Bringing manufacturing into the digital age – where is the money going to come from?
We now see a number of companies progressing from the initial stage of their journey into the age of ‘digital manufacturing’ (Industry 4.0) – where they cut through the promotional messages and are identifying technologies and process and product / service improvements that could actually help them to profitably grow their business. Which then leads to the big questions: who of our existing people can help us with implementing these technologies, where do we get outside help and, last but certainly not least, where’s the money going to come from?
The first answer to the latter will in most cases be to realise where it’s less likely to come from – the banks. Which leaves retained earnings, but with shrinking margins and the step-up in investment required that will often not be enough. And then?
The government in its budget announcement has – under the headline of Building a Productive Nation – announced a couple of relevant initiatives that could be helpful for manufacturing. The first one, Future-Proofing New Zealand’s Manufacturing Sector by Driving Industry 4.0 Uptake and Skills Development, has $6.8m allocated over four years. It can be made to be quite helpful for those manufacturers and their employees who are still exploring the opportunities in digital manufacturing technologies – and that would be most of our manufacturers, especially at the smaller end. But it won’t directly help those in need of capital.
The other item of interest is Building Early Stage Capital Market Development and has $240m in capital allocated, to be invested through the venture capital network. That network has traditionally had a strong bias towards investing in (IT and biotech) start-ups, and it’ll be interesting to see whether there will be any appetite to use (some of) the money for investing in established manufacturing companies that want, for example, to transform their business model by adding services via digitally connect products.
Be that as it may, what we are seeing internationally is that the huge global streams of capital that have driven stocks and real estate prices to precipitous heights have now discovered SME manufacturing as an exciting area for prospecting – or at least funds managers for a small part of that stream have. And that wave has even washed to the shores of New Zealand – we are now getting some enquiries along those lines from overseas. The challenge for everybody will be that the scale of investment required by most manufacturers is smaller than the sums available for investment by an order of magnitude. No funds manager in London would lift a finger to place, say, $2m in a $20m manufacturing business in New Zealand, the expected returns being way out of balance with the due diligence effort required. What we need is a New-Zealand-based and, hopefully, New-Zealand-managed intermediary fund, or aggregator. Wouldn’t it be great if the Capital Market Development initiative announced by the government could play a role here?
But there is hope from other corners as well. Simplicity, the Kiwisaver fund that is shaking up the industry a bit, is raising the prospect of (in due course) becoming a passive minority investor in well-managed manufacturing businesses, for example. So there may well be good opportunities for those seeking outside capital to modernise their manufacturing businesses – with the usual caveat that the operation overall is sustainably profitable and the business case for the additional investment is sound.