Good management includes creating a strong culture, says Martin Simpson. Photo / Mark Mitchell
Out now, the TIN100 report lists our biggest tech companies. Anthony Doesburg looks at how the sector is faring, while Skye Wishart profiles some of the businesses on the list - and one heading that way
As the high kiwi dollar eats into many exporters' sales, a new technology sector report shows companies that do business in Australia are bucking the trend.
The 2012 TIN100 survey of leading technology companies, out now, records a 7 per cent increase in sales to Australia, at the same time as the value of exports to North America has fallen by 5 per cent. Sales to Europe were down by 3.5 per cent, offset by a similar size rise in exports to Asia.
"One of the simplest takeways is that the US dollar and the euro are moving adversely from an export position against the New Zealand dollar, but that's not the case with the Australian dollar," says Greg Shanahan, who has compiled the TIN100 report for the past eight years.
Overall, exports by the 100 companies in the report rose more than 2 per cent to $5.2 billion - fractionally less than the meat industry and more than four times as much as wine sales overseas. Their total revenue increased by the same proportion to $7.3 billion.
Shanahan says dollar's rise is "muting" the sector's potential.
"It is not causing a decline, it is just creating an environment that is more pressurised. There is less room for error, there is more pressure on margins."
If it hadn't been for Australia, he says, things would be much worse.
Computer services company Datacom, which the reports ranks second by revenue behind Fisher & Paykel Appliances, is an example of a company prospering across the Tasman.
"Datacom and any of our IT services companies have the advantage that a head office in New Zealand is a lot cheaper than a head office in Australia. We have a lower cost structure in New Zealand irrespective of the currency."
The plight of F&P Appliances, which lost $83 million in sales in the past year, might suggest gloom pervades the whole appliance sector. But Shanahan says a 13 per cent revenue rise at commercial refrigeration company Skope Industries, and modest growth at air conditioning manufacturer Temperzone Group, both on the back of Australian sales, demonstrate that it's not just IT companies cashing in.
"When you get the opportunity for a more stable currency relationship our manufacturers show themselves to be highly competitive, particularly against Australian companies. So it's not just ICT.
"We have the ability to service the Australian market more easily in New Zealand. We have a lower cost structure, which we've developed because of our small economy, and we have a favourable currency."
Another company being squeezed by the strong kiwi dollar, relative to the US currency, is electronics component-maker Rakon. It ranked fifth in last year's TIN100 but this year slips to seventh, as its sales slumped by $11 million to $178 million.
Rakon swapped places with electric fence-maker Gallagher, which lifted sales by $12 million to $187 million. Like Datacom, Skope and Temperzone, Gallagher is privately owned, and those businesses tended to have stronger growth than companies traded on the NZX.
"Being public has a lot of complex issues in terms of stakeholders," says Shanahan.
However there are exceptions, with two publicly listed additions to the TIN100 each having more than doubled sales over the past year. Shanahan says of nine new arrivals, the standouts were Diligent Board Member Services and Xero, which entered in 72nd and 81st spots respectively. Both companies joined the NZX50 index in June.
Diligent's sales in the past year jumped 168 per cent to $22 million and Xero's by 107 per cent to $19 million.
Shanahan says that aside from the issue of private versus public ownership, it's possible to generalise about other characteristics of TIN100 companies.
"First, they're larger, so we have record numbers of companies over $50 million and $100 million this year. But increasingly these companies have to be leaders in their field, which is almost like the price of admission."
Leadership seems to come from a couple of sources. One spur is that New Zealand companies operate in a small domestic market that forces them to focus on cost-effectiveness.
"New Zealand manufacturing businesses are dogged by poor economies of scale so any that service the local market would be competitive internationally. There's a whole raft of engineering companies, in terms of production machinery and manufacturing processes, that have spun out of an evolution beginning in the 1960s that still exist today."
One example is Scott Technology - another trend-defying listed company that is 33rd in the list - which pioneered steel roll forming with Fisher & Paykel.
"We developed a lot of stuff well before larger countries that are known for this, like Japan and the US, because the economic pressure was there," says Shanahan. "Companies did it because they had to."
A second strength of New Zealand companies is their prowess in business-to-business transactions, he says, citing Datacom as an exemplar.
"It runs a very tight ship and delivers a good service. That's a New Zealand discipline - being able to run businesses very efficiently - and that applies as much to manufacturing and ICT."
Although its sales are $788 million, Datacom gets by without formal marketing or human resources departments, Shanahan says, which would be unheard of elsewhere.
"The first time I went to a Datacom office, it was on the third floor and the lift wasn't working. They're not letting their ego carry them away. In the US I couldn't imagine any company turning over that amount without an HR or marketing department, or having a chief executive working in a building with no lift. To me that's a very Kiwi thing."
If this proves to be the last TIN100 led by a New Zealand-owned Fisher & Paykel Appliances, Shanahan will consider that unfortunate. However if the company passes into Chinese appliance-maker Haier's hands, it will still qualify for inclusion in the report provided it continues to have a significant present here.
Shanahan can see the pace of overseas acquisitions of local companies accelerating if the dollar strengthens further against the US currency, causing company owners to succumb to "founder fatigue".
Typically, small New Zealand companies can counter that by quickly switching to more lucrative markets, as has Christchurch company Tait, which has a US$29 million contract to supply radios to Victoria's Country Fire Authority.
"Orion Health is another company that has embarked on a deliberate strategy of making its business less US-centric." That has propelled the Auckland-based software company into the $100 million revenue league.
The TIN100 report is sponsored by IRL, the Ministry of Business, Innovation and Employment and New Zealand Trade and Enterprise.
Fraser Engineering
Fire truck manufacturer
TIN100 ranking: 56
Revenue: $31 million (est)
A sense of humour and a love of fishing - those are qualities that Fraser Engineering chief executive Martin Simpson is after in an employee. He cites culture as a key ingredient in the success of the Lower Hutt fire truck maker.
A new face on the TIN100 list, Fraser Engineering rocketed straight into 56th place this year. While the company would not release revenue figures, the compilers of the TIN list estimated the figure at $31 million.
Established in 1953, Fraser Engineering provides a variety of engineering services, but specialises in building fire trucks for use in urban, rural and airport locations. Most components are designed and manufactured in-house.
The firm's 100 engineers recently began a second contract to supply 20 fire trucks to the South Australian Country Fire Service. Fraser Engineering has also tendered for contracts to supply vehicles for Auckland and Wellington airports.
Simpson says success lies not only in good leadership and management structure, but also in the culture that the leaders create.
"We identify and reward for effort, and we make sure wages are in line with their work.
"We also make sure our guys are paid the best in the industry, so that we keep them - but they deserve it, they work bloody hard.
"Weltec [the Wellington Institute of Technology] and the universities are turning out extremely smart, useful people, but we also hire for a specific culture - they must have a sense of humour and like fishing."
The company has faced a few stumbling blocks, including, as Simpson describes it "fighting for 25 years for the right to exist in the manufacturing game".
Wedgelock Equipment
Excavator attachments
TIN100 ranking: 68th
Revenue: $25.95 million (est)
Wedgelock Equipment, which makes its debut on the TIN100 list this year, credits its success to the high proportion of revenue spent on research and development.
A manufacturer of excavator attachments for civil earthworks, contractors and forestry, the Lower Hutt engineering firm exports all over the globe.
Chief executive Matthew Calvert counts intellectual property development and R&D as high priorities in terms of commercialising new ideas and technology.
"Without it, New Zealand businesses are no better than a factory in China making stuff - you've got to be ahead of the curve," he says, estimating he spends two to three times the average of New Zealand companies on those areas, and has more than 10 per cent of his workforce in R&D roles: eight out of the 70-75 staff.
New Zealanders, he says, have to be resourceful because our market is so small - resulting in broader expertise. "Offshore, you see companies that make similar products but not the full range of them because their market is big enough to focus on just one segment. For example, we do 15 attachments and quick couplers but they might do just one attachment. So you have all that knowledge."
He says the economic climate over the past year has been good for business, with signs of the US housing market starting to recover. The local market is growing, too, with the Christchurch rebuild. Seventy per cent of revenue comes from exports, compared to 20-30 per cent a few years ago.
Through partnerships and subcontractors, Wedgelock manufactures in Australia, New Zealand, China, the US, Britain, Europe, and Eastern Europe. The company is now looking at Asian expansion.
Calvert says Wedgelock has a diverse ownership, with 15 shareholders. In the past the company has received funding from NZTE and is now looking to see what co-funding deals it can tap into.
They plan to use strategic partners rather than new capital to increase the size of the the business, and now have four - one of them Caterpillar in the US, with whom Wedgelock has a supply contract.
Japanese food group Meiji is listed on the Nikkei 225.