Failure of nerve limits NZ to role of bit-player

BY ROD ORAM

OPINION: JULY 19, 2010, must become a pivotal date in our history. We must mark it as the moment we finally realised we had to radically change the way we do business.

If we don't, we will continue to limp along happy with the crumbs our current businesses throw off.

We'll remain incapable of baking tomorrow's bread. We won't stand a hope in hell of building a prosperous, resilient economy.

Two deals this past Monday made it such a day of infamy. First Bright, China's third-largest dairy company, said it was paying $82 million for 51% of the downstream processing and marketing operations of Synlait, one of our most ambitious dairy companies.

Then Olam, a Singapore company, said it was making a full bid for New Zealand Farming Systems Uruguay. It picked up PGG Wrightson's 11.5% stake for $15.5m, taking its holding in NZFSU to 29.95%.

The deals showed once again that we are incapable of growing sophisticated international companies of scale and lasting economic value. The handful we already have, such as Fonterra and Fletcher Building, are legacies of earlier eras.

Where are this generation's? Try naming a single New Zealand company that started up within the past two decades, has revenues of more than $500m a year, is growing at faster than 20% a year, is nicely profitable, highly international and still largely New Zealand-owned.

Yes, we have a number of admirable companies that are smaller and slower-growing. But even if we had 10 times as many, they would be too immaterial to transform the New Zealand economy, let alone help us catch up with Australia by 2025.

The simple truth is that this economy is tiny. So to prosper, we have to earn the bulk of our living in the international economy. We can export but there are limits to how much we can produce and ship from here or how many markets we can serve from here. So, we also need to invest in operations overseas.

But we're bad at both, as the New Zealand Institute has shown with its Internationalisation Index. For each OECD country, it analysed exports and foreign direct investment as a percentage of GDP in 1990 and their gains by 2005. The more a country grew those two income streams, the more engaged it became with the international economy. It turns out we were the only OECD member to come up with a negative number. Our share of world trade and foreign direct investment had fallen.

We were the only developed country that had become relatively less engaged with the world economy, and we will have fallen even further behind since.

If any sector in New Zealand stands a chance of doing better on both, it is dairy. It is our biggest productive sector, although it is tiny in global terms – our entire dairy output each year is smaller than the annual growth in world dairy production. But it has competitive advantages, technology and management skills and, at least on-farm, is one of the fastest innovators around.

That's why Synlait and NZFSU are so important. Synlait, starting in 2000, has big ambitions to become an integrated company from farm to market in high-value milk products. It rapidly built up farms, contract milk supply, a processing plant and some strategic international relationships.

But to grow faster and build a second milk drier it needed more capital. Last year it tried to raise $150m by floating Synlait Milk, its downstream processing and marketing operations, on the NZX. But it failed to attract sufficient interest.

So Synlait turned to Bright. The deal is helpful in some respects. It provides capital and a channel into China through one of the best Chinese dairy companies.

But there are serious disadvantages: Bright's majority control of the processing and marketing operations will largely lock Synlait into the Chinese company's strategy and future prospects.

No doubt Synlait will sell lots of product through Bright. But the real value created will accrue downstream to Bright rather than upstream in processing or on farm where New Zealand investors retain most of their interest.

This is the classic trap that bedevils our entire primary sector. We are good at growing and processing, but we have largely shut ourselves out of distribution, selling and downstream value creation. If you look at the entire value chain of our agricultural products, the bulk of profits are captured by the likes of supermarkets, distributors and end users overseas.

Building a presence right up through the value chain is immensely difficult.

Companies like Synlait have tried very hard. They deserve plenty of credit for what they have achieved and sympathy for their failures.

Synlait needs international partners but it has blighted its future by selling control of its downstream operations to Bright. It is locking itself into China and forgoing the wider world. And it is the Chinese investors who will benefit the most.

NZFSU is just as cautionary a tale. Under Craig Norgate's leadership, Wrightson invested in 11,000ha of prime farmland in Uruguay.

The bold strategy was to export NZ dairy farming technology, capital and skills to a country with much lower land costs than here.

This was an attempt to shift commodity dairy farming from an export business constrained by high land costs here to a truly international business with virtually unlimited potential.

Uruguay has proved very hard. For example, drought has meant NZFSU has needed much more capital than it expected for irrigation and other farm improvements.

Most of the capital came from floating NZFSU on the NZX in 2007, with a heavy subscription from NZ dairy farmers in particular. But when things got tough, many of the local investors sold out, including Norgate and Wrightson. The rest will probably leap at Olam's 55c a share offer even though they paid $1.17 a share to buy in.

Olam, in contrast, understands the long-term potential of the Uruguay investment and has the money to bring it to fruition. Its future wealth will be built in part on the foresight, skills and money New Zealanders invested in NZFSU but then walked away from at a big loss.

Wrightson said it didn't need to retain its 11.5% stake and it will use the proceeds of selling the shares to pay down debt. It still hopes to sell seeds and other farm inputs to the new owners.

This is absolutely typical of the strategic ineptitude of New Zealand businesses. They are happy with a few crumbs from selling a bit of stuff to the real players.

They are incapable of becoming big, long-term value creators themselves.

Yes, learning to be international value creators is exceptionally hard. Life isn't easy for Bright and Olam, two young, ambitious and competent companies that are doing just that for the benefit of their shareholders and economies.

Our failure to do so is not simply a narrow issue of a tiny and timid capital market. It is a failure of national nerve.

Wake up New Zealand! Make July 19, 2010, the day we got the message and began rescuing ourselves from economic failure.

- © Fairfax NZ News