KEY POINTS:
When Tony Hembrow decided to turn his love of boating into a full-time occupation, he had no idea it would make him one of New Zealand's richest men.
As the founder of Rayglass Boats sheepishly explains in television ads still screening for Westpac, home for him and his wife Vicki was quite literally a factory for several years, as he helped build up the company in the wake of the 1987 sharemarket crash.
Nearly two decades later, Rayglass has established itself as New Zealand's biggest boatbuilder, winning a swag of international awards and a rapidly expanding global customer base.
So it was somewhat ironic that in the same week Hembrow announced to staff that he had agreed to sell all his remaining shares in the business to Brunswick, the world's biggest boat company, Rayglass was touted in a Government review as an outstanding example of a local success story that had benefited from foreign investment without selling out.
The review in question, a comprehensive critique of Investment New Zealand by the Ministry of Economic Development, was made public on August 30. But as it turns out, the review was actually completed a year ago, which explains why it also boasts about Brunswick's other significant investment in New Zealand, satellite navigation company Navman.
Even now, Rayglass continues to feature on Investment NZ's website as a fine example of how bureaucrats can play a crucial role in greasing the wheels for foreign investors interested in taking a stake in innovative local companies.
Except that's not quite how Hembrow sees it. According to him, the original deal four years ago which saw Brunswick take a 49 per cent stake in his company was all but done when Investment NZ staff got a whiff of it.
"They run round saying to everybody they did it but we told them about it three weeks after it happened and ever since then they haven't left us alone," he jokes.
"They keep sending us people to tell us how good at negotiating they are but it was all over before we ever met them."
In fact, Hembrow had decided in 2001 that he eventually wanted to sell the business to Brunswick.
"They didn't hunt us down. We went and asked them to be a partner. It took about two years.
"We went along with a bunch of facts and figures, then they said: 'That all looks okay but go away and prove you're going to do what you say you will'.
"We went back to them 18 months to two years later and put the deal together."
Hembrow won't say how much money the United States-based company has invested in the business but since then, he says, Rayglass has grown by about 60 per cent.
Largely thanks to Brunswick, it has built new plants, expanded its facilities and extended ventures with other local companies.
It employs about 100 people in Hamilton and Auckland, and also keeps busy another 50 who work for associated businesses.
According to accounts filed with the Companies Office, Rayglass sold $22 million worth of power boats in the year to the end of March, up from $17.8 million the previous year.
Hembrow says its sales are growing by about 20 per cent a year and, like most Kiwi businesses, it is struggling to find skilled staff to keep pace with that growth.
One of the reasons Hembrow chose Brunswick was because of its commitment to training and that, he says, is one of the reasons he felt "very comfortable" in selling his remaining stake. "We wanted to see whether they were the people we wanted to do business with, because obviously we've got a large responsibility to our staff and customers.
"We wanted to make sure going forward that they weren't going to pack it all in a box and go to China or something."
Which was, perhaps, a reasonable fear, given what happened to Navman. After initially promising to help turn Navman into New Zealand's first billion-dollar IT company, Brunswick changed its mind when chief executive George Buckley was wooed by giant multinational 3M. Its various divisions have since been carved up and sold off.
In April, Navman founder Peter Maire told The Business he was "pretty pissed off" about the turn of events.
He also disclosed the real reason he sold to Brunswick was not because of synergies or scale. "We actually just got tired," he said.
And Hembrow comes close to admitting a similar motivation. "We were probably the biggest [boatbuilder] in this country and, realistically, we didn't have the want to be making it massive, if you know what I mean."
Hembrow is quick to defend Brunswick, pointing out that Navman was always an odd fit for the firm, given that its core business is boats. And he doesn't agree with Maire, who now chairs listed crystal-maker Rakon, another company being touted as a potential Kiwi superstar, that the Navman deal had gone sour.
"Is making a $100 million a year company into a $350 million a year company a bad thing? It's still retained here, with the same workers doing the same job, so you can spin that any way you want," he says.
However, the Government appears to be on Maire's side. Around the same time Hembrow was announcing to Rayglass staff that Brunswick intended to pour even more money into the business, Economic Development Minister Trevor Mallard said he had gone off the idea of using taxpayers' money to lure multinationals to our shores and had instead decided to focus on helping local companies be the ones to write the investment cheques.
That was prompted largely by the review of Investment NZ, which concluded that many of the organisation's efforts to foster foreign direct investment had been a waste of time.
While the agency claimed to be involved in 19 investments worth $500 million since 2002 (excluding movie projects), only four were associated with high-growth, local companies seeking strategic investment partners.
The review found that most of the deals would probably have gone ahead anyway and that the flow-on effects from the rest were unlikely to exceed the $60 million cost involved (see Pg 18). It calls for the organisation to "significantly sharpen their focus".
A similar review of the Strategic Investment Fund, which has handed out more than $3.2 million to foreign and local investors during the past six years, was even more damning.
Of the eight projects approved by the fund since 2001, only two could have been considered successful, the ministry concluded. Its major grants and loan guarantees scheme has been scrapped, although its feasibility study grants, which account for another $3.5 million, continue.
The Visiting Investor Programme will also continue. It was initially expected that the programme, launched in the wake of Apec and the America's Cup in Auckland, would cost about $350,000 a year. In fact, only around a third of that has been spent in each of the past few years on wooing wealthy executives with bulging wallets and it has apparently been well spent.
But exactly what will happen to the bulk of the $17 million allocated to Investment NZ each year is unclear. The review hints that the organisation is overstaffed: between 2002 and 2006, it notes, staff numbers almost doubled to 49 fulltime equivalents, 37 of whom were "professionals". A recent World Bank study claims the norm for such agencies in countries of similar wealth to New Zealand is around half that.
Mallard insists the Government is keen to continue to encourage foreign direct investment for "strategic" purposes, although Auckland Airport's board would no doubt choke over that.
Given his role as the minister who might have to approve, or otherwise, any airport deal, Mallard refuses to be drawn into that particular issue. But he happily admits the Government feels it got its fingers burned by Brunswick.
"In a funny way, Navman was seminal in some of our thinking, because it's something that looked pretty flash at the time. It looked like we were going to get a lot of added value, but when you have an owner that's not committed to New Zealand, some of the exciting stuff dropped away pretty quickly."
The initiatives surrounding Export Year have also helped focus minds, he says. It's all very well boosting exports, but if the company doing the exporting is not locally owned, then it's not exactly helping our balance of payments deficit.
"I think there was a bit of a point where almost subconsciously we didn't think carefully about ownership," he muses. "We weren't aware, as we are now, that asset ownership matters."
As far as Investment NZ is concerned, Mallard expects "a lot less" of its effort will go into wooing wealthy foreigners. But exactly what it will do instead is far from obvious. Officials are due to report back next month on how some of its budget could be redirected. But, according to a Cabinet paper on the issue, the ministry is not yet convinced that any new programmes would result in "direct productivity benefits" to New Zealand firms investing offshore.
"To do so at this point in time risks diverting [departmental] resources away from support for other forms of internationalisation, particularly developing export markets, where the evidence of the barriers and benefits to firms is clearer, and interventions likely to be more effective," it says.
It suggests reporting back to ministers by next June after further research into what makes New Zealand firms successful.
In the meantime, some industry figures would like to see the Government clarify its criteria for loans made outside the Investment NZ criteria.
Its decision to advance a $14 million interest-free loan to 3D graphics company Right Hemisphere, for example, raised eyebrows up and down the country. The aim of the loan, which has significant penalties if it does not achieve its goals, is to keep the main part of the operation in New Zealand and potentially help develop an industry cluster.
The Investment NZ review shows that Cabinet turned down a similar deal for another company, which Mallard won't name. But while he appears to accept criticism of the ad hoc approach, he warns that businesses shouldn't hold their breath waiting for more direct incentives to expand overseas - not even in election year.
He concedes that science and research policy could still do with some fine-tuning, but notes that the Government has already addressed several of the business sector's main gripes in this year's Budget, including exempting Kiwi companies from having to pay tax in New Zealand on their foreign earnings, and attempting to address the problem of our woeful rate of private sector R&D by announcing a 15 per cent tax credit. It has also allocated tens of millions of dollars to NZ Trade & Enterprise to help New Zealand firms in China, India and Japan; and to expand export initiatives such as the Beachheads programme, and a scheme that covers up to half the cost of things like promotions and exhibitions.
Naturally, lobby groups such as Business NZ argue there is a lot more it could do. But New Zealand Institute chief executive David Skilling, who has devoted much of the past three years of his life to addressing the same issues, is typically diplomatic about what he sees as a major breakthrough in Labour Party policy.
"To us, it never really seemed to make much sense to have lots of programmes that provide assistance to exporters without also thinking about how we assist firms who want to go global through direct investment," he says.
For a party with strong union support to back the idea that New Zealand companies should be investing overseas is politically brave and shows how much the debate has moved.
"I think we've probably moved a little bit beyond seeing firms investing abroad as somehow being traitorous."
But by the same token, few of the initiatives announced so far are probably grand enough to transform the economy.
Skilling's view that KiwiSaver should be compulsory is well known and his latest hobbyhorse is that high-speed broadband is also crucial to our future.
"If New Zealand really were to get aspirational around the quality of its broadband infrastructure, I think that has the potential to be really quite game-changing, in a not dissimilar way that refrigerated shipping was 125 years ago.
It doesn't transform the economy overnight, he says, but "unless you've got those basic bits of infrastructure, be it capital markets or savings or communications infrastructure, the chances that New Zealand firms can really go global in a significant way are much reduced."
But at least one very happy, and very wealthy, Kiwi businessman remains on the side of the bureaucrats when it comes to foreign investment.
Just last month, former Bendon chief executive Stefan Preston publicly slammed 42 Below as an example of a Kiwi company that had sold out to foreigners far too early, therefore denying New Zealand the benefits of its potential growth.
Yet 42 Below's chief vodka bloke, Geoff Ross, claims to have heard little criticism of the board's decision to sell to Bacardi.
He admits to sleepless nights before the deal was struck, but says, in the end, it seemed crazy not to take the money. After all, he reasons, it would have taken an age for 42 Below to build to a size where it was making profits of $138 million, which is what he sold the company for, so why not take the money now and the skills you've learned and reinvest them?
"I think a viable way for New Zealanders to make lots of money for this country is to make businesses and sell them," he argues. "In every case I'm aware of, that wealth comes back into New Zealand to create more companies, and bigger companies. So it's a bit shortsighted to say selling your business is not creating any wealth for New Zealand."
The analogy he likes to use is one most Kiwis can relate to: investing in property.
If a couple buy a house when they're young, do it up, and stay in it for the rest of their lives they'll probably have a perfectly nice house, he says.
But if they do it up, sell it, then do up another house, and sell that and so on, then they'll end up with a much bigger and much nicer house.
While he acknowledges that there is genuine concern over the "hollowing out" of New Zealand's economy, he insists that even the sale of Kiwi icon The Warehouse would not necessarily be a disaster.
While Stephen Tindall is probably bracing himself for criticism if he does decide to sell his family's stake in the Red Sheds, there is little doubt that his reinvestment in dozens of start-ups will eventually be of even greater benefit to the country, says Ross.
And, like Hembrow, he argues that selling out does not necessarily hurt those who don't have an equity stake in the business.
In 42 Below's case, Bacardi has hired an extra 10 to 15 staff in New Zealand since its purchase and increased production.
"As far as foreign owners are concerned, there's a whole bunch of things they might do," he says.
"Some might stuff it up, but others might invest a huge amount of money and grow it, like we believe Bacardi will. All that production is going to stay in New Zealand forever."
Since the Bacardi sale, 42 Below's founders have had "zillions" of approaches from other young entrepreneurs desperate for money and advice, says Ross.
In fact, it has reinforced for him how desperate the New Zealand market is for seed capital. But according to Tindall, who should know, even that situation is improving.
The retailer-turned-philanthropist remains "reasonably optimistic" about the explosion in entrepreneurship in New Zealand in recent years, and says he has noticed a "huge change" in even the past five years. As for whether the Government should be taking the sort of risks that private investors seem only too happy to take themselves, Tindall believes there is a role for politicians, where they think a greater good can be met.
"There's lots of conjecture on both sides of the fence about what works and what doesn't," he says. "I think sometimes it's appropriate and sometimes it isn't. To get it right is incredibly difficult."
Perhaps, suggests Ross, the Government's own Venture Investment Fund could be somehow tied to KiwiSaver to give ordinary investors a chance to take extremely high risks.
Or maybe we should simply resign ourselves to the fact that we are actually good at flogging off small and medium-sized businesses to foreign buyers, he says. Just ask Sam Morgan.
"Imagine if 1000 New Zealanders made businesses last year worth $138 million and sold them. That would be massive. Maybe because we have a smaller market, maybe a viable business strategy for New Zealand is growing small and medium businesses and selling them. If that's something we're good at, that's something we should embrace."
Well maybe, says Skilling. The problem with the New Zealand-as-incubator argument is two-fold, he says.
First, it is questionable whether many cashed-up business owners do in fact reinvest most of their moolah in new ventures. And second, to make any real difference, we'd have to be doing deals like the Bacardi one every week of the year. Perhaps it's not a bad goal to have.
But for a small country, it's time we learned that big can be beautiful, too.
Fortunately, says Skilling, there are the vaguest signs that we might finally be getting the message.
Plenty of money coming in - even if investors don't always feel wanted
Investment New Zealand was set up five years ago, after the Boston Consulting Group argued that foreign direct investment was the key to fuelling the nation's prosperity.
The Government agreed to set up the investment promotion agency as a separate business unit within Industry New Zealand, which is now part of NZ Trade and Enterprise. And New Zealand has certainly had little problem attracting foreign investors in recent years.
The Ministry of Economic Development said our stock of inward investment experienced the third largest growth among OECD countries in the 1990s, peaking at around 65 per cent of GDP in 1999. However, much of this growth can be attributed to former state-owned enterprises being sold in this period.
After initially falling back to $56.9 billion (52.6 per cent of GDP) in 2001, it has since steadily increased again. Australia has been the biggest investor, followed by the United States, the Netherlands and Britain. For New Zealand companies keen to partner with foreign firms, such partnerships have opened doors to international distribution networks, bolstered their credibility, given them improved access to funding for expansion and/or research and development, and increased the opportunity to supply larger multinational structures.
The ministry's review of Investment NZ quotes Rayglass founder Tony Hembrow as saying: "If our objective was merely to increase or double turnover, we probably could have achieved this by partnering with a local investor. However, partnering with Brunswick enabled us to increase potential turnover eight-fold. We now have an infinite demand for our product."
But the review also notes that some foreign investors feel far from welcome here. "The New Zealand press is extremely anti-foreign ownership," it quotes former Brunswick boss George Buckley as saying. "New Zealand, as opposed to Singapore, created the impression that 'we don't need you'. Elsewhere, Brunswick has been welcomed with open arms."
The report also appears to show that NZ Trade and Enterprise has its work cut out persuading foreign investors there is more to the country than sheep. It quotes another investor as saying: "We never considered New Zealand before because there is a perception out there that New Zealand is a primary commodity-based economy with little to offer. And it is far from everything."
The report says: "Investor feedback suggests that New Zealand is viewed as globally disconnected with a relatively small domestic market.
"It lacks government incentives and there is little understanding of what New Zealand has to offer outside its traditional industries. Investors also perceive a lack of discipline in business practices and commercial realism by New Zealand companies."
The report suggests the question of incentives be reviewed. "Financial benefits that are simple to administer as well as transparent could mobilise quality FDI to grow target industries.
"Targeting those industries in which New Zealand enjoys globally competitive advantages should not necessarily lead to competitive bargaining between countries. In fact, such an approach will align New Zealand with other OECD countries."
However, it appears a more immediate problem has caught the Government's attention: our lack of outward investment, which declined to about 12 per cent of GDP in 2005, well below the OECD average of 27 per cent.
The crucial benefit NZ is missing out on, the review claims, is what is known as "the feedback loop"; pay-offs to other local firms. It appears that is now the latest trend on which NZ is keen to capitalise. Or not, as the case may be.
