By Rod Oram
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Monday 1st April 2002 |
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Standing atop Dunedin's Signal Hill you can almost hear a faint new message from the city below. From the valleys, mountains and plains of Otago and Southland, which run away to the north, west and south, comes the persistent drum beat of a new confidence, a new economy. But the message is still weak and intermittent, drowned out time and again by the loud rumblings of the old commodity economy and by the aftermath of decades of demise and denial.
The south has never been a place of easy optimism, as Signal Hill's obelisk attests. "At the beginning of the Dominion's second century, this monument is dedicated to the memory of the pioneers who braved the first," signed AH Allen, Mayor of Dunedin on February 21, 1940.
The downbeat message offered no enthusiasm for the future, only recognition of hardship and survival in the past. Perhaps even in 1940 the people of Dunedin sensed more hardship in their future. Turns out they were right. It was downhill all the way for the next 60 years. Farming became impoverished, countless companies died or moved away, old wealth faded, people left and buildings crumbled. By the time Plunket, nurturer of the nation's future generations, moved its headquarters to Wellington in 1998 Dunedin had nothing much left to lose.
And it was even worse down in Southland. "We were a depressing looking and depressing feeling place for a long time," says Invercargill lawyer Nic Soper.
Yet, for all the doom and gloom, a revival began about three years ago, driven by resurgent old industries and burgeoning new ones. Out in the rural hinterland, sheep, beef and dairy farmers are enjoying their best returns in 20 years. Down in Southland, investment keeps pouring into new dairy farms. Land prices have doubled in the past three years. Invercargill house prices rose 30% last year, taking them back to 1996 levels.
Up in central Otago, money is cascading into vineyards, giving rise to some award-winning pinot noirs and other wines. Tourists and migrants are rushing into Fiordland and the lakes around Queenstown and Wanaka, triggering real estate development and escalating property prices. Dunedin is building its own future on the likes of biotechnology, multimedia, tourism, education and engineering - a blend of the new, the newish and the old.
Are these the first stirrings of real economic transformation? Or just froth on top of the commodity cycle? Forty years from now, will the Signal Hill obelisk deserve an upbeat, future-looking addendum to mark the start of the region's third century?
"I've some confidence we're not just riding a rural boom," says Peter Brown, Dunedin City Council's general manager for marketing and development. The emphasis on new capabilities and new industries is laying foundations for a more diversified, technologically advanced and somewhat less cyclical economy, he says.
A few early successes are encouraging more people to take charge of their own destiny again after years of retrenchment at the hands of others. "People are more willing to invest in their own future," says John Christie, chief executive of the Otago Chamber of Commerce and Industry. His members have racked up 14 consecutive quarters of confidence in business conditions.
The recovery is also about doing old things better. Over the past decade, the dairy industry has rediscovered Southland. Its excellent climate and soil has attracted a new breed of dairy farmers, who have developed the largest, most productive and profitable operations in the country. In the ebb and flow of commodity prices, these farms will fare the best of any. "The province has created its own microclimate of wealth," says Philip Ryan, a partner in Southern Wide Real Estate in Invercargill, the largest trader of farms in Southland.
It is a good example of how the massive economic reforms of the past 15 years have worked. First came great pain. Farming was the first sector to lose its subsidies and protection. Many farmers went bust because they lacked the skills, capital or ambition to adapt. Grown men wept and communities suffered as foreclosure sales peaked in Southland in 1988. As a result, land prices plunged to an average of $2500 a hectare. Only 22 new tractors were sold that year in the entire province, Ryan recalls.
Eventually, there came great gains. Over the past decade, the number of dairy farms has more than tripled to 500, each bringing anywhere from $1 million to $5 million in new investment, and one to five jobs. Land prices have risen five-fold and Fonterra is investing $120 million to lift the processing capacity of its Edendale plant, south of Gore, by 65% to 8.2 million litres of milk a day. The payback is sluicing through the local economy. Last year the income of Southland dairy farms rose $80 million and 270 new tractors were bought across the province.
It is not just a matter of milk. Southland sheep farms still outnumber dairy by seven to one. Their productivity has risen sharply in the past decade: on-farm, thanks to better land management and animal husbandry; and off-farm, thanks to massive restructuring by local meat processors such as Alliance and PPCS. The processors are also getting smarter about meeting the needs of northern hemisphere consumers, offering them high-quality, chilled cuts rather than frozen carcasses. The industry's productivity gains have averaged 7.6% a year for the past five years at constant prices, well above the 5% threshold international management consultants McKinsey identified as the minimum for survival in its industry transformation strategy.
Even better, innovation is extending far beyond the giant co-ops that have dominated agriculture for generations. Ross Johnston is one of five sheep farmers near Gore who are seeking ways for their family farms to work together in pursuing direct marketing initiatives.
"As farmers, we've been at the end of the line, taking what was offered to us. It's time for us to get out to markets ourselves." Their first battle is their name. When they tried to register Southern Producers Agriculture New Zealand they got lawyers' letters from Hormell, the US meat processor. It claimed the acronym Spanz was a rip-off of its infamous Spam brand. The legal skirmish rolls on. Clearly, the US lawyers have never tasted luscious southern lamb.
There's no denying that today's prosperity is driven by the highest sheep meat prices in 20 years. But there are signs that farmers and processors are beginning to build more sophisticated businesses, which will carry them through the inevitable cyclical downturn in prices and demand. Such is their confidence, a sheep farmer outbid dairy farmers for a Southland property in February for the first time in 11 years.
Growing sophistication
Forestry is another sector scampering to escape the commodity cycle. But its challenge is even greater because of the huge quantity of wood coming up to harvesting maturity. Over the next 10 years, Otago will become one of the country's major forestry regions, if it can attract the capital and workforce required to harvest the trees and process the logs. This, however, requires a big break from forestry's traditional model, argues Tom Whitefield, managing director of Forest Products Holdings, a Dunedin investor in wood processing which has direct links into major US retail chains such as Home Depot, through its US backers.
In the past, the industry lived by lobbing logs into commodity export markets. But to extract greater value, it has to integrate sawmills, processing plants, marketing and supply chains in order to respond faster and more sensitively to consumer demands abroad. "I don't think a lot of people in the industry have got their heads around that," says Whitefield.
Achieving greater sophistication to better compete abroad is a theme running through other industries, too. The best engineering companies, for example, are carving out international reputations for their ability to deliver world-leading technology at highly competitive prices.
One Dunedin example is Millers Mechanical, a maker of equipment for meat works, which it exports to Australia, Japan and the US. Another is Farra, a maker of access hoists (built-in hoists used for external maintenance of high-rise buildings), which sell in Singapore, Hong Kong and the UK. "Offshore, we're regarded as the company that can do difficult work in a short time," says Peter Loeber, Millers' general manager.
Farra is one of Dunedin's oldest engineering companies, with roots going back almost 140 years. For the past 30 years "it's been a matter of survival because of dependence on the local economy", says managing director Eoin Orr, a fifth-generation member of the family business. The company began looking for work offshore at the end of the 1980s, pinning its hopes on its access hoists.
Over recent years, export demand for the hoists has taken off. Farra's technology and designs are superior to competitors, and these products spin off plenty of work to Farra's other divisions, such as its foundry, and to local subcontractors in hydraulics and electrical controls. This presents the company with a new challenge. "We want to take a big leap in scale but we don't know yet how to or where we'll find the space and people," Orr says. Over the lean years - Farra employs 110 people today, down from 260 in the late 1980s - many skilled employees left the engineering industry and have no desire to come back.
Plenty of New Zealand companies are equally innovative, but too few have the systems, skills, capital and professionalism to meet the rigorous demands of the international marketplace. They fall short because they lack the ambition, tenacity or resources to make the difficult transformation.
One Southland company that's embarked on that tough journey is Stabi-Craft, the Invercargill maker of recreational and work boats. "We're taking ourselves from a cottage industry to a systematised manufacturing company," says Paul Adams, Stabi-Craft's managing director (see "Crafting a stable business").
The knowledge advantage
Of all the efforts to diversify the regional economy, the most ambitious is Dunedin's attempt to make itself the biotechnology capital of the South Island, if not the whole country. It started with a good base of research and discovery, the University of Otago and local branches of Crown Research Institutes such as AgResearch and Crop and Food. The BioSouth cluster has some 80 members.
Back in the mid-1990s, the university began cranking up the commercialisation of its scientists' knowledge. Over the past four years it has signed more than 50 licensing and development agreements. Half of these agreements are with foreign parties, says John Scandrett, who recently left his post as the university's director of commercial development to become chief executive of Botry-Zen, one of the four biotech companies backed by Howard Paterson (see "The biotech guru").
The centrepiece for the fledgling biotech cluster is the University's Centre for Innovation, a stunning $8.5 million building opened recently to incubate start-up companies or other forms of commercialisation of research (see "Glass works").
In the agriculture sector, Southland has led the country in efforts to diversify crops. Starting seven years ago, the Southland District Council began micro-detailed studies of the topography and climate of the province to seek pockets of land suitable for alternative crops. The Topoclimate project has accumulated a vast body of knowledge that farmers of high-value crops such as flowers or wasabi are beginning to put to use.
This work is underpinned by the Crops for Southland research centre in Invercargill, which is evaluating some 60 crops. Moreover, participants in the programme share data and best practices to help lift everybody's game. It remains to be seen, though, how wide an impact Crops for Southland will have. It was originally conceived as a way to help farmers supplement the poor living they were earning from mainstream farming at the time. But since farming has become profitable again, some of the farmers' motivation has fallen away. "With everything so high, there's not so much interest in diversification," says Wayne Hutchinson, coordinator of the project.
Ideally, Crops for Southland needs to become mainstream itself, in two ways. First, the wealth of Topoclimate information needs to be applied to dairy and sheep farming to improve their productivity. Second, some of the farmers of alternative crops need to develop from cottage industries into big producers, so they can reap the benefits of direct marketing and sales to consumers abroad.
New positivity
Running through all these economic initiatives is a big change in attitudes. Gone is the victim mentality that had dragged down Otago and Southland over recent decades. Too often, the region's woes were laid at other people's doors, usually in Wellington. It was the government's fault and it should do something about it. Around the mid-1990s, people began to realise that the National government had no intention of helping them. But on a more positive note, there were some great opportunities to seize for themselves. With that realisation came a new sense of the excellence needed to compete abroad. "We're not prepared to accept mediocrity any longer," says Invercargill lawyer Nic Soper. "The change in attitude in the last two years has been astronomical."
By far the most positive change is in the way once-fierce competitors are learning how to work together for the good of their industries. The most arresting example is the engineering companies in Dunedin that have formed themselves into a cluster of some 50 businesses. Not only are they exploring ways they can bring their skills together on new products, they are also helping each other out in unprecedented fashion. Farra, for example, is borrowing staff from other companies and subcontracting out more production to cope with "a bloody great wave of work", Orr says.
Down in Invercargill, local companies have similarly come together to form a modern apprenticeship scheme. So far there are some 55 apprentices at work across a wide range of trades and skills, says Ross Young, managing director of Crown Sheetmetal, which exports its stainless steel milk tanks as far afield as the UK.
Communities are also helping themselves in new ways. Tuatapere, for example, was a depressed small town an hour's drive of west of Invercargill. It is right in the southeast corner of Fiordland, far away from the well-beaten tourist trail through Te Anau to Milford Sound. The local community came up with the idea of creating the Hump Ridge Trail, a three-day walk through stunning mountains to the west of town. They raised money from trusts and other bodies and put 10,000 hours into creating the track themselves. Since it opened to great acclaim last spring, Tuatapere has enjoyed a brisk upturn in tourism.
Invercargill has pulled off a far bigger coup with its zero-fees scheme at the Southern Institute of Technology (see "The world is SIT's oyster"). The influx of students has helped bring life to the city, not to mention push up house prices and rentals. In a similar fashion, the InvestSouth venture capital fund was set up three years ago, with $7.5 million of funding from the Community Trust of Southland and $2.5 million from Southland Building Society. So far it has invested in nine businesses, but in the process has "uncovered a dearth of good management", says John Prendergast, the trust's chief executive.
Local governments are getting in on the act, too. Changing leader-ship has helped. In Invercargill in 1998, for example, dynamic mayor Tim Shadbolt and six youngish, forward-looking independent councillors displaced the old guard backed by the likes of an anti-growth ratepayer association and Greypower. Around the region - as is happening elsewhere in the country - politicians are trying hard to put local rivalries behind them so they can work together on economic development and other initiatives on a broader scale. They started this work some years ago in a rather desultory fashion because of a lack of support from Wellington. However, that's changed markedly over the past two years thanks to the Labour-Alliance commitment to regional development in the form of funds to develop strategies and a plethora of programmes through the Ministry of Economic Development and Industry New Zealand.
Nurture the growth
But do all these positive developments add up to transformation? Not yet. They are seeds from which great things could grow. More time and careful nurture is needed to alleviate the South's deep-rooted problems. For example, according to the latest census, population - particularly of 15–24-year-olds - is still declining, albeit at a slower rate. And there is a huge backlog of under-investment in existing facilities, let alone investment in new infrastructure. Dunedin, Invercargill and smaller towns still look threadbare. There are plenty of second-hand and empty shops in their main streets.
Many things could trample these seeds of change. Here are four of them:
Conflict: There are ongoing tensions between growth and no-growth lobbies, both in recovering cities like Dunedin and in booming ones like Queenstown and Wanaka. Dunedin has failed, for example, to get an enterprise park off the ground because of arguments over what types of industry should be allowed in it. Across the region, there is tension between advocates of home-grown success and advocates of foreign direct investment. Above all, there are factions in local politics. Getting Venture Southland, the new economic development agency, off the ground is requiring exquisite diplomatic skills to decide on the organisation's scope, funding, staffing and location.
Small workforce: With unemployment down to around 3.5% around the region, employers are finding it very hard to fill jobs with qualified candidates. Venture Southland's modest proposals for growth forecast the creation of 3760 new jobs by 2016, which will only tighten the job market. The long-term solution it advocates is an increase in the area's population from 92,000 to 150,000, over an unspecified time. Sure, there's room in Southland for many new people, but they will need upgraded infrastructure at a cost to ratepayers. Moreover, the incomers will inevitably change the culture and nature of Southland, further antagonising the anti-growth lobby.
Small ambition: Attitudes to entrepreneurship are becoming more positive, but the risks of failure still weigh heavily against the rewards of success. "If you fail here, all of a sudden you are at the bottom of the heap," one Dunedin business leader says.
Conservatism: Southern people remain the most cautious in the country - no surprise, given the hardships they've lived with in recent decades. They are not, for example, letting today's successes go to their heads. A farmer is more likely to retire debt or buy a new tractor than splurge on a new car. And if they succumb to a car, it's unlikely to be flashier than a Falcon. Old systems and attributes are hard to change. The Invercargill Licensing Trust is a perfect example. It owns all of the town's taverns and two of the three hotels. Restrictive drinking laws prohibit bottle shops for the general public or the sale of alcohol in supermarkets. Its competition comes from licensed premises such as restaurants and motels, which have to serve food with alcohol.
Raise the subject of the Trust with citizens and you'll provoke far longer, hotter debate than on any economic or political issue. Some resent the Trust's power and resulting lack of choice. Yet the Trust is highly profitable, funnelling money and management time into the community. If drinkers had greater freedom, sports fans might not have the likes of Stadium Southland, into which the Trust put $5 million and four years' effort. Nor might it have a winning team like netball's Southern Sting, sponsored by the Trust's Ascot Park Hotel.
But something is stirring in the South, even down to its oldest living resident, Henry. The Southland Museum and Art Gallery's oldest tuatara was born in 1880, and is still going strong. The museum's captive breeding programme has played a vital role in helping the endangered, ancient species survive. Although it's been funded by government and largely local supporters, Henry and his 60-odd fellow tuatara residents are a unique world resource, says David Wooding, the museum's director. Why not offer sponsorship and publicity over the internet so people around the world can grab the opportunity to make the tuataras part of their lives? Global support could do wonders for the museum.
Just imagine. Henry was a 60-year-old whipper-snapper when Mayor Allen penned his ode to survival on the Signal Hill obelisk. With a bit of luck, Henry will be still with us and be an international star when it's time to update the monument for the dawn of the South's third century.
When Dunedin's having a bad weather day it's like an antipodean Glasgow. Gloomy old stone buildings crouch below rain-sodden hills ... but up at the University of Otago a sparkling new building is changing the landscape.
The building's gorgeous green-tinted glass and sweeping curves are reminiscent of a Boston biotech cluster, which is precisely the ambition of the Centre for Innovation. At $8.5 million and 4800m2, it is a big bet by the university on the commercial value of its research. It hoped to populate the 30 or so research suites (about 60% incorporate high-spec wet labs) with people intent on the hot new alchemy: turning knowledge into money. The theory was that by charging tenants market rents, the building would pay for its spot in the business district.
Seems the gamble may have paid off. Even before it opened, almost all the suites were taken. First to sign was Tatua, the Waikato dairy co-op famous for its ultra-high-value niche milk proteins such as lactoferrin, a natural antibacterial compound. At the other end of the corporate scale, Fonterra weighed in, too. Then came all the wannabes, one- and two-person start-ups with an idea keeping them awake at night. For the newbies, the centre offers a full range of services, such as introductions to intellectual property lawyers and venture capitalists.
"If this is successful, we'll do another building and another," says John Scandrett, the university's director of commercial development, with all the confidence of a man with the blueprints in his bottom drawer.
He's certainly caught the commercialisation bug. As soon as the building opened, Scandrett scooted down the road to become chief executive of Botry-Zen, one of South Island investor Howard Paterson's quartet of biotech start-ups.
Back in 1986 some fishermen from Bluff had an idea for a better work boat. How about a pair of rigid aluminium pontoons, with a pointed bow like an inflatable and a big work platform between them, powered by an outboard? It would be more stable in rough seas and highly dependable, impervious to sharp-edged oyster and paua shells.
Paul Adams, a young Invercargill man who had worked as a coach builder, told his friends he thought he could make such a boat. So he did. In fact, in his first full year he made 75 Stabi-Crafts.
But, as it turned out, the big challenge was not building boats but building the business. From about 1993 to 1995 "we were working hard but not smart", says Adams. "I had good process and manufacturing skills, but the biggest hurdle was management skills. We had a jobbing-shop mentality, not a production mentality."
He set about learning on the job how to run a company. The best move he made, he says, was to get a pair of non-executive directors: John Walley, chief executive of the Canterbury Manufacturers Association, and Ian Morrison, an Auckland businessman. Mentors and disciplinarians to him, they kept him focused on the changes he needed to make.
The company enjoyed big growth again in 1999, including brisk exports, but plateaued in 2000 and 2001 until it embarked on another round of upskilling. This one saw, for example, the adoption of the Japanese kanban system for controlling work-in-progress, a systemised store for components and an increased focus on efficiency.
"We have plans that could let us produce 1000 boats a year," says Adams, and that's with only one eight-hour shift a day. "We could increase that quite dramatically with our efficiency gains." It is now investigating leading-edge technologies. "We're taking ourselves from a cottage industry to a systemised manufacturing company."
Marketing lesson one. An efficient way of encouraging people to use your product is give it to them cheap - or free. Obvious, isn't it? But when it comes to tertiary education, it's not a principle many New Zealand institutions have actually tried, or even thought was possible. Penny Simmonds, chief executive of Southern Institute of Technology in Invercargill, was faced with the problem of getting students to flock to a polytech at the far end of the country. She applied marketing lesson one, stopped charging tuition fees, and instead of bankrupting the polytech, has brought people and money to the institution - and the region.
It's all a numbers game. With staff accounting for 70% of costs, you can lift the number of students in each class with only a marginal increase in costs. Then, government funding of each student covers all the costs. After all, fees only count for a minor share of revenues in even the most inefficient tertiary institutions.
As one of the most efficient polytechs in the country, SIT reckoned it could abandon fees if it lifted its student numbers from 1700 to 3000, equal to an average of about 20 per class, versus a fee-subsidised 13.3 per class. However, the polytech would need some $7.25 million of funding to get it through the three years it thought it would take to build up the numbers.
Was the theory too good to be true? Simmonds and colleagues had senior local business people and Gareth Morgan's Infometrics consultancy analyse it every which way before committing to the plan. They gave it the green light, at which point the Invercargill community stumped up the cash, with the Community Trust ($3.5 million), the Invercargill Licensing Trust ($1.75 million) and the city council ($1.3 million) being the big hitters.
The backers saw it as economic development money, which indeed it has been. Student numbers jumped from 1700 to 2500 last year when the scheme was launched and to 3000 this year, hitting the self-sufficiency target in two years rather than three.
The extra students have brought a buzz, money and housing demand to town. And they are not all young ravers. Many are in their 40s, attracted by the zero-fee chance of upskilling themselves, and they've brought their families with them.
"Zero fees have opened up huge opportunities we did not see before," says Simmonds. With such innovative thinking, capacity is merely a mindset, she says, and very expandable. Why not run the training kitchens from 7am to 9pm and weekends, too? Or get IT students to lease-to-own their computers to save the polytech buying them? Or offer nursing training online to students in China? All three are real initiatives, though the last is just going into a pilot project in mid-year.
Rod Oram
oram@clear.net.nz
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