High-tech sector beats the bank

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Last updated 10:15 31/10/2011

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It's been over a decade since the Catching the Knowledge Wave conference in Auckland that, like many other similar talkfests, aimed to chart a course into a new economy built on high value, differentiated products and services that would deliver quality jobs, and an improved standard of living to New Zealanders.

Since then, progress has been hard to discern. Every year, promising local companies are sold into foreign ownership, often long before they have reached the scale of their full potential.

In June, business columnist Fran O'Sullivan lamented the apparent lost years since the Knowledge Wave conference, saying in retrospect it was "too much about conversation and too little about action".

"But where are the big raft of high-tech and service companies that should also be spearheading New Zealand's overseas performance and providing young New Zealanders the opportunity to work from here?" she asked, castigating successive governments for being "far too slow and far too slack when it comes to implementing a big agenda".

This year's TIN100 report, a census of our high technology companies, is an emphatic response to such lamentations.

The 2011 report, the seventh in all, tracks a turnaround since last year, with companies achieving good levels of growth, particularly in the information and communications (ICT) area, where revenues grew 13%.

But, more importantly, it runs a measure over our high-tech sector that highlights its increasing importance and contribution to the New Zealand economy.

Revenue recorded in the report passed $7 billion for the first time, up from $6.7b in 2010, off revenue growth of 5% - which would have been higher but for unfavourable exchange rates with the US. That cost TIN100 companies around $100 million.

The high-tech sector, though, is now firmly established as our third biggest exporter, said Greg Shanahan of the Technology Investment Network, which produced the report. The report covers three sub-sectors - ICT, biotechnology and high-tech manufacturing.

"This year, exports grew by 4% to over $5b and shows further growth potential," Shanahan said. Companies were able to exploit growth opportunities, particularly across the Tasman, where export revenues grew by 10%.

Australia is where the current action is, said Shanahan, assisted by a more favourable exchange rate. Sales across the ditch, for instance, were a big boost for manufacturers such as Methven and Fisher and Paykel Appliances.

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Combined Australian and Asian revenues accounted for 40% of total revenue among TIN100 companies.

Local businesses are also achieving scale. Thirty percent of companies have revenues of over $50m, another first.

Companies with even higher revenues, between $50m and $100m, grew by 15% during the year, evidence, Shanahan said, of a maturing sector that is becoming defined by larger, more capable companies.

New Zealand's scale, often seen as a barrier to global success, may in fact be driving innovation here. Shanahan said that because of our small economy, companies have developed technologies to create efficiencies that are not available through scale, earlier than in other countries.

"Technology offers the opportunity to develop solutions that simultaneously add value and reduce cost. This enables businesses to achieve efficiencies not so dependent on scale, establish a unique market position, and enjoy higher gross margins that enable further investment in research and development," Shanahan said.

Another feature is a spreading adoption of lean manufacturing techniques that drive continuous improvement.

Companies are also investing more on research and development, a promising sign for the future. Research and development spend grew by 15 per cent and employment in research and development grew by 16% across the 200 companies.

R&D spending averaged 5 per cent of revenues, but in some areas was over 10 per cent (telco solutions, 18.1 per cent, financial services solutions, 12.4 per cent, and production and materials handling, 11.6 per cent).

Shanahan notes in his report that the CEOs of New Zealand's high-tech companies spoke of innovation designed to "intersect with future value points" rather than being reactive to market conditions, in other words, the need to take risks in developing a solution ahead of its time as a competitive strategy.

By sector, IT services and support and healthcare lead growth, with healthcare breaking through the $1b revenue mark. Financial services solutions showed big gains, as did production and materials handling equipment.

The report charts a resurgence in manufacturing. Companies such as Scott Technologies, NDA, Rakon, Temperzone and others are mentioned.

Biotechnology remains a small proportion, 5 per cent, of TIN100 revenue, but even here there were strong performances from companies such as Argenta, AFT Pharmaceuticals, Pharmazen, and Canterbury Scientific.

The top-10 emerging companies by growth recorded revenue nearly double that of the previous year. Profitability for the 11 listed TIN100 companies jumped from a $11m loss in 2010 to a $156m profit in 2011. Fisher & Paykel Appliances returned to profit after two years in the red.

TIN100 companies on average filed two new patents and released four new products per company in 2011.

However, it's not all positive. At the other end of the scale, there were more failures, with four companies from 2010 ceasing operations. There was also an increase in foreign acquisitions, not necessarily a bad thing if the price is right, or there are constraints on further growth. Companies such as Electropar, Mcom, EMS Cortex, Aptimize, Commtest, Prism Software, Bomac, and Right Hemisphere were sold.

But, in the end, this is about transforming and diversifying the New Zealand economy.

"Our enthusiasm for the technology sector is not based on the fact that that technology is cool or elitist. It has a scalability that agriculture or tourism cannot provide," said Shanahan.

And that delivers quality opportunities for our best and brightest: the 200 companies employ a record 30,000 staff.

ABOUT THE TIN100

The TIN100 report monitors data from New Zealand's largest 100 technology exporters and 100 emerging companies in the areas of ICT, High Tech Manufacturing and Biotechnology.

It is produced in association with Industrial Research, as well as with sponsorship from New Zealand Trade and Enterprise and the Ministry of Science and Innovation.

The report has become a critical reference for benchmarking the performance of the New Zealand's 200 largest globally focused technology companies, report author Greg Shanahan said.

To be included, companies must be in one of three sectors, IT service and support and software development, high-tech manufacturing or biotechnology; have originated in New Zealand; have a minimum of 10 per cent of their revenue outside of New Zealand; and have a minimum revenue threshold.

THE BOTTOM LINE

A TIN100 revenue growth - 5 per cent

A TIN100 increase in R&D spending - 15 per cent

A TIN100 increase in marketing spending - 4 per cent

A TIN100 increase in staff numbers - 6 per cent

A TIN200 increase in R&D staff - 16 per cent

- Sunday Star Times

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