Strengthening dollar restricts ICT export growth

A stronger dollar means Orion can bring less money back for R&D in New Zealand, says chief executive

Last week’s interest rate hike by the Reserve Bank is only expected to make things harder for local ICT exporters.

Exports of ICT goods and services increased 19.9% to $1.6 billion for the 2006 financial year, according to Statistics NZ, but the strong Kiwi dollar could pour rain on the ICT export parade.

Eighty percent of health software developer Orion Health’s revenues come from offshore, says Orion chief executive Ian McCrae.

“A portion of that stays in those markets to cover local costs, but a good portion of it does come back to New Zealand to pay for head office costs, in particular our research and development.

“So, a stronger dollar means we bring less back. It means we can afford less development.”

McCrae is confident Orion will grow another 50% next year, but with a lower dollar, the company would have grown faster, he says.

To counter a slow-down, Orion focuses on operational efficiency; “doing more with the same number of people”, he says. “This year you really need to do that.”

The strong dollar brings some benefit, though. “When we recruit international people, the salary differentials are less, which means we can attract overseas people more than we might have otherwise,” he says.

However, Selwyn Pellett, chief executive of network appliance developer Endace, is not worried about the strong currency.

“Fortunately we have very high growth margins, so it doesn’t affect us greatly,” he says. “We have taken the prudent measure of reporting our results in US dollars, and buying and selling components in US dollars, so for us [the strong dollar] is a little bit painful, because it lifts our operating costs, but it is not material.”

Pellett says the message, if there is one, is the more New Zealand companies that get to that position, the less vulnerable New Zealand is to fluctuations in the exchange rate.

“But more importantly, what is the government going to do about it?” Pellett asks. “Because we are in a big trap.”

The high-tech industry would typically have reasonable margins, at least 35% and up to, in Endace’s case, 75%, he says. “So, 5% or 10% can be absorbed and not be horrendously bad for the business.

“The lower the margin the worse it gets. One of the things we have learnt with this high dollar is how vulnerable the commodity-type exporters are, and that is just another reason why we need more ICT companies,” he says.

Pellett’s biggest challenge in growing the company is finding staff. The only way in which the strong dollar is beneficial to Endace, as with Orion, is when recruiting staff from overseas. For an American, for example, looking to work in New Zealand, the high dollar will mean a 25% cut in salary instead of a 50% cut, he says. However, the cash they bring with them is being devalued at the same time.

Peter Dickinson, executive director of financial and business management software developer Greentree, says the New Zealand dollar is falsely overvalued.

“My gut-feel is that the New Zealand dollar is overvalued by about 20%,” he says.

Most of Greentree’s export value, at the moment, is out of Australia, he says.

“We’ve been holding reasonably stable against the Australian dollar, and we have also had some good forward cover in place.

“But if the New Zealand rate continues to go up and the Australian dollar doesn’t, and if our Reserve Bank keeps pumping the interest rates up, then our big concern is that our rate is going to improve against the Australian dollar and that would really affect our export earnings,” he says.

Greentree’s forward cover is going to last for another three or four months, but it is the period after that “has got us a little bit worried”, Dickinson says.

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