Right Hemisphere - from the New Zealand taxpayer with love

Later this month, German software giant SAP will close a deal to buy New Zealand’s Right Hemisphere.

Right Hemisphere, which has offices in Auckland and San Ramon, California, makes 3D modelling software used in manufacturing and marketing by the likes of Boeing, Nike, Siemens Medical and Chrysler.

But it is best-known in tech circles for the $US8 million interest-free loan extended to it by the Labour government in 2006 (at the exchange rate of the time worth around $NZ14 million), then extended by National in 2009.

The company also received direct grants from FoRST.

Right Hemisphere's 2010 accounts - first highlighted by NBR Online – showed the company is still $10 million in hock to the government.

The loss-making Auckland company is far from the first to be heavily subsidised by the New Zealand taxpayer, only for ownership - and in some cases jobs - to go offshore.

The largesse has increased under Science and Innovation Minister Wayne Mapp.

Mid August, Dr Mapp announced a second round of funding under the $321 million Technology Development Grants scheme, which gives money to tech companies (on the proviso they match it with their own R&D spend).

There were some eyebrow-raising allotments, including $4 million for NZX-listed Xero (which recently boasted at its annual meeting that it had $16 million in cash).

And Auckland software company NextWindow received $6 million – despite the fact the company was sold last year to Canada's Smart Technologies in what was essentially a hostile takeover (at the time, NextWindow founder Al Munro told NBR that selling to Smart Technologies was the only way to settle a patent action brought by the North American company, which Mr Munro could not afford to defend).

Smart Technologies has so far held fast on its promise to keep Next Window jobs in Auckland.

But Peter Griffin, head of the Science Media Centre, and a long-time technology commentator, noted to NBR that this is not always the case.

“The problem is maintaining the multinational’s interest in keeping things based here post sale,” Mr Griffin said.

“Whether we give companies loans or grants, the big question is how do we keep a New Zealand stake in these companies once they've got to the size and stage of development that they attract overseas buyers?”

Mr Griffin recalled sitting down with the head of Brunswick Corp shortly after the US company bought Navman in 2004.

“He was raving about New Zealand and how he looked forward to heading down on a regular basis,” Mr Griffin remembers. “But within a couple of years Navman had been split up, and bits sold off.”

Brunswick onsold Navman’s core business to Taiwan’s Mitac in 2007, and jobs immediately began to move offshore in the first of a series of restructures. By mid 2009, a high-tech workforce that once numbered 300 on Auckland’s North Shore was down to a rump of 48.

Skin in the game
Commenting on the issue online, entrepreneur Sam Morgan (who among many other roles is a Xero director) offered that “loans make more sense than grants to companies.” Loans meant the Crown had some “skin in the game”.

Navman received help from the government, including a $1 million from Crown agency Technology New Zealand after the company – founded by Rich Lister Peter Maire – had been sold to Illinois-based Brunswick.

At the time, the government justified giving money to the in the now US-owned company on the basis that it would help keep jobs in New Zealand (and indeed – although it workforce was ultimately hollowed – 14 bodies were added to Navman in the short term). The government also argued that it would help increase the tax base.

And in some cases, government backing has kept jobs local.

Network security company Endace drew a $4.4 million grant from Technology New Zealand grant in July 2010, despite the fact it’s snubbed the NZX in favour of listing on London’s AIM index.

Endace returned the favour by bring manufacturing of its networking hardware, formerly carried out around Asia, home to Christchurch. It also doubled the numbers in its Hamilton R&D centre to 90.

As for Right Hemisphere (which last year sneaked a $694,000 profit on $6.65 million revenue - against a loss of $3.8 million in the previous year)? SAP told NBR it would repay the outstanding $10 million government loan when its deal closed.

The German company has also pledged to keep jobs in New Zealand.