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Recent key developments in MAKE│NZ
Invitations are out for our Fireside Chat on the 24th! You’ll be hearing from Charlie North from Dawn Aerospace, and then Dr Onur Koska from the University of Canterbury, focusing on “The economics of trade sanctions – (when) do they make sense“.
If you haven’t received an invitation it’s not too late to reach out to the MAKE│NZ team – either sabine@makenz.org or dieter@makenz.org!
Do you find you learn best from others’ experience? Are anecdotes, case studies, and workshops your idea of a great way to acquire and share knowledge? Well, do we have the event for you.
In conjunction with SouthMACH, on May 28th the MAKE│NZ manufacturing conference will return- this time focusing on productivity at all levels within a manufacturing business, especially those at the operations level. And it’ll be full of anecdotes, case studies, and workshops- just like you like!
Make sure to get your tickets here, and see if you’re eligible for discounted tickets as a community member!
A quick update from your MAKE│NZ Digital Engagement Specialist (me, Sabine) – thank you so much to those helping me on my journey to convince Dieter I need coffee, we’ve grown over the past week all thanks to you! If this rate is kept up I’ll make sure to find a way to pay it forward back to you in the community. In the meantime, please keep spreading the word!
• Ever since the ‘Economic Reforms of the 1980s’, New Zealand’s official approach – and the mindset of most of us – to international trade has been strong support for ‘free trade’. Prime Minister Luxon is in India just now, among others to open up negotiations on a free-trade agreement [FTA] with that country, and there can be no doubt that FTAs negotiated over the past three decades have benefited especially our primary industries, and the country as a whole.
What is worth keeping in mind is that New Zealand manufacturers have advocated for strong measures to protect the domestic market from imports not only in the ‘horrible 1970s’, but pretty much in every issue of the NZ National Review / The New Zealand Manufacturer since 1928 we have on our shelves:
And this from 1954, when the fourth round of GATT (predecessor to WTO) negotiations was in full swing and global trade was expanding significantly (see also below):
All this reading about trade has got me thinking, it’d be nice to discuss it. Especially with an expert in the room. Isn’t it good our Fireside chat is coming up focusing on exactly this? If you want to talk more, make sure to attend!
Recent key developments in New Zealand
• In November 2018, Christchurch manufacturer of low-voltage charging systems, ENATEL Ltd, was sold to the US-based IDEAL Industries, Inc. by its majority shareholder, Dennis Chapman, and others. IDEAL is a 109-year-old family-owned and privately-held company with sales of USD750m last year, and about 1,250 employees. The company describes itself as “a global leader in wire connectivity products, electrical installation tools and supplies and test and measurement equipment.”
• In December 2019, Christchurch-based manufacturer of motor control solutions for low- and medium-voltage applications, Aucom Electronics Ltd, was sold by its majority owner Raynor Archer and other New Zealand shareholders to the US-based motor control specialist Benshaw, with the ultimate holding company being Sun Capital Partners VI, L.P.. The acquisition was part of a larger deal where Sun Capital also acquired Benshaw and Unico Technologies, another specialist manufacturer of variable speed drives and controls systems. Florida-based Sun Capital Partners, Inc is a mid-sized US private equity firm that currently holds equity in about 40 companies globally.
• In May 2023, Christchurch-based MHM Automation Ltd acquired Wyma Engineering (NZ) Ltd., a global leader in fruit and vegetable handling systems. In turn, NZX-listed MHM was acquired by Bettcher Industries of Birmingham, Ohio. Bettcher is a leading developer and manufacturer of equipment in protein food processing, with KKR Group Partnership LP as the ultimate holding company. Bettcher, MHM and Wyma are all part of the much larger Fortifi Food Processing Solutions, Inc and represent KKR’s significant investment in the manufacture of processing machinery and equipment for a range of food products globally. KKR (Kohlberg Kravis Roberts & Co.) is one of the larger US private equity firms, regarded as one of the top five PE firms globally, with a current investment of in excess of USD25b in funds
• The latest one in this series of acquisitions was the announcement over the weekend that Christchurch engineered bonze specialist A.W. Fraser Ltd has been sold to the French Lebronze Alloys [LBA], “an industrial group specialized in the production of semi-finished and finished products in technical high-performance copper and nickel alloys”. The 90-year-old company is about three times the size of A.W. Fraser in employee numbers (750), with an annual turnover of €239m. Concurrently with the acquisition of A.W. Fraser, Lebronze also acquired a smaller distributor of products in its range in the UK, Allied Copper Alloys. The strategic fit of these acquisitions from Lebronze’s perspective appears to be obvious, and as A.W. Fraser’s MD, Gordon Sutherland commented, from their perspective the transaction provides much better access to capital and markets for their company – “this could see Frasers double in size over the next five years”, says Gordon.
LBA is a privately-held company. These acquisitions were possible after the owners, the Dumont family sold a majority shareholding to private equity company Astorg late last year, with the Dumont-led management team remaining in place. Astorg is a well-known European PE firm, and the investment in LBA is part of its eighth round of funds
• The observation of a pattern in the above doesn’t establish cause and effect, but we do observe that:
- In all cases these acquisitions – including where the ultimate purchaser was a private equity company – appear to be following a rationale of strategic fit; an intent by the acquiring company to enlarge the portfolio of products and services in a specialised market niche, rather than just “investing in a promising company for financial gain”
- Apart from ENATEL, the acquisitions were made with the help of capital introduced by selling equity to private equity investors, with a (strong) suggestion that without the introduction of these PE investors, the transaction in question would not have been possible
• Three questions remain from the perspective of the New Zealand companies that have gone into ‘foreign ownership’ (a loaded term in the way it is used by some):
- Is this beneficial for the acquired company? The comment from A.W, Fraser’s MD, Gordon Sutherland, says it all: “With much better access to capital and markets, this could see Frasers double in size over the next five years.” Growing sales and distribution networks in (far-away) export markets is expensive in terms of capital and human resources and is usually a much more important component of the ‘tyranny of distance’ for New Zealand companies than the usually quoted physical shipment of their products. As the then-CEO of Jade Software, Dr Rod Carr, said in an essay in the early 2000s – at a time, when Jade was following Apple’s approach to growth closely: “If the iPod had been invented in New Zealand, would the world know about it?”
- What are the impacts on the employees – from senior management to frontline workers – of the acquired company? It is usually senior managers that are most affected when the company they have led successfully is acquired by another company. There is a long list of literature on the topic, with an overarching theme of ‘rapid, but gentle integration, recognising individual and collective strengths in the management team of the acquired company’: “If it ain’t broke, don’t try to fix it!” As is often the case, the real-life experience of managers in companies acquired by others can be far from best practice. Fingers crossed that this is / will not be the case in the examples above
- Are these sales beneficial for NZ, Inc.? – If the company continues to operate in New Zealand, and ideally on a larger scale, and provides employment directly, and indirectly through its domestic supply chain, all good. The question of tax income for our country is more complicated. Employees will continue to pay income tax, and if the company grows, more employees will pay more income tax. When it comes to the income tax on the company’s profits, the benefits may be elusive. Companies operating in different countries tend to find ways to be most profitable in the country with the lowest taxes. The Federal Corporate Tax rate on income in the US is 21%. Other taxes that States may impose, in lieu of or in addition to taxes on income, include franchise taxes and taxes on the capital of a corporation. State and municipal taxes are deductible expenses for federal income tax purposes.
The French Corporate Income Tax is 25%, with no additional local or regional taxes. And since there is a tax treaty between New Zealand and France that has been in place since 1981, income from Lebronze’s operations in New Zealand would be eligible for taxation in France.
There is another aspect to this from a New Zealand economic development perspective, given the dearth of (domestic) capital available for investment in manufacturing. There are significant sources of capital that have seen the merit in investing in manufacturing. But PE firms like KKR or Sun Capital are quite unlikely to directly invest in a New Zealand company when the opportunity available is small, usually <$100m. By New Zealand companies becoming part of an international portfolio or group of companies, they can access this source of capital, albeit indirectly.
Recent key developments in the World
• “Tariff,” Donald Trump has said many times, “is the most beautiful word in the dictionary.” That may be so, but contrary to what some may believe, he certainly didn’t invent them, not even during his first term in office. In her very interesting presentation in December 2023, IMF First Managing Deputy Director Gita Gopinath showed that tariffs and other trade-restricting measures had taken hold well before then
Note the date of this presentation – December 2023 – well before it was even clear that Donald Trump would return to the Whitehouse. In her presentation, Ms Gopinath lists several contributors to what she calls ‘the cost of fragmentation’. One that may be less obvious, and certainly not desirable from either a logistics or a carbon-reduction perspective, is the (physical) lengthening of supply chains:
One real-life manifestation of the above has led the US Federal Maritime Commission [FMC] to launch a ‘nonadjudicatory investigation into transit constraints at international maritime chokepoints’ out of concerns that “constraints in [seven identified] global maritime chokepoints have created unfavorable shipping conditions”.
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