Cleaning up in foreign markets

Fisher & Paykel is taking another big step towards becoming a truly international company with its recently announced global alliance with Whirlpool, the US maker of kitchen and laundry appliances. F&P has a strong hand. Thanks to its dedication to innovation, technology, manufacturing skills, financial strength and up-market products, it will be a genuine partnership between two of the world's great manufacturing companies.

But while a close relationship will help secure F&P's future, it is a model few other New Zealand companies are ready to emulate. Quite simply, they lack its capabilities, amassed over 70 years but most crucially in the 15 years or so since tariff barriers tumbled.

Different industries have radically different dynamics. Contrast appliances with software and electronics. F&P enjoys a leisurely technology cycle with five to seven years between major changes. Its funding needs for R&D and plant are relatively light.

In software and electronics, however, five months can be a lifetime. They are capital hungry, although returns can be spectacular on a blockbuster product. Ironically, though, success can devour even more capital before generating big profits.

F&P is an inspiring role model for other New Zealand companies and not just manufacturers. Its ambition to play on the world stage and its understanding of the skills it needs to do so are widely applicable even as far as the service sector and creative industries.

In essence, F&P's success hinges on its astute exploitation of the prevailing economic system. When this was a closed economy, it played brilliantly the game of manufacturing behind tariff barriers. Unusually, though, it did not abuse the near-monopoly. Despite the lack of competition, it was restless for change and innovation.

This corporate culture served it well when free trade roared like a cyclone through the economy. To survive the onslaught of imports, it developed technology and products superior to the competition. It also devised phenomenally flexible manufacturing systems so it could be cost-competitive as a minnow among whales.

Whirlpool is 25 times larger than F&P and Haier, the Chinese appliance maker, is 22 times larger. Only nine-years-old, Haier already sells in 160 countries and has plants in 13, including the US.

F&P is one of the most successful - though sadly one of the few - examples of a major New Zealand company that is transforming itself from a domestic to an international enterprise.

To achieve this, F&P has played to its New Zealand roots. It devised a business model which was uniquely right for its small scale, limited resources and lack of supporting industrial infrastructure.

It is a highly integrated manufacturer with deep skills in injection moulding, electronics, software and electric motors. It holds more than 400 patents and has more than 200 patent applications pending. In contrast, its competitors are heavily dependent on component suppliers. They are little more than design, assembly and marketing organisations.

F&P's big technology breakthrough, its SmartDrive electric motor, came in the early 1990s. F&P knew it was on to a winner but it also knew it had to quickly get critical mass in the market before competitors caught up. It tried to interest US appliance maker General Electric in an Original Equipment Manufacturer (OEM) deal. F&P washing machines would be re-badged as GE for US consumers. But the design was too radical for GE and nothing came of it.

So F&P decided to go it alone. First it consolidated its position domestically (it has a 55%-60% market share here), then it moved into Australia, building a pair of plants outside Brisbane and capturing a 20%-25% market share.

Since the early 1980s, it has been supplying some OEM fridges to Japan under the Sharp and Sanden brands. But the first real step in overseas sales came in the late 1990s, starting in the US and more recently in Europe.

But this has been painfully slow and costly. In its financial year to March, F&P sold 82% of its appliances in Australasia and the remaining 18% - 181,600 of them - in the US, Europe, Singapore, Japan and other markets.

This incremental policy took its toll financially. Only in recent years have F&P's shareholders been rewarded for this investment. It reported operating profits of $91 million on sales of $781m in the financial year to March. Its return on assets has risen from 6.9% in 2000 to last year's 19.5%, which makes F&P an astonishingly profitable small company in an industry notorious for its mega scale and minimal profits.

But F&P also took a technology risk: that its big foreign competitors would catch up with its direct drive motors. Fortunately they were very slow to do so but now the fight is intensifying.

F&P's next big technology breakthrough has been the Dishdrawer dishwasher. This time, F&P is trying to move much faster to establish the technology as the de facto new standard in the world market.

But again it is trying to do so in an incremental way. Rather than build a big new factory in Europe or the US - which would temporarily depress profits as the mid-1990s expansion had done - it is banking on piecemeal manufacturing expansion in New Zealand and perhaps later in Australia.

The alliance with Whirlpool is crucial to the strategy. It will accelerate sales in Europe and bring synergies worldwide through some pooling of procurement, logistics, technology and appliance service. Whirlpool started selling Dishdrawers under its own brand in Europe early this year.

F&P has three big challenges. First, to develop its relationship with Whirlpool from a simple OEM into a far deeper and richer partnership while maintaining independence of thought and action.

Second, it has to develop its own distribution network and brand across Europe. In markets such as the UK and Scandinavia, it will be on its own, but in others such as Germany and central Europe, it will be competing against identical appliances it has made under the Whirlpool brand. Whirlpool sells as a very high end product, yet F&P is trying to pitch itself even higher using an almost unknown brand and the same products.

And third, it and Whirlpool have to win the race to establish Dishdrawer technology.

Given its thoughtful and disciplined approach to business, F&P has a good chance of pulling off these challenges. If it does, it will have broken new ground as a New Zealand role model.

>From stuff.co.nz

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