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Wellington continues to thrive as a tech hub, with the fastest growth rate in the country. Datacom, its Wellington HQ pictured here, ranked #1 in terms of revenue. Photo/Public Domain/Good Free Photos

Tech sector booming: The paradigm shift NZ's been waiting for

If the growth of our tech sector continues as projected, we’ll soon be well on our way to realising the late, great Sir Paul Callaghan’s dream of “getting off the grass” and making New Zealand a place where “talent wants to live”.

The latest Tech Investment Network (TIN) report, which tracks the revenues and activities of the country’s tech sector, has our 200 tech companies generating $12.1 billion in 2019, up $1.1 billion on the previous year, the second consecutive year of double-digit revenue growth.

The tech sector, which TIN defines quite broadly to include agri-tech and biotech, notched up $8 billion in export earnings, larger than forestry ($5.5 billion) and meat exports ($7.7 billion).

When you consider that dairy, our largest export sector, accounted for export earnings of $14.1 billion in the last year, it isn’t hard to believe TIN founder and managing director Greg Shanahan when he says that he expects tech exports to outstrip dairy exports in “three to five years”.

Pulling the right levers

That will indeed be a highly symbolic moment. For the last 20 years, since the much-hyped Knowledge Wave conference set the scene early in the Helen Clark government’s term for a shift to a higher value and more innovative economy, we’ve seen various government-led efforts to stimulate our tech sector.

A lot of them weren’t particularly well-conceived or executed. We didn’t do enough in the early 2000s to create a favourable environment for investing in start-ups and early-stage tech companies, while Israel, Ireland and others began raking in foreign investment. Our efforts to boost business R&D still haven’t delivered and our research sector isn’t structurally optimised to spin off the ideas and talent to create the high-value tech companies of the future. Whether living under a red or blue government, we underinvested in building the knowledge economy everyone told us we needed to transition to.

So maybe tech could have been our largest export earner earlier. But its upwards march has nevertheless been impressive. That’s largely down to our generally favourable business conditions over the last two decades, our attractiveness to tech workers internationally and our well-established trade links.

An impressive amount of innovation has translated into export dollars everything from precision agriculture and fin-tech (financial technology) services to high-value manufacturing and IT services.

We now have three companies turning over more than $1 billion in annual revenue – Datacom Group, Fisher & Paykel Appliances and Fisher & Paykel Healthcare. Xero, the accounting software company founded by Rod Drury in 2007, took in $553 million in revenue last year.

Fonterra’s current travails and the increasing calls to halt dairy intensification in the interests of better environmental sustainability, make tech’s rapid ascent even more pleasing to witness.

Knowledge, not nature

Before his death from cancer in 2012, Sir Paul Callaghan and his close colleague Professor Shaun Hendy, collaborated on Get Off the Grass, a book that urged New Zealand to “live off knowledge rather than nature”. At the time, I called the book a “must-read for entrepreneurs, business people, CEOs and policymakers.”

It made a compelling case for pulling all of the levers to move away from primary sector commodities to earn export dollars, towards high-tech weightless products and services that generated more value, higher salaries and had less of an impact on the environment.

As Sir Paul and Professor Hendy starkly put it in the book: “The average worker of a TIN100 firm generates annual revenues of more than $250,000, compared to less than $120,000 in the tourism sector.”

Tourism was our second-largest export revenue generator last year, earning $11.3 billion. But it is a low-value business compared to tech and the pressure of growing tourist numbers on our most scenic tourist spots is becoming increasingly noticeable. 

So we are getting off the grass gradually, thanks to the entrepreneurs and tech leaders who have led the innovation and investment efforts that can make such a large difference in a small economy. Without Rod Drury’s determination to make better accounting software and deliver it from the cloud, Xero wouldn’t exist.

Without the commitment to engineering excellence over decades, we wouldn’t have world-class products from Fisher & Paykel. Without wealthy players like Sir Stephen Tindall and Sam Morgan reinvesting their millions into emerging tech companies, we wouldn’t have a host of thriving tech companies that benefited from their capital injection, but also their wisdom.

But while dairy and other primary sector products served us well for over a century, tech can be more volatile, its rewards fleeting, unless we really commit to becoming one of the most innovative countries in the world.

Top 10 tech companies in New Zealand, ranked by revenue.

Embracing disruption

We need to be constantly spinning off great ideas that generate intellectual property and research that can be commercialised. We also need to be early adopters of some of the big disruptive technologies that are shaping the world, from artificial intelligence and 5G mobile networks to robotics and industry 4.0 manufacturing processes.

On that front, we’ve got a lot more work to do. The Government has identified our productivity gap, which threatens to see our manufacturing industry become less competitive. We are good at relatively short-run manufacturing of high-value products, rather than the mass production Chinese factories are capable of.

But those factories are using these new technologies to beat us at our own game. I was recently in a mobile phone factory in Shenzhen, China, which has been optimised to produce a phone every 60 seconds and to reduce the number of workers on the production line from 80 to 17. Automation is revolutionising manufacturing and unless we embrace it quickly in our high-value manufacturing, we will get left behind.

We are still not investing enough in R&D, though the TIN report suggests that the 200 companies it has tracked invested 11.1 per cent of their revenue in R&D, which is a heartening sign. The Government’s new 15 per cent R&D tax incentive only started in April, so it will be a couple of years before we can tell if this policy is shifting the needle more than the grants programme it has replaced.

Helping the regions thrive

There are other things we need to do, such as require the tech giants to pay their fair share of tax here so that they operate on a level playing field with our own digital companies.

We also need to make sure the knowledge economy is everywhere, not just in our top three cities. It was heartening for me to see that Wellington continues to thrive as a tech hub, with the fastest growth rate in the country in the last year (17.5 per cent and $386 million in sales).

But tech companies should be able to thrive anywhere. That was the whole point of investing over $2 billion in the ultrafast broadband network – to enable the regions to host innovative, digital companies.

Greg Shanahan.

This week’s announcement of a $10 million investment in Dunedin as a hub for video game development is a great boost for the city’s digital economy. Regional Economic Development  Minister Shane Jones would do well to spend more of his regional growth fund war chest on enabling tech entrepreneurship to thrive beyond our cities, making our beautiful smaller cities and towns more attractive places to live in the process.

This year marks 20 years of the TIN report and Greg Shanahan’s efforts to track our tech sector’s performance.

“In 20 years’ time, when we are looking back on another two decades of evolution of the New Zealand tech sector, I’m confident that we’ll be able to trace the threads back to the TIN Report of 2019 and see how the successes of today translated into the strong foundations of a tomorrow that brought benefit and prosperity to all,” he says.

If we are smart in building on what we’ve achieved with our thriving tech sector, he can only be proved right.

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