Opinion: NZ’s underwhelming top 200

Economist Michael Reddell challenges the idea that New Zealand's 200 biggest companies show much dynamism. Actually, they're symptomatic of an inwardly focused economy with relatively low levels of business investment.

In last Friday’s NZ Herald there was a weighty supplement headed “Dynamic Business" that celebrated the results of the annual Deloitte Top 200 business awards for the country's 200 biggest companies. This table showing the performance of the top 200 non-financial companies in New Zealand was eye-catching.

  Annual percentage growth 2016/17
Revenue 4.3
Pre-tax profit minus 6.4
Tax paid profit 22.7
EBITDA 2.9
Assets minus 5.7
Equity 2.9

Tax aside, those numbers didn’t look very impressive, particularly when the latest annual accounts for the whole economy show nominal GDP rose 6.2 percent in the year to March 2017 and 5.1 percent the previous year. Against that backdrop, the performance of the top 200 companies was, if anything, surprisingly weak.

Big companies, in aggregate, doing less well than the economy as a whole needn’t be a concern.  It could, after all, be a sign of thrusting new companies surging ahead and displacing the tired old giants.  But there isn’t really much sign of that sort of process in at work in New Zealand. And, of course, our overall per capita growth in real GDP (let alone productivity growth) has been pretty deeply underwhelming.

In a way, a simple list of the top 10 most profitable companies (dollar value of profits) is quite revealing: Fonterra, Spark, Air NZ, Ryman Health, Kaingaroa Forest, Auckland Airport,Transpower, Z Energy, Meridian Energy and Mercury.

Of those 10, we have four majority state-owned companies (one a natural monopoly), a chain of petrol stations, a property-boom play, and a co-op whose profits are largely driven by swings in global commodity prices. There wasn’t much new or very dynamic about it. In a way, the list of top 10 money-losing companies looks more interesting – in addition to Tasman Steel (No 1) and Kiwirail (No 2), it does feature Xero and Orion Health.

It is a very different list than, say, one of the top most profitable non-financials in the US, which does feature (relative) newcomers like Apple and Alphabet (Google) and where almost all the companies have a strong international focus.

This chart showing New Zealand's export and import shares of GDP show how New Zealand's connections to the rest of the world have withered rather than expanded in the last 15-20 years.

As a share of GDP, imports haven’t been lower since the depths of the recession in the year to March 1992.  Exports haven’t been lower, as a share of GDP, since the year to March 1976 –  more than 40 years ago. There was, so it was claimed, a policy focus on increasing the outward orientation of the New Zealand economy.  If so, it failed.

And what of business investment as a share of GDP?

It picked up a couple of years ago from recession-era lows, but has gone sideways since, and is nowhere near the rates reached in the previous expansion.

When profit growth in our top 200 companies has been relatively subdued, perhaps it shouldn’t be surprising that not very much business investment is occurring.   And those export/import numbers shown earlier strongly suggest that what business investment is occurring will have been disproportionately concentrated in the non-tradables bits of the economy, those that don’t (by definition) face much international competition.

Deloittes and the Herald might think this is a “dynamic economy” –  and I’m sure there are plenty of small exciting firms in it –  but once we stand back and look at the aggregate numbers the picture isn’t very encouraging at all.  If change is constant, the change here seems –  in aggregate –  to more akin to drifting slowly backwards.

That was the legacy of the now-departed National-led government.  That government’s policies were not, in relevant areas, materially different to those of the previous Labour-led government.  

The worry now is whether there is any realistic basis for expecting something different, and better, from the new centre-left government.  At present, it isn’t obvious why the future should be any better than the performance over the last 20 years or so.

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