Bloody (good) foreigners

By Frances Martin

Sunday 1st December 2002

Kiwi meat industry veteran Jack Corner speaks with fervour when he tells you he was saved from the valley of death by US beef jerky maker Link Industries. Corner's not talking about a religious experience here, though hooking up with the maker of Jack Link's Beef Jerky certainly changed his life. He's talking about Link Industries' decision to invest in his dream of building a beef jerky processing plant in South Auckland. "We couldn't have done this without Jack Link's," Corner says. "To make a snack of the quality that our US partner makes would've involved significant investment in research and development. I couldn't have afforded that cash flow 'death valley' phase."

Link Industries had just about everything Corner needed to set up his plant - bar the beef. Established in 1890, it has a strong brand, top-notch technology, processing know-how and snack food marketing skills. With the help of Investment New Zealand, Corner convinced the Americans to buy into his idea and in July this year a $12 million Jack Link's beef jerky plant opened in South Auckland. The foreign partner has a 60% stake in the business, with the rest owned by Corner and associated parties.

Corner says without the US company the venture wouldn't have got off the ground. The cost of developing the technology and processing skills would have been too great. Once Link Industries came on board, he was able to send senior staff to train in the US and he copied his partner's plant to a T. "Being able to use the Jack Link's brand and promotional gear has also been a bonus. We've been able to tap into their marketing expertise and that's given us a quantum leap forward."

According to Investment New Zealand, Jack Link's is a great example of the benefits foreign direct investment (FDI) can bring to this country - when it's done right. It created a business employing 150 people - many from the unemployment lines - and supplying local and export markets, says Ross Campbell, investment services project manager with Investment New Zealand. Campbell's job is to woo FDI - where foreigners take a direct stake in a company, as opposed to buying portfolios of shares or bonds. He says FDI like Jack Link's makes the country richer by bringing in new technology and management skills. It can also have substantial knock-on effects - like the extra income created for beef farmers, transport companies and other local firms trading with the factory.

But if FDI is so marvellous, how come New Zealand hasn't got rich on the billions of foreign dollars attracted to this country since deregulation began in the 1980s? Economic growth did speed up to an average of 3.3% in the decade to 2002 - compared with less than 1% in the 25 years to 1999. But this hasn't been enough to reverse a 50-year decline in our standard of living. During that time, New Zealand's per capital GDP has slipped from third in the OECD to 20th. Meanwhile, the millions of dollars foreigners take out of our country each year in profits and dividends is leaving the country's balance of payments deeply in the red.

We've also seen some high-profile FDI duds. You'd hardly argue that US rail company Wisconsin Central, Tranz Rail's biggest shareholder until last year, turned the rail operator into a thriving transport business. Rather, it left a business struggling to recover from years of under-investment in track and trains. Likewise, you wouldn't say the Chinese government's investment in the Central North Island Forest has done much for our forestry industry. Its partnership with Fletcher Challenge subsequently collapsed amid acrimony and is now in receivership.

So have the benefits of FDI been oversold? Is Campbell right in claiming that the right kind of FDI can put a rocket under our economic growth rate and bring benefits to the whole country, not just the foreigner buying and the Kiwi selling? And what does he mean by the right kind of FDI?

Not the sort we've mostly had in the past, that's for sure. Historically New Zealand has been quite good at attracting FDI, particularly just after the rapid deregulation of the economy in the 1980s and early 1990s. Between 1990 and 2000, the total value of New Zealand's FDI increased almost fourfold, from $13.7 billion to $63.8 billion. Trouble is, much of that was spent on buying existing businesses through mergers and acquisitions, rather than on greenfield or new investments. In fact M&A accounted for 100% of FDI between 1994 and 1999, according to a report published earlier this year by business consultants Boston Consulting, "Building the future: Using foreign direct investment to help fuel New Zealand's economic prosperity."

That's grim. For while greenfield foreign investment injects new capital, employment, tax dollars and the rest into the country, M&A often involves simply replacing one shareholder's money with another's. The result at best is a bit of fresh cash, and at worst profits that previously stayed in New Zealand simply go offshore.

What's even grimmer is that the little greenfield investment we have had occurred in relatively low-growth, low-return sectors of the economy, says Boston Consulting. Half the $562.4 million of greenfield investment approved by the Overseas Investment Commission between 1996 and 1999 went into property and business services - areas that don't do much to fuel our economic output.

Another big issue is that an estimated 85% of FDI in New Zealand has been in companies that service our domestic market. While we wouldn't want to be without most of these firms - they bring us essentials such as cars, oil and computers - real economic growth is only really possible when FDI is going into creating or enhancing our export industries.

The concentration of FDI in our domestic economy is also bad news for our current account, our chequebook with the rest of the world. An estimated 70%-85% of profits and repayments repatriated by foreign direct investors are earned in domestic-orientated sectors. This drain of money out of the country wouldn't be a problem if it was matched by New Zealand exporters and investors pulling foreign currency back home. But currently it's not, and as a result our current account is stuck firmly in the red.

Given all that, it's not surprising that Campbell and his bosses in government are specifically targeting greenfield FDI in export-orientated companies. "Our objective is to attract new investment. We're not interested in mergers and acquisitions unless they will enable a New Zealand company to accelerate growth in exports." Done right, FDI doesn't just provide Kiwi companies with investment cash, he says. "It creates partnerships that give them access to new technologies, markets and management skills."

So how do we get FDI right? According to Fonterra chief executive Craig Norgate, we need to hook up with foreign investors who bring more than just cash. "These days investment money is pretty much a commodity, especially with global interest rates being where they are. A lack of capital is the least constraint on companies. What they really need are technical linkages, introductions to markets, access to key people and, in certain industries, help gaining critical mass." Norgate calls it "smart money".

The need for critical mass was a driving force behind Fonterra's decision to form a joint venture in Latin America with food giant Nestlé. The deal isn't FDI in the traditional sense - the New Zealand company's ownership structure prevents foreigners buying a direct stake. So Fonterra's FDI involves forming new offshore ventures with foreigners. And this is what it did with Nestlé - setting up a marketing and distribution alliance to jointly tackle the Latin American markets. Eventually, the partnership will be expanded to Central and North America, Norgate says. "We have complementary skills. Ours are in milk processing and manufacturing, though we've also done well in marketing and distribution. Nestlé is outstanding at the consumer marketing end of the business."

The companies won't compete to buy local businesses - hopefully meaning their joint venture can pick them up at a cheaper price. Fonterra is also getting an inside look at how a true global multinational works. "We're already good at marketing but we're learning from them."

Auckland University professor Wayne Cartwright likes Fonterra's FDI model for another reason - it keeps ownership of the company and New Zealand farmland in local hands, while allowing foreign investment at the value-added end of the business. Cartwright, who was involved behind the scenes in forming Fonterra, thinks New Zealand is too willing to allow FDI in land-based resources. Currently, the only regulatory hurdle is the Overseas Investment Act, and that only applies to purchases of land worth more than $10 million, covering an area of 5ha and above or close to sensitive areas such as reserves. The act also applies to foreigners wanting to buy a stake of 25% or more in Kiwi businesses worth more than $50 million.

Cartwright says we need to be realistic about the motives of foreigners investing in our primary industries. "Their objective is to maximise profit to shareholders and this ... approach might have remarkably little effect on the national interest." He's particularly sceptical about whether FDI has brought many benefits to our forestry sector, where about 35% of logs grown here are shipped raw to be processed overseas. "In the case of forestry, most of the intellectual property [to grow pine efficiently] was developed here but almost all the value added is captured by the external investor." FDI will work best for us if we bring foreigners in at the value-added end of the business, rather than letting them use us as a source of raw materials, he says.

Dennis Hall, chief financial officer of Pan Pac Forest Products, acknowledges the common perception that FDI in forestry is all about foreigners getting their hands on cheap logs. But he points out that his Hawkes Bay-based company - owned by Japanese paper giants Oji Paper (87%) and Nippon Paper Industries (13%) - processes 60% of the logs it harvests in New Zealand. "The remaining 40% does not meet the required specification of the processing units and is sold to both domestic and export customers in log form." And in case you think that last bit is just an excuse to flog off a few raw logs, Hall points out that Pan Pac actually buys additional logs in New Zealand to supply the balance of its process requirements.

He says the company's Japanese shareholders have proven themselves loyal investors in New Zealand, having been involved in Pan Pac since 1971. Over the years they've ed between $460 million and $500 million into buying forests and developing processing facilities. Their Kiwi company employs 350 people, with another 400 contract staff dependent on the company for business. Hall says Pan Pac has a policy of using local contracts where possible. "The most recent example of this is Easteel, a Dannevirke company commissioned to build a new boiler plant on the Whirinaki site."

Over the past three years the forestry firm has earned $481 million in foreign exchange, and most profits are reinvested. Oji and Nippon are among the world's 10 biggest paper companies and Hall says their technical skills in the areas of manufacturing pulp and running processing plants are a real bonus. "Their knowledge of and access to markets have allowed Pan Pac to identify opportunities to grow the business."

Pan Pac's boiler plant deal with Easteel highlights one of the secondary benefits of FDI identified in recent research by Joanna Scott-Kennel, a lecturer at Victoria University. Scott-Kennel examined the impact of FDI not just on the company involved, but also on other local firms that trade with it, such as the retailers that sell its products or firms that supply parts for plant.

Of the 516 foreign-owned firms and affiliates she questioned, about a third had collaborative agreements with local businesses that resulted in a swapping of technology and know-how. More than half the firms surveyed said that in the past year they'd helped other Kiwi companies improve products and services. More than 80% had introduced innovations to their industry in the last three years, while two thirds considered themselves to have had a major impact on competition.

"A common perception is that foreign-owned businesses take more than they give to the New Zealand economy," Scott-Kennel says. "My research reveals that through interacting with foreign-owned businesses, domestic businesses develop skills and practices that give them the edge over competitors and a foot in the door of international markets they might not have had."

Her research also contradicts the widely held view that foreigners come here to get access to cheap natural resources, including labour. The most common reason given for investing in New Zealand was to get closer to customers. Less than a fifth of the firms said their main motive was access to natural resources, and only 44 firms invested here to cut costs or raise efficiency.

At Waikato University, FDI expert Peter Enderwick says the ideal FDI relationship includes three key elements. First, it marries skills and resources unique to the investor with resources unique to New Zealand. Second, it triggers internationally competitive clusters that can drive economic growth. And last, it embeds the foreign investor into the New Zealand economy, encouraging them to continuously invest and upgrade competitiveness. The government should support all three elements, Enderwick says, "through appropriate investment in infrastructure and upgrading the quality of resources, regulatory regimes and so on".

Continuous investment and upgraded competitiveness certainly look to be two outcomes of HJ Heinz's 1992 purchase of Hawkes Bay food processor Wattie's. Heinz has invested about $100 million in Wattie's Hastings manufacturing sites, says Heinz Wattie's New Zealand managing director Nigel Comer. As a result, output has nearly doubled from 85,000 tonnes to 195,000 tonnes (though that includes 22,000 tonnes transferred from Gisborne when the pet food plant there was closed). Permanent staff numbers have also doubled to about 800, as have the number of people employed in research and development. The company now exports 40% of production - up from 15% in l992 - and a fivefold increase in the number of containers it moves through Napier's port has had a substantial impact on keeping the port on international shipping routes.

Heinz Wattie's pours $40 million a year into the regional economy through wages, and much of the $140 million spent in other areas such as packaging, raw materials and crops also goes into local pockets. Comer, who's been with Wattie's for 22 years, says Heinz boosted the business in three ways. It provided capital for acquisitions (in recent years Wattie's bought the Craig's spreads business and Eta Dressings) and stumped up the money for plant upgrades and expansions. The most recent of those expansions was in 2000 when Heinz chose to shift some of its Australian production to Hastings.

Lastly, Comer says, the association with Heinz helped Wattie's learn enough about the Japanese market and culture that in 1999 it convinced Heinz's Japanese arm to shift production to Hastings. "Japan is probably the most demanding country in the world in terms of quality standards, so convincing them to shift production here wasn't easy." But the two years of negotiating were worth it. "That transfer lifted our capability and created opportunities for us in other markets. It brought new technology to New Zealand and allowed us to mobilise technology that couldn't have been justified by the size of the local market."

According to Investment New Zealand's Campbell, New Zealand has become more sophisticated about the kinds of foreign investment it's chasing. Yes, we still need investment cash. But equally important are skills, technology and access to markets. We also seem to be getting better at structuring investment deals in a way that suits us. Take Ian Handricks. In February, Handricks, who owns Auckland photo manipulation business Photopages, presented his homegrown software to three San Francisco-based venture capitalists from Creekside LLC. Handricks had already franchised the Photopages business around the country and sold licensing rights in Australia. But he wanted to break into the US market, and to do that he needed some rich and well-connected friends.

"We were one of about 20 technology companies invited to pitch our ideas to them - each company only got 30 minutes of their time," Handricks recalls. "Afterwards I didn't think much about it, until I came into work on the Sunday and there was a one-line email: 'We have an opportunity to enter the North American market. Contact me immediately.'" Handricks sketched out a heads of agreement with the Americans at Auckland airport as they were on their way out of the country. Four weeks later, a full marketing distribution agreement was signed covering the US and Canada. There is also an option to expand into Europe and talk of an eventual listing on Nasdaq.

What foreign direct investment essentially did was move Photopages from a market of just under four million people to a market of 288 million. The company's services are now offered through more than 3000 photographic outlets in the US and the first Canadian stores are about to sign up. The North American stores collect pictures customers want restored, manipulated or rendered from black and white into colour. It emails them to Photopages, which works on them during the northern hemisphere night, and emails them back ready for customers the next day.

For Photopages, linking up with Creekside had a dramatic impact on its rate of growth. The volume of work it handles is expected to rise from 25-30 photos a day before the deal to several thousand after it. Staff numbers have already grown fivefold to 18. But one of the best aspects of the deal from Handricks' point of view is that Photopages and its technology remain in New Zealand hands. Creekside's investment is in the North American distribution side of the business. "We retained ownership of the IP in New Zealand. That's a big issue because if you've got intellectual property, you don't want to give it away if you can avoid it."

Of course not every foreign investment deal can be structured so that the company remains in New Zealand hands. It would be hard to imagine Heinz agreeing to put so much money into Wattie's without some form of direct ownership. And while some Kiwis might lament national icons like Wattie's falling to foreigners, Boston Consulting insists intense doses of FDI are our only hope of raising living standards.

To return our per capita income to the top half of the OECD rankings by 2011 - the government's stated goal - New Zealand's GDP must grow by 5% a year for the next 10 years. That's a huge task. It will take massive amounts of investment and, going on our past track record, New Zealanders won't save enough to do it on their own.

We need those foreign investors to fuel our economic growth, Boston Consulting says. In fact, FDI will need to climb from $4 billion a year in 2001 to about $11 billion in 2011 if we're to have any chance of hitting the government's OECD target. Even more daunting, greenfield FDI must grow by 37% a year, from $200 million in 2001 to $4-$5 billion in 2011. That's equivalent to adding about four new Fisher & Paykels over the next nine years.

Boston Consulting concedes FDI has potential risks and these have to be managed. Foreigners can try to exploit our natural resources, or buy up our companies and move head offices and research and development overseas. But anyone who reads the newspaper will know that companies don't have to be foreign-owned to be done over by their shareholders. Sure, Tranz Rail didn't thrive under Wisconsin Central. But would anyone argue that our very own Air New Zealand did better under the tender care of then locally-based Brierleys?

Like it or not, we need FDI. Some might view it as a necessary evil, the price we must pay to boost our standard of living. Others - like John Corner and Ian Handricks - see it as the means of turning good ideas into global businesses.

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