Defining High-Tech Manufacturing – does it matter?

28 June 2016

By Dieter Adam, Chief Executive, NZMEA

I recently spent time in Wellington, meeting members and officials from the Ministry of Business, Innovation and Employment (MBIE) and Callaghan Innovation. It was interesting to discuss MBIE’s recent Sector Reports, and to see how government defines and views manufacturing, in particular high-tech manufacturing. There are still misconceptions on what manufacturing is, and what should be considered high or medium-technology manufacturing.

High-tech manufacturing is often touted by government as an important source of growth and innovation for our country. But it does not capture all the high value-added activity happening across manufacturing businesses, and focusing only on what is defined as high-tech can lead to missing and undervaluing all the innovation and growth that is created in other parts of the sector, just because they do not fit a specific definition.

The definition used for high-tech manufacturing in the Sector Reports covers those manufacturers who spend greater than 8% of revenue on research and development (R&D). By this definition, the high tech sub-sectors of manufacturing are: pharmaceuticals, aircraft manufacturing, professional and scientific equipment manufacturing and computer and electronic manufacturing. Medium-tech manufacturing is defined by R&D expenditure of between 2% and 8% of revenues, and sub-sectors listed as medium tech are: Chemical manufacturing, transport equipment manufacturing and machinery and equipment manufacturing. It is important to note that these definitions have been created by the OECD and are used so to allow international comparison.

One issue is that any definition based on R&D expenditure relies on such expenditure being captured reliably by the accounting practices used by the companies in question. We know that this is often not the case, as doing so introduces additional complexity in accounting methods without any immediate benefit to the firm. Moreover, accepted definitions of ‘R&D expenditure’ in accounting fall well short of capturing all the innovation investment made in business process and business model / market innovation by many companies.

Thus the definition of high-tech manufacturing used by government does not fit the reality of manufacturing in New Zealand well – there are many businesses that should be considered high-tech due to their complex and innovative processes and products, but are not captured as such by the current definition.

This focus on a narrow definition of high tech can often lead us to the wrong conclusions - a lot of the most effective innovation happens in the manufacturing sub sectors currently defined as medium-tech, with some of the biggest positive flow on effects to the rest of our economy. Flow on benefits to the rest of our economy must be a key consideration for what we value as important, helping us make the most efficient use of resources to create wealth. Manufacturing generally does this very well: for every $1 of value added in manufacturing, $1.4 of additional value is created elsewhere in the economy, and every job in manufacturing generates between 2 and 3 jobs in the rest of the economy.

We encourage our members, however, to move to a more systematic view and treatment of innovation in their business. Currently we still see a fair bit of intuitive and owner-driven innovation. As businesses grow, and to help them to grow, analysing, documenting and accounting for innovation activity separate from the production process will not only make it easier for companies to apply for government innovation grants, but more importantly, undertaking innovation in a more systemic and planned way can both keep track of and make the most of R&D expenditure and help improve the effectiveness of a business’ innovation efforts. We can’t improve what we don’t measure, and separately capturing both the cost of and the return on specific innovation activities is one of the paths to a more profitable business.

While politicians like to mention innovation, high-tech manufacturing and growth in our economy in the same breath because it sounds sexy and intuitively right, the reality is just a little bit more complex, as is often the case. Having said that, moving from intuitive to systematic innovation is something you can do to create more wealth in and from your business.