Wicked brew

By Rod Oram

Monday 1st July 2002

Blessed with booming vineyards, thriving forests and rich seabeds, the beautiful top of the South Island is ripe for growth. But Rod Oram wonders if the mix of big ambitions and stretched infrastructure is a dangerous cocktail.

Just down the road from the Nelson airport sits a weird hybrid of a building, with a stylish art museum at the front and a car plant out the back. It's a building with a story to tell as both a microcosm of the economy at the "Top of the South" - the upper third of the South Island - and a monument to 30 years of twists and turns in the life of the New Zealand economy. The plant sprang to life in the 1970s era of Think Big. "Nelson needs jobs, so we'll build a factory," decreed the bureaucrats in Wellington. And, lo! It came to pass that a mighty building was constructed to turn imported raw cotton into textiles for the local clothing industry. Legend has it that Plan A sank over an elementary detail: no one had sorted out where the cotton was coming from. "Don't worry," said Wellington, "we'll use this splendid Nelson plant to assemble cars instead." Tariff barriers would make it work. Then in 1998, Wellington waved its wand again and tariffs disappeared. Honda, which was assembling its cars in the Nelson factory, shifted gear, and today uses the plant to refurbish used cars imported from Japan. However, there is more room than the car company needs.

Transformed by an elegant fa�ade and landscaping, the front section now houses the World of Wearable Art and a collection of old cars. It's the first permanent home for the Wearable Arts Festival, launched by Nelson sculptor Suzie Moncrieff in a marquee in 1987 and now an international tourist attraction and export in its own right, with the Tourism Board taking a mini-version to Singapore in 1996. The museum gives the festival year-round revenue and a showcase for the wonderfully wacky costumes from festivals past. It also eliminates the risk of Nelson losing the valuable tourist attraction to some other, more enterprising city. It took an innovative solution to make the finances stack up, though. A local investor suggested the curious coupling that sees cars graced by mannequins dressed in wearable art. But it works. "This isn't a blokes and women thing … cars to keep the men happy while their wives look at the art," says a young guide. "The guys get a buzz out of the dresses and the women like looking at the cars." The factory-turned-museum is a microcosm of what is needed in the Top of the South. From Greymouth on the West Coast to Kaikoura on the East, this is beautiful and abundant land that glistens with the potential for bigger earnings. However, only transformation and innovation will help overcome the constraints of a sharp shortage of people, skills and capital - and some potent forces against progress.

Log-jams to development

Take forestry, which is set to boom in the Nelson region. The volume of trees coming to harvest maturity will increase by 60% over the next few years, and investors are willing to fund downstream processing. Japanese trading company Sumitomo just spent $80 million on a plant to make laminated veneer lumber at its Nelson Pine facility. It will consume 40% of the timber resource within a 40km radius of Nelson. However, ongoing arguments in Nelson over truck routes are making it hard to get the trees to processing plants and the port, potentially discouraging further downstream investment by other companies. Yet adding value to the region's resources is the key to economic development. "We're pretty close to full employment now," says Marilyn Gibbs, chief executive of local business association Commerce Nelson, "but our wages are some of the lowest in the country. We can only bring up wealth if we bring up wages. We can't do it by increasing activity. We don't have the people."

Frustrations also emerge in the fishing industry, which accounts for one-third of Nelson's jobs. Since quotas were introduced in 1986, the industry has deve-loped sustainable practices and huge economy efficiency, says George Clement, a Nelson-based fishery analyst and adviser. "We have high-quality products. People beat a path to our door, but demand exceeds supply." This government, he says, has a no-fishing agenda. Ad hoc measures and over-sensitivity to environmental issues are "driving holes in the quota system". It is also denying the industry the chance to develop fishing of under-used species such as squid or fishing grounds such as the sub-Antarctic.

People problems

Over in Marlborough, the local economy is similarly constrained. Wine, aquaculture and engineering - the region's three biggest businesses - are squeezed between tight resources and strong resistance to progress. Aquaculture, which has the potential to quadruple its exports to $1 billion a year by 2017, is stymied by a nationwide moratorium on new leases, a shortage of workers and a lack of local processing facilities. "Our philosophy is not to pick winners but to identify barriers," says Tony Smale, chairman of the Marlborough Economic Development Trust, the local private-public partnership fostering growth. In the past, the region focused on creating any kind of job, he says. "But the real problem is not a lack of jobs but a lack of skilled people."

On a different note, the opposite problem - too many people - may be creeping into Kaikoura. Whale-watching began 12 years ago and the industry revived the town. Today it directly generates about $25 million of revenue a year and one-third of the town's full-time jobs. But with the number of watchers heading towards 300,000 a year, the town is in danger of losing its appeal. "One of the magical things about Kaikoura is it's still a small village," says Wally Stone, who is chairman of both Tourism New Zealand and the main local tourism operator, Whale Watch Kaikoura. "Because of the sense of space and quality of experience, people go away and rave about it, and more people come. But we can't destroy what we have." He says restrictions on growth could be beneficial: if tourists had to book well ahead of arrival, Kaikoura's tourism operators could run their existing capacity at higher occupancy levels and yields over a longer season. In other words, more work and wealth from the same resources; a good example of sustainable development.

How well the Top of the South copes with these pressures and dilemmas will not only determine its fortunes but also help to shape the national debate over development. No one expects rapid population growth for New Zealand. We have to build a bigger economy by generating the maximum value from the people and resources we've got.

That's just excellent!

Marlborough is focusing much of its upskilling efforts on the creation of centres of excellence in viticulture, aeronautical engineering and aquaculture. An example is the launch last year of the first degree course in viticulture. "We thought it would be a three- to five-year project to start it," says Smale. But rather than starting from scratch, the Marlborough Economic Development Trust fast-forwarded the project by bringing in Lincoln University and the Nelson/Marlborough Institute of Technology as partners.

The next step is to set up a national centre for viticulture research, which fits with Marlborough's status as the largest winemaking area in the country. In May Industry New Zealand awarded the project a $2 million grant for building the centre, and Marlborough is seeking further backing from Lincoln and Auckland Universities, wine growers across the country and Crown Research Institutes.

These moves will strengthen the technology and teaching of winemaking, but need to be kept in perspective, says Peter Hubscher, chief executive of Montana Wines, the country's dominant viticulture player. An active promoter of the research centre, he points out that while the University of Auckland wants to appoint one professor of viticulture, "a good university abroad has 10 professors with diversified skills who can bounce ideas off each other".

Good progress is also being made on creating an aeronautical engineering teaching centre at Blenheim airport. But don't think crop-dusters and sightseeing planes. The teaching centre would bring together two close neighbours: Safe Air, an Air New Zealand maintenance subsidiary with impressive skills (see "Safe Air" sidebar), and Woodbourne, the RNZAF's main engineering base.

As for acquaculture: a centre of excellence is so far just an idea, but plans are on the way.

Hero companies

Companies like Taylor Sheet Metal in Blenheim are among the unsung heroes of the Top of the South, generating good downstream value from the country's primary production base. Taylor's Engineering is a leading supplier of stainless steel tanks to the wine industry. Booming business has left it short of staff and paying high wages: up some 30% over the past three years. With overtime, a good worker can earn up to $60,000 a year.

The company began honing its wine technology in 1990 when, with partners, it set up a company to contract process grapes for local growers. "We were responsible for the hardware so we were able to innovate," says Geoff Taylor, who established the company in 1970.

The processing company was subsequently sold, but "innovation breeds innovation", says Taylor. These days, roughly half the company's business is in making equipment for Australian, US and Canadian winemakers. "Last year we went to Long Island. You should have seen the incredulous look on the US immigration officer's face when we told him we'd come to install some equipment. He couldn't believe America didn't make the best."

The foreign sales are a big boon, filling in the very quiet winter here. "In years past, we had almost no work from mid-April to July." Another encouraging example is Dispatch & Garlick, a Greymouth engineering company that exports 72-cow rotary milking stalls to Mexico, the US, Canada, Ireland and the UK.

Tough tasks

Some areas are proving far harder to develop, though. Aquaculture is probably the worst, according to Smale. "It is the most contentious issue and we haven't made a hell of a lot of progress yet." The resistance of boat and bach owners to granting more leases in the Marlborough Sounds is an old problem. But bigger and more serious was the moratorium the government imposed last year. A flood of some 150 lease applications around the country, many for huge areas of water, prompted the government to call a time out while it finished work on new legislation due late this year. The industry supported the halt in the hope of better processes to help defuse public antagonism. "Legislation to date has been inadequate," says George Coates, chief executive of the New Zealand Aquaculture Council. The industry believes it has a strong economic case. So far, only 4000ha of New Zealand's inshore waters are farmed, an area equivalent to an average high country farm. Some 80% of those leases are in the Marlborough Sounds, yet only 2% of the Sounds are cultivated. The industry would like to have some 17,000ha cultivated nationwide by 2017, generating about $1 billion in exports.

The area of sea 2km out from the beach is New Zealand's most valuable asset, says Peter Tally of Nelson-based Amaltal, one of the country's largest fishing companies. Ideal for aquaculture, "it is seven times more fertile than land but it is being locked up in marine parks and regulations. We're being forced further out into deeper water, which is much less fertile, and we don't have the technology for it."

Investment and innovation

While the industry is fighting this battle, it is also investing in infrastructure and technology. "This whole sector of the food industry is moving from hunter-gathering to farming," says Coates. A big driver is hatchery techniques. Salmon and, to a lesser extent, oysters are already bred in captivity. Greenshelled mussels had proved the ultimate challenge, but earlier this year the Cawthron Institute in Nelson cracked it, announcing a world first: freezing mussel eggs in a critical step to enable captive breeding. "This is the engineroom for breedstock programmes," says Graeme Robertson, chief executive of Cawthron.

The institute is growing fast in other areas, too. After reorganising into five fields of research 18 months ago, its staff numbers swelled by 50% to 150 employees. Highly promising areas for research and revenue include marine bio-security and bio-actives. In the latter area, for example, Cawthron has won a government grant for a research project with the University of Auckland to examine the therapeutic effect of substances from marine organisms on human brain functions.

Technology has also catapulted New Zealand to the forefront of deep-water fishing (below 1000m) during the past decade. Trawling equipment and techniques developed for our waters are in strong demand abroad. New Zealand captains are eagerly sought by foreign trawler owners to pioneer new fishing grounds.

The foreign interest is vital. "With quotas here, there's not a lot of room for expansion, says Andrew Hope, general manager of Motueka Nets Nelson. "So we've looked abroad to Australia, Argentina and Chile, and now to the US and Europe."

Hope's company is a classic innovator. It buys line and netting from Holland, uses its ingenious designs to turn them into state-of-the-art trawls, then outsells the Dutch in markets like Chile. Its Stealth net, for example, is bigger and more efficient than the competition's version. Even with an opening of 120m by 220m, it offers 15–20% less resistance when it's pulled through deep water. With MotNets opening up new markets, Hope can see the company growing by 50% over the next five years.

Mapping the seabed

Seabed Mapping is another example from the Nelson fishing cluster. Its first product was paper and electronic seabed maps for fishermen around the world, derived from public data. But the real opportunity lay in integrating all the data coming onto the bridge of each trawler, says chief executive Declan O'Toole. "Captains have all these pictures from different screens, such as GPS-linked maps and fish plotters, which they have to pull together in their heads." But O'Toole's new software system, launched in May, gives them a real-time, 3D picture of the seabed, the trawl and the boat on a single screen. With it, they can steer their nets over the top of hills and along the bottom of canyons where fish congregate - and steer the nets away from obstacles like uncharted pinnacles. Even better, the system archives all their data, so their proprietary maps get ever better than the publicly available ones. Seabed Mapping developed the system with the help of funding from Technology New Zealand, which it used to hire programmers at Geological and Nuclear Sciences, a Crown Research Institute. The assistance "worked very well for us", O'Toole says. He is ambitious; O'Toole says his three competitors (French and Norwegian companies) will catch up with his new technology, but he has plenty of ideas to leap-frog them again. "Within two years we'll be the dominant player in a very niche world market."

Heady cocktail

The optimism cuts a different way for some other people in Nelson. Rather than plunge into big investments, they take good growth for granted, admits Marilyn Gibbs, chief executive of Commerce Nelson. "Some people are saying the economy's going so well, why bother with a strategy? There are no issues to work on." She begs to differ.

Other players note there are also urban and rural conflicts on subjects such as public transport and infrastructure between Nelson City Council and Tasman District Council. Lacking a regional council, the two use a number of joint working parties to tackle issues.

A crucial test comes early this month with the release of an economic development stra-tegy. The issues raised by the huge growth of the wine industry are a good example of why the Top of the South needs to look ahead. Thanks to escalating investment in land since the mid-1990s, Marlborough's latest grape harvest was some 120,000 tonnes, up 50% from the previous peak in 2000. The financial commitment is huge. Not only has the price of land rocketed from $80,000 a hectare of quality Sauvignon Blanc vines to $180,000 over the last four years, but the amount of working capital has soared because of the long lead time from planting grapes to selling wine.

"You need $4000 of working capital for every tonne of grapes," says Mark Peters, a Blenheim accountant and chairman of Grove Mill winery. "This year the region has harvested 30,000 more tonnes, so wine growers need $120 million more working capital." And that's barely the beginning. The Marlborough vineyards planted but not yet grown to harvest maturity are three times the size of the vineyards picked this year. The growers face an enormous challenge to finance the downstream expansion and develop markets to absorb the increase. But if market discipline breaks down and strapped-for-cash wineries sell at distressed prices, then all hell could break loose.

"Wine marketing teams have been order-takers because demand has exceeded supply," says Peters. "But from this harvest they will have to be salespeople because of the pressure from volumes. The industry, though, is fairly well equipped for that." He thinks there will be a lot more joint marketing by some vineyards and consolidation among the weaker ones.

If there is a potentially dangerous cocktail of big ambition, inadequate resources and over-stretched infrastructure at the Top of the South, then a drive through this territory does nothing to dispel that impression. There are no passing bays on the 130km of Highway 1 from Blenheim to Kaikoura. Forget the fact that the road boasts the second-steepest stretch between Cape Reinga and Bluff: the crowning glory is the single-lane road and rail bridge across the Awatere River just north of Seddon. It is no less than 100 years old. Look at that bridge and wonder: is this place ready for the future?

Safe Air

A small group of Chinese stroll down a Blenheim street chatting in their native tongue. Students, perhaps, or tourists? Nope. They are aircraft engineers in town to help on the overhaul of one of their airliners at Safe Air.

For more than 50 years, Safe Air has operated out of Blenheim airport. In the first four decades, its cargo aircraft served an "air bridge" over the Cook Strait and around the country. After its final flight in 1990, the company - by now an Air New Zealand subsidiary - built on its engineering expertise. In 1998 it began operating part of its neighbouring facility, RNZAF Woodbourne, on a royalty basis, taking over more of the air force's maintenance.

However, with the end of the air force's attack aircraft capability, Safe Air lost about 40% of its RNZAF work, some 70,000 working hours a year.

It had also hoped to do a lot of work for its sister company Ansett - until it collapsed.

But thanks to swift moves into other markets, such as major overhauls of Chinese-owned BAe 146 jet airliners, Safe Air has kept its 355 employees fully loaded. With a wide range of skills in engine, propeller and airframe overhaul, the company sees abundant opportunities in civil and military aviation at home and abroad.

"Our outlook is positive," says general manager Brent Earnshaw. "We have a lot of work on the books and we're bidding for some interesting programmes."

Rod Oram
oram@clear.net.nz

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