No escape for NZ's tech sector as economy 'grinds to a halt'

Monday, 6 April 2020

Numbers validate the view of most economists that the US is already in recession from coronavirus fallout.

Farmers aren't the only ones doing their bit to keep 'NZ Inc' on life support during the coronavirus crisis.

Some of the country's best-known technology companies – including Fisher & Paykel Healthcare, Xero and Datacom – have continued to work through the lockdown relatively untroubled, earning export dollars.

But dig deeper and the cracks are starting to show.

'There is a general perception that the technology industry is doing really well and is a beneficiary of all of this,' NZ Tech chief executive Graeme Muller says.

But he says that is 'a risky and short-sighted take' on the situation.

Fisher & Paykel Healthcare's 5000 staff are busier than ever making equipment to help Covid-19 patients, but not all tech firms are in the same position (file pic).

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'While there is a surge of work right now for some of these companies, some are already feeling the pain because their customers are the rest of the economy,' Muller says.

Start-ups that don't yet have revenues, but which can't work purely online, are in a particularly difficult position.

They believe it is unfair they can't access the Government's wage subsidy scheme that is helping other struggling businesses tick over.

National Party research, science and innovation spokeswoman Parmjeet Parmar has urged the Government to look into their particular predicament as 'a matter of urgency'.

First the 'better news'.

Mint Innovations opens up demonstration factory

The country's largest locally-listed technology business, Fisher & Paykel Healthcare, has seen its sales and share price rise as a result of the coronavirus pandemic.

The virus has generated more demand for its respiratory humidifiers and masks, while the decline in the New Zealand dollar means it is getting paid more for them from overseas buyers.

'We have nearly 5000 people around the world who are focussed on meeting the increased demand for our respiratory products, which are being used in the treatment of patients with Covid-19,' chief financial officer Lyndal York said on Monday.

Chief executive Lewis Gradon said last month that the company was ramping up its manufacturing, and upped its revenue guidance for the year to $1.24 billion.

The company may be the only one to see its share price on the NZX rise as a result of the pandemic, but it is not the only one that is trading through the crisis relatively untroubled.

Cloud software company Xero has also been able to continue selling, supporting and developing its products during the lockdown.

Xero has not been classed as an essential service, meaning its offices are closed.

But the nature of its work means that its employees – including about 1000 staff who normally work out of its Wellington head office – have been able to switch to working from home.

'As a cloud-based business, Xero is well placed to operate remotely during this unprecedented Covid-19 situation,' Xero New Zealand managing director Craig Hudson says.

Mint Innovation chief executive Will Barker says the situation is of course frustrating.

'Our people are successfully working from home and we've worked hard to ensure they have the tools, technology and work processes to do so.'

Instead of asking for help, Xero has been in the happier position of trying to provide it.

Xero has put prices rises that were due to take effect on Thursday in most of its major markets, bar Britain, on hold, and has created a 'dedicated customer response team' customers can contact for 'case by case' support.

It is holding daily 'webinars' to help explain to its customers what government support may be available in their country, and is aiming to pay its own small business suppliers within 10 days to help their cash flow, Hudson says.

New Zealand's largest specialist IT services firm, Datacom, which employs about 7000 staff including about 3500 in New Zealand, is also keeping its disk drives spinning.

Spokesman Paul Brislen says about 90 per cent of the company's staff are working from home and the remainder from its facilities, including its data centres, supporting clients that are essential services.

Xero is not an 'essential business' but its staff have been able to continue developing and supporting its cloud software from home.

No staff have been stood down, he says.

'We have actually seen a bit of an uptick in interest in some of the work we do, so generally speaking it is 'business as usual'.'

Muller says most software firms that have a cloud-based model appear to be doing okay for now.

'They have got the 'drip-drip' annuity experience.'

For most Xero customers 'online accounting is unlikely to be the first thing they turn off', he notes.

IT services firms have also been busy helping customers adapt to remote working, he says.

The Government should bring forward IT projects for the same reasons that it is accelerating investment in roading and other physical infrastructure, says NZ Tech chief executive Graeme Muller.

But, disturbingly, Muller estimates software and services firms have seen about an 80 per cent drop in their pipeline of future project-based work as customers put investments on hold.

'Unless they are in the cloud-based subscription model, their businesses can see a cliff coming.'

Earlier stage companies can't now see where they are going to get their next round of funding firm, so they are looking at how much time they have and how many staff they can keep on, he says.

'Do they go into 'hibernation? It is very difficult for any company that is in the highly-capitalised growth phase.

'They are trying to work out what to do.

Mint Innovation's researchers are locked out of its labs for now.

'I don't think there is any escaping this crisis for any sector in the country as the economy grinds to a halt.'

Muller says government work accounts for about 30 per cent of the revenues of the IT sector but much of its spending has been frozen.

NZ Tech is calling on the Government to instead bring forward IT projects, to apply the same thinking it has shown in accelerating investments in roading and other physical infrastructure.

'If the Government was to bring forward projects and potentially consider some new ones, it would be a potential infrastructure stimulus,' he says.

Even within the relatively protected cloud software sector, there have been some losers.

National Party science spokeswoman Parmjeet Parmar has gone into bat for 'pre-revenue' R&D firms that can't access wage subsidies.

Export award-winner Serko was the darling of NZX investors for three years until the pandemic cast a long pall over the market for its cloud-based software, which helps manage business travel.

Serko's staff are able to work remotely and cash isn't a problem, after it raised $42m last year, but there is a big question over when – or even 'whether' – the corporate travel market will recover.

Xero NZ chief executive Craig Hudson says Xero is well-placed to operate remotely.

Like many technology businesses in its situation, Serko is looking to the Government's wage subsidy scheme for some short-term relief.

But wage subsidies are only available to companies that can show a 30 per cent drop in their monthly sales, meaning they can't be claimed by companies that are at the pre-revenue stage.

That can be a showstopper for young tech firms that need to access specialist facilities such as laboratories.

One such company is Auckland 'clean tech' firm Mint Innovation, which is developing chemical and biological agents to help reclaim valuable materials from electronic waste and is a finalist in this year's Hi-Tech Awards.

Chief executive Will Barker says the company likes to think of itself as being on a similar trajectory to an 'early Rocket Lab' or LanzaTech, but the coronavirus is 'incredibly bad timing' for its own business.

'We are venture capital backed, and have to hit certain milestones and while we are locked out of our R&D facilities, it all stops,' he explains.

Mint Innovation raised $5m from investors in 2018, but Baker says it is now in the frustrating position of burning through its capital to pay its researchers while they are locked out of its labs.

Datacom's datacentres are still humming.

'We can do a bit of 'housekeeping'', but its 16 staff – seven of whom have doctorate degrees – are now largely unproductive, he says.

'I can't afford to lose them; because they are so highly-trained it would cost me a fortune to replace them, so we are in a real spot.'

Barker says he has talked to a dozen early-stage research or 'deep tech' firms in a similar position, and believes there would be 40 or 50 in total around the country, employing hundreds of highly-skilled staff.

We are 'inventing stuff' and don't fit the criteria for the wage subsidies because we don't yet have anything to sell.

'It is a bit of a 'hole' in the scheme.

Mint Innovation 'can and will get through', he says.

'But if we get through having burnt through our cash then we have got a big problem next year.'

Government grants agency Callaghan Innovation, the Ministry of Business, Innovation and Employment and NZ Trade and Enterprise, are all trying to find ways to support Mint Innovation and other such businesses, he says.

'It is going to require all sorts of different mechanisms.'

But with a rule change, the wage subsidy scheme would be 'a nice easy fix that could get us through the worst that the lockdown is going to throw at us', he says.

National's Parmar has taken up that cause and wrote to Science Minister Megan Woods last week asking the Government to consider an urgent change to the wage subsidy rules.

'Kiwi start-up R&D companies in pre-revenue phase should have access to the Government's wage subsidy scheme to offset some of the financial harm being caused by the Covid-19 crisis,' she says.

'Leaving it too late might result in this sector collapsing.'

Woods indicates she is looking into the issue.

'I am aware of the unique situation that R&D intensive companies are in during this time,' she says.

'We have been actively working through this issue since last week and are investigating the options for pre-revenue companies to access support.

'We know that many of these innovative companies are vital to our future. I am expecting advice in the next day or so.'