The New Zealand Electronics Industry Past, Present and Future ENZCon ’06 Keynote address

The New Zealand Electronics Industry: Past, Present and Future ENZCon ’06 Keynote addressAdrian Buschab@How big is the New Zealand electronics industry? You would think that this would be pretty easy to find out. I asked New Zealand Trade and Enterprise, who referred me to the Statistics New Zealand. I asked Statistics New Zealand and they told me they didn’t collect these figures. I asked the Northern Employers and Manufacturers Association and they put me on hold. It had the commerce librarian here at Canterbury University library stumped. I must have spent a day trying to track this figure down, without much luck. Compare that with the wine industry - it took me less than a minute to find out that the New Zealand wine industry annual had exports worth $512 million dollars last year (New Zealand Winegrowers, 2006).Our industry is a major export earner but it seems like its size is a state secret. I’m honoured to be asked to speak at this conference where so many exciting developments are on show. I think it’s great that we have an occasion to come together and learn what others are up to. In this spirit of information sharing I hope to shed some light on the electronics industry, where it has come from, how it has changed and where I see it going in the future.Lets start our brief history with the year of the first ENZCon conference. This was held in Hamilton in 1994. Peter Jackson had just finished his movie “Heavenly Creatures”. This movie was based on the Parker-Hulme murder that took place in Christchurch forty years earlier. An interesting piece of trivia for out of towners is that Juliet Hulme’s father Dr. Henry Hulme was Rector of the University of Canterbury at the time, and they lived in the building where Sunday’s Icebreaker reception was held.A fortnight before the first ENZcon conference a by-election was held in the Canterbury electorate of Selwyn for the seat vacated by Ruth Richardson. She had been removed as finance minister the previous year, marking the end of a decade of profound change in the New Zealand economy.These changes began in 1984 with the election of the Fourth Labour Government. Facing a fiscal crisis, the government embarked on a programme of rapid tariff reduction, and the abolition of subsidies and export incentives. Much of New Zealand’s manufacturing at the time was directed towards import substitution, and the sudden removal of subsidies and reduced tariffs hit this sector hard. Some manufacturers paid a high price: local firms such as PYE, AWA and GEC simply disappeared (Green, 2005, p. 83).The whole manufacturing sector found times hard. Between 1986 and 1990 72,500 jobs were lost in manufacturing (Dalziel & Lattimore, 1996, p. 33). Indeed, between 1984 and 1994 manufacturing’s share of GDP fell from 22% to 19%.By the late 1980s financial liberalisation had led to boom time for the banks, which had a bit of a debt binge, with many low quality loans being granted across the sector. By 1989 the hangover had set in. The BNZ needed hundreds of millions of dollars in government cash injections to keep it afloat. Tait, which had borrowed to invest in production equipment, found the going pretty tough until sales for the new products taking full advantage of the new equipment started kicking in (Green, 2005, p. 81).By 1994, Tait had come through a rocky patch to win the Exporter of the Year award. That year Tait had annual sales of $75 million, with 75% of this exported.Two years later Exporter of the Year award was won by MAS Technology Ltd, a Wellington microwave telecommunications manufacturer. MAS Technology had been formed 21 years earlier, and had survived the turbulence of the 1980s and early 1990s. In 1997 it listed on the NASDAQ national market in the United States. MAS Technology is still the only private New Zealand firm to successfully list on NASDAQ. The following year it was bought by Stratex Networks for $170 million.This marked the advent of significant foreign investment in New Zealand’s electronics industry. There are pros and cons of this type of investment. New Zealand has always been a capital-importing nation. Our low savings and investment rates mean that we have to look offshore for development capital. Being run by a foreign multinational brings modern business practices and inbound technology transfer. But the other side is that the local outfit grows and shrinks at the whim of foreign investors.1998 saw local firm Swichtec sold to British firm BTR for $75 million (Green, 2005, p. 141). Swichtec was founded by Dennis Chapman, a one time Tait employee. Dennis left Tait in 1983 to go out on his own. His background in RF electronics provided him with a different perspective on switchmode power supply design. His power supplies had a switching frequency ten times higher than any competing product, meaning that his power supplies could get 5 times the density of power in the same space. This gave the company a competitive edge, and after seven years Dennis’s firm had grown to the second largest electronics manufacturer in New Zealand.Buckley Systems Ltd won the Exporter of the Year award in 1998. Buckley Systems is a privately-owned company founded in 1986 to produce electromagnets for ion implantation equipment (Campbell & Corbett, 2003). Ion implantation is used in the production of integrated circuits for doping as a superior alternative to diffusion. By 2003 Buckley Systems was supplying electromagnets to 90% of the world’s ion implantation industry. Owner Bill Buckley was involved in the manufacture of the first ion implanter back in the 1970s giving his firm first-mover advantages in technology and manufacturing cost. All of Buckley’s equipment is exported – around 350 tonnes each month.The 2002 Exporter of the Year winner was Navman. Originally named Talon Technologies, Peter Maire founded Navman in 1986 to produce products for the pleasure boating industry. His idea was to design the products here in New Zealand, manufacture them in Asia, and to sell to wealthy boaties in the United States. Later Navman got help from Industrial Research Limited in the development of a patch GPS antenna. Navman built considerable experience in GPS technology, to the point where the engineers from Conexant, the company making the GPS chips, came out to New Zealand to find out how Navman got these chips to perform so well. In 2004 Brunswick Corporation bought Navman for $108 million.Last year Rakon Ltd won the Exporter of the Year award. Warren Robinson started Rakon in a basement in 1967, grinding crystals for mobile radios. In the early 2000s Rakon saw the emerging need for miniature high-stability crystal oscillators for the GPS and mobile phone markets, and developed technologies that gave two to five times the performance of competing products for a similar price – stealing a march of around two years on the competition. Rakon listed on the New Zealand stock exchange in May.Over the last twelve years the Exporter of the Year award has gone to a firm from the electronics industry five times, which is a pretty impressive result. These larger companies give the industry a certain mass and momentum. But each of these firms was once a small firm, and looking back it took these firms ten to thirty years to reach their current size. The growth of tomorrow will come from today’s small firms. And the economic contribution of these firms is significant: For example in 2005 the output of small and medium electronics firms in Canterbury was estimated to be $270 million (Tantrum Ltd, 2003, p. 4).So where is the industry today? Some statistics:• I estimate the production of the total industry at around $1.3 billion, with exports of $1 billion• the annual growth in demand in the decade to 2002 for electronics engineers was 7.6% versus 4 percent for other professionals (Departmentof Labour, 2005)• around 3700 people are employed in electronic equipment manufacturing, almost double that in the year 2000 (Statistics New Zealand, 2006) • Since the first Electronics New Zealand conference in 1994 the high tech share of exports has risen from 2.1% to 5.3% in 2003This is a tremendous record of growth. Today’s electronics industry has shed its parochial import-substitution heritage and grown in depth and diversity. Inward foreign investment has brought capital, business competencies and access to distribution channels. The big electronics firms earn valuable export returns and provide employment for many. Some of the founders of these firms, having sold up, are now putting their experience and wealth into new firms, building the industry leaders of tomorrow.But what of the future? What is the engine of growth that will drive future industry growth and development? Given that Samsung manages to produce the equivalent of half of New Zealand’s GDP with 123,000 employees this is a question that I think is pretty important to New Zealand as a nation.I don’t want to dwell today on the barriers to industry growth. These have been the focus in recent times with initiatives such as the ICT Taskforce (ICT Taskforce, 2003) and the Once Upon a Leader project by the Royal Society (Janson & McQueen, 2003). An industry needs a reason to be – the source of its competitive advantage, if you like - so what is ours?I think the sources of advantage can be grouped into two categories – those arising from abundance, and those arising from scarcity.One source of advantage arising from abundance is demand management. For example the United States response to the cold war was a big contributor to the development of the US electronics industry in the 1950s and 1960s. Increased local demand can be achieved through the erection of barriers, such as tariff barriers or standards-based barriers.Another source of advantage comes about through abundant investment capital. This is seen in economies such as Singapore, where at one point 40% of GDP was channelled to investment (Krugman, 1994). A study in the looking at Taiwan’s development to the early 1990s found that 89% of the growth of industry was directly attributable to tangible capital investment and the bulk of the remainder was due to rising worker skill levels (Kim & Lau, 1996).I don’t think that the future of the electronics industry in New Zealand will come about through abundance-based sources of advantage. Import barriers did not serve uswell in the days of import substitution. We don’t really have critical mass to erect standards-based barriers. Our abysmal private savings and investment rate rules out industry growth through an abundance of investment capital, and I don’t think the Cullen super fund will offer us any preferential treatment.We are left with sources of advantage arising from scarcity. Where a cluster of firms competes in an industry sector, their competitiveness improves. Some people assume that this is because these firms are cooperating, but in fact it is the high level of competition that leads to competitiveness. Take the Hong Kong electronics assembly industry – lots of small manufacturers and thin margins. This leads to a strong focus on costs, and a very high interest in any innovation by any manufacturer. New ideas get copied in a flash since any firm that falls behind is quickly out of business. I view this as advantage arising from scarcity because instead of firms becoming fat on easy capital or protected markets they are kept lean and responsive by the ever-present strong competition.Now of course to benefit from this source of advantage one must first have a cluster. I don’t think we have such an electronics cluster. Take wireless exports for example. The larger players are Tait, Harris Stratex Networks (which now owns the firm that was once MAS Technologies) and 4RF. There is no overlap between Tait’s products and those of 4RF and Harris Stratex. Both 4RF and Harris Stratex make microwave linking equipment, but one of these is a local start-up focusing on lower-capacity products while the other is a full-service multinational focusing on higher capacity links. The times where a buyer with a particular need would find a viable product choice from more than one of these firms would be very rare. These firms don’t compete in a particular product-market and I wouldn’t call them a cluster. The same argument extends to the whole of our electronics industry. There isn’t the competition to drive cluster-based competitiveness. The only real competition is for skilled people, for which there is a perennial shortage.Another source of advantage arising from scarcity comes about through the virtue of necessity. This is advantage gained by not having easy access to capital or markets, by not having well-developed downstream support industries, and by not having the baggage that comes with traditional way of doing things. This is evident in several of the Export Award winners:• Bob Buckley has said “clients have been critical of me being too far away, but being in New Zealand disciplines you into putting quality first. Youdon’t want to fly 130 tonnes of machine and have to fly that back to fix it”(Campbell & Corbett, 2003, p. 5)• Dennis Chapman, bringing his radio frequency circuit design skills to bear on switchmode power supplies – he couldn’t do radio design after leavingTait because he didn’t have the several hundred thousand dollars needed tobuy the required RF test equipment• Rakon, going from grinding crystals in Warren Robinson’s basement to developing world-leading products two years ahead of the competition In each of these three examples scarcity or challenge contributed to a high level of competitiveness, stimulating innovation to make world-beating products. I believe that it is this type of innovation that is behind the success of the New Zealand electronics industry and is the engine for future growth. I certainly agree that the barriers to growth need to be addressed. We will suffer critical engineer shortages over the next decade along will much of the globe. While the internet has brought world closer, we are yet to see the ‘death of distance’. Selling our products when weare physically so far from the worlds markets will continue to be a challenge.But these challenges can be partially offset by superior products. I believe that innovation must be the engine of growth in future development of the New Zealand electronics industry. To quote Ernest Rutherford, “we haven’t got the money so we’ve got to think”.Impressive innovation is found in each of our industry success stories. In each case they have built their own outstanding capability. Success wasn’t found in being, say, two percent better than someone else – that sort of advantage is just too small to be sustainable given the challenges we face.So how can innovation be promoted? One way is by learning off each other. A characteristic of successful industries in the Nordic countries is the prominence of industry associations promoting contact and collective action (Perry, 2001). We certainly have our fair share of characters in the electronics industry – but our preference for individualism stands in the way of learning from each other. We need to find ways to work together to maximise the value of all the hard-won knowledge within the industry. We need to connect our creative researchers, engineers and technologists with each other and with the sales people, marketers and production people to exploit opportunities and let us do things in new and different ways. This is the potent combination that will be the cauldron of growth for our industry.This brings me to the relevance of this conference. One feature of ENZCon that appeals to me is its breadth. I see papers in a wide range of fields, from mathematical modelling to microelectronics and mechatronics. I see industry collaboration, some from my colleagues at Tait. In fact I see this conference as symbolising the characteristic strength of New Zealand’s electronics industry and the driver for its future growth. I hope that you’ll listen carefully to presenters from fields outside your own and take something different away for your own work. I hope you’ve met new people with whom you’ll collaborate in the future. Innovation is the primary source of advantage for our industry, and the key to its future.New Zealand’s electronics industry has emerged from the harbour of import substitution to sail through stormy seas to emerge as a strong, vital and important contributor to New Zealand’s economy. Our exports are twice that of the wine industry. The story of our industry is the story of individual achievement against the odds but I call on you to reach out to others to support the next stage of our industry’s development. I take great heart in the exciting work on show over the two days of this conference. It bodes well for the future and I’d like to thank you all. Thank you.ReferencesCampbell, C., & Corbett, L. (2003). Buckley Systems: Competitive Advantage New Zealand Project Case Study. Wellington: Victoria University.Dalziel, P., & Lattimore, R. (1996). The New Zealand Macroeconomy: A Briefing on the Reforms. Oxford: Oxford University Press.Department of Labour. (2005). Electronic Engineer: Occupational Skill Shortage Assessment. Wellington: Author.Green, V. (2005). Radio Fidelity: The Story of Angus Tait and an Industry Sparked by Loyalty. Auckland: VividWorld Ltd.ICT Taskforce. (2003). Breaking Through the Barriers: ICT Taskforce Report.Wellington: Author.Janson, A., & McQueen, B. (2003). Once Upon a Leader: Leadership Pathways to Wealth Creation in Science and Technology. Hamilton: Royal Society of New Zealand.Kim, J.-I., & Lau, L. (1996). The Sources of Asian Pacific Economic Growth.Canadian Journal of Economics, 29(April special issue, part 2), pp. S448-S454. Krugman, P. 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