a bigger living in the world economy.

Seeking answers, the New Zealand Institute began a massive research project in 2005 entitled "Creating a global New Zealand economy". Early on, its analysis showed we had grown our exports and outbound foreign direct investment (FDI) more slowly than other OECD members.

Thus, we were the only OECD country to become relatively less engaged with the world economy over the previous 15 years. As a result, our per capita income languishes in the lower ranks of developed nations.

The institute's further analysis led it to conclude in July 2006: "Achieving an additional $35 billion of exports by 2020 will require an additional three Fonterra-scale companies (current exports about $10.5b), or about 500 Rakon-size companies (current exports around $70 million), 150 Pumpkin Patch companies (current exports over $200m), or over 2300 companies the size of 42 Below (current exports around $15m).

"To achieve the $18b FDI target will require 18 $1b investments to be made over the next 15 years. This is the equivalent of about seven transactions a year that are the size of Fonterra's recent purchase of 43% of San Lu in China ($153m)."

Fonterra is probably a special case. The dairy sector is a big chunk of our economy and exports. Moreover, the nature of the industry and international trade were good reasons for pulling most of the sector together into one large company.

It seems highly unlikely we can replicate the big-company answer in other sectors. But we can achieve the same goals by helping a very large number of much smaller companies become internationally competitive. This model has worked very well for Germany and Italy, for example. One of their strengths is relatively small, family and privately owned export businesses.

We currently have about 350 globally competitive companies, according to analysis by the Icehouse, the entrepreneurship centre at the University of Auckland's business school. In addition, we have some 400 domestic market companies that are equally competitive, judging by their ability to win business here from foreign rivals. Potentially, many of them could become exporters.

But to meet our economic goals we need four times as many. And each needs to be two to three times bigger than those 750 typically are today, says Icehouse chief executive Andy Hamilton.

Through a variety of programmes for the likes of owner-managers, agribusinesses and high-tech start-ups, the Icehouse has worked with some 500 companies since it was founded in 2001. It reckons 150 of them are internationally competitive and another 90 will be soon.

Analysis of the first 280 companies through the programmes showed that 23% were manufacturers, 17% in service, 11% in retail and the rest in other sectors; some 45% were exporters; but of those, only 14% generated more than 60% of their sales overseas while a further 46% of the exporters generated 10% or less abroad.

But they have been growing faster than typical for such sized companies, judging by national benchmarks. Between the 2005 and 2007 surveys of Icehouse alumni, the owner-manager companies grew their sales on average 27% and earnings before interest and tax 40%. Their average profit margins were 27%.

Joining the programme in a cohort of 25 other companies "opens your mind to advice and reality", says Hamish Whyte, owner of Furnware, a Hastings maker of classroom furniture. "We found everybody has the same problems. You don't feel lonely any more."

Developing a supportive network of like-minded companies, learning new skills and gaining access to advisers has helped Furnware strengthen its point of difference and accelerate its growth. It had a record year to March with exports contributing 10%. This year business is still strong around the world. It plans to lift exports to 25% of sales, helped by opening offices in Melbourne and Dubai.

While Icehouse and similar programmes around the country are helping more companies become internationally competitive, we would, on current trends, take 20 years to develop 3000 big ones, Hamilton reckons. He is calling for national strategies to fast-forward the work. For its part, the Icehouse is planning to help a further 350 meet the goal over the next five years.

Similarly, NZTE has long argued for focussing its programmes on some 500-600 companies, leaving smaller ones to use more generic sources of help through, for example, regional economic development agencies. The government recently agreed to let it combine some programmes as a step towards that goal. As a result, it will be able to invest potentially up to $1m in each company, matched in part by their financial contributions.

Flagship NZTE programmes include Manufacturing Plus which helps companies identify and develop strong global niches; Lean Manufacturing, which helps them develop operational excellence; and Better by Design, which helps them apply design disciplines to company structure and culture, product development, brands and other essential ingredients in generating high-value goods and services.

Manufacturing Plus companies succeed by carving out niches in which they either lead internationally or face no real competition, says Mike Pratt, the former dean of Waikato University's Management School, who works intensively with them.

A number of them have also gone through the Lean Manufacturing and Better by Design programmes to develop a full suite of skills. For example, Pacific Aerospace is an international leader in building light aircraft for skydiving. But that is a highly volatile market.

Better by Design helped it understand the aircraft was perfect for freight and passenger use from extremely short airstrips in rugged equatorial conditions. It is a large market in which the few competitors offer old-technology aircraft adapted from general aviation.

Learning lean manufacturing, the discipline of continual improvement, enabled the company to halve the build time for each aircraft, thereby sharply increasing manufacturing capacity with minimal investment, says Damian Camp, its chief executive.

Likewise, Comvita, the maker of specialist healthcare products from manuka honey, has used all three programmes to help it create a new business model to support its rapid international growth.

It began learning lean manufacturing by using an outside consultant but quickly moved to bringing an expert on staff. One result was a 20% cut in inventories in its global supply chain within a matter of months.

"We freed up cash, settled debt ahead of schedule, achieved greater efficiencies and reduced frustrations," says chief executive Brett Hewlett.

There are many more companies like these around the country. They have done a terrific job over the past decade or so to get themselves to the point they can now thrive on rapid international expansion in these very difficult times. Many of them are unknown to the wider business community. All deserve high credit for what they have achieved and help in achieving much more.

Creating 3000 of them in the next 15 years is just our next big challenge, building on all the rest we've tackled since we began transforming the economy in 1984.

Disclosure: Rod Oram works occasionally with all these programmes.

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