Rod Oram on NZ’s innovation vacuum – it’s really a marketing one

There’s an interesting story in today’s Sunday Star Times on the state of invention and commercialisation in NZ.

Basically BigCake is with Rod Oram on this. He says alot of innovation in NZ is done “in a vacuum – it’s by people who are not plugging into any kind of  commercial reality”.

Not sure if Rod is nailing these guys, but the story mentions Rex Bionics’ exo-skeleton that enables paralysed people to walk and the Martin Jetpack.

But I reckon the story puts to much emphasis on the need to be first, not “reinventing the wheel” which looks to the ‘thing’ of Kristian Slack whose ideas drive the story.

Being first can be a big advantage in commercialising a product, but it’s not everything by a long shot. It’s not even a matter of being best.

Ask  Sony. In the the videotape format war of the 1970s and 80s Sony’s Betamax lost to JVC’s VCR, even though Betamax was first to market and was in many ways the better product. Essentially, according to Wikipedia “Sony believed that having better quality recordings was the key to success. 

“…Consumers would be willing to pay the higher retail price for it (the Betamax), whereas it soon became clear that consumer desire was focused more intently on recording time, lower retail price, compatibility with other machines…” (Things that VCRs were good at).

As I’ve posted before, NZ business skills in marketing (including identifying markets) and selling is a bit of a blind spot. (There’s a series of posts on this theme – check out the ‘selling’ tag).

Let’s hope Rex Bionics and the Martin Jetpack have their eyes open.

BigCake’s not sure how scalable these businesses are, but NZ’s track record for turning what looks to be world-beating technology into businesses that register on a national economic scale ain’t that great.

I’ve also posted before on the lack of size of our high-tech companies compared with those of other smaller nations.

There’s a disjunction between our high levels of inventiveness and entrepreneurial drive, as shown by the above two companies, and our relatively poor overall economic growth performance.

Brian Gaynor and false oriental wisdom on Christchurch earthquake – an opportunity lurking in the crisis

An old myth is that the Chinese word for crisis is a combination of the characters danger and opportunity.

It’s a great idea, but it’s a “curious specimen of alleged oriental wisdom“.

However, it does give you a clue about how to handle crises.

In today’s NZ Herald, columnist Brian Gaynor sees opportunity in the Christchurch earthquake.

He says although the quake has had a devastating impact on local residents “it will divert resources into an area of the economy that is much more likely to take us out of the recent recession.

“The economic argument, which is becoming increasingly popular in the United States, goes a bit like this.

“The consumer, who accounts for around 70 per cent of economic growth, is shopped-out because of too much debt and the depressed state of the housing market. In other words economic recovery is not going to be consumer-led, there have to be other economic drivers.

“Construction and infrastructure-led recoveries are obvious alternatives to a consumer-led recovery.”

BigCake has posted before on why our spending power has taken a hit. It’s not just that we’re now more sensible with money and debt, but we’ve run out of ways to ensure we can continue to buy what we want rather than what we need.

These mechanisms are:
• Two-income families
• Working longer
• Debt.

The Global Financial Crisis killed the last one.

And now to the danger bit in a crisis.

Gaynor says influential US business people, looking for ways to fill the economic hole left by newly thrifty consumers, want US federal and state governments to sell infrastructure assets and use the proceeds to build new infrastructure projects or repay debt .

“A similar approach needs to be looked at in New Zealand because the debt-loaded consumer is in no position to drive the economy out of recession through increased spending.

“An obvious alternative is for the Crown to sell minority shareholdings in its commercial companies and use these proceeds to invest in the country’s rundown infrastructure assets.

“The new Auckland Super City could do the same by selling a stake in Ports of Auckland and a number of other assets and use the proceeds to invest in badly needed infrastructure assets, particularly roads and public transport.

“Unfortunately, the domestic political environment is not sympathetic to that approach so it looks as if we have to rely on a natural disaster to create a construction/infrastructure led recovery.”

There’s a growing heap of stuff that needs to be sold.

Gaynor says “it is patently clear that we are not going to have a consumption-led recovery …

“…the preferred option is to have a government policy-led construction/infrastructure boost instead of just waiting for the next natural disaster.”

BigCake would add this boost should be funded by asset sales as Gaynor suggests, not debt (of which we have already got more than enough).

Has NZ’s infrastructure paid the price for the mismatch between our health and education expectations and our ability to pay?

Something BigCake has long wondered about is why our infrastructure is so shitty compared with other modern economies.

The obvious answer is that we haven’t invested in it, but why’s that?

In most other areas that underpin economic growth we, most of the time, at least do okay.

My theory (just formulated this morning – apologies if someone else has bet me to it) is that investment in infrastructure over the last couple of decades has been cut back (or at least not matched what was needed) so we can continue to enjoy first world standards in health and education.

A price for this has been our slide into second-world standard road, rail and telecommunications. And reduced economic growth which would help to bridge the gap between what we want and what we can afford.

Given our relatively poor economic growth compared to the countries we like to think ourselves the equal of, something had to take a hit. So maybe fair enough for infrastructure.

But it’s helped mask the truth that NZ has been living beyond its means.

As the Ministerial Review Group on health said about our health spend: “We like to consume health services like other OECD countries, but we are less able to afford to.

“The difficulty is that our per capita income is much weaker than [our] per capita health spend.”

According to the BigCake theory, our infrastructure has paid the price this mismatch between what we can afford in health and what we expect. Same for education.

But with infrastructure these particular chickens have come home to roost.

Global Competitiveness Index rankings highlight the disparities resulting from these investment (or underinvestment) policies.

In the latest index we come in 23rd (down from 20th last year) out of 139 countries in overall competitiveness with infrastructure being the standout brake on our overall economic performance.

We do well in things like:
• Institutions (such as banks etc) – 3rd in world
• Health and primary education – 5th
• Market efficiency – 7th
• Higher education and training – 13th

But in quality of overall infrastructure we come 48th thanks to:
• Electricity supply – 56th best/worst in the world
• Mobile phone subscriptions – 48th
• Roads – 45th
• Rail – 45th

Kiwi businesses rate ‘inadequate supply of infrastructure’ as the single biggest problem they face.

There are other shockers as well, but often these are in things we don’t have much control over:
• Local supplier quantity – 77th
• Domestic market size – 59th

But some we do:
• National savings rate – 90th (the worst indicator of all)
• State of cluster development – 56th
• Company spending on R&D – 38th

What a cow – district council seeks to buy rest of dairy company

What’s left of one-time sharemarket darling Tasman Agriculture is about to disappear from public ownership, fully gobbled up by New Plymouth District Council.

Yeah, you read right, the New Plymouth bloody District Council.

Local government asset creep is an aspect of state asset creep I didn’t cover in earlier posts on this phenomenon because there was more than enough examples in the state sector. Check out NZ Post, Quotable Value, Orcon…

(Declaration of interest here: I’m a small Tasman Farms – the company’s current name – shareholder. It trades on the Unlisted exchange. I bought into Tasman Ag very early on and have stayed for the ride).

I hung in because it was one of (the only?) way the few ways for me to get investment exposure to the agriculture sector, in this case dairying. If agriculture was going to be NZ’s economic saviour, then I wanted a bit of it.

Anyway, the NPDC now holds about 75% of Tasman Farm shares and last week gave notice it wanted the rest.

I ain’t arguing that Tasman Farms has been badly run under NPDC ownership, but I’d point out that the current share offer price is exactly the same as what Tasman Farms shares were trading at (albeit thinly) three years ago.

The Capital Market Development Taskforce noted that New Zealanders don’t have as many opportunities to invest in large and mature, local companies (like Tasman Farms) as investors in many other countries.

It saw agriculture as a key gap.

The other thing is that in the long run I wouldn’t bet on district councils, or the state, running businesses better than the private sector.

The more of the economy that ends up out of the reach of private investors, the worse it’ll be for the economy.

BTW – there’s an Alan Hubbard connection here. Alan Hubbard co-owned the bulk of Dairy Holdings which at one time held 42% of Tasman Farms.

The Mr Blobby effect in housing. Treasury backs tax-favoured argument

There’s been a long standing sh!t fight over housing and saving.

But at the bottom of the saving debate BigCake reckons is our relative impecuniousness. Kiwis don’t save enough because we haven’t been able to afford to (or at least we haven’t been willing to stop spending on things we want rather than need).

Savings of course being what remains of your pay packet after consumption.

On one side of the housing war zone, there’s a group that says ‘no worries’ about Kiwis piling their money into housing, after all they’re saving for the future and they’ll eventually be able to cash up.

On the other are those who say our love affair with housing crowds out investment in more productive exercises.

Treasury’s Saving in New Zealand – issues and options discussion paper probably gives ammunition to both sides.

Housing is the Mr Blobby of NZ investment. About 95% of our net wealth is tied up in our homes, investment properties, baches etc much more than in other countries Treasury looked at. The next highest are Australia and France with around 65%.

In the US it’s less than half.

But housing as a percentage of disposable income, at 5 times disposable income, is pretty average – about the same as Australia’s, less than for the UK, France and Italy but more than the US and Canada.

One thing not mentioned is that our houses are often crap (at least compared to the above countries) so we’re paying more for less.

Anyway, Treasury’s interpretation of the above is that we’re not over investing in housing because our stock of housing wealth is not unusually high. “Rather it is more a reflection of the low rate of household saving more generally.”

Which means we spend more than other countries? Don’t think so.

It’s just that after paying for our housing and consuming, we have less left over to save.

Later in the discussion document Treasury does ask whether NZ households’ relatively low stock of financial assets is a reflection of an ‘over investment’ in housing or a reflection of the low rate of household saving more generally?

Could even be a bit of both.

Treasury agrees with arguments that investment in housing has had preferential tax treatment compared with investment in debt or equities, leading to our preference for holding wealth in the form of housing rather than financial assets. “Even so, these tax distortions do not explain New Zealand’s low rate of national saving, other than to the extent that the wealth (or collateral) effect from rising house prices encouraged more consumption at the expense of saving.”

High debt, Treasury says is the counterpart to very low levels of private saving. “New Zealand’s household debt levels doubled in the last 15 years as a fraction of disposable income. They are now around 160 percent of disposable income.”

Debt is one of the coping mechanisms we use to make sure we can keep up with our spending expectations. I’ve posted before on the tricks consumers in Western countries have used to overcome the fact that their incomes were not keeping up with all the goods and services they were producing.

Latest NZ Institute paper out – “A goal is not a strategy”. NZ’s tiddlywinks approach to economic growth

The NZ Institute’s latest discussion paper – “A goal is not a strategy – focusing efforts to improve NZ’s prosperity” – touches on one of BigCake’s observations about how this country attacks its economic growth issues.

We’re playing “bloody tiddlywinks” while countries, even of a similar size, play big boys’ games.

Tens of millions of dollar there, millions here ain’t going to make much difference.

As the NZ Institute says if a goal is important, then resources should be poured in to match.  “Competing small countries are committing hundreds of millions of  dollars to efforts they regard as strategically important.”

The Herald’s Brian Fallow has commented on the sizeable discrepancy between what NZ will fork out for its national broadband network (calculated to be $5-8 billion) and Australia’s A$43 billion.

“Canberra’s estimate is the equivalent of $2400 per Australian, eight times the per capita outlay of public money our Government is talking about.”

Fallow was making the point that “this does not, as they used to say, compute.” Someone is going to lose – the taxpayer and/or the consumer.

BigCake’s point is the difference in ambition – geographical and population differences aside.

A couple of years ago I wrote about how the then Labour Government was, under the heading of economic transformation, going to spend $3.6 billion over four years on infrastructure skills and R&D.

At the same time Ireland’s National Development Plan projected expenditure of NZ$105 billion on infrastructure alone over six years.

Whether either happened is not really the point – it’s just the gap in ambition (and the money backing it) that hits you between the eyes.

You see the small thinking in the current Government’s tens of millions approach to agriculture R&D.

As usual the NZ Institute’s work is packed with good grunty stuff on what’s wrong with our economy and what we can do to fix it.

“A goal is not a strategy” is focused on boosting the non-commodity side of the economy – “exports of differentiated goods and services, and helping firms overcome the barriers to internationalisation.

“New Zealand’s exports have grown much more slowly than the OECD average partly because global trade in commodities (where New Zealand exports are concentrated) has grown more slowly than trade in differentiated goods and services.

“New Zealand’s most important sectors for exports are tourism, agriculture, and manufacturing. All three sectors have average or lower than average productivity so simply growing these activities without also substantially lifting productivity would not lift GDP per capita materially.

“Other small countries are becoming prosperous by exporting differentiated goods and services and New Zealand must find a way to join them or find another strategy for success.”

A post on the performance of our ICT sector has been banging around my head for a while. The above looks like good context for a post.

Does regulation crowd out investment?

Brian Fallow is on a bit of a downer on the economy in his latest Herald column.

A grumpy reponse to the column’s dismal prognosis on investment from (BigCake assumes) a small manufacturer highlights an issue with regulation BigCake hadn’t considered  – does regulation crowd out capital investment?

Reading between the lines of the comment, it looks as though this manufacturer has no time, money or energy for capital investment because it’s all being used up dealing with the demands of regulations.

Fallow says: “The labour market and housing market are torpid, at best. The cost of living is rising and interest rates are rising too.

“Business confidence is slipping and business investment is weak. Credit growth is flat-lining. The net inflow of migrants has dwindled to a meagre and exiguous trickle.

“Even the bright spot – export commodity prices – is getting dimmer.”

He’s also not impressed by our productivity progress which I think he blames mainly on the lack of capital.

But even if businesses could get it, BigCake not convinced they’ll use it to expand. They’re just not in the mood as the comment makes clear.

“Investment in manufacturing now days isn’t about capital. The focus is on putting time and effort into developing procedures and processes that minimise risk and add often unnecessary layers of cost to products which were previously developed and produced quite efficiently.

“Regulation is developed by large corporations in co-operation with Govt regulatory departments and it’s then forced onto smaller businesses who only have limited resources to invest in their business.”

Not sure big business is driving regulations – they hate it as much as the small guys – but usually they are in better shape to cope.

Anyway, our productivity story is still ugly.

Fallow  points out that between 2006 and 2009 labour productivity declined at an average annual rate of 0.3 per cent. “But that period is only part of a cycle and included a recession.

“In the complete peak-to-peak cycle before that, 2000 to 2006, annual labour productivity growth was 1.3 per cent, less than half its rate in the 1990s and lower than it was in Muldoon’s day. By 2006 New Zealand ranked 22nd among the 30 OECD countries in labour productivity and in GDP per capita.

“The problem, in short, is capital shallowness – too little capital invested per worker by firms in plant, equipment and software, and by the country in infrastructure.

“When it comes to multi-factor productivity – how much output is extracted from given inputs of capital and labour – New Zealand has in fact significantly outperformed Australia over the past 30 years.”

You depressed yet?