The Fonterra crisis, and the real problem with New Zealand's economy

Telecommunications Users Association CEO Paul Brislen

OPINION

The New Zealand economy is in damage control mode at the moment. Let me give you some stats to paint the picture.

New Zealand is a trading nation – we earn US$37.9bn a year from our exporters.

Dairy exports have risen from 5.9% of all exports to 13% between 1995 and 2010. In that same period, the number of dairy cows in New Zealand doubled.

We export most of our goods to Australia (21%) followed by China (15%) then the US (9%) and Japan (7%).

One company, a collective although really a multination corporation, accounts for most of that export revenue. Fonterra, which grew out of a merger of the New Zealand Dairy Group and Kiwi Cooperative Dairies in 2001, has lead that charge and now controls one third of the world’s dairy trade, exporting 95% of its output.

We are, as an economy, totally reliant on one company for wellbeing.

This, then, is the heart of the matter. Forget the grubby pipe and the botulism. Put aside the PR debacle of sitting on the news for months and then holding a press conference with no information.

That we are utterly reliant on one source for our income is the real catastrophe here.

In the same time period – 1995-2010 – the internet revolution came and swept all before it, yet ICT related exports are worth a fraction of dairying. How did we miss this opportunity?

Diversification is the name of the game and we as a nation, as an economy have, to mix my farming metaphors, put all our eggs in one basket.

This is the real issue revealed by the dirty pipe. Not that there’s an issue with process in one factory in the Waikato, but that we are utterly exposed to an issue with process in one factory in the Waikato. That we are utterly exposed to one industry for our place in the world.

We need to diversify. We need a concerted government-level drive to build up our other export earners.

Traditionally, New Zealand has made its money off the land and the sea. We’ve harvested trees, whales, gold, coal and seals. With the advent of freezer ships we moved into sheep and beef and yes, dairy goods.

We cannot simply remain reliant on the good weather and remoteness of our islands in order to survive. We have to do more and we have to do it now. Arguably we’ve missed the internet revolution and all that could have come from that, but I’m convinced it’s not too late, but we have to act and we have to act now.

Forget low-value manufacturing – we simply can’t compete with China or India. Forget mining – we love our clean, green (well, green at any rate) environment too much to dig up the national parks looking for oil and uranium. If there’s any one answer to this issue, it’s ICT.

(EDIT: Hattip to David Farrar at Kiwiblog for the above link to The Economist's piece on Estonia. We should be doing this) 

We need to encourage our students to go into ICT fields of study instead of accounting and management.

We need to build an export market that grows much faster than the 11% year on year we see today.

We need to encourage more investment and more entrepreneurship in ICT areas and not be too afraid of spending money on businesses that ultimately don’t succeed.

We need to change the tax laws to encourage ICT developers to do more.

We need to spend more on R&D (currently we are spending less than the OECD average. That’s no way to get ahead).

We need to invest more in our ICT infrastructure – from our national deployments of fibre infrastructure to our international needs with submarine cables, but also our electricity sector to power all these devices.

We need to do these things because the alternative is that our global economic output is entirely in the hands of a pipe cleaner in the Waikato earning, I’m going to say, minimum wage. I’d like it to be a touch more secure than that.

Paul Brislen is CEO of the Telecommunications Users Association, www.tuanz.org.nz

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23 Comments & Questions

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Paul - Great article and you are on the money. My only comment is that the NZ tech sector goes far wider than just "ICT". In fact, many of our biggest tech-related exporters fit outside the ICT umbrella and are world leaders in their field. As a country we should be embracing the whole tech sector and the contribution it makes to the economy, jobs and the nation as a whole.

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NZ has always been good at farming. NZ still has a farm culture.

NZ not yet good at ITC, with a couple exceptions. NZ has nothing in particular to offer investors into ITC companies.

More government involvement will not help. If ITC wants to grow its industry, it's up to them. Silicon Valley is one of few US industries not built on government subsidies (mostly). That's the model for NZ ITC to follow. Go to it.

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I think the point is that NZ needs more/bigger/brighter ICT - not that ICT needs more NZ

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The US Government didn't 'subsidise' Silicon Valley, they created it. Silicon Valley owes its entire existence to the Department of Defence and the CIA's (i.e., US Government) massive increase in spending on defence technology from the 1950s to the present day. It's probably the most successful example in the world of government involvement building an industry.

This link gives a quick overview:
http://www.inc.com/eric-schurenberg/inconvenient-history-of-silicon-vall...

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Hi there, I think you're missing the point. Yes, we are good at cows. Mostly. But what happens if (for example) Fonterra were to have a problem that sees its products, our products, banned from some key markets, what is our fallback position?

We cannot rely on one industry or provider for our economic well being. We must have more strings to our bow.

I'd also disagree regarding NZ's ICT potential. We have great ICT businesses that create world-class products and services in a market that is mildly negative to benign at best. US ICT companies get far more help from both state and federal governments. If we are to compete we need to go further than simply matching their support.

Paul

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Paul, I couldn't agree more. Adding to the problem is that it's only a matter of time before we don't need sheep/cows any more - http://tvnz.co.nz/technology-news/garth-bray-world-s-most-expensive-beef...

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Lol ... you mean the same ICT sector that is about to become infested and then hamstrung by officious with GCSB mandates and compulsory server hardware installed at all the critical gateways?

No corporates are going to go near NZ ICT infrastructure once the govt. clowns are put into such a powerful controlling position of ALL information that comes through the pipes ...

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Get real. Have you seen the US Patriot Act? It makes the current GCSB legislation look like a puff in a thunderstorm.

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I have been working in technology for 20 years and am professionally qualified. Setting up a company working in technology is high risk and the government does not let you set R&D against tax - you have to the provide the capital cost up front and can only set aside losses.

If GetReady thinks that I am going to put my house and children's future at risk by betting on a risky start-up then he will be disappointed. I can easily work with little risk, thank you very much, and put my money instead into property that will allow me to set losses against tax while enjoying asset value increase.

I am tired of people preaching about the market when the whole 'market knows best' model was blown out of the water in 2008 and the taxpayer had to baleout the finance industry.

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Somewhat of a myopic view. Ploughing money into real estate benefits a handful - i.e., you and your family. Investing into business, particularly tech companies, creates opportunities, jobs for the next generation, wealth for the country and gives us (NZ) an opportunity to succeed in the global market.

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I suggest you get in contact with Callaghan Innovation. Funds are there for start ups through to large corps if you meet their criteria. R and D tax credits are just open to rorting and far higher administration costs.

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I have spent the past five years living between New Zealand and South East Asia. In Thailand and Singapore I continuously meet extremely clever men and women. Some with PhDs, some with just that majic touch.

Why are they there? Location, taxation and absolutely pro-business environments.

While NZ has made considerable improvements in these areas we still need to advance to the killer punch. A very simple low flat tax that allows great rewards for effort, risk and success.

We are bogged down in Tax the Rich, Capital gains tax and egalitarian attitudes. Over half our adult population lives on transfer payments.

No such attitudes or GFC here in Singapore, Thailand or Malaysia. They die laughing when I tell them about Working for Families policies and other OECD handbrakes.

Company tax, 8-15%, is a big attraction, personal rates reach 20% at $320,000.

We (NZ) are close to having a very good setup but are the futuristic bold decisions necessary going to come from JK? MMP does not help.

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I couldn't agree more.
NZ was supposed to have a near flat tax system when GST was hoisted on us. Max 20%. Min 10%.
When you attain the three Bs - BMW, batch, boat - there is no point in striving for more as you are taxed too much for it to be worth the effort.

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Paul
I agree with your general argument about diversification. That has been talked about for decades. But I tend to agree with Bob Pincin above with his comments about the high-tech sector in general.
Yes, the story of Estonia is great, just like Nokia was for Finland. But in the end if NZ is to compete in the ICT sector it has to have some competitive advantage in what it does in it. For example, software development can be done anywhere, and thanks to the internet those who want it done can get it from anywhere.
So it seems that developing the ICT needs of agriculture, forestry and some of the energy fields is an area we could be competitive in. Yes, I know it is already happening (within the Gallagher group, for example) but I think that is where the emphasis should be if NZ is to go down the ICT development route.

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This is old technology but it still is not being made here. This unit for milking cows in the paddock os available from Denmark.

No resource consent ; no concrete yards to hose,; no cows with sore feet from walking too far; no pathogen build-up in the milking area; small groups of cows (120/robot)= less stress; great milking hygiene; great data management.

http://www.youtube.com/watch?v=QXtk-AJnpNY

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Agree with you, Ross. Great perspective. Wouldn't hold Nokia/Finland up as a guiding light, though, as Nokia is to Finland ICT what dairying is to New Zealand.

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Not just one company, but increasingly one market that is just a commodity market.

One comment re ICT industry in NZ. Too often we lose the value of ICT startups as they are sold overseas. Increasing investment by angel investors encourages this further. While some will say it isn't a problem because of the proceeds from the sale (which may be re-invested), we are missing out on the rewards of ICT success just as the companies are about to blossom.

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Nothing stopping this happening

It is not farming versus ICT or anything else

Plus while the Fonterra situation is not welcome, the media in NZ except for the NBR have reported it in sensational headlines.

Marine is over $1 billion I believe, plus wine is up there.

But for a long time primary produce will be number one

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In principle I agree wholeheartedly Paul but....

Douglas and Prebble in the 80's(in particular) and Helen Clark in the early 2000's both said that farming was yesterday's industry but it's importance remains as strong as ever. It is, in basic economic terms, where our competitive advantage lies. And more importantly nobody can come in and buy it pick it up and take it away.

We need a broader based economy no doubt but what we really need is a bigger domestic market of our own so that we are less dependent on the whims of foreign governments, foreign company owners or the exchange rates.

On the question of Fonterra it is a major issue that the country is somewhat at it's mercy in terms of it's export clout but there are still a couple of meat companies that are a bit significant as well though their inability to get together in markeing strategies reflects badly on them when compared to Fonterra

There are an enormous number of countries in the World where anyone could set up ICT and the skills are exportable but there are not a lot with the farming expertise and advantages that NZ has.

That doesn't sure the current problem I know(and biosecurity is a far bigger danger than this current slip up) but we do have tremendous resources that those Greens stop us accessing. A major hiccup(God forbid!) might get them realising the comment 'A Country can't be poor and Green' has some truth to it

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If you know what you are talking about, go raise the money. Does the taxpayer owe you? No.

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For the last 20-30 years there have been regular calls for New Zealand to diversify from agriculture, arguing that we can't be a rich, successful country if we are so dominated by agriculture.

I remember when farming was called a sunset industry in the 1980s. A few pundits and politicians got that one wrong.

The problem is not our ongoing agricultural success - where would we be without it?

Our farmers and marketers of agricultural produce should be congratulated and held up as exemplars of entrepreneurial and technological success. The world wants food and we supply it. There is every chance that our food will be in even stronger demand for the foreseeable future. If nothing else changes in the rest of the economy, agriculture will be even more dominant in the future than it is today.

The rest of the economy should learn from agriculture - taking a long-term view, investing in R&D, developing added-value opportunities.

It is not a win/lose scenario. We need to rejoice in, and enhance, our strength in agriculture at the same time as we encourage a range of other opportunities. Don't bag agriculture to try and encourage another sector.

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It is difficult to see that the development of added-value opportunities has occurred to any significant extent in the dairy industry when the gross realisation to the country is about $1/litre of milk.

It is a fact that half the dairy production realising twice the price - i.e. $2/ litre - would be more profitable all round for the industry and the country.

Dairy farmers, as a group, have got themselves into a huge amount of debt in the pursuit of some very thin margins, and with a significant detrimental environmental impact as a result of very high stocking rates to boot.

Nobody is arguing that this is a sustainable situation.

Playing to our strengths must be the way forward, and we will never get rich as a country by selling to the poor.

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Interesting, Paul, if somewhat overstated on 'needs' and ICT angled.

Consider would you whether Kiwis have both opportunity and intellectual ability to rank with Estonians?

And how about diversification out of Fonterra. In its industry my feel is that processing has a good deal still to offer. And cashflows could certainly deploy through such a global reach into very promising additional ventures.

Cow-based in its starter, seen in this way. Not its end.

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