Increasing the worth of the good we send offshore is a crucial way of improving New Zealand's prosperity. Christopher Adams reports
Few Kiwi commentators could more eloquently describe the importance of transforming New Zealand's economy - and boosting the value of its exports - than the late Sir Paul Callaghan.
In his 2009 book, Wool to Weta, the physicist highlighted one of the more heartrending effects of this country's relatively low level of per capita gross domestic product (GDP), which has fallen well behind Australia's over the past 40 years.
"Our children go to London or Sydney or New York, and they like the lifestyle, they like the high salaries and they have plenty of Kiwi mates on hand," wrote Callaghan, who died last year following a battle with cancer.
"There are plenty of countries on the planet less prosperous than our own. But when our grandchildren are growing up on the other side of the world, when we have to Skype to read a bedtime story, we feel a pang of grief."
Increasing the value of the goods we send offshore is a critical component of boosting the nation's prosperity and the Government has set a goal of lifting exports to 40 per cent of GDP by 2025.
It's a bullish target and victory is far from within our sights.
In the 12 months to March 2013, New Zealand's total exports - at $46.2 billion - accounted for 31.4 per cent of the country's $147 billion real (inflation adjusted) GDP, according to Statistics NZ.
In the same period of 2008/2009, when the National Party came to power, the proportion of exports was almost exactly the same.
Massey University professor of innovation and economics, Christoph Schumacher, says the 40 per cent goal is ambitious, particularly given the short timeframe that's been set.
"But it's feasible if the right changes are made," he adds. "I don't think we can just go on with business as usual and hope we will get there."
He says New Zealand won't hit the target through only increasing its primary exports - commodities such as milk powder and logs - or simply growing the tourism sector.
"If we want to increase our export revenue we need to provide more innovative products," Schumacher says.
"At the moment New Zealand focuses very heavily on the agricultural sector, but we are too often providing the raw product and shipping it offshore, where other companies make things out of it. I think there's a big opportunity to be involved in more stages of the value chain."
A Government-commissioned report by market research firm Coriolis says high-value, processed food accounted for only 14 per cent of New Zealand's total food and beverage export value in 2009.
By comparison, processed food made up about 30 per cent of Denmark's and almost 40 per cent of Ireland's in the same year.
According to the research, New Zealand's "export mix" to Australia is more heavily weighted towards processed foods.
"Conceptually, if we could get our global food export mix to resemble our Australian food export mix, our food industry would be more value-added and profitable," the report says.
Achieving the shift towards higher value exports - which has been a topic of countless conferences, Government reports and newspaper columns over the past couple of decades - remains a distant goal.
New Zealand exported $45.5 billion of goods in the 12 months to the end of August this year, 44 per cent of which was dairy commodities (mostly milk powder), logs and meat.
Andy Hamilton, chief executive of Auckland business incubator The Icehouse, says reaching the 40 per cent of GDP target will require boosting primary exports in tandem with other, higher-value products such as technology.
"I don't support 'let's forget agriculture', because the whole economy is based on it," he says.
But while Kiwi technology stars like accounting software provider Xero are forging new paths for New Zealand's export growth, Hamilton says many opportunities remain in the food and beverage sector.
"If we just get a whole lot more of our food and beverage companies growing into Australia and succeeding, that would have a massive impact," he says.
Pat English, executive director of the New Zealand China Council, says the Chinese market will play a huge role in this country's export growth.
"Of the $10 billion increase in exports we've had in the last five or six years, $6.1 billion of that has been to China," he says.
Indeed, New Zealand's exports to the Asian mega economy have tripled to $7.9 billion since the two countries signed a free trade agreement in October 2008.
Marco Marinkovich, founder of Auckland's KiwiMilk Nutrition, says the booming Chinese infant formula market - estimated to be worth US$12.4 billion and expected to double by 2017 - offers this country a lucrative opportunity to add value to its primary dairy products.
There's also talk of China, population 1.35 billion, relaxing its one child policy, which could unleash a baby boom of almost unimaginable proportions.
"But the thing is, we're not going to get there if we continue to screw it up," Marinkovich says, referring to the recent debacles in this country's trade relationship with China, including January's dicyandiamide (DCD) scare and Fonterra's spectacular botulism false alarm.
Small-scale New Zealand infant formula firms, whose exports had soared in recent years, have been losing up to $2 million of weekly sales in China as a result of the ongoing impact of the botulism scare, according to the NZ Infant Formula Exporters Association.
While China promises to be major component of the country's future export success, Schumacher says we shouldn't lose focus on other emerging markets - such as Latin America and smaller Asian economies - as well as traditional markets like Europe and the United States.
John Penno, chief executive of Canterbury dairy processor Synlait, which is 39 per cent owned by Chinese dairy giant Bright Dairy, says his firm is being careful not to become too "China-centric".
"At this point in history it would be easy for us to do that," Penno said in his presentation at October's China Business Summit in Auckland. "Our primary marketing strategy is a third [of exports] to China, a third to the rest of Asia and a third to the rest of the world."
German-born Schumacher says New Zealand could learn a thing or two from his homeland.
Germany spends a lot more on research and development than New Zealand and the links between German universities and industry are much stronger than those in this country.
New Zealand's R&D spending, particularly from the private sector, lags behind other small, advanced economies.
Businesses in this country spent $1.2 billion on R&D in 2012, or roughly 0.8 per cent of GDP, according to Statistics NZ.
Finland and Denmark's private sectors spend more than 2 per cent while Israel's companies spend over 3 per cent.
Schumacher says firms such as Warkworth's Core Builders Composites, which built Oracle's America's Cup-winning catamaran, are examples of the opportunities that exist for this country in high-tech boatbuilding.
Globally successful Fisher & Paykel Healthcare - which spent $45.7 million, or 8.2 per cent of its operating revenue, on R&D in its last financial year - has also shown that New Zealand can lead the way in certain areas of medical technology, he adds.
However, less than 20 per cent of local companies are currently earning revenue in overseas markets, according to a report by Massey University's Centre for Small and Medium Enterprise Research.
The centre recently completed a study of how and why New Zealand companies "internationalise".
David Deakins, the centre's director, says the research found some common factors among the firms that had experienced export success.
"There really is a major commitment needed, so to sustain export activity you have to take a long-term view and commit enough time and resources into the overseas market," he says, adding that the study also found many companies had only modest export ambitions, often limited to Australia.
And the New Zealand dollar, which was trading at more than US85c in the middle of October, remains an ongoing impediment to the export sector.
ExportNZ executive director Catherine Beard says some companies are learning to deal with the strong currency.
"The companies that are getting good growth are the ones that appreciate that they've got to be globally competitive and developing products with an X Factor where they're not competing so much on price."
TOP FIVE INDUSTRIES FOR GROWTH
1. Dairy: Huge scope for growth in Asia, particularly China. Two-thirds of the global middle class expected to be located in Asia Pacific by 2030, while the Chinese middle class is predicted to reach one billion by the same year.
2. Marine/boatbuilding: Aiming to double technology and equipment exports to $1.3 billion by 2020.
3. Software/cloud computing: Companies such as accounting software provider Xero and medical records firm Orion Health well on their way to becoming global players.
4. Clean technology/biotechnology: Companies like biofuels developer LanzaTech and cancer diagnosis provider Pacific Edge showing positive signs that they could become the country's first biotech "big wins".
5. Food and beverage: Opportunities exist for adding value to primary dairy ingredients with products such as infant formula and adult nutritional goods.