Death of inflation should give birth to innovation

In a market where even young technology can quickly become a commodity, SELWYN PARKER discovers it is vital to be new and better.

When the founders of Fisher & Paykel, Sir Woolf Fisher and Maurice Paykel, decided back in the mid-1960s that their little company's survival depended on innovation, they stumbled on a very modern management philosophy.

Namely, that in a low-inflation economy, originality is one of the keys to prosperity. This is exactly what economist Roger Bootle preaches in his book, The Death of Inflation.

In a market where even quite young technology such as computers can quickly become a commodity, it is vital to be new and better. Then you can charge a bit more and get away with it.

It is a philosophy that could be described as "long live the difference." When Bootle's book was published three years ago, it was met with widespread scepticism, especially in his home country of Britain. In New Zealand, where we've had years of low headline inflation, the book would have had more credibility.

But a prophet is not without honour even in his own country and, suddenly, Bootle has been granted the status of a seer. Headline inflation in Britain has slumped to 1.3 per cent, the lowest in six years. Commodity prices are weak around the world. Labour markets are the quietest they have been since reliable statistics have been kept.

Result? Manufacturers all over Britain are reading The Death of Inflation. The manufacturers know that price changes will average close to zero for the next few years, which is what Dr Don Brash has repeatedly warned their counterparts in New Zealand.

If companies haven't got low-inflation policies in place, God help them, says Bootle. According to the Bootle thesis, low-inflation policy comes in three different packages - financial, pricing and labour.

The financial side is fairly obvious and do-able. He recommends a wholesale review of company debt, and especially of any fixed-rate, long-term loans. Floating rates are the way to go, he says.

Pricing is more complicated and more interesting. Companies have to determine whether their products or services are "plungers", "risers", or "fluctuaters".

The plungers are commodity products, like computers, most categories of cars, and telephone calls, and will probably drop in price.

Fisher & Paykel's present concentration on its up-market, "intelligent" Quantum range of products is based on its conviction that conventional whiteware - or "major appliances" as the Americans say - is rapidly turning into a commodity product.

Bootle isn't saying that companies can't make money on plungers, but only if their entire modus operandi recognises they operate in a low-inflation, virtually zero-pricing economy.

This is behind the merger of the global car giants as they seek economies of scale. It is also behind the global and ruthless extermination of costs. For example, warns Bootle, it is ruinous if fixed labour costs rise when prices fall. Inflation will not rescue companies any more, he says.

Risers are innovative products that can command a premium and some other items such as school fees that parents, rather than companies, have to worry about. Among fluctuaters are goods that are sensitive to supply and demand, such as agricultural produce and economy-class air fares.

But back to innovation. There are plenty of opportunities within even commodity sectors, as the Dyson vacuum cleaner, iMac - which has revived Apple - British Airways' new bed in its first-class cabin, and Fisher & Paykel's DishDrawer and Intuitive fridge have all proved. All are examples of innovation that can maintain or boost margins.

Low inflation is not a curse; it is just different. "Price stability and cost stability are an advantage because it is easier to plan," enthuses Ruth Lea, head of the policy unit at Britain's Institute of Directors. "You just have to be careful you're competitive because if you're not, you will get wiped out." This is also something Dr Brash has said, albeit differently.

Innovation appears to be a passion for those companies that have it, rather than a mere tool that they've just decided might be a good idea.

For Sir Woolf and Mr Paykel, everything hung on it. Innovative products would protect them from the coming flood of whiteware from Europe and Australia (although they had many helpful years of tariff protection). And innovation was as the path to exports.

"As a small player from a small country on the wrong side of the world," as Fisher & Paykel's Richard Blundell, general manager corporate affairs, puts it, "they realised that they had to innovate to compete with the higher levels of production that they would face from international competitors."

For Fisher & Paykel, innovation has two hats. One is innovation in the process of manufacturing - highly flexible runs, for example. The other is in the products - like the DishDrawer, which has been collecting awards all over America this year.

Innovation is expensive, time-consuming and requires patience. The DishDrawer is based on nearly 10 years of research and consumed $35 million.

But innovation also sells. In Australia, DishDrawer has boosted Fisher & Paykel's market share to a claimed 25 per cent since its launch early last year. In America, 1000 DishDrawers sell every month although it will be while yet before Fisher & Paykel gets into the black in the US.

You have to ask: Where would Fisher & Paykel be now if hadn't decided to do something different? Roger Bootle would have a pretty good idea.

* Contributing writer Selwyn Parker is available at wordz@xtra.co.nz