Hidden Champions of the 21st Century

A recent New York Times article  examined why Apple has its iPhones made in China.  The article deservedly attracted a lot on attention for its insights on China's supply chain advantages in manufacturing (far more significant than simple cheap labour) and the USA's continuing shortages of engineering skills at all levels. Unfortunately, the main reactions I've heard can be summed up as defeatist:

• the West has lost the "war" in manufacturing, and
• anyone thinking of investing in Western manufacturing is crazy. 

Both reactions are wrong.  While it certainly makes sense for some manufacturers to have Chinese operations, it does not mean that Western manufacturing should throw in the towel.  For an alternative and far more upbeat view, I recommend you read Hidden Champions of the Twenty-First Century: The Success Strategies of Unknown World Market Leaders by Hermann Simon.

Simon was a noted academic and today heads an international consulting business.  He first brought attention to the "Hidden Champions" - mid-size firms with global leadership positions - with a 1992 article in the Harvard Business Review, followed in 1996 with a best-selling book Hidden Champions: Lessons from 500 of the World's Best Unknown Companies. With Hidden Champions of the Twenty-First Century, Simon has updated his earlier analysis in the context of the rise of China, and finds that his original ideas are even more valid today. He provides examples and data to make his case that mid-size firms can be globally successful, without recourse to management fads and magic bullets.

Simon estimates that 80% of the hidden champions are based in north-west Europe, especially Germany and Scandinavia - most definitely not low-cost regions.  He also notes that many of the hidden champions are based in small towns where it is difficult to hire the top talent attracted to big cities and big corporations.  That hasn't stopped them being successful; likewise, Simon is dismissive of those who opt for the easy outsourcing route for core activities.

The last chapter is especially useful, as Simon distills his ideas into eight lessons for success:

1. Effective leadership with ambitious goals
2. High performance employees
3. Depth (supply chain and vertical integration)
4. Decentralisation
5. Focus
6. Globalisation
7. Innovation
8. Closeness to customer

I strongly recommend anyone thinking about how to improve their mid-size business  (or simply wanting to feel good about their potential) to read this book.  It could almost be tailor-made for New Zealand's manufacturers.

Disclosure: Isambard receives commissions from Amazon for purchases made via links from this website, but that has not influenced my opinion.

Exports are not enough!

Flashback: First published 13 August 2001 in the Dominion Post.

“Export or die!” We have heard that message so often - and for many companies, it is the right message. Getting the world to buy a New Zealand product or service is an important milestone for a developing business. Lots of successful exporters are needed for a healthy economy - but they are not enough. The world’s most successful companies do not just export globally - they operate globally. That means having sales, service, logistics, production and development operating around the world. Look at the world’s greatest companies. How many do things only at home to ship out to the rest of the world? I can only think of one - Boeing. The others made the leap from exporting to international operations. Our own Dairy Board/GlobalCo [Fonterra] has substantial and growing offshore development, procurement, manufacturing and logistics. More Kiwi companies need to recognise when to make that change.

Why? To minimise the cost of distance - freight, duties, foreign exchange risk and in-transit inventory; to reduce production costs, through greater volumes, lower material costs and lower manufacturing wages (an unpleasant reality); to get closer to customers for more efficient service and faster reaction to changing needs; to build critical mass for future investment; and to build credibility with large global customers.

I speak from personal experience. Deltec developed an advanced antenna technology for mobile phone networks - Teletilt - that enables network operators to adjust their cell coverage remotely and with improved signal quality. We began in New Zealand and Australia, explored SE Asia, and then expanded sales rapidly in China. Our products were key components of large infrastructure projects. We were the world leader in our niche. But as we grew and started to explore Europe and the Americas, our larger customers demanded the cost and service benefits of in-market operations. By mid-2000, we were getting a consistent message from global customers like Motorola and Nokia: “Set up full-scale sales, service, manufacturing and logistics in North America, Europe, China and Brazil. Do it now. Or don’t expect to get our business in future.”

The time had come to switch from a Kiwi exporter to a global business.

The capital requirements and the risks were large. Then the tech sector went into meltdown, and technology investors took fright. So we decided to sell. Andrew Corporation, a global competitor with complementary products and a similar vision for the future, recognised the value of Teletilt and our expertise. Our Wellington development facility will become their worldwide centre for developing advanced antenna systems. New Zealand will continue to play a key role in the technology. It won’t save the mainstream manufacturing, which would have gone to China eventually anyway, but we can reinvest in new opportunities.

My point is that New Zealand should not wistfully expect its companies to export everything from home. Global companies like Nokia, Vodafone, and Nestlé operate in many countries. The interesting thing is that large numbers of their high-value jobs are still at home - in development, marketing, and corporate administration. They are surrounded at home by a plethora of supporting organisations in banking, IT, law, accounting, advertising, travel, short-run early-stage manufacturing, research, education, etc. Together, they bring home huge revenue and profit streams.

If New Zealand wants a high-value economy, it needs more than just exporters. It needs global businesses that operate offshore in all facets of their business. New Zealand should encourage its businesses to invest offshore, not deride them for it. Without global operations, we won’t get a Kiwi Nokia or Vodafone. With global operations, we look like getting a Kiwi Nestlé. We could sure do with some more.

PS. At the HiTech2000 Awards, Deltec won the High Growth Company of the Year Award, the Investing in People Award and the Supreme Award. When the tech-wreck got even worse in 2002, Andrew’s NZ R&D centre went too, but that could happen under any owner, and only validates my argument that we need our own global players based here. The home R&D is usually the last to go.

It’s stuff that makes the world go around, not money

Flashback: first posted May 28th, 2008

“… we’re moving back to a world of stuff, whether that’s vegetable oil or copper or zinc or cotton. Stuff that you can hold in your hand and drop on your foot.”

That’s from an article in the LA Times. While that particular article looked at the renaissance of old-economy US commodity firms with the liberalisation and industrialisation of the BRICs (Brazil, Russia, India and China) et al, there’s another interpretation: that the world of stuff has always been the fundamental driver of the world’s economy, and that it’s reasserting its fundamental power over the worlds of finance and services.

I define the world of stuff in a pretty broad way: everything from food, water, materials, energy and manufactured goods through to electrons (power and communications) and those services directly associated with the delivery of stuff (e.g. shops, warehouses, transport networks, utility networks). Things get a bit vague when I start looking at films and bespoke software, but you’re a smart bunch; you can live with a bit of uncertainty. (OK, not the IT guys - never any good with shades of grey).

Although finance and services are essential elements of the world’s economy, and have been ever since their invention thousands of years ago (I’ll even classify politicians as part of the world of services), they are mostly facilitators of our ability to make, sell, buy and use stuff. Yes, we do spend money and time on other things, such as education (arguably so we can achieve the means to get more stuff), entertainment, healthcare, etc., but those are afforded by someone somewhere producing stuff that others want. And when stuff isn’t being produced and purchased, the rest can go hang.

Those who look disdainfully at the world of stuff have a misguided sense of their own importance or self-righteousness. Civilised society owes its very existence to the world of stuff. Those in finance and services (including politicians) would do well to remember that connectedness.

PS. This isn’t an argument for every national or local economy to make manufacturing its cornerstone. The phrase “From each according to his ability, to each according to his need” springs to mind, but don’t mistake me for a Marxist. Each should do what it does best and buy what else it needs

Zealandia: the idea grows

Suggestions and questions on NZ's mineral and energy opportunities

New Zealand is the visible part of Zealandia - the unofficial name for the sunken continent that surrounds us, and the fifth largest exclusive economic zone in the world (bigger than Europe). Robert Allen's book on the Industrial Revolution prompted me in 2009 to think about what major economic opportunities exist today, especially any hindered by complex technical challenges; (hard-to-solve opportunities offer rich rewards once solved).  I identified two - marine energy and submarine minerals, both of which New Zealand has in abundance.

I started talking to people about these ideas in 2010. I generally received positive reactions, and I learnt of others with similar views.  However, some inept political PR and and high-profile international incidents meant the environment was not conducive to taking the discussion to a general audience. But continuing economic turmoil has seen a shift in sentiment.  In 2011, more people were asking for some real strategy on economic development.  Like others such as Solid Energy's Don Elder, I felt the time was right to go public, and I wrote a short article titled "Zealandia - an untapped opportunity", including some suggestions for our government:

• Announce that Zealandia is open for business; grab the attention of local and international investors, entrepreneurs, designers, and businesses.
• Give resource licence allocation a bias* for creating local operations to discover, harvest, process and productize our mineral and energy resources. (*Bias does not imply giving away resource licence fees to subsidise jobs - that's a mug's game).
• Ensure the regulatory regime encourages both resource development and environmental protection.
• Significantly increase the proportion of government science funding allocated to discover, harvest, process and productize our mineral and energy resources.
• Give IRL (our engineering research institute) a primary focus on technologies to discover, harvest, process and productize our mineral and energy resources (in the same way that our pastoral, arable and forestry science institutes are focused on primary industries and downstream value chains).
• Merge GNS (geology) and NIWA (water and atmosphere) to create an integrated resource science institute (possibly merged with the refocused IRL).
• Mandate Solid Energy to become a broader minerals business, pursuing coal and non-coal opportunities.
• Free Solid Energy from short-term dividend demands and allow it to raise new private capital and enter joint ventures to develop its most promising opportunities.

Although the Zealandia opportunity didn't figure much in November's election, there were some promising initiatives announced by the government, especially the partial privatisation of Solid Energy and the repurposing of Industrial Research Limited into an advanced technology institute focused on key economic opportunities including marine energy and materials.  There's also an ongoing review of the Crown Minerals regime, with public consultation due soon. Phil O'Reilly from Business NZ has urged people to make submissions addressing key questions:

• Which resources, how much and when, should we access?
• Which offer most opportunity to grow high-tech industries with high-skill, high-paid jobs?
• What level of royalties and taxes should be paid by enterprises wishing to access our resources?
• How much transparency should we demand from those enterprises?
• How can we best use the income earned?
• How can we have world-best safety standards?
• How can we ensure the environment is left the same or better afterwards?

Phil's questions are good, but they mostly focus on the extraction aspects. While extremely important, just being a mineral resource is not the whole answer.  Phil's second question is where much value lies: Which offer most opportunity to grow high-tech industries with high-skill, high-paid jobs?  Related to that, there's another question that should be asked (although the CMR consultation is probably not theforum): How do we grow NZ-owned businesses capable of discovering, harvesting, processing and productizing our mineral and energy resources, and providing the technologies to do so?  This is a not an area where angel investors can help much.

Strategy lessons from the Industrial Revolution

Flashback: First posted  January 2010. Something to think about over the holiday.

One of my best reads recently had the somewhat dry title “The British Industrial Revolution in Global Perspective (New Approaches to Economic and Social History).“ Don’t be put off. Written by Robert Allen, Professor of Economic History at Oxford University, it’s a very readable* and convincing account of why the Industrial Revolution happened in 18th-century Britain, rather than anywhere else. Allen discounts any notions that Britons were superior entrepreneurs or innovators; indeed, other countries enjoyed similar advances in science, education, institutions and commerce. Instead, after setting the scene with societal and economic developments in the 16th and 17th centuries, Allen points to some primary factors which came together only in Britain and nowhere else:

• The highest wages in the world (thanks to the Black Death and its effects on British society).
• An abundance of cheap energy from coal (albeit not very useful initially, but developed to supply growing city populations).
• Ample supplies of iron ore close to that coal.

Those factor conditions did not come together anywhere else, and so there were not the incentives and rewards for creating the wave of technological and business innovation that transformed Britain (and later the world). Allen also shows that the state played very little distinctive role in the British transformation. It was the cumulative efforts of individual entrepreneurs, engineers and other innovators addressing real business problems and opportunities which, because they were common in Britain, also generated classic cluster effects.

While interesting in its own right, Allen’s book reinforced for me much of what is wrong with current economic development thinking. All we seem to hear is more education, more science, more infrastructure, less regulation, less tax, and so on. All well and good (at least up to a point) but these are me-too strategies. Everyone else is following them, more or less. Me-too economies can’t make the step-change that Britain achieved in the 18th century (and sustained for 200 years).

The questions I think business innovators should examine are not only “What do we do to sustain and grow the industries we already have?” but also “What unique un-addressed problems and opportunities do we have which, if resolved, will enable us to build new unique and sustainable global competitive advantage?” And for policy-makers, “Will you adjust your economic development mechanisms to support those new initiatives?”

I can think of at least a couple of significant problem/opportunity combinations where New Zealand could build global leadership. Know anyone with some serious spare investment dollars?

*For those wanting data and/or academic references, Allen provides plenty, but they don’t get in the way.