PRIME MINISTER’S SCIENCE, ENGINEERING AND INNOVATION COUNCIL n FINAL REPORT m MARCH 2005

WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs n FINAL REPORT m Part A — Phase 2: pages 1–62 m Part B — Phase 1: pages 63–103

ISBN - 0 642 72390 7

This paper was prepared by an independent working group for PMSEIC. Its views are those of the group, not necessarily of the Australian Government. k P ART A

PHASE 2 REPORT: GROWING EXPORT CAPABILITY – MARCH 2005 CONTENTS

1 Executive Summary and Recommendations 3

2 Introduction 5

3 Exports are key drivers of economic growth 6

4 Backing technology-based SMEs to export 7

4.1 Tech Team 7

a. Export competent teams who can open markets and assist companies to close deals 8

b. Foster relationships between SMEs, larger firms and Multinational Enterprises 8

c. One, coordinated strategy 9

4.2 Improve the reach and focus of Austrade’s national and international representation 10

4.3 Government and industry leadership to remove constraints on L expansion stage businesses 10

a. Back Australian products in the domestic market 10

b. Maximise the impact of Government support programs 11

c. Modify EMDG to better support technology-based SMEs 11

5 Further evidence affirming Phase 1 Recommendations 11

Appendices

A Terms of Reference 12 B Working group members 13 C List of submissions and contacts 14 D Growing Export Capability: SME Case Studies 15 E Growing Export Capability: MNE Case Studies 36 F Export Market Development Grants program – suggested approaches 60

G Glossary of terms 61 H Index of References 62

k 2 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 1 EXECUTIVE SUMMARY 1.5 The PMSEIC Growing Technology-based SMEs Working Group’s recommendations 6 focus on 1.1 It is imperative that we back our technology-based promoting sustainable and expanding export Small to Medium Enterprises (SMEs) and grow them capability for Australia’s technology-based companies into sustainable businesses linked to global markets so which comprise around 13 per cent of Australia’s that they contribute to an increase in Australia’s GDP SMEs.7 The recommendations will assist the per capita and wealth creation potential in the Government to achieve a higher return on its knowledge economy. considerable investment in R&D and early stage commercialisation. 1.2 The Government makes a substantial investment in

early stage businesses, through financial and other 1.6 The Working Group proposes changes that will: assistance for innovation, early commercialisation of m back technology-based SMEs to develop the products and export promotion and should capitalise agility and sustainability to deliver high-value on its investment by backing the transition of these exports; businesses through the expansion stage 1 and m beyond. There is no critical mass of sustainable SME maximise the benefits of all export-related effort exporters 2 and too few SMEs become Multinational whether government or commercially-led to Enterprises (MNEs). enable growth in the number, sustainability and value-add of SMEs and to their transition to larger 1.3 Australian SMEs, aided by various Government firms or MNEs; and programs produce leading–edge innovation. The m resource the pipeline of skill attainment required working group acknowledges that in a globalised by individuals and their businesses to drive the environment the high levels of investment required to business capability to deliver high value-adding, commercialise some technologies, for example, bio- sustainable SME technology-based exports. pharmaceuticals, means that a proportion of SMEs must trade a whole or part of their IP to gain access 1.7 RECOMMENDATION 1 to capital. Yet it is industry’s view that many SMEs Implement a Tech Team concept for technology-based fail to capitalise their innovation and that too often SMEs through cooperation between key representatives their idea is lost to well-resourced off-shore from the States, Territories and Federal government, companies, resulting in loss of income, jobs and relevant industry representative and commercial sectors, economic growth. to establish: 1.4 Technology-based SMEs3 produce high-value, m a network comprising all levels of government and innovative products and services which, owing to the private sector partners; small size of Australia’s domestic market, must be m a shared vision for growing technology-based SMEs exported. Exporters add value to the domestic through strengthening the links between exporting economy — they pay better wages and provide and innovation; more training for their employees and drive the development of high-value, high-skill products which m initiatives that align policies and programs to enable return export income for Australia.4 Exports are the delivery of the vision; and critical to growing SMEs into successful, medium to m the skills needed now and into the future to drive the large enterprises and MNEs; and technology-based achievement of the vision. exports have a high potential to accelerate company growth.5

1 Expansion-stage refers to product in the market and significant revenue growth - Venture Capital 2003-04,Cat.No. 5678.0, Australian Bureau of Statistics (ABS) 2 Sensis data indicates that overall, 16 per cent of SMEs reported that they had exported in the past year, with 4.4 per cent of all SMEs being high/medium high technology exporters -Technology-based SMEs, Special Report for the Department of Industry, Tourism and Resources. Sensis Business Index, May 2004 3 A technology-based company is defined as one which acquires or creates new technology that it integrates to develop new products, processes and services as the basis of its business competitiveness – see Glossary of Terms at Appendix G 4 Based on data in Australian Bureau of Statistics (ABS), Longitudinal Survey 1997/98. ABS Cat No. 8154.0 5 This is evidenced by the growth trajectories of a number of SMEs and MNEs based on technology export contracts. See case studies (Appendices D and E) 6 List of members and Terms of Reference are at Appendices A and B 7 Technology-based SMEs, Special Report for the Department of Industry, Tourism and Resources. Sensis Business Index, May 2004

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 3 k Tech Team will develop: 1.9 RECOMMENDATION 3 i) export competent teams who can open markets and Government and industry leadership to support later — progress opportunities to the point where companies and expansion-stage business by: can close deals; m backing Australian product in the domestic market: ii) foster partnerships between SMEs, larger firms and Government to maximise its investment in Australian MNEs to pursue international opportunities; and innovation by ensuring that Australia’s technology- based SMEs have adequate opportunity to participate iii) one, coordinated strategy focussed on the needs of in Government business; technology-based SMEs involving: m maximising the impact of Government support m enhanced trade and industry hubs; programs: allowing those companies that have m a web-based national entry point providing access to already met eligibility criteria for COMET and all business growth and development-related Commercial Ready,11 to apply for the Export Market programs; and Development Grant Program (EMDG)12 without the m a Government-sponsored portal to enable companies need to retest their eligibility for the same criteria, in to seek partners for new export ventures. particular, those relating to the demonstration of business skills; and harmonising the turnover limit for 1.8 RECOMMENDATION 2 access to EMDG ($30 million) with the turnover limit Improve the reach and focus of Austrade’s 8 national and for access to Commercial Ready ($50 million); and international representation for technology-based SMEs m modifying EMDG to better support technology-based by adjusting the Austrade adviser skill profile and SMEs in the areas of: employment arrangements to include: - Timeliness and quantum of support, m a COMET 9-style, success-based 10 remuneration scheme; - Intellectual property management, m a requirement for demonstrable ability, in progressing - Building relationships with other companies, opportunities to the point where companies can close - Engagement of advisers/mentors, deals in relevant technology-based industries; skills -Greater interaction with other Government market development and sales; and capacity to spot programs, potential buyers; and -Technology showcasing.

m all front-line Austrade advisers to undertake technology industry secondments on a regular basis to ensure the currency of their skills and commercial acumen.

8 Austrade – Australian Trade Commission 9 COMET is a grants program administered by AusIndustry which focuses on early stage commercialisation. See www.ausindustry.gov.au for more information 10 A business owner has a ‘success fee agreement’ with a COMET adviser to assist with commercialisation, including raising capital. Under the extended COMET program (in effect since October 2004), the success fee is payable at a flat two per cent and capped at $100,000, and applies to capital raised by either equity or borrowing 11 Commercial Ready is a grants program administered by AusIndustry which focuses on R&D, proof of concept activities and/or early stage commercialisation. See www.ausindustry.gov.au 12 The Export Market Development Program is an entitlement-based grants program administered by Austrade which provides business with export assistance. See www.austrade.gov.au k 4 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 2INTRODUCTION

2.1 The challenge addressed by this working group is to sustain and grow Australia’s promising technology- based SMEs, and to see them develop into larger, successful Australian exporting businesses. By their nature technology-based businesses must link with global markets to be competitive. The advantages for Australia multiply when these companies grow through exports rather than move offshore and ‘seed other economies’.

2.2 From 2005, the liberalisation of trade through the Australia United States Free Trade Agreement (AUSFTA), bilateral free-trade agreements with Thailand and Singapore and multilateral agreements will boost opportunities for Australian companies to access overseas markets.

2.3 This working group examined the support mechanisms and growth factors for Australian technology-based SMEs and identified that growing SMEs is about enabling Australian companies to develop export markets for products and services: it’s about business not science. Four critical factors have been identified which have implications for Government and the commercial sector in influencing the growth of technology-based SMEs: i) the ability to export; ii) a focus on developing innovative solutions to customer problems; iii) having access to sufficient domestic expansion capital; and iv) possessing experienced and skilled management.

2.4 The working group’s Phase 1 Report (tabled June 2004 PMSEIC meeting), sets out the major findings on these growth factors.13 PMSEIC agreed that the working group continue its work with a focus on the export capability of technology-based SMEs. This final report is the outcome of that additional work.

13 The Prime Minister’s Science, Engineering and Innovation Council Working Group: Growing Technology- based SMEs: Phase 1 Report, June 2004 is Part B of this publication

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 5 k 2.5 The working group consulted with government, 3 EXPORTS ARE A KEY business and industry in preparing the final report. DRIVER OF ECONOMIC A list of submissions and contacts is at Appendix C. GROWTH Case studies on technology-based SMEs and MNEs have been developed as part of this study based on 3.1 Exports are a key driver of economic growth and interviews and discussions with leading Australian wealth creation – they provide jobs, the capacity to companies.14 (Appendices D and E). trade for goods and services Australia needs and the capital to fund further innovation and growth. 2.6 The working group found further evidence affirming the recommendations from the Phase 1 report, in “At the macro level, increasing exports will particular, those relating to availability of domestic generate important spillovers, and over time will expansion capital and development of appropriate contribute to improving Australia’s … export business skills by SMEs. revenue, employment productivity and living standards.”15 2.7 The working group has consulted with the Department of Foreign Affairs and Trade and 3.2 Australian companies, 99.8 per cent of which are Treasury with respect to the impacts of current SMEs, need to export to provide the critical mass policy and the opportunities for change. As a result and expertise necessary for them to be competitive of the advice, and further consideration of the and to grow to be MNEs. The Australian Government issues, Recommendation 1, Phase 1 report is has set a target to double the number of exporters supplanted by the recommendations in Phase 2. With by 2006-07, and has identified SMEs as the priority regard to further investigation of tax issues (sub-item target group16. Meeting this target could increase Recommendation 7), the working group decided that export revenue over 5 years by $36 billion according this would not be a focus of the final study and that it to Austrade estimates methodology.17 would not pursue Recommendation 1, Phase 1 3.3 Encouraging and supporting technology-based firms Report, further. to export represents a good return on the investment as technology-based SMEs are:

m more likely to persist as exporters, compared with lower technology exporters;18

m twice as likely to actively seek significant expansion, compared with lower technology firms; 19 and

m able to achieve a higher rate of intention to export immediately or within the next 12 months than other SMEs. 20

3.4 In addition to driving export opportunities in new leading-edge technologies such as biotechnology, information technology and nanotechnology, Australian technology companies add value to existing industries. For example, Pacifica, a car

14 The report and case studies will be available on the DEST website following presentation of the report to PMSEIC at http://www.dest.gov.au/science/pmseic/meetings/13thmeeting.htm 15 Knowing and Growing the Exporter Community: A report from the Australian Trade Commission, (Austrade), 2002. ISBN 0-9580741-0-0, page 11 16 The Hon. Mark Vaile MP, media release, Historic Agreement to Boost Exports, 4 April 2002 17 Knowing and Growing the Exporter Community: A report from the Australian Trade Commission, (Austrade), 2002. ISBN 0-9580741-0-0, page 10, updated with 30 June 2004 export revenue figure of $143.4 billion from Table 5 ABS Cat. No. 5204.0 Australian System Of National Accounts 18 Based on data in Australian Bureau of Statistics (ABS), Longitudinal Survey 1997/98. ABS Cat No. 8154.0 19 Technology-based SMEs, Special Report for the Department of Industry, Tourism and Resources. Sensis Business Index, May 2004, Table 2. The full report will be available on the DEST website following presentation of the report to PMSEIC at http://www.dest.gov.au/science/pmseic/meetings/13thmeeting.htm 20 ibid k 6 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 component manufacturer – a traditional 4BACKING TECHNOLOGY- manufacturing industry, has adopted a cluster BASED SMES TO EXPORT strategy to encourage the development of small, technology companies to provide Pacifica with their 4.0 Australia needs to invest in a fully coordinated and leading-edge technology.21 collaborative effort between all stakeholders relevant to technology-based companies to encourage more 3.5 Total Australian export values grew at an average SMEs into sustainable exporting and growth into larger annual rate of 5.6 per cent over the decade to 2003- firms or MNEs.22 The working group proposes creating 04. However, export values peaked in 2000-01 and a Tech Team which will bring the right people together fell by 3.2 per cent in 2002-03 and by a further 3.3 at the right time to open markets and progress per cent in 2003-04. The recent falls reflected a opportunities to the point where companies can close range of factors including drought, SARS and deals. Further, the working group proposes that the exchange rate movements. right people to drive this initiative for technology-based SMEs could be Austrade advisers remunerated on a 3.6 The value of manufactured goods exports, which success-based, COMET-style arrangement. include the high technology products that are the subject of this report, grew by an average annual rate of 6.3 per cent over the decade to 2003–04 4.1 Tech Team

but reached a peak in 2000–01, fell by just 0.1 per 4.1.1 The working group recommends bringing together cent in 2001–02 and 2002–03 and fell by a further all relevant government and commercial sector 3.9 per cent in 2003–04. Total export volumes fell providers of export services to Australian 0.6 per cent in 2002–03 but recovered in 2003–04, technology-based SMEs, including industry increasing by 1.6 per cent. The Treasury Mid-Year representatives,23 to form Tech Team. Economic and Fiscal Outlook 2004–05 forecasts 4.1.2 The first task for Tech Team would be to develop further growth in export volumes of 4 per cent in one, shared strategy to align all export-related 2004–05. efforts to the vision for technology-based SMEs. Tech Team would: m be a network comprising all levels of government and private sector partners; m create a shared vision for growing technology- based SMEs through exporting, embracing the essential relationship with innovation; m identify and integrate, and where appropriate, retain, cease or re-frame initiatives or activities that will enable delivery of the vision; and m identify the skills needed now and into the future to drive the achievement of the vision.

4.1.3 This proposal draws upon the philosophy of Team Canada 24 embraced in a single point of access to export information, market intelligence and financial assistance, and advice and support from federal, provincial and territorial governments, and the private sector.

21 From an interview with John McKenzie, managing director and Alan Stevens, vice-president of Pacifica, and David Miles, Chairman of the working group on Growing Technology-Based SMEs 22 According to Mr Ian Gillespie, General Manager, Metal Storm, there are advantages for Australia’s SMEs when they can establish business relationships and learn from others’ experience. Metal Storm has learnt from other firms about how they have done things, especially in the US, where there are rules requiring majority US ownership. “We had to find ways to extract the value and bring it back to Australia.” 23 Including groups such as the Industry Capability Network which assists SMEs build links with MNEs in relation to major projects 24 Team Canada Inc Annual Report 2002, www.exportsource.ca

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 7 k 4.1.4 The working group’s proposal is closely in line with Austrade officer. Mr David Sekel, CEO of Portland Defence policies and initiatives to promote the Orthopaedics, commented that Austrade assistance development and sustainability of Australian has been extremely helpful for Portland, as it assisted industrial capabilities.25 Defence exports support in getting a contact in Japan. However, he also said: Australian technology through: “The extent to which Austrade is helpful depends on m the Defence Technology Investment Program the consultant.”27 (encompassing the Capability Technology Demonstration program) to promote industry Dr Gray, Executive Chairman Sirtex Medical, investment in research, development and commented, “In the end their (Austrade’s) service is demonstration of technologies critical to too generic, it’s not focussed enough.” Defence self-reliance; A.3 Other issues raised by SMEs included the degree of m a new Defence Export Facilitation service to red tape in accessing services and programs; the improve export facilitation opportunities for need for access to the right knowledge such as small business via a coordinated whole of financial, legal, cultural and consular services, and Government approach to defence exports; and the need for better promotion of the services m continued marketing under the Team Australia provided in Australia for SMEs. banner. A.4 The challenge for Austrade is to create an

4.1.5 The Tech Team concept addresses the major environment where the right people with the right barriers for achieving and sustaining growth of skills will want to work in Tech Team: flexible, results- technology-based SMEs across all industries and focussed people who can form speciality teams better coordinates the critical success factors for around technology-based SMEs, open and access that growth, including: markets and progress opportunities to the point where companies can close deals. 4.1.A Export competent teams who can open A.5 Access to experts in Tech Team will expedite the markets and assist companies to close development of business acumen in technology- deals based SMEs, mitigate a level of risk inherent in SMEs A.1 Consultations with technology-based SMEs indicated establishing export capability and increase the that they are generally appreciative of Austrade’s number of business successes. efforts, especially in terms of providing contacts in overseas markets. However, many technology-based 4.1.B Foster partnerships between SMEs, larger SME exporters believe there is a lack of firms and MNEs understanding of high-technology applications and B.1 Tech Team would be a first contact point for the defence industry within Austrade. While overall he companies seeking partnerships and sound advice was positive about the government assistance about domestic and global business relationships. provided by Austrade, Mr Gillespie of Metal Storm The worth of mutually beneficial relationships between noted that “there is a lack of understanding of our firms is acknowledged by some SMEs. However, industry, both the technology and the markets. others are sceptical that big firms would want to take Austrade knows about dairy and wool, but doesn’t them over, or would not deal fairly, especially on have the specialised knowledge about our industry issues of intellectual property. Australian businesses and markets.”26 need to develop strategic partnerships around

28 A.2 A common theme was that the effectiveness of common interests to fully capitalise on their assistance depended very much on the specific innovative leading-edge technologies.29

25 From a submission from the Defence Science and Technology Organisation (DSTO) in the Department of Defence 26 See Appendix D, Metal Storm, paragraph 8 27 See Appendix D, Portland Orthopaedics, paragraph 9 28 Several SMEs reported on the value of partnerships to advance their business and exporting objectives for example, Managing Director of GPS Online, Mr Robert Angel says “A collaboration with ADI military has enabled GPS to enter the Middle East market.” 29 Such as Tenix which runs a Take to Market Investment Fund to drive commercialisation of Australian technology by investing in companies, including SMEs, concepts and initiatives, individuals and products where they can see some potential opportunities. Appendix E, Tenix, paragraph 2 k 8 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 B.2 In discussions with David Miles30 several MNEs noted at the frontline in integrating the programs by the value of business relationships including formal promoting understanding of the relationship cluster models in which Pacifica31 is investing and between all export programs. They would explain collaborations such as those IBM32 deploys. Angus the journey of development required for people Robinson of the AEEMA33 noted that the low number and their businesses to achieve sustainability by of MNEs in Australia makes it difficult to cluster accessing programs at key growth points; SMEs around companies with truly extensive global ii) program owners creating seamless transition for supply chain linkages. Chris Smallbone of the WTIA34 businesses moving along the pipeline by promotes the SMART TechNet Project which brings managing the boundaries between their industry and all levels of government together to programs – ‘pass the baton’; supply the technologies and technology receptors to create viable industry sectors and overcome iii) building a web-based national entry point constraints. providing access to all business growth and development-related programs and advice from Mr Du Plessis says, “GeoSim has established State and Federal agencies focussed on the strategic alliances with four, specialist, micro- information needs of a business seeking to companies in the aviation field, with the intention of become a sustainable exporter. establishing an aviation cluster to support and

35 stimulate growth in the simulation environment.” The communication strategy should utilise the internet to market information on Robert Angel from GPS Online suggests that the opportunities for SMEs to collaborate, government pay facilitators, for up to six months, to become internationally competitive and create and manage networks for approved display their capability, as according to the companies. “Getting the right partner is imperative to Sensis Business Index, February 2004, exporting, as one of the major challenges is having internet information is the most highly desired the capability to support the technology in remote by SMEs.38 locations.”36 iv) a government-sponsored portal, under the 4.1.C One, coordinated strategy auspices of Tech Team, on which companies C.1 The strategy would encompass a number of advertise export business ventures for which initiatives designed to maximise the value of partners or collaborators are required. A suitably information services for the current clients and skilled broker driving the development of create new audiences. These initiatives would opportunities by mining the list, identifying include: potential partners and facilitating partnership- creation would stimulate the growth of existing i) enhancing the role of the trade and industry SMEs. The working group suggest interest in hubs, including the eight new hubs announced in extending the functionality of the privately funded the Coalition’s Election commitment37, by InnovationXchange39 website be considered incorporating Tech Team. The hub staff would be before committing to a new portal.

30 Mr David Miles, Chairman of the PMSEIC Working Group on Growing Technology-Based SMEs 31 Pacifica Group Limited makes car components. From a file note by David Miles, Chairman of the working group, of his conversation with John Mackenzie, managing director, and Alan Stevens, vice-president 32 IBM Australia Limited – submission dated 28 September 2004 33 AEEMA — Australian Electrical and Electronic Manufacturers Association. From a submission to the working group confirming a discussion with Mr David Miles, Chairman of the working group, dated 22 October 2004 34 WTIA – Welding Technology Institute of Australia. From a submission to the working group, The Oz Weld Technology Support Centres Network: A Unique Model for Technology Innovation by Industry by Chris Smallbone 35 Appendix D, Geosim Technologies Pty Ltd, paragraph 7 36 Appendix D, GPS Online Limited, paragraph 4 37 Trade – Creating Jobs for Australians, Coalition election commitment issued 1 October 2004 38 Sensis Special report on How SMEs Access Information April 2004t www.sensis.com.au 39 InnovationXchange offers comparable functionality and demonstrates the merit of such a forum in creating opportunities to include exports – www.innovationXchange.com.au

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 9 k 4.2 Improve the reach and focus of 4.3 Government and industry Austrade’s national and leadership to remove international representation constraints on expansion stage for technology-based SMEs businesses

4.2.1 The working group believes technology-based 4.3.1 The working group believes government and advisers for export development agencies like industry have a role to lead the development of Austrade should be incentivised in the same initiatives in some specific areas and to remove manner as COMET advisers – however, in this constraints that are hindering the growth of proposal, the company and the adviser enter into a technology-based SMEs, namely:

contract whereby the company pays a success fee a. back Australian product in the domestic 40 to the adviser based on a certain volume of sales. market; A success-based remuneration scheme aligns the b. maximise the impact of Government support interests of the company and the adviser with the programs; and vision of making and sustaining export sales to drive the growth of SMEs. c. modify EMDG to better support technology- based SMEs. 4.2.2 Such advisers need to be recruited in Australia, and

in key overseas markets with a strong demand for a. Back Australian product in the domestic market technology-based products to ensure they have the SMEs comment that Australia does not support its own skills to advance the export objectives of companies by purchasing Australian made products but technology-based SMEs. Further, all Austrade front prefers to buy foreign made goods. The impacts of this line advisers should be encouraged to engage in include: regular technology industry secondments (in m Australian companies can’t get cashflow from initial Australia or in another country) to ensure the sales; 41 currency of their skills and commercial acumen with respect to assisting companies to progress m buyers often experience unsuccessful after sales opportunities to the point where companies can service arrangements with offshore companies; close deals. m overseas customers question the credibility of the products because they are not bought in Australia 4.2.3 An incentive-based scheme the Australian where the products should be least disadvantaged. Government would see heightened international activity, leading to increased export earnings. Managing Director of GPS Online Robert Angel says, “We need exports to find a market for our cutting edge technology. But we need some sales here in Australia to create a reference base for our overseas clients to look at.”42

Dr Keith Williams of Proteome Systems comments, “Government needs to encourage Australians to purchase locally as Australian sales are useful not only because it is easier to deal locally, but it helps when dealing with the Asian market as they have the attitude that if you can’t sell at home then why should you expect to sell anywhere else?”43

40 Under COMET, the company pays a success fee to the adviser based on the value of equity raised (capped at 2 per cent or $100,000) 41 Mincom Chief Executive Officer, Alan McElrea says that Mincom, an Australian MNE, would not have made the dramatic leaps forward in its development were it not for strategic ‘backers’ – be they customers, partners or investors. One of the best current examples of this is Mincom’s partnership with the Australian Defence Force (ADF). Appendix E, Mincom Ltd 42 Appendix D, GPS Online Limited, paragraph 3 43 Appendix D, Proteome Systems Limited, paragraph 8 k 10 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 The Commonwealth Procurement Guidelines state: “The 5Further evidence affirming Government is committed to FMA agencies sourcing at Phase 1 Recommendations least 10 per cent of their purchases by value from SMEs.”44 The industry view is that the greater proportion 5.1 Improve access to expansion capital of this is in non-technology-based consumables and is The Phase 1 Report identified the cause and effect insufficient to redress the disadvantage of current between lack of adequate expansion capital, the rate purchasing patterns across technology-based industries. of business failure and the rate at which Australian IP is sold-offshore. b. Maximise the impact of Government support programs 5.2 The Phase 2 Report affirms the findings of Phase 1 Industry believes that individual service delivery models Report with respect to lack of expansion stage for various government programs could achieve greater venture capital and concludes that there is an seamlessness if better aligned and with reduced important role for Government, in collaboration with duplication45. The working group believes seamlessness industry and the investment community to encourage would be advanced by allowing those who have greater venture capital participation. For example, for previously met eligibility criteria for COMET and the 3 years to June 2004, the average amounts Commercial Ready, to apply for the Export Market invested in expansion stage companies fell from Development Grants (EMDG) program without the need $4.15 million to $4.06 million.46 to retest their eligibility for the same criteria, in particular, those relating to the demonstration of 5.3 A recent firm-based study by the Industry, Research 47 business skills. Further, the working group recommends and Development Board found that: “While harmonisation of the turnover limit for access to EMDG Australia’s domestic market is strong and growing, it ($30 million) with the turnover limit for access to is too small to enable innovative firms to source Commercial Ready ($50 million). growth capital, increase sales and grow their business.” It notes that, “capital for innovative R&D c. Modify EMDG to better support and its commercialisation can be less costly and technology-based SMEs more readily available overseas than it is in Australia. The EMDG program is the major export assistance This is especially the case for capital beyond the program for Australian companies and therefore was A$10 million threshold.” under consideration by this working group. The working 5.4 This perspective reflects views expressed by a number group was invited by the Austrade Review Team to of SMEs interviewed for Phase 2 regarding the provide input to the review of EMDG. In doing so, the difficulties in accessing finance after early stage working group drew on personal experiences and wider development to achieve successful commercialisation. industry views obtained as part of its consultation with SMEs. The working group considers that EMDG could Dr Keith Williams from Proteome Systems says, better support technology-based SMEs if changes were “In Australia capital for scaling-up and sustaining made in the areas of: the company through the manufacturing and i. Timeliness and quantum of support, commercialisation stages is a problem. The ii. Intellectual property management, assumption that supporting SMEs through the iii. Building relationships with other companies, R&D phase is sufficient to propel them into successful commercialisation is wrong – in fact iv. Engagement of advisers/mentors, commercialisation is more expensive and difficult v. Greater interaction with other Government programs, than R&D. Without a commercialised product vi. Technology showcasing. there will be no exports – companies need These suggestions are expanded on in Appendix F. support to commercialise and to prepare for exporting.”48 44 Commonwealth Procurement Guidelines, January 2005, Section 5.6 45 Mr Gillespie of Metal Storm commented that government programs aren’t well promoted, Metal Storm only identified them by accident and the linkage between programs is not clear. Appendix D, Metal Storm Limited, paragraph 8 46 ABS survey on venture capital, ABS Cat.No. 5678.0, in Venture Capital -04, November 2004. A portion of this is due to the record number of exits from investments via trade sales, initial public offers and buyback 47 Industry, Research and Development Board: SMEs: Taking Innovation to the Global Market, a study of a small number (25) of selected participants in the R&D Start and Biotechnology Innovation Fund programs, February 2005 48 Excerpt from discussion at Working Group meeting of 25 October 2004

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 11 k APPENDIX A TERMS OF REFERENCE FOR PHASE 2*

m Identify the key success factors that drive growth in technology-based SMEs.

m Describe the impediments or hurdles to growth faced by technology-based SMEs including accessing global markets.

m Advise how Australia can best support the growth of sustainable Australian technology-based SMEs.

m Develop case studies of technology-based SMEs which are at different phases of growth to highlight key issues. Case studies should be drawn from a number of sectors such as mining, defence, agriculture, energy, IT and biomedical technologies.

m Discuss the implications of these findings for government, industry and other stakeholders.

*Note that Terms of Reference for Phase 2 were as for Phase 1. The particular focus of Phase 2 was on the export capability of technology- based SMEs.

k 12 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 APPENDIX BPPENDIX A WORKING GROUP MEMBERS

Mr David Miles Chairman, PMSEIC Working Group; Chairman, Industry Research & Development Board; Chairman, National Innovation Council

Mr Gareth Dando CEO, Uniseed

Mr David Gaul President, CEA Technologies

Dr Katherine Woodthorpe Director, People and Innovation Corporate Advisers Pty Ltd

Dr Keith Williams AM CEO, Proteome Systems Limited

Mr Martin Adams Chairman and CEO, Lochard Pty Ltd

Mr Peter Lewis General Manager, CSIRO Business Development

Working Group Support Department of Industry Tourism and Resources, Innovation Taskforce

Ms Carolyn Jenkins, Manager Ms Bianca Bortolin Ms Anne Holmes Mr Karl Rumba Ms Denise Skea

Department of Education, Science and Training, Office of the Chief Scientist

Ms Julie Walding, Manager Mr Justin Withers

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 13 k APPENDIX C c) Discussions with company executives or their officers were followed by the development of Case LIST OF SUBMISSIONS Studies, Appendix E, for the following MNEs: AND CONTACTS Austal Ships; CEA Technologies; Cochlear Limited; The Chairman of the PMSEIC Working Group, Mr David Computershare Ltd; Cowan Manufacturing Pty Ltd; IDT Miles, wrote to multinational enterprises and industry Australia Ltd; Lochard Pty Ltd; Mincom Limited; ResMed; associations providing an opportunity for engagement, Softlaw Corporation Ltd; Tenix Group. either through putting forward a submission, or a discussion on any initiatives or views relevant to growing d) The Chairman of the PMSEIC Working Group, SME export capability. Mr David Miles, wrote to technology-based SMEs to invite them to participate in a survey on growing a) Submissions were received from: SME export capability. Mr Angus Robinson Eleven SMEs participated and Case Studies were Executive Director developed from survey responses for the following SMEs Australian Electrical and Electronic Manufacturers (Appendix D): Association (AEEMA) Codarra Advanced Systems; Electric Optic Systems Dr Allan Clark Holdings Limited; Geosim Technologies Pty Ltd; GPS CEO Online Limited; Intellection Pty Ltd; Metal Storm Limited; Australian Industry Research Group (AIRG) Portland Orthopaedics; Proteome Systems Limited; Mr Philip Bullock Seeing Machines; Sirtex Medical. Managing Director IBM

Mr Chris Smallbone Executive Director Welding Technology Institute of Australia (WTIA)

b) Discussions were conducted by David Miles or members of the ITR team, over the phone and through interviews, with several industry/business representatives including:

Mr Rob Durie Executive Director Australian Information Industry Association

Mr John MacKenzie, Managing Director and Mr Alan Stevens, Vice-President Pacifica Group Limited

k 14 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 APPENDIX D 3. Collaborations Two thirds of the companies were currently collaborating GROWING EXPORT with other firms or would collaborate in the future. The CAPABILITY remaining third were reluctant to collaborate expressing SMALL AND MEDIUM ENTERPRISE CASE STUDIES suspicion of large firms in Australia and were sceptical they could form useful partnerships with them or that A small enterprise is an enterprise employing less than larger firms would deal fairly especially on issues of 20 people. A medium enterprise is defined as an intellectual property. enterprise employing 20 or more people, but less than 200 people. 4. Government assistance There was general appreciation for the government’s The following case studies are based on structured role in providing contacts in overseas markets and in interviews with CEOs of technology-based SMEs — eight providing support through various export and innovation are high technology enterprises and two are medium programs. With regard to export assistance, two technology enterprises. The interviews focussed on common themes were that the effectiveness of growing SME export capability. The selected companies assistance depended very much on the specific officer; are successful technology-based companies who feature and there was a lack of understanding of high-technology in lists of fast growers. Many are award winners, and a applications. number were interviewed as part of the first phase of the working group’s study. Other issues raised in relation to government assistance generally included: concerns about the time taken to Their individual stories highlight some of the key complete applications; difficulties in obtaining finance characteristics of successful exporting firms, what after the early stages of development to achieve assists firms with exporting, some of the barriers and successful commercialisation; and the lack of knowledge challenges of exporting and suggestions for improving about operating in other countries in areas such as the opportunities for exporting companies. Some common tax system, laws and cultural processes. themes that emerged from the interviews were: Suggested areas for improvement included the need for 1. Importance of exporting to firm growth better promotion of export assistance; and more Exporting was seen as important to all firms and most specialised knowledge of technology industries to help saw it as the only way to increase scale and support the identify suitable partners and commercial opportunities. development costs of high technology products. All firms interviewed were exporting or planning to export in the List of SME Case Studies: near future. Several firms have virtually no sales in Codarra Advanced Systems Australia, having gone straight to export – they were Electric Optic Systems Holdings Limited ‘born global’. Geosim Technologies Pty Ltd

2. Support for Australian products GPS Online Limited Several companies expressed concern that they could Intellection Pty Ltd not get their product accepted in the home market until they had sales abroad. They referred to a “cultural Metal Storm Limited cringe” and called for more support through government Portland Orthopaedics procurement and for Australians to buy local products. Proteome Systems Limited

Seeing Machines

Sirtex Medical

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 15 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY CODARRA ADVANCED SYSTEMS

Codarra is an information and communications technology consultancy and systems integration company. It offers complete project management services from concept development to delivery and follow-up. Codarra has both government (especially defence) and private sector clients. Most of its products are custom designed, but some are packaged, including the Deployable Incident Management Toolkit, the Aircraft Electrical Load Analysis tool and the Avatar Tactical Mobile Reconnaissance Uninhabited Aerial Vehicle.

Codarra commenced operations 15 years ago when Warren Williams and Scott McGeechan decided to launch themselves into communications engineering services. The company later expanded into both people services and projects. Codarra has grown into a company that employs 60 to 70 people, and has offices in Canberra, Melbourne and Sydney. It also has a serviced office in New York, which CEO Warren Williams describes as a temporary ‘shop front’ solution, in order to obtain a US presence, as most US companies will only purchase from US-based companies. Currently, there is an agent working on a commission basis servicing the US operations: eventually, there will be a full time person working in this office. Codarra currently invests most of its profits into R&D and expects to expand its R&D program to cover product support for exported items.

Codarra is a medium technology company that teams with other technology companies to come up with clever products to meet clients’ needs. For example, Codarra has teamed with Intersect Alliance to sell its product, Systems iNtrusion Analysis and Reporting Environment or ‘Snare’. This is a leading-edge server product which provides the ability to monitor network access and usage. Codarra is in the early stages of exporting, not having focussed on this in the past, and expects that by the end of the financial year exports will have grown to just less than 10 per cent of revenue. Mr Williams says there is a demand for their IT security, aerospace and defence products and services overseas. Codarra do not export their intellectual property.

k 16 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 Initially Codarra took too narrow a focus and generally thought ‘too small’. Although the company expanded and diversified at one point it was not sustainable and now the company is focused on its primary ambition to be a prime systems integrator company, competing with the big players. According to Mr Williams this is a challenge as Codarra lacks capital, and the only options are either to merge with another company or raise capital through means such as listing on the stock exchange. Codarra has attended Austrade briefings, which according to Mr Williams were “useful and informative.” Codarra has collaborated with other Australian firms in However, Codarra does not expend significant funds on order to export. Mr Williams has the view that big overseas exhibitions because they have learnt that such companies would be unlikely to help them develop exhibitions are useless unless substantial preliminary exports. However, he does use his own contacts in work is undertaken in developing local relationships with order to drive exports. agents beforehand. A barrier to exporting Mr Williams believes lies with the Mr Williams believes exporters could be assisted through need for domestic acceptance of a product. In Australia, access to the right knowledge, for example a hand book preference is often given for non-Australian products, covering information for a range of potential export which denies Australian companies access to the countries, including: the basics of setting up; exporting; domestic market and as a consequence casts a tax system; relevant laws; and culture. This would assist negative view of the products with potential overseas in spreading knowledge about different markets, for buyers. Furthermore, Mr Williams has observed that the example, “in Singapore we lost 20 per cent of our Australian bureaucracy is approaching the Australian revenue from withholding taxes that we did not know United States Free Trade Agreement with incredible about,” Mr Williams said. Further, access to capital and enthusiasm and he fears that such enthusiasm will not time to devote to export preparation would ease the way be reciprocated. for new exporters. Mr Williams says the main challenges in accessing www.codarra.com.au overseas markets are selecting appropriate contacts and being aware that bribery and reverse engineering are prevalent in some countries.

In the past Codarra received a grant of $200,000 from the ACT government. Due to time restraints and the desire to be self sufficient, Codarra has not sought any other financial assistance from the government, as they consider the overheads to seek assistance are prohibitively high. Mr Williams says “the red tape associated with government ‘help’ often turns you away.” However, in the future Codarra will look at seeking assistance. Codarra plan to look at assistance through the R&D tax concession, Commercial Ready 49 and the Export Market Development Grants program.50

49 Information on these innovation programs can be found at www.ausindustry.gov.au 50 The Export Market Development Grant program (EMDG), administered by Austrade, provides assistance to small and medium Australian exporters committed to, and capable of, seeking out and developing export business by repaying part of their promotional expenses. For more information see www.austrade.gov.au

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 17 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Electro Optic Systems (EOS) specialises in the design, development and production of sophisticated laser technologies including supporting software and electronic sub-systems. The technologies are applied to a variety of space systems, defence products and space surveillance. EOS is also a developer, manufacturer and marketer of robotic weapon systems to approved military customers. The company, which was established in 1985 and earns virtually all its revenue from exports, has grown rapidly and has 88 staff employed in Australia and Arizona, USA.

Dr Greene considers assistance and incentives for R&D are critical for growth of companies, without which there is a risk companies will sell off their IP early, or that venture capitalists will strip the company of its assets. EOS has received approval for $11 million in support under two R&D Start51 grants.

EOS established laser products for an overseas market initially and when profits were earned the company expanded its product line by employing appropriately skilled staff through recruiting research staff largely from the Defence Science and Technology Organisation. EOS has a high technology profile, and its technology is described as leading-edge. For larger projects EOS enters into bundled arrangements where EOS contributes the technology and other firms contribute the finance. Dr Ben Greene says, “we plan intersections with markets that no-one else sees because of our close relationships with customers. This involves break through R&D; this is why R&D is so expensive.” EOS mainly exports products but is moving more into export of services.

EOS has reached its initial target of $100 million, and the company is continuing to accelerate. The next step for EOS is to be a $1 billion company, and Dr Greene expects that this level of growth will result in listing on the stock exchange and that will change the focus for EOS.

51 Information on the R&D Start program and other Government innovation programs can be found at www.ausindustry.gov.au k 18 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 Dr Greene says for the first 15 years EOS had no they received GERD funding worth $300,000. Dr Greene domestic market and was ‘born global’: in the last 3 says “without R&D Start, EOS wouldn’t be in Australia.” years 1 per cent of revenue has come from domestic Dr Greene says, “we had huge help from the government sales and EOS is aiming to drive that market to 4–5 per in the beginning. At that stage the Australian Overseas cent of revenue. Dr Greene says, “we bring jobs here, Projects Corporation (AOPC) merged into Austrade and and as a consequence we get good support.” Dr Greene they did back-to-back contracts. The AOPC accepted believes the EOS strategy is simple and is the same now private contracts and went as the guarantor. At the as it was initially — understand the customers’ needs moment there is not the same support for building and develop solutions for them. The key for realising the overseas markets for example, Austrade does not strategy is commitment to deep relationships with adequately exercise its powers to be a guarantor to present and future customers. “For us to grow to a overseas customers for supply of products.” Dr Greene billion dollar company we don’t need new customers, all believes Australian Defence organisations could help we need to do is increase the penetration of our market products, for example, UK and French Defence products to their business. It’s simple — we understand representatives demonstrate the capability of their and make our customers happy. We committed $100 indigenous technologies. Dr Greene believes that CRC million to a product and $70 million was contributed to it funding has been largely appropriated by universities by a customer — symbiotic relationships with customers without a plan to focus funding in those areas of most have helped us enormously.” strategic need for Australia. There needs to be a Dr Greene said his own contacts have been helpful in stronger focus on creative R&D. establishing exports, and cites the value and assistance www.eos-aus.com of good government support, including, for example, that EOS has a good relationship with US defence. Dr Greene believes political support has been helpful in raising the company’s profile, for example when the Prime Minister makes positive comments about EOS products when he visits other countries.

EOS plans to double its exports next year – although that doesn’t imply that exporting is easy – it isn’t. “We have rebuilt our business model, and reinvented ourselves, because that’s what the market, our customers, required of us,” Dr Greene said. He believes Austrade was helpful in the past, but that Austrade has its own focus, for example, value added manufacturing, which isn’t wholly consistent with EOS needs. EOS accessed EMDG funding in the early years of the company.

“EFIC52 is no more help than other financial programs. I think better access to performance guarantees in relation to EFIC would assist the market more,” Dr Greene said. EOS has received three R&D Start grants worth $3 million from AusIndustry, and in 1986

52 Export Finance and Insurance Corporation (EFIC) is Australia’s export credit agency providing competitive finance and insurance services to Australian exporters and Australian companies investing in new projects overseas. Products offered include: Direct Loan; Export Finance Guarantee; Documentary Credit Finance and Guarantee; Political Risk Insurance; Medium-Term Payment Insurance; Bonds and Guarantees. See www.efic.gov.au

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 19 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY GEOSIM TECHNOLOGIES PTY LTD

GeoSim Technologies is a Queensland company that has developed a helicopter Part Task Trainer which has Civil Aviation Safety Authority Certification to count for a considerable number of the required instrument flying time for helicopter pilots as well as recency and currency credits. The software program uses 3D visualization software based on local Australian airports and topographical reference points as part of its training function.

The company was established in September 2002 by Charles Du Plessis and Graeme Brooke to develop the Trainer in response to an identified gap in the market for helicopter flight simulators. Geosim received a Government COMET grant in 2004 of $52,000 to assist in the commercialization of the product and was initially supported by the Queensland Department of State Development (QDSD) via Aviation Australia.

GeoSim is focused on product development to expand their product range and to keep them at the forefront of their industry. Currently, a Fixed Wing Part Task Trainer is under development and negotiations are underway to develop a sports trainer in collaboration with Jabiru, an aircraft manufacturer, which will assist in the deployment and promotion of the Trainer in the aviation industry worldwide.

GeoSim is a medium-to high-technology company which bundles with other companies to access technologies to meet customer need. GeoSim base their technology on off-the-shelf products and develop them further to meet market needs and a key to its success in developing products has been gaining access to adequate finance and skills. Geosim export their products, but not their intellectual property.

Exports are important to GeoSim, but it is a young company, and is still developing its markets. Its first sale was to a flight training company in Cairns. Now it has ventured overseas and has four orders from Africa and potential orders with the Singapore military. Geosim is also looking at a joint venture into the United States.

k 20 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 The company plans to expand internationally through get a grant.” Further, he believes that a number of SMEs exporting products, creating employment and building don’t know about the Australian Trade Consulates wealth for the company’s founders. In order to grow, located around the world and that these need to be GeoSim is looking at Singapore, as it is the gateway to better promoted. South East Asia. With regard to the African markets, Mr Du Plessis suggested, “more needs to be done in Mr Du Plessis knows the African culture and has supporting entrepreneurs to establish overseas markets. extensive contacts in that market. Currently funding support for travel costs is received Mr Du Plessis says, “GeoSim has collaborated with only when a sale is made without regard for the various specialists to access required skills and has difficulties and length of time it can take to get to the established strategic alliances with four, specialist, first sale. This is compared with South Africa where the micro-companies in the aviation field, with the intention government offers tax and support incentives for foreign of establishing an aviation cluster to support and expansion. For example, the government assists stimulate growth in the simulation environment.” When entrepreneurs financially to enter overseas markets, entering a new market Geosim establishes, through a instead of requiring them to draw on scarce company new company majority owned by GeoSim, a partnership reserves.” with a sales management company, which has a Access to adequate early- and expansion-capital is presence or capacity to sell into that new market. critical for technology-based SMEs. Access to some kind Aviation Australia provided GeoSim with some useful of working capital to assist the innovator develop and contacts and Mr Du Plessis describes their support as commercialise the innovation would allow projects to “tremendous and invaluable: they gave us credibility in develop at a much faster rate. the market place, with both financial and management www.geosim.com.au assistance.”

Visibility in the market is important and GeoSim has attended almost every single air show in Australia since it began. The launch of their product by Premier Beattie gave Geosim major magazine coverage around the world and added to their credibility.

Mr Du Plessis believes Austrade has been helpful with information and contacts in various countries, and through EMDG assistance. GeoSim is still cautious in its foray into the overseas markets where these countries have a reputation for reverse engineering.

With regard to Federal and State involvement, he says, “it has been a bittersweet relationship with the state and federal offices, with Comet and QDSD giving invaluable support, without which we probably would not be where we are today. However we have been turned down on a number of occasions on applications such as R&D Start.” The problem as he sees it resides with the grant criteria, — “if you don’t fit into a box, then you do not

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 21 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY GPS ONLINE LIMITED

GPS Online commenced life in 1987 in the construction and energy industries. It was listed in 1999 as a company specialising in innovative location-based asset management solutions. GPS Online provides solutions and technology to help people understand and manage asset usage and asset location. The company’s products include mobile asset management, static asset monitoring and process control.

GPS Online produces leading edge technology in Defence, Environment, and Security and Asset Management fields. It is a world leader in defence applications including shallow water minesweeper technology and military fleet health and usage monitoring. GPS is currently exporting to the United Arab Emirates and the UK. In 1998, the company tried exporting to South East Asia but got caught up in the currency crisis. The Company re-entered the exporting market in 2002 supported by an R&D program which develops products to meet specific market needs. It includes the integration of GPS technology with third party knowledge where applicable. Today GPS employs around 45 employees.

Exports currently earn 15 per cent revenue and the company aims to increase exports by developing products which are technological solutions to meet global market needs. To export successfully, GPS invests in matching other countries’ technology infrastructure and associated standards. For example, GPS has to customise specifications for data protocols for engine monitoring. Managing Director of GPS Online Robert Angel says, “we need exports to grow revenue derived from our cutting edge technology. It is important that export sales are built upon a firm reference base in the domestic market. The home market still has some potential, but it’s limited. Overseas clients like to view the working system of newly implemented technology.”

Local partnering has been useful when entering new markets, as Mr Angel believes you cannot use an Australian manager for overseas operations: getting the

k 22 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 right partner is imperative to exporting, as one of the of success. Mr Angel praised the new R&D Tax major challenges is having the capability to support the Concession allowing the rebate if no profit was earned, technology in remote locations. For example, in South as the old Tax Concession was only good if a business East Asia Mr Angel says, “it’s not as simple as was profitable. GPS considered accessing EFIC for understanding the technology as the intellectual property potential work in Indonesia but EFIC is only relevant once is in the application of knowledge rather than in patents.” a contract is in place, so it was not pursued. A collaboration with ADI military has enabled GPS to Mr Angel said Australia has leading edge technology and enter the Middle East market. “There is always a risk some of the best innovators in the world, however, that the larger firm can develop a competitive product advancements in commercialisation are needed. He once the system parameters are understood. GPS tries suggested we need strategic partners to fill the gaps. to incentivise any partner with the ability to develop Mr Angel believes both local and federal money for air overseas markets to keep their focus on promoting the fares, accommodation and facilitation would assist in the products in the local market. This includes revenue commercialisation process. Mr Angel also suggested targets and generous margins,” Mr Angel said. that the government pay facilitators, for up to six The Australian Defence Industry Network group has months, to create and manage networks for approved assisted in introductions to overseas companies and companies. potential customers. In addition, government schemes www.gpsonline.com.au have been helpful in making suitable overseas contacts. For example, the Queensland Government is helping GPS get into the UK waste disposal market, and with strategic alliances in Ireland. At other times, GPS has targeted customers and approached them directly in order to achieve export sales.

Mr Angel says that “Austrade have been particularly helpful in Hong Kong and Singapore where they not only made useful introduction to potential clients, but followed up with the contract completion phase. However not all Austrade offices have the same successful partnership.” GPS has used EMDG assistance in the past, and Mr Angel considers that the scheme was good for GPS initially, but that Year 4 and 5 sales targets became too demanding. Mr Angel said GPS would be reluctant to use Austrade’s user pays arrangements as they were not good value for money. He believes the real assistance from government is in networking.

Mr Angel was generally positive about AusIndustry, as he thought Comet was a well designed, good introductory scheme, although he thought the guidelines were very strict. He said in the past R&D Start was time consuming with little feedback and a low success rate. The replacement Federal Government scheme is more accommodating and offers companies a better chance

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 23 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY INTELLECTION PTY LTD

Intellection Pty Ltd is a Commonwealth Scientific and Industrial Research Organisation (CSIRO) spin-off company selling mineral analysis instruments and services for ore characterisation and process optimisation to resources companies. Intellection was created in 2003 and employs 15 full time and 4 part time employees.

Today, Intellection has three main systems – QEMSCAN, the organisation’s flagship system, plus SITESCAN and MINSCAN. Intellection’s primary business is providing systems that maximise the returns from mining operations by identifying, analysing and quantifying minerals. The systems have also proven application in oil and gas exploration, mineral exploration and for characterizing coal, fly ash and environmental waste. Intellection’s systems are used worldwide, including by many Fortune 500 mining companies across five continents.

Intellection is three divisions within one company, offering systems, solutions and services: Intellection Systems develops QEMSCAN, the fastest and most accurate particle analysis tool in the world, as well as other related software applications for the preparation of samples and analysis of data; Intellection Solutions continues the company’s scientific tradition by providing research, development, training and analysis to help clients maximise the benefits from their system investment; and Intellection Services operates as a mineral analysis agency, providing competitive and reliable data from sample analysis.

Mr Calvin Treacy, CEO of Intellection, says the company has a high technology profile, and leading edge products. Mr Treacy describes Intellection as being ‘born global’ as its first system was exported and approximately 90 per cent of its business is through exporting. Mr Treacy says Intellection will continue to develop its technology and grow, whilst maintaining financial independence. In the medium-term the company

k 24 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 will expand into new sectors by providing standard tools for industry.

Intellection was fortunate as it gained original customers through the CSIRO research network and were able to sell directly to end users. However in the second stage of development resellers needed to be engaged in South Africa, the US and Canada; this was not effective as it was costly and the benefits didn’t flow to customers or the supplier.

Mr Treacy says Intellection has a strong belief in strategic alliances and companies such as Micromine and Gecko have a very good fit with what Intellection is doing. It is hoped that as Intellection grows these types of relationships can be formalised and SMEs will be able to grow together. Additionally, Intellection works closely with overseas companies such as Carl Zeiss SMT and Gresham Scientific Instruments who are original equipment manufacturers for Intellection.

Mr Treacy says Intellection has little experience with government, as they do not want to become reliant on government funding and support. Mr Treacy was positive about Austrade and Intellection plan to use them in the future “provided we are able to use them in the right way, and the process is managed properly from our side.”

In order to grow Australian exporters Mr Treacy believes that “Australia needs to focus on where we have a comparative advantage for example minerals and agriculture; and the technology associated with these areas. Support these and lose the emphasis on the bright and shiny things like biotech.” www.intellection.com.au

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 25 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY METAL STORM LIMITED

Metal Storm Limited is an electronic ballistics technology company based in Brisbane, Australia, with an office in Washington DC in the United States. Potential applications range from military through to industrial, agricultural and seismic uses. The 100 per cent electronic ballistics technology involves objects, such as bullets, that have been tightly grouped in multiple tube containers, such as barrels, and can be electronically fired from those containers at variable burst rates. Currently, leading defence and government agencies have committed over AU$100 million of funding to R&D programs for the technology.

The company was founded in 1994 by Mike O’Dwyer to commercialise electronic ballistics technology. He invented the technology to solve the problem of slow- firing guns he observed when watching a WW2 movie about the Coral Sea battle. Metal Storm is in the Guinness Book of Records for achieving the fastest rate of fire in a gun.

Metal Storm listed on the Australian Stock Exchange in mid-1999 (ASX trading code MST) and listed on the Nasdaq Small Cap Market in December 2001 (ticker code MTSX), trading in Level 2 American Depositary Receipts. Its major shareholders with approximately 70 per cent of the company’s capital are its founder, Mr O’Dwyer, and a venture capital fund that invested in the early years of Metal Storm’s existence.

Ian Gillespie, General Manager of Metal Storm, says the company has been back to the market four times since listing to raise a total of $50 million, in addition to $50 million from other sources. It employs about twenty people in Australia – a year ago it was seven people, and it employs about 35 people in a subsidiary machine shop in the US. Metal Storm’s market capitalisation is approximately $120 million.

k 26 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 Metal Storm has a high technology profile, and its Australia has the skills, both technical and intellectual, to technology is described as being leading-edge. Metal commercialise world-class technology.” Metal Storm has Storm has two key product streams arising from two learnt from other firms about how they have done things, areas of intellectual property. The company has exported especially in the US, where there are rules requiring some IP to the USA already and intends to continue, by majority US ownership. “We had to find ways to extract way of licensing technology, but may also manufacture the value and bring it back to Australia,” Mr Gillespie the consumable, ie the ammunition and export some said. tangible product. Mr Gillespie says collaboration is Overall, Mr Gillespie is positive about the government unlikely to be an option as we “guard our IP very closely assistance provided by Austrade and AusIndustry. He as our value as a company is in our IP portfolio.” Metal mentioned that the EMDG is useful for financial support, Storm currently holds 49 issued national patents on its however he believes the “amounts aren’t big.” In technology and has 284 patent applications pending in comparison, he notes that, the US government gives a different countries and regions. lot of money to develop products, and then allows the From day one Metal Storm was exporting and exports developer to commercialise, unlike here, where he account for 95 per cent of revenue. Metal Storm is still considers making money is frowned on. Mr Gillespie in its development stage, with negative cash flows but commented that the government programs aren’t well this production phase, will lead into commercialisation promoted, as Metal Storm only identified them by and then sales to customers by way of licensing. Metal accident and that the linkages between programs are Storm wants to grow its market capitalisation by 10 to not clear. He believes companies need knowledge of 20 times in the next five years. The recent acquisition of how to approach other countries – and advice about the US manufacturer ProCam Machine LLC enables Metal complexities of culture and business practices in Storm to accelerate development of prototype weapon countries which may vary markedly from Australian systems for demonstration to potential US defence standards. Further, Mr Gillespie noted that “there is a industry customers and partners and in doing so remain lack of understanding of our industry, both the a leader in ballistics technology. Prior to the acquisition, technology and the markets. Austrade knows about dairy Metal Storm contracted its prototyping to an Australian and wool, but doesn’t have the specialised knowledge SME. Metal Storm wants to remain an Australian about our industry and markets.” company, with its research operations and IP based in www.metalstorm.com Australia, but will have a USA-based manufacturing capability, which is important to the US Government and US defence companies and avoids the export costs incurred in Australia.

Mr Gillespie believes, “Australia should, but doesn’t, buy local. There are lots of controls and rules. We are restricted in where we sell, for example, we can’t sell to China because it’s weaponry. Also the firearms regulations make it very complex to move our product, for example, to export a prototype. We aren’t in that position yet, but it’s possible that all these impediments will cause us to manufacture our prototypes offshore. It’s a pity, because we have used them to showcase Australian technology – and our great cost advantages.

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 27 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY PORTLAND ORTHOPAEDICS

Portland Orthopaedics was established in 1991 by Professor Ron Sekel, who formed a group which included the University of NSW Department of Engineering, Lucas Heights Atomic Research Centre and the Commonwealth Scientific and Industrial Research Organisation (CSIRO) to research and develop the Margron Total Hip Replacement System.

The Margron prosthesis was first implanted in 1997, initially as a primary hip replacement, and after two years of successful application the range was expanded to include revision and oncology implants. Over 1,500 patients have received the Margron Hip prosthesis and many more have benefited from an increased range of products, including, prosthetic components and instruments all of which Portland manufacture to maintain complete control over quality assurance and supply. From October 2001, the Rothschild Group, Superannuation Trust of Australia and Equity Partners invested the growth of the company to enable a sustainable entry into the US, European and Asian markets.

Portland produces high technology products, which are leading edge. CEO David Sekel says that Portland’s R&D focuses on convergence with other technologies to meet new market needs and break through innovations leading to new products and market uses. Portland “aims to be a market leader in Joint Replacement Systems, through developing a range of new and innovative orthopaedic devices.” Mr Sekel would like Portland to grow into a substantial designer and manufacturer of orthopaedic implants based in Australia, however, access to commercialisation capital is a problem. Currently Portland is exporting to New Zealand, the US, Israel and Belgium and aims to achieve export growth by establishing markets in Japan, England and France.

Portland Orthopaedics commenced exporting in its first three years of operation as “the Australian market is tiny. Without exports we would not be able to sustain our

k 28 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 R&D as 80 per cent of revenue comes from exports,” and assists very well in the early stages. However, there said Mr Sekel. “Portland is learning from other exporters is a problem with the cash flow timing, as you do not get through interaction with their companies, which have had the money straight away creating a ‘big hole’ between similar experiences, including those arranged by expenditure and reimbursement.” Austrade. Introductions to contacts in other countries “EFIC”, Mr Sekel said “is too hard and too confusing to are important as it reduces the time spent consulting. In try. If you are just selling to a distributor, then EFIC addition opportunities to showcase our products have works well. However, if you are doing the distribution been beneficial as have trade missions – it doesn’t yourself, then EFIC does not help you if you don’t have a matter about the stage of development you are in, there purchase order, or contract. For example, to develop a are benefits: the Australian Technology Showcase is market in the USA we needed to build and take with us leading the way in early stage mentoring,” according to $500,000-$600,000 of inventory, but we didn’t have a Mr Sekel. distributor or signed contracts, as we were going to do One of the main challenges for Portland is the fact that direct sales so we didn’t get any assistance – we would they participate in a very conservative market, as have received assistance if we’d had a distributor.” surgeons take a long time to train and do not like www.margron.com change. In addition, working offshore is very expensive: “it takes years to export and a lot of resources and a lot of financial dollars, in order for the market to become loyal,” Mr Sekel said.

Mr Sekel suggests there needs to be better promotion of the services provided in Australia for SMEs. He believes that the government has done a great job in the last ten years, with R&D Start and the Biotechnology Innovation Fund. However, he mentioned that although there is early stage funding, “there is not one program that helps commercialisation later on, and the hardest hurdle is the later stage, as this costs millions.” Mr Sekel believes there is a serious lack of venture capital for the mid stage, and as a result of this companies go offshore and take their profits and rewards with them. “For example with R&D Start, if I fly 5 surgeons who are members of the surgical advisory team to a location, and pay their wages for 2 days to get their advice on product improvements, this is not seen as an expense, even though they are our designers and ultimately will be our customers. It is yet to be seen whether the new Commercial Ready programme addresses this issue.”

Austrade assistance has been extremely helpful for Portland, as it assisted in getting a contact in Japan. However Mr Sekel does say that the extent to which Austrade are helpful depends on the consultant. Mr Sekel mentioned, “the EMDG is a ‘terrific’ scheme

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 29 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY PROTEOME SYSTEMS LIMITED (PSL)

Proteome Systems Limited is comprised of Proteome Systems Technology and Proteome Systems Discovery. Proteome Systems Technology business develops, manufactures and commercialises innovative technology solutions comprising instruments, software and consumables that enable proteomics research. Proteome Systems Discovery business discovers protein biomarkers that have potential for use as diagnostics and therapeutic targets in the areas of respiratory disease, neurobiology and aging, cancer and infectious disease. PSL has research and development and manufacturing facilities in Sydney and in Boston.

A $7 million funding grant under the Australian Government’s Major National Research Facilities program led to the construction of APAF, (Australian Proteome Analysis Facility) the world’s first national proteomics facility under the directorship of Professor Keith Williams at Macquarie University who subsequently founded Proteome Systems in 1999 through a program with Dow AgroSciences.

Proteome has a leading-edge, high technology profile and has established business relationships with other companies to access specific skills for example, ‘bundling arrangements’ to sell their technology and foster the convergence of skills to develop their products. Proteome export both IP and products. “We employ people who are technically literate and who understand that this is a business and can see opportunities for the future,” said Dr Williams.

Proteome has a relatively long business horizon – as it now has a suite of technology products available, including for example, a device for measuring wheat quality which is being marketed in the US and Canada. This product uses core technology that will be used for human diagnostics but attracts fewer regulatory requirements as it’s an agricultural application. Proteome seeks to commercialise diagnostics tools, for example, the market for a TB diagnostic tool is potentially worth $1.8 billion and similar opportunities are driving current

k 30 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 development work on treatments for lung infections and locally, but it helps when dealing with the Asian market ovarian cancer. as they have the attitude if you can’t sell at home then why should you expect to sell anywhere else.” To complement its biomarker Discovery programs, Proteome is in the process of acquiring a Boston-based “A critical issue for the start-up and development of biopharmaceutical company with a portfolio of biotechnology companies in Australia is a lack of therapeutic compounds for disease that have knowledgeable and experienced local venture capital. demonstrated potential efficacy in pre-clinical trials in This results in many early stage companies being forced many disease models including stroke, MS, Alzheimer’s to list too early on ASX where they often languish as disease and radiation induced dermatitis. In addition they receive little or no attention from analysts, and are Proteome undertakes its own ambitious research not well understood by the market. As young companies program. seek out further capital, they are often forced to go to the US. This can result in the relocation of the company As biotechnology SMEs have very limited markets in or its headquarters to the US. We have been lucky to Australia, Proteome Systems was born global with a access substantial private equity from the largest focus on the major markets of USA and Japan. The investor in the biotech industry in Australia, Queensland business was built through forming strategic alliances Investment Corporation”, said Dr Williams. and joint ventures with large overseas firms e.g. IBM, and Japanese scientific instrument maker Shimadzu. Business skills are important according to Dr Williams and he has learned from companies which have failed: Dr Williams believes early funding assistance from “their technology was great but they didn’t put in place Government is helpful to enable spin-off companies to sound business management practices, whereas we develop initial products, but in Australia capital for have invested in good business, legal and accounting scaling-up and sustaining the company through the advice – it makes Proteome more resilient.” manufacturing and commercialisation stages is a problem. The assumption that supporting SMEs through www.proteomesystems.com the R&D phase is sufficient to propel them into successful commercialisation is wrong – in fact commercialisation is more expensive and difficult than R&D. Without a commercialised product there will be no exports – companies need support to commercialise and to prepare for exporting.

Dr Williams says there is a problem with cultural cringe in Australia. He suggests that the Government needs to encourage Australians to purchase locally as “Australian sales are useful not only because it is easier to deal

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 31 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY SEEING MACHINES

Seeing Machines is an award-winning technology company with a focus on vision-based human machine interfaces. Formed in 2000 from a spin off from the Australian National University, Seeing Machines' purpose is to commercialise its computer-vision IP across a range of industries and applications.

Seeing Machines technology, faceLAB™ provides head- pose, gaze direction and eyelid closure tracking, and has immediate and far-reaching impact in the realm of transportation safety and active information awareness systems. FaceLAB™ is used across the automotive industry by clients such as Bosch, Delphi, Volvo, Motorola, Nissan, Mitsubishi, Daimler Chrysler, PSA, Honda, Hyundai, Renault and Toyota. It is also used by many of the leading academic research groups and transportation authorities worldwide.

Seeing Machines has been granted $250,000 under the Biotechnology Innovation Fund to help develop a new device that will enable earlier and more accurate detection of glaucoma. The project will combine a specialised extension of Seeing Machines’ unique vision- sensing technology with the latest glaucoma research conducted at the Centre for Visual Research at the Australian National University’s Research School of Biological Sciences. The resulting product will passively measure involuntary responses of the pupil to specialised visual stimuli, dramatically improving measurement of a person’s field of vision and the quality and reliability of diagnosis. In 2002-03, Seeing Machines received a R&D Start grant of $602,319 (part of $3.34 million dollar Start grant awarded January 2001).

Seeing Machines has a high technology profile and produces leading-edge breakthrough innovations. Exports are very important as they provide over 90 per cent of revenue with in excess of 100 sales worldwide versus 12 sales in Australia for faceLAB. Seeing Machines export both the product and license to the technology.

k 32 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 Dr Zelinsky, founder and former Chief Executive Officer, exporting and is an incentive to spend money on currently Chief Technology Officer of Seeing Machines overseas ventures.” says their “ambition is to make a difference and to be Dr Zelinsky says, “compared with other countries global and profitable in R&D.” He says when dealing with Australia does not have favourable tax treatments multinational customers, it is easier for Seeing Machines applying to employee stock options for start-ups. This to go directly to the companies overseas, rather than discourages private-sector ICT innovators from starting working with its Australian office. Seeing Machines has companies in Australia. For this reason many start-ups not yet collaborated with another firm in order to export, end up going to the US. In Australia employees can end but are looking at a partnership with a local company. up paying tax on untradable shares as options can be Dr Zelinsky says ‘business angels’ have assisted Seeing taxed when issued instead of as a capital gain on Machines in getting some good contacts overseas. He disposal.” also mentioned that it was difficult to spin out of New Australian companies must be born global as ICT is universities as there were barriers to setting up a viable a global business and the domestic market is too small business – access to real capital is one of them but also to be profitable. Products must be able to compete in Australian universities and public research and international markets and access to markets needs to development institutions have poor records in be facilitated through strategic partners and international commercialising intellectual property, particularly in ICT. business networks. Government programs staffed by ICT "The right incentives have not been put in place that professionals could facilitate access to these encourages institutions, staff and students to undertake international business networks. entrepreneurial activities, and Government funding should become tied to commercialisation outcomes and not just www.seeingmachines.com.au research and teaching outcomes,” he says.

A major challenge for Seeing Machines is that Australia does not buy products until they are proven. Dr Zelinsky questions why the government outsources to multinational corporations instead of stimulating capacity in local SMEs and supporting retention of Australian owned capability, for example, BHP IT has been sold off and this reinforces the “subsidiary culture.”

Good government support through Austrade has helped Seeing Machines in exporting by providing access to distributors. Although Seeing Machines did most of the overseas selling by themselves, Dr Zelinsky said some contacts have been gained through trade shows, however he noted that for SMEs “some delegations are not good as they lack a specific focus.” Dr Zelinsky was disappointed that Austrade had downgraded the Detroit office which was “great for component manufacturers.” He also commented that the service received at Austrade “depends on who you get at Austrade.” Dr Zelinsky was positive about the EMDG as it “encourages

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 33 k APPENDIX D n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY SIRTEX MEDICAL

Sirtex Medical was formed in 1997 to acquire and commercialise technology relating to the treatment of liver cancer developed by the Cancer Research Institute (CRI). Financial support for the development of the technology came from Japan namely, and investment fund managed by Nomura/JAFCO Investment (Asia) Ltd which subscribed for equity in the Company.

Since its formation, Sirtex Medical has undertaken its own research and development and also contracted other agencies such as the CRI to further develop the Company's technologies. The primary objective of the R&D program is to research, develop and commercialise effective treatments for liver cancer using novel, small particle technology.

To capitalise on the market opportunities for its technologies, Sirtex Medical has moved its corporate head office from Perth to Sydney and has employed key executives with experience in establishing and growing an international medical products business. It is just about to engage external consultants to find international distributors.

Sirtex Medical aims to become the world leader in liver cancer treatment products and believes the unmet demand for effective treatment of liver cancer provides an opportunity for its products. The Company will also apply its intellectual property – micro-sphere technology, to other diseases to ‘take their technology to a wider community,” said Dr Bruce Gray, Executive Chairman. Sirtex is a high technology enterprise with leading edge products which when exported earn 95 per cent of all revenue. Sirtex exported very early in their development and are described as ‘born global’.

Dr Gray considers that a major impediment to exporting was that Sirtex could not get finance in Australia as the finance community had a “very short term view”, and as a result the company had to go to Japan for the finance. Sirtex has recently received financial backing to conduct major clinical trials on SIR-Spheres, its liver cancer

k 34 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 treatment, at two prestigious sites in Belgium. The results from these trials will advantage the product in global markets and thus earn greater export dollars.

Dr Gray said, “Austrade assistance was marginal in the beginning, although more recently they have been helpful in Japan as they showcased our product and got us some contacts, although we took our own consultant with us so that we could address enquiries appropriately.” Dr Gray believes that: “trade shows usually lack focus, Austrade are helpful but not very effective, as they aren’t focused on our product, we have to fit in with them. Austrade have such a hard task, trying to cut their cloth to 50 different requirements. In the end their service is too generic, it’s not focused enough.” Dr Gray was positive about the EMDG scheme as “every dollar is important to a small business, but the amount is small and the rules keep changing every three years.” Dr Gray said, “with the money we received from Austrade we would have preferred to have used it to engage our own consultants.” Sirtex has received funding support from AusIndustry’s R&D Start which “has been valuable and very helpful” although Dr Gray was critical of the onerous reporting requirements.

In order to grow SME exports Dr Gray believes that SMEs need money. “If there is a financial incentive things happen.” Dr Gray stated that the lack of re-imbursement for its product under Medicare or private insurance in Australia makes it almost impossible to sell here and as a consequence it is hard to explain its value and sell it in overseas markets. On the back of the heightened reputation the SIR-Spheres will acquire from the trials in Belgium Dr Gray will pursue government re-imbursement for treatments in Europe and Australia. In the US, the reimbursement authorities and physicians have little interest in what happens in Australia so it doesn’t matter to them, but it matters in Asia. The US government is a delight to deal with. Their processes are much clearer than Australia’s.” www.sirtex.com

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 35 k APPENDIX E List of MNE Case Studies: Austal Limited GROWING EXPORT CAPABILITY CEA Technologies Cochlear Limited MULTINATIONAL ENTERPRISE CASE STUDIES Computershare Ltd A Multinational Enterprise (MNE) is a large enterprise Cowan Manufacturing Ltd operating in a number of countries and having at least one production or service facility outside its country of ITD Limited origin. The following 11 case studies of Australian-based Lochard Pty Ltd

MNEs tell individual stories and reflect the diversity of Mincom Limited the Australia’s technology landscape. ResMed

Key success factors Softlaw Ltd A review of their stories highlights some key success Tenix Group factors in growing their business from a small company to a large, multinational firm53.

m Understanding business at a global level

m A streamlined product strategy

m Willingness to diversify product design to match customer needs

m Access to capital and human resources to facilitate growth

m Extensive use of strategic business partnerships and alliances

m Technology acquisitions

m Continuous improvement

Benefits to the economy The case studies illustrate some of the benefits brought to the economy by multinational enterprises:

m Employment opportunities

m Continuous improvement of products, processes and services

m Creation of investment opportunities for SMEs

m Opportunities for local firms to link into global markets

53 In developing these case studies, the Department of Industry, Tourism and Resources spoke with company executives and drew on corporate documents and other source material. All case studies were approved by the companies concerned with the exception of Cochlear and Computershare which were based on publicly available documents. k 36 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 37 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY AUSTAL LIMITED

Austal commenced operations in 1988 with a vision to build high quality commercial vessels for the international market. By the company's fifth anniversary, Austal had become the world's leading manufacturer of 40 metre passenger catamarans and the dominant supplier to Asia. Today, Austal is the world's largest builder of fast ferries and lists among its customers many of the world's leading fast ferry and shipping operators. The Austal Group had 1,209 employees and an operating profit after tax and outside equity interests of $20.1 million at the close of the financial year 2004.

In 1993 in Hong Kong Austal introduced gas turbine propulsion and the first two installations of the Austal developed ride control system. The success in Asia and the introduction of a range of sophisticated, large vehicle-carrying fast ferries were the springboard for ongoing growth in Europe, the Mediterranean and the Asia-Pacific. In 1998 Austal entered the patrol boat market securing an order for eight Bay Class vessels for the Australian Customs Service. Sizeable orders from other Australian and International agencies, including the Royal Australian Navy, and the US Department of Defense have cemented the company's place among the world's elite patrol and combat vessel builders.

Austal listed on the Australian Stock Exchange in December 1998 and has diversified its product base through two acquisitions in 1999 of Image Marine and luxury motor yacht builder, Oceanfast, and through, in partnership with Bender Shipbuilding & Repair, the establishment of a new US shipyard in Mobile, Alabama in 2000. The Austal quality culture is embodied through significant inter-site transfer between the Mobile yard and the headquarters in Western Australia. Austal is well placed to meet the requirements of the global market and in both locations has purchased adjacent sites for expansion.

k 38 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 Austal's vessels embody the company's leadership in engineering and technological advancements and it is committed to implementing research and development initiatives that will ensure the company stays at the forefront of the shipbuilding industry. Austal pioneered the use of a bulbous-bow, rounded-bilge hull catamaran form developed by means of Computational Fluid Dynamics and has been described by a leading international hydrodynamics facility as providing the best sea-keeping and lowest resistance in the catamaran market.

Austal is at the cutting edge of aluminium structural design and its use of laser welded and composite aluminium structural panels are indicative of its continuous innovation program and its dedication to meeting customer needs. Austal developed it own ship monitoring and control network, Marine Link, which allows monitoring of machinery and systems throughout the vessels, and is another example of technological leadership.

Austal’s vision and continued focus is to provide customers with the perfect solution, designing, constructing and delivering vessels that are ideally suited to operational requirements and that fully comply with the needs and desires of its customers.

Austal’s success is based on: m In-house design offering customisation and flexibility m High quality technologically advanced and market proven product m Diversified product range m Focus on meeting agreed customer requirements m Productive, skilled and stable workforce m On-time and on-budget delivery m Financial strength and sound management m Price competitive www.austal.com

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 39 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs

capability, particularly by developing more in-house production. CEA’s Marketing Manager Mark Foster describes CEA’s research and development as a combination of product development and breakthrough technology enabled by the CEA Board which has supported the investment in, and the development of, a centre of excellence in research and development. The R&D continues to be converted into new and innovative products and systems which are exported with the exception being those products designed exclusively for the Australian Department of Defence.

CEA’s aim is to be successful in Australia, and to continue to grow its export sales. CEA’s business strategy is CASE STUDY consistent with these objectives and focuses on fostering CEA TECHNOLOGIES partnerships in equity, products development and projects. Despite its leading–edge profile CEA often teams with CEA Technologies was formed in 1983 and designs, local firms when entering new markets — USA for develops and exports systems at the forefront of radar example, and it’s probable CEA Technologies will need to and communications technology. The Queanbeyan head consider listing on the stock exchange as a means of office includes an extensive test and system integration raising more growth capital as its venture capital partner laboratory and antenna test facilities. It also has facilities will exit soon. Mr Foster commented that CEA “needs to in Melbourne and Adelaide and an office in San Diego and learn about different environments and ways of doing a combined workforce of over 200 full-time permanent business, especially when trying to enter markets in employees. Europe and the Middle East.”

The company’s first contract was to improve an existing CEA does have a domestic market but 30 to 40 per cent communications system for the Royal Australian Navy of revenue comes from exports and over 90 per cent of (RAN) which led to further development work with defence that comes from defence-related products. “The Australian support products as well as developing their own systems market is too small to support our products plus there can for communications and radar applications. This be a disinclination in the Australian marketplace to buy culminated in the development of a radar system for port from local companies: both factors make exporting crucial surveillance, with the assistance of federal funding, for the for survival,” Mr Foster says. However, at the moment, he ports of Melbourne and Brisbane. US military interest in says, “our main competitors are major international primes this system led to significant overseas orders over the involved in radar and communications systems, but they years which now represent a major portion of on-going are also our partners when we collaborate – there are export sales. "The secret is to have a global focus from areas where we work with them and areas where we day one – don’t limit your horizons," says David Gaul, CEA compete.” President. The US Department of Defense is CEA’s most important CEA’s ambition is to maintain its Australian identity, customer, and has assisted in establishing both agents in develop and grow its R&D capability and to expand its the Middle East and advocacy suppliers generally. Mr capacity to commercialise their technology. To this end Foster says, “Australia doesn’t carry its companies like the CEA invests 60–70 per cent of its resources in research US and Europe. For example if the US or UK need a radar, and development and is trying to grow an indigenous then they would go to one of their primes and ask them to

k 40 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 develop it and give them $100 million to do so. In operationally proven in service with the RAN including addition, the UK has DESO which is solely organised to successful firings of the ESSM in 2003 and 2004. sell UK defence product overseas. We receive some help On 14 November 2004, in a further testimony to the for investment in our technology, but the amounts are SSCWI Transmitter’s scalable design and modular comparatively small – we get $5-6 million, of which we architecture, a contract was signed with the Abu Dhabi need to fund 50 per cent (refer full story below), however, Shipyards for the manufacture and delivery of four 1kW this does help us to stay competitive and not SSCWI Transmitters, spares and installation support to the complacent.” UAE Navy for the Baynunah Corvette Programme. This is CEA worked with the local Canberra network to get into CEA’s first export to the UAE and the second major Indonesia and usually contact Austrade when entering new contract in the region. markets. Generally Austrade are helpful although it can depend on the person you get at Austrade: overall CEA-MOUNT (3rd generation product) Austrade needs more people with specialist defence In 1998, the Industry Research and Development Board, knowledge. CEA has used EFIC and praise their rapid through an R&D Start Grant, awarded CEA $5.9 million to assistance, for example, a 48 hour turn around on assist with the development and successful testing of the statements on insurance bonds is the norm. EFIC support next generation of target illumination technology, the CEA- takes a lot of pressure off companies. MOUNT Active Phased Array Continuous Wave Illuminator. This technology replaces the conventional SSCWI Mr Foster has two main concerns with the AusIndustry Transmitter and the Fire Control Director with an active R&D Start program: the first is that, while it helps through phased array illuminator. product development stages, right when the company has products developed and ready to sell, the assistance CEA also received an R&D Start Grant to develop and test drops off; and the second issue is the requirement for an L Band Active Phased Array Identification Friend or Foe SMEs to put in 50 per cent of finance, this sum can be (IFF) radar. This new radar is designed to complement the difficult for fledgling companies to find. CEA-FAR radar, which, together with the CEA-MOUNT illuminator, is currently being considered by Defence for The following sets out the chronological development of the Anti Ship Missile Defence (ASMD) upgrade programme two product lines and shows the assistance provided for the ANZAC Frigates of the RAN and the new Air which enabled CEA to undertake the work. Warfare Destroyers (AWD).

Solid State Continuous Wave Illuminator (SSCWI) The success of these leading-edge capabilities in domestic Transmitter (2nd generation product) and export markets will rely heavily on the confidence In 1995, CEA was awarded a contract by the RAN to shown in Australian developed technology by Defence and design, develop and manufacture six solid state 2kW the Government. While the SSCWI contract provided CEA illuminator transmitters for installation in the final six with an excellent opportunity to offer an upgraded product ANZAC Frigates. CEA was awarded a follow-on contract in into the marketplace, the design was constrained by the 2002 to replace the existing Mk73 transmitters in the first specification to replace an existing design. Consequently three ANZAC Frigates that were based on older Travelling the company sought alternative funds soon after to allow Wave Tube (TWT) technology and were becoming it to commence a green-field development on the next increasingly unreliable. generation of this type of system. This approach helps ensure that the company remains at the leading-edge of The CEA SSCWI Transmitters provide target illumination for product development. the Evolved Sea Sparrow Missiles (ESSM) by transmitting a powerful radar signal at an incoming target through the www.ceatechnologies.com.au SAAB 9LV Antenna Director. This combination has been

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 41 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY COCHLEAR LIMITED

Twenty years ago Professor Graeme Clark, in his groundbreaking research launched the world’s first commercial multichannel cochlear implant. Since the first commercial implant, Cochlear’s award-winning Nucleus range has been implanted in nearly 62,000 people worldwide. Cochlear is the world leader in cochlear implants that have enabled tens of thousands of severe to profoundly hearing-impaired people to hear. Cochlear is the only Australian publicly listed company in this industry.

Cochlear operates in a global niche market with 80 per cent share of the market in Asia-Pacific, 60 per cent share in the Americas and approximately 60 per cent share in Europe. Cochlear markets into 80 countries across the Americas, Europe and Asia, in which are located 1,000 clinics. Cochlear continues to expand its export base throughout these regions and the Middle East. Cochlear employs over 800 people, 450 of them in Australia, with head office, manufacturing, and the majority of R&D remaining in Australia: although some R&D is undertaken in Europe and the USA. They have regional offices in the USA, the UK, France, Belgium, Switzerland, Germany, Japan and Hong Kong.

Dedication to innovation means Cochlear is a significant investor in R&D, with $44.5 million spent on R&D in 2004 – which was a 7 per cent increase from the previous year reflecting acceleration in the development of new generation technology. Cochlear’s extensive research program involves clinics all over the world. The research program provides significant opportunity for Cochlear to leverage the latest technology research for future products. The collaboration is also a critical part of the developing relationship between major implant professionals and Cochlear. Cochlear’s research efforts are closely linked to those of the Bionic Ear Institute, University of Melbourne and the Cooperative Research Centre for Cochlear Implants and Hearing Innovation.

k 42 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 Today, Cochlear Limited is just outside Australia’s top 100 companies with a market capitalisation of over $1.5 billion. Cochlear has been one of the major success stories on the Australian share market over the last five years, experiencing enormous growth in revenue and operating profits and providing substantial share returns. Sales revenue for the year ending June 2004 was $282 million, below the record 2003 revenue of $306 million which reflects the impact of increased competition, pressure on clinics and a slower than expected uptake of neonatal screening and referral hindering forecast growth in the infant market.

Cochlear has a strong focus on bringing its products to new markets such as the Break the Silence, a national campaign aimed at 26,000 Australians aged over 65 who are isolated by deafness. Cochlear has invested in building skills and infrastructure in the Asia-Pacific by conducting training programs with more than 150 surgeons, audiologists and rehabilitationists in North East Asia and Japan. Similarly, the Cochlear Training and Education Centre in Belgium is providing surgeons and audiologists from Europe and the Middle East with professional skills.

Cochlear has re-focussed its future growth strategy, ceasing involvement in peripheral areas of research and redirecting resources on its core business, the Cochlear implant business, and the development of new products and applications in the hearing impaired market. In 2005 Cochlear will launch its 4th generation cochlear implant system; emphasise strategies to increase rate of sales growth; and continue efforts to penetrate infant and progressive markets through awareness and advocate programs.

This case study was prepared from Cochlear’s 2004 Annual Report and material from the Cochlear website. www.cochlear.com.au

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 43 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs

recompression chamber saw another significant turning point for the company and although the company struggled financially, the product was successful. In 1992/93 an order from the US Navy for 70 chambers turned the tide for the company.

Cowan received financial support through loans and cash payments. These included an Austrade Market Development Grant worth approximately $150,000 and an AusIndustry export loan to the value of approximately $500,000. This enabled Cowan to strengthen its focus on a market development strategy which has since proven effective, and complete Quality Systems training through the former National Industry Extension Service Scheme. Cowan has also received small injections of R&D funding under the R&D Start Program and its predecessors. In total approximately $50,000 was received to develop the necessary Quality Assurance Systems.

Cowan Manufacturing has transformed its skills base from refit-style sheet metal work and has diversified into specialised high value added manufacturing. To support CASE STUDY its recompression chamber projects Cowan has designed and built chamber assembly/disassembly COWAN MANUFACTURING rooms, facilities to clean components for oxygen use, PTY LTD carbon dioxide scrubbing devices and a CO2 and oxygen Cowan Manufacturing specialises in stainless steel and analyser. To overcome the high temperature/humidity aluminium fabrication, and is respected throughout the associated with climates such as Thailand, Cowan has world for its pioneering work on the design, development also developed environmental control systems. and manufacture of unique transportable recompression Cowan chambers are today used by police forces, chambers. rescue organisations, commercial diving companies, and The company was formed in 1973 by Bob Cowan and in hospitals and Navies – including those of Australia, USA, the early years the business undertook refitting of ships. Thailand and the Philippines. Over 140 Cowan chambers Their reputation for good work gave them access to are currently in operation worldwide. Products include contracts for the Australian Navy refits with Cowan the highly successful Transportable Recompression designing, manufacturing, and installing equipment on a Chamber System, used extensively by the US and range of vessels. During its first 10 years the company Australian Navy, and the new era Standard 54” Double grew considerably. The 1980s saw a period of Lock Chamber currently being purchased by the US diversification into marine fabrication; floating marina Navy. systems; video booms for security cameras; design; Search and Rescue Chambers, for use on Philippine building of an aluminium cladding system for the Coastguard vessels, have also been supplied along with construction industry; and 4-wheel drive bull bars. In low magnetic signature Twin Lock Chambers for the RAN 1987 a request to develop a transportable

k 44 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 Minehunter fleet, the Thai Navy and the RAN Penguin The focus on quality and commitment through gaining Training Facility. Cowan has carried out training of Thai and sustaining trusting business relationships with clients Navy and Malay nationals on chamber operations and has earned Cowan a valued reputation. A further market maintenance. differentiator in Cowan’s Asian market is the through-life support model that Cowan has adopted with its in- In 2002, a major turnkey 14-person Hyperbaric Medical country agents. Cowan has made a considerable Chamber project for a Thai Hospital was completed. investment in training its in-country agents by fully Cowan undertakes annual audits of the full system, along involving them from the installation stage through to in- with the reaccreditation of its Thai agent as in-service service maintenance support. The trained local agent support provider. A unique containerised recompression can detect and resolve issues early, communicate chamber system has also recently been supplied to the directly back to Cowan’s Australian-based technical Thai Navy. support team and is in a unique position to collect The Cowan website is used extensively to establish market intelligence. Cowan is using the same model in contact with new or potential clients and communicate its approach to win contracts in India and the Middle its credentials to the global marketplace. Cowan’s East. To strengthen this model, Cowan has brought business strategy includes the ongoing development and Malaysian technical staff to Australia for training and has refinement of recompression chamber products and received funding from Department of Defence Export to services, hypobaric chamber systems that simulate high the total value of approximately $50,000, in 2003 and altitude conditions for air force pilot training, hyperbaric 2004, to run courses in Thailand to train Thai Navy medical systems and other high value added products officers in chamber operations and maintenance. such as underground rescue chambers. Its precision Cowan considers that smaller-sized companies have the welding capability, utilised by the ANU Plasma Research advantage of greater agility and responsiveness to the Facility, is used in the development of many innovative changing needs of markets. Such companies tend to be products. Within these bounds Cowan maintains a global highly creative and innovative. Often these attributes are focus on Defence, other Government and commercial vested in one or two key people, for example, the markets. Cowan also continues to invite proposals to founders of the company. This means these businesses manufacture metal structures and components. need to appreciate the need for succession planning and Cowan has formed informal partnerships with other invest in identifying and nurturing entrepreneurship within businesses including members of the HunterNet the company and outside the company through Cooperative to add specialised expertise and meet client networks, such as The Young President’s Group, needs. As an example Cowan has established a long- Australian Industry Group and the HunterNet term partnership with IS Systems which enables it to Cooperative. AusIndustry provides opportunities for access the latest IP and capability essential to develop companies to highlight their successes and to motivate more sophisticated products for clients, namely, a people who have the essential ‘fire in the belly’ for computer driven control system. The relationship is working or running a high-technology business. Cowan underpinned by high levels of trust and ensures a believes that regional Austrade assistance through trade seamless interface with the client from the contract shows and positive statements about the successes of proposal stage through to the delivery and through-life SMEs provides a good platform to help SMEs establish support. The US market is still valuable to Cowan. and prosper. However, Asia represents a growth market in both www.cowanmfg.com.au Defence and medical applications for recompression chambers with new markets having been established in Thailand and Malaysia.

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 45 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY COMPUTERSHARE LTD

Computershare is the largest and only global provider of shareholder and employee management services, administering more than 70 million shareholder accounts for over 13,000 corporations across twelve countries on five continents. Founded in Melbourne in 1978, Computershare listed on the Australian Stock Exchange in 1994 with an initial market capitalisation of $36 million. By 2001, it had a stock market capitalisation of nearly $3 billion. Today Computershare employs approximately 8,000 people worldwide. Australia accounts for 25 per cent of Computershare’s sales, with the rest being sales offshore.

Computershare has pursued growth via acquisition and alliances on a global basis. For the few years after 1997, Computershare purchased many acquisitions to the value of approximately $300 million. Among a long list of acquisitions are:

m 1997: The acquisition of the share registery business of the Royal Bank of Scotland Group, which doubled the size of Computershare’s business.

m 1998-99: registry businesses in Ireland, South Africa and Hong Kong. The Hong Kong acquisition established Computershare’s presence in Asia whilst considerably strengthening its position in the UK due to the high levels of cross-ownership between Hong Kong and the UK.

m 2000: acquisitions of the stock transfer business of Harris Bank in the US, the stock transfer and corporate trust businesses of Montreal Trust in Canada, the employee plans business of Merrill Lynch in the US, and the UK's leading institutional share ownership analysis business, Citywatch.

m 2002: the employee stock purchase plan business of Charles Schwab in the US; EFA Group’s assets, including the software rights to EFA’s trading systems and settlement and clearing systems. (During 2002 Computershare also formed a number of partnerships in various countries for the strategic supply of its services and expertise.)

k 46 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 m 2003: the share registry and employee plans In 2003, Computershare announced that it was building businesses of Fifth Third Bancorp in the US; and its new international headquarters in Melbourne, which is Georgeson Shareholder Communications, the world’s expected to create over 1200 jobs in Victoria over five oldest and most highly regarded security holder years. As a result the Victorian Government is providing solicitation and response firm. payroll tax relief to Computershare, whereby they gain rebates when certain employment and investment m 2004: Equiserve, one of America’s largest share milestones are reached. Overall, it is estimated that registrars, for US$292 million. The deal makes 2600 offshoot jobs will be created in sectors such as Computershare a pre-eminent supplier of both share construction and finance. registry and employee plan services in the US. This case study was prepared from information located In 2000, Computershare engaged in a joint venture with on Computershare’s website. San Francisco firm Pacific Exchange, which brought in automated screen trading for 850 options traded on the www.computershare.com stock exchange.

Computershare is leveraged to global share markets and interest rates, earning fees through corporate transactions. A major contribution to Computershare’s growth has been its flagship software product SCRIP, which automates and stores records of each shareholder’s investment into a company. In Commonwealth countries it allows Computershare to be the share registry and transfer agent registrar in both the US and Canada. Because this is a complex process with many parties participating, the software needs to be both strong and flexible and has to be modified for different countries.

Currently Computershare is trying to gain a strong market presence in the US, through its Chicago office. There has been a large marketing campaign in order to gain new US customers and make people aware of the brand.

Dudley Chamberlain, Computershare’s Strategic Business Development Manager says Computershare is utilising the 24/7 software development in Bristol, Chicago and Melbourne. This means at the end of each day the projects are forwarded to the office in the next time zone.

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 47 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY IDT AUSTRALIA LTD

Institute of Drug Technology Australia Ltd (IDT) is a good example of growth through a major contract with a large multinational firm, achieved in part through the Commonwealth’s Pharmaceutical Industry Development Program.

IDT has become a significant FDA-approved active pharmaceutical ingredients development and manufacturing company in Australia. It grew out of the Victorian College of Pharmacy and now is a contract research organisation that offers a range of high quality drug development services to the pharmaceutical industry. The Melbourne manufacturing site is used primarily for the manufacture of anti-cancer drugs (specialising in cytotoxics), anti-psychotics, antibiotics, narcotics and anti-inflammatory drugs on a scale of between 1 and 100kg. The facility also provides small- scale manufacture of non-sterile finished product for clinical trials, used in its Adelaide trials facility or under contract for clients. IDT employs approximately 150 scientists and support staff.

IDT acquired CMAX, a 48 bed, phase I/II clinical trial unit located within a dedicated ward of the Royal Adelaide Hospital, Adelaide, in 2002. The clinical trial unit provides a full range of clinical services including proof of concept studies, first-in-man trials and bioequivalence studies. Clients include small biotech companies through to large multinational pharmaceutical companies. Both the Melbourne and Adelaide clinics are regularly audited by FDA and the Therapeutic Goods Administration.

IDT has won a long-term, multi-million dollar deal with Pfizer Inc, the world's largest pharmaceuticals manufacturer, for the development and manufacture of a new developmental drug candidate. Under the contract, IDT will provide a range of services to Pfizer including:

-process development and manufacture of active pharmaceutical ingredients

- manufacture of sterile and solid dosage formulations

- clinical labelling and packaging of drug supplies

k 48 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 The impetus for its primary manufacturing originally came from a contract with Pfizer, which was a direct result of Pfizer’s participation in the Factor (f) Scheme under the Pharmaceutical Industry Development Program. This demonstrates that supporting one part of the value chain can have important flow on effects for other sectors. In this case, the growth from Pfizer’s investment has assisted IDT to become an established contract manufacturer for smaller organisations.

IDT’s recently built manufacturing facilities will increase the suite of full containment chemical manufacturing and development facilities. This investment will help the company diversify into the highly specialised area of drug manufacturing and development, with a 9 per cent growth in the reported net tangible assets of the firm.

Growth has also been achieved by IDT through its Adelaide based CMAX operation. This business has continued to grow and develop, gaining contacts from both Australian biotechnology and pharmaceutical companies and those in the UK and US. Additionally, IDT is seeking to diversify its business to widen the range of research to be undertaken. IDT attribute its success in attracting important contracts to its high reputation in meeting customer needs. www.idtaus.com.au

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 49 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY LOCHARD LTD

Lochard is the world leader in aircraft noise and track monitoring with a 60 per cent global market share and installations at 130 airports, including Los Angeles, Chicago, Heathrow, Amsterdam and Hong Kong.

Lochard was born global and quickly built a global presence and is now an unlisted public company with wholly owned subsidiaries in USA, Europe and Asia, with 95 per cent of its revenues derived from exporting around the world.

The head office is in Melbourne from where the operations and R&D are conducted. Sales and marketing and customer services are conducted from its regional offices in Boston, Sacramento, Amsterdam, Leeds, Madrid and Taipei.

Lochard was formed out of a joint venture which successfully tendered for a noise and track monitoring system at Sydney and Brisbane airports to Airservices Australia.

With limited opportunity in the Australian market, the Lochard growth strategy focused on markets in Europe and North America. With the help of an Export Market Development Grant and an International Trade Enhancement Scheme 54 grant from Austrade, the company was able to secure contracts at key reference airports in Manchester, Zurich, Washington and Vancouver.

Lochard initially formed a ‘strategic alliance’ with NLR (Dutch National Aerospace Laboratory) for the development of specific technologies and complemented this with the R&D work undertaken in Australia with the support of an R&D Start grant. This grant was pivotal as it enabled Lochard to catch the crest of the technological wave quickly develop what was needed and leap frog the competition. Lochard has strategic alliances with CSIRO, Swinburne University and the Wyle Laboratories (USA) to build and maintain leading–edge technology.

54 This grant is no longer available. k 50 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 Lochard develops its software and instrumentation in Australia and maintains a strong commitment to R&D in order to ensure it continues to lead the market in innovation and product offering. Lochard takes on the brightest university students and invests in the development of its employees.

Running a global business from Australia adds some complexity but the cost benefits are derived from access to Australia’s excellent R&D base.

Lochard has shifted its business model from that of a supplier of equipment with a maintenance contract to be an outsourced service provider. Lochard’s systems now run from a common datacentre using the internet to provide scalability. Lochard has capability in monitoring air quality at airports reflecting environmental initiatives such as carbon trading.

Lochard is now expanding its products and services into real time optimisation of air traffic flow control systems at airports in conjunction with its German partner delair, a spin off company from DLR (German Aerospace Research Laboratories). This technology is the most advanced implementation of Collaborative Decision Making with reference installations in Zurich and Frankfurt is creating strong demand around the world.

Lochard’s business strategy is to focus: on outcomes for clients; to be the best at what it does and to conquer the niche which will be driven by getting into as many of the major airports as it can; shifting the business model — moving focus from a one-time sale to a service relationship and achieving a longer-term revenue stream; and expanding products to existing clients — air quality and airport operation management optimisation. www.lochard.com

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 51 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY MINCOM LIMITED

Mincom funded all its early export efforts itself, from operating cash flow. The company was fortunate in that its primary market sector, mining, already had a number of global players when Mincom was started in the 1980s. As a result, Mincom’s early Australian successes created a degree of brand recognition in other countries with a strong mining sector – particularly South Africa and North America. Mincom was able to use this to get a hearing from prospective customers, and then was successful in securing that all-important foundation client in the new geography. In the first eight years of Mincom’s existence it self-funded establishing export markets in North America (Canada and USA), South Africa and Indonesia.

Other early export activities were supported by reseller partnerships established with locally based mining and IT operations such as Gemcom in South Africa and a joint venture with a local company PTMI in Indonesia. Mincom identified and trained these partners.

Mincom received an Export Market Development Grant in 1989, which funded expansion into Latin America to support prospect development in the region. Offices were opened in the region in the early 1990s and Latin America continues to be an important geographic market for Mincom.

The fundamental concepts behind the Mincom software products and associated service packages were based upon the experiences of the founders and those that joined the company in its infancy. Early support for Mincom products was derived from customers who recognised the potential of the software for their business and provided ongoing feedback to ensure the software being developed would meet their needs. This reflects the size of the gap in the marketplace that Mincom software was filling and validation of Mincom’s approach to customers.

In one case an early adopter of Mincom software helped fund its further development by pre-paying a proportion of the licence fees. Apart from this all R&D was funded

k 52 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 from cash-flow. R&D has always been a core priority for m Selecting core alliance partners, significant because Mincom and a significant portion of earnings are of geography, industry or market and developing long- ploughed back into R&D. In fact R&D spending increased standing, supportive relationships with key clients. 23 per cent during FY04 to capitalise on opportunities in mining, defence and utilities. Mincom received a R&D Mincom has made its living from selling its ideas and Start Grant for MineStar in 1999 – a new product technology to local and overseas companies. Critical to co-developed with mining equipment manufacturer, success has been the unflagging belief in its expertise Caterpillar. by some of the biggest offshore customers. Mincom would not have made the dramatic leaps forward in its Mincom has collaborated with numerous technology development were it not for strategic ‘backers’ – be they partners to enhance solutions. For example, a recent customers, partners or investors. This underscores the agreement with Dexterra provides mobile connectivity to importance of collaborative, strategic partnerships to the Mincom Ellipse product and Mincom also has a long drive innovation. One of the best current examples of and fruitful technical alliance with IBM. Mincom is this is Mincom’s partnership with the Australian Defence branching into new areas of technology such as Force (ADF). Together, Mincom and the ADF are leading specialised business to business ecommerce solutions the world in the development of logistics systems for and exploring alternative ways to fund accelerated defence forces. As other defence operations around the development to capitalise on burgeoning market need. world are coming to understand the enormous Among the options is the opportunity to commercialise significance of these Mincom projects, they too are the business unit responsible for the development of looking to be part of the development program. This ebusiness products, so it can seek separate funding means sharing the development risk for ultimately a from external, strategic investors. globally cohesive and operable military solution.

Critical success factors for Mincom’s development and However, this model is currently applicable to the sustainability have been: defence industry alone. There is no forum for other industries to collaborate on shared technology needs. m Specialisation in five key industries through identifying The creation of such a forum would help to drive more and addressing deficiencies in the current software efficient, market-driven development that reflects the solutions available; broader interests of any given industry, rather than the m Development of transportable software that can be needs peculiar to a single operator. used on a wide variety of platform combinations, i.e. hardware, operating software and databases enabling The key opportunity for government and industry is to solutions to be offered to companies with an existing establish a forum where ideas for future development standard platform; and innovation can be discussed and prioritised, creating a clear, shared path for intellectual property investment. m Diversification into utilities support as their products There may be opportunities for seed funding from key meet the software requirements of remote mining stakeholders to provide greater ‘ownership’ of the communities in Australia which operate infrastructure development and ensure projects come to fruition. and services such as railways, power generation, ports, roads and housing; This will help to drive industry-specific, yet industry-wide m Responding to the ‘outsourcing’ by the mining sector technology solutions, where development risk is spread who was also an early adopter of ‘outsourcing’, by and minimised, because there is a guaranteed market at providing services such as facilities management. the end of development. These multiple sources of revenue have proven www.mincom.com invaluable from a sustainability perspective; and

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 53 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY RESMED

ResMed is a leading respiratory medical device manufacturer, specialising in products for the diagnosis and treatment of sleep disordered breathing (SDB). When ResMed was formed in 1989, its primary purpose was to commercialise a device for treating obstructive sleep apnoea (OSA) which affects approximately 10 per cent of adult males in Australia. If left untreated it can severely affect quality of life, health and mortality, and it is strongly associated with hypertension, heart disease and stroke.

© ResMed Limited 2005 Dr Peter Farrell formed the ResMed group of companies to commercialise an invention of Dr Sullivan and colleagues at the University of Sydney in the 1980s. The technology uses masks that provide nasal continuous positive airway pressure from an airflow generator. This was the first successful non-invasive treatment of OSA.

The most obvious manifestation of OSA is heavy snoring. It proved very difficult to gain referee approval for research grants for a treatment of a condition that the medical profession regarded as clinically insignificant. For example, a clinical conference of top © ResMed Limited 2005 research scientists in pulmonary disease, when considering why it had taken so long to acknowledge the success of Sullivan’s treatment of OSA, reported (Chest vol 86, 121, 1984) that: “It is hard to understand why all the air blown into the nose does not come out the mouth, but it does not. …it appears that this device is 100 per cent effective.”

During these early years ResMed received financial support from a number of Commonwealth programs, including: an R&D grant of AU$150,000 in 1989, a National Procurement Development Grant of © ResMed Limited 2005 AU$375,000 in 1991 and an R&D Start grant of AU$2.6 million in 1997 and an Austrade International Business Development grant in 1990. However, during this time the company faced difficulties with attracting interest from potential financiers, primarily due to perceptions about its one product focus and a lack of understanding about OSA.

k 54 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 In June 1995 the company registered on the NASDAQ technologies. Strategic alliances with other market exchange raising US$24 million and in 1999 the leaders such as Medcare Flaga hf., whose multi-channel company transferred to the New York Stock Exchange sleep recording equipment complements ResMed's and later co-listed on the Australian Stock Exchange. innovative range of diagnostic devices, enable ResMed Subsequently, wholly owned subsidiaries have been to offer a comprehensive product suite. formed (such as in the UK) or successful distributors Critical factors which influenced the international have been acquired in eleven countries. success of ResMed include:

ResMed was ‘born global’ and more than 95 per cent of i. the research base — Professor Sullivan’s group its products are exported to over 60 countries by made the initial invention and has maintained employees and distributors with extensive knowledge developments in this field of research; and experience of local markets. This ensures that ii. the invention filled a high value, high volume need ResMed supplies the right products to the right that took time to be recognised by competitors; markets—a key factor in the Company's business strategy. iii. attracting the best overseas researchers through strong research credentials — which enabled ResMed employs some 1,200 people world-wide with ResMed to access international markets; 550 at Sydney sites and from offices in the United iv. establishing intellectual property — the original States, the United Kingdom, Europe, Asia, and New patents enabled ResMed to keep potential Zealand. ResMed's principal manufacturing facilities are competitors out of Australia for approximately five located at the Norwest Business Park where it years. This was enough time to enable ResMed to assembles and tests devices, masks and accessories. start selling and establish an important base in the Revenues grew on average by 30 per cent from US; and

US$88.6 million in 1999 to US$339 million by 2004. v. continuous improvement — willingness to invest in ResMed has a current market capitalisation of new technologies to improve the outcomes for the AU$2.2 billion on the Australian Stock Exchange. patients, for example, considerable research effort ResMed spends approximately 7 – 8 per cent of net over time has produced a range of flow generators revenues on research and product development and this, becoming quieter and smaller. Over 1 million have along with a clear focus on growing market been sold. Masks are being made more comfortable, opportunities, has enabled it to create and maintain smaller, and capable of retaining pressure during shareholder value. Listing on the New York Stock head movement. Production is running at a level of Exchange provides greater visibility within the financial about $2 million per year. community and increases the marketing opportunities for the products. www.Resmed.com.au

Innovation has played a major role in ResMed's success. Since the company's inception a large number of product advancements and improvements designed to increase patient comfort and encourage compliance with therapy have been developed using feedback from patients, those in the supply chain and physicians worldwide working with the treatment of SDB. At the beginning of 2005, the Company had a total of over 1,000 patents issued and pending for a range of

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 55 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY SOFTLAW CORPORATION LTD

SoftLaw is a good example of growth through alliances, especially with Government departments.

SoftLaw is involved in development and sale of computer software, STATUTE Expert, which assists people in the interpretation and assessment of how legislation and other rules apply to a given factual situation.

SoftLaw was established in 1989 with a vision of assisting citizens to obtain their correct entitlements from government. Today, its clients include some of the largest government agencies and its technology has matured to support rule-based decision making across a range of practice areas including social security, compensation, veterans’ benefits, housing and human resources. It employs about 50 people worldwide.

The company has recently been the subject of a friendly takeover but remains Australian owned, retaining many of its original investors. The takeover has brought additional capital, and strong management experience to the company.

SoftLaw’s head office is in Canberra. In May 2001 the company opened its European office in London and in July 2002 its North American office in Arlington, Virginia. The European and North American offices were opened to provide a base for expansion into these markets so that clients in Europe and North America could have easier access to the software and services. In July 2003 Softlaw opened a Sydney office to accommodate its Sydney based staff, to support its expansion into the financial sector and to support state government clients.

An important early contract for SoftLaw was with the Department of Veterans’ Affairs (DVA), where it developed a Compensation Claims Processing System (CPPS) incorporating STATUTE Expert. CCPS resulted in radical work redesign, productivity improvements and an average cut in claim processing time by 60 per cent for approximately 50,000 claims a year.

k 56 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 SoftLaw introduced a similar system, also incorporating Seminars run in conjunction with Austrade resulted in STATUTE Expert, in the Department of Defence to introductions to some major customers in the United replace over 60 manual and PC based systems. Other Kingdom. “The relationship SoftLaw has with Austrade tailored solutions were developed for Centrelink and the has been very helpful,” Surend Dayal, CEO of SoftLaw, Commonwealth Department of Family and Community said. Mr Dayal also mentioned that, “we tend to have Services. An application of the concepts in a human broad and deep relationships within the one department resources environment has been adopted by the New or organisation rather than spreading ourselves thinly South Wales Premier’s Department. across many customers.”

All of these sites became reference sites for SoftLaw’s www.softlaw.com.au world leading technology. DVA was happy to promote the value of SoftLaw’s intellectual property in the equivalent departments in the United States and the United Kingdom.

The company has achieved substantial sales in the United Kingdom, with applications in the areas of Inland Revenue and social security, and the UK Veterans’ Agency (the equivalent of DVA).

Government support has further contributed to SoftLaw’s development. SoftLaw recently received an AusIndustry R&D Start grant which provides matching funding over three years of up to $4.1 million for SoftLaw’s research and development. This new grant will aid the research and development of SoftLaw’s technology for international sale, including: m significant enhancements to productivity through accelerated rule-base construction techniques that will result in quicker and cheaper application development and improved tools for legislative QA, drafting and rationalisation; m broadening its own capabilities by incorporating conventional third party tools; and m additional work in advanced computational processing techniques.

SoftLaw has twice received support from the ACT Knowledge Fund Grant, the most recent in December 2003. This has been used to commercialise SoftLaw’s Rapid Legal Analysis and Legislative Quality Assurance technologies, now being used by the Inland Revenue and other UK customers.

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 57 k APPENDIX E n PMSEIC WORKING GROUP: GROWING TECHNOLOGY-BASED SMEs CASE STUDY TENIX GROUP

The Tenix Group has its origins in Transfield, a construction company which was commenced in 1956 by two engineers, Carlo Salteri and Franco Belgiorno.

Transfield diversified into defence in 1987 at the initiative of then Joint Managing Director, Paul Salteri. This led to the purchase of a company known as AMEC, which successfully bid for the Naval Dockyard at Williamstown, Victoria. First known as AMECON, then as TDS, the company re-established a naval shipbuilding capability in Australia constructing ten frigates for the Royal Australian Navy and two for the Royal New Zealand Navy.

Tenix acquired Hawker de Havilland in 1998 and sold it on to Boeing in 2000 in line with global consolidation of the aviation industry. In 1999 Tenix acquired a leading engineering and maintenance contractor, Enetech, which was named Tenix Alliance in 2001.

Tenix invests in extending capability from existing products such as Crossbow, a web-based tool which provides a single and intuitive view of information from disparate databases. Tenix’s R&D program delivers significant results such as the radar cross-section reduction for surface ships.

In 2001 Tenix diversified further by establishing an infrastructure group to provide project management services to major private infrastructure projects and a technology group to provide technology commercialisation functions.

k 58 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 Tenix defines its approach to building technology commercialisation infrastructure as: m connectivity, bringing together the right stakeholders to advance projects; m collaboration, alliances with local companies to market products overseas; m communication, about product uniqueness, capability to solve problems, cost advantage and how to buy it; and m conservatism, balancing the excitement of science and sound business decisions.

Tenix runs a Take to Market Investment Fund to drive commercialisation of Australian technology by investing in companies, including SMEs, concepts and initiatives, individuals and products where they can see some potential opportunities.

Across its business groups Tenix invests in partnerships, joint ventures and alliances. Its government partners include CSIRO with whom it has products under commercialisation stage, Department of Defence with whom it has led products through commercialisation and into the marketplace. A joint venture between Tenix and Lockheed Martin grew into Tenix Solutions which is Australia’s largest provider of traffic enforcement management services.

With respect to Government support programs Tenix has found working with EFIC to be very useful and valuable.

Today the Tenix Group, comprising Tenix Alliance, Tenix Aviation, Tenix International USA/UK, Tenix Defence and Tenix Solutions, employs over 3,000 people. The financial strength of the Tenix Group is underpinned by total assets of more than A$776 million, full ownership of its facilities and a forward order book of approximately A$2.1 billion. www.tenix.com.au

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 59 k APPENDIX F iii. Building Relationships with other companies Support collaboration and linkages more strongly EXPERT MARKET through EMDG by easing the application process and DEVELOPMENT GRANT increasing incentives for the MNEs to initiate such PROGRAM – SUGGESTED business relationships to foster innovation and exporting. APPROACHES iv. Engagement of advisers/mentors i. Timeliness and quantum of support Make explicit in the EMDG Act and Guidelines that m Consider refinements to program design to reduce reimbursement for engaging mentors/advisers is what is often an 18 month delay in receipt of claimable under ‘marketing consultants’. reimbursement of claims.

m Validate the whole export effort by guaranteeing v. Greater interaction with other Government payment size for tranche 1 and 2. Recognise that programs SMEs cannot self-fund a larger proportion of the Recognise achievement of eligibility criteria for COMET export effort from their export earnings and cash and Commercial Ready should satisfy those eligibility reserves to compensate for the reduced size of a criteria for EMDG – thereby establishing the two former second tranche payment. programs as ‘pipeline programs’ for EMDG. m Reinstate grants for new markets after 7 years in recognition that at this stage an exporter is still vi. Technology showcasing financially vulnerable and to build sustainability needs Support technology showcasing through EMDG as it is to expand more deeply or broadly into markets. analogous to the kinds of export promotional activity supported by EMDG — with the variation that the m Increase the current daily rate of $200 for Overseas particular method of demonstration requires higher Visit Allowance to recognise higher market rates. contact time with potential buyers. It represents SMEs efforts to ‘scale up’ by developing further applications ii. Intellectual Property management for its products and to achieve new markets. Provide m Make expenses for professional IP advice and higher levels of government support for various offshore management eligible under EMDG (5.3 Early Australian technology business associations, many of Commercialisation includes IP management and whom provide their members with a mix of mentoring, protection as eligible expenditure) to provide networks, and experienced heads that technology continuity of that support. Increased support for IP newcomers can call upon. Support through EMDG for management has been identified by various Action technology showcasing would augment the support to Agenda industries. Australian scientists through the International Science m Allow expenses incurred by a firm which has disposed Linkages program, which although it supports science of IP to a related company provided the related linkages and collaborations, does not directly support company is NOT operating in the same market as the showcasing activities. This gap has been identified by 55 first company. various Action Agenda industries. m Reinstating expenses for registering and protecting IP rights in overseas markets would remove a disincentive these costs currently impose on potential technology-based exporters, leaving the company vulnerable to loss of the IP.

m Review the Australian content rules such as the ‘eligible goods’ status which is difficult to determine in high-technology products, including IP, to remove disincentives.

55 For example: when Australian-based Company A establishes Company B in the US to circumvent local market prejudice to foreign-owned companies; Company A disposes of IP to Company B, and undertakes to finance the export promotional activity for and on behalf of Company B; Provided Company B does not operate in Australia then an amendment to s55 would be supported k 60 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 APPENDIX G Types of equity capital: Pre-seed capital: ‘proof of concept’ funding to GLOSSARY OF TERMS establish whether the idea will work and if there is a Business Innovation: Business innovation is the potential market. process by which ideas and the outcomes of research Seed capital: product is in development. Usually in and development are converted to goods and services, business less than 18 months. Funding used for or enhance the operation of a business. Business prototyping, testing, IP protection, business plan Innovation generates a measurable change in output, development and other requirements to ready the such as new products or services, increased productivity product for market. or reduced costs.56 Start-up capital: product in pilot production. Usually in Large Enterprise: A large enterprise is defined as an business less than 30 months. Used to get the business enterprise employing 200 or more people.57 licensed, set up and operating as a going concern. Large Firm: A large firm is defined as a business Early expansion capital: product in market. The 1st employing 200 or more people which exports but does round of growth funding for the business. not have any operations in other countries. Expansion capital: provides capital for further rounds Multinational Enterprise (MNE): An MNE is defined as (2nd, 3rd) of growth funding as business plan milestones a large enterprise operating in a number of countries are met. and having at least one production or service facility outside its country of origin.58

Small and Medium Enterprise (SME): A small enterprise is defined as an enterprise employing less than 20 people. A medium enterprise is defined as an enterprise employing 20 or more people, but less than 200 people.59

Technology-based company: A technology-based company is defined as one which acquires or creates new technology that it integrates to develop new products, processes and services as the basis of its business competitiveness. These companies occur in many industry sectors and not just those that have been traditionally regarded as high-technology industries such as aerospace and electronics.

56 Department of Industry, Tourism Resources, 2003, Business Innovation, Working Paper for the Mapping Australian Science and Innovation, page 11 57 Australian Bureau of Statistics, 1321.0 Small Business in Australia, 2001 58 Penguin Dictionary of Economics 59 Australian Bureau of Statistics, 1321.0 Small Business in Australia, 2001

PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 61 k APPENDIX H INDEX OF REFERENCES

Australian Bureau of Statistics, Longitudinal Survey 1997/98. ABS Cat.No.8154.0

Australian Bureau of Statistics survey on venture capital, Venture Capital 2003-04, ABS Cat.No. 5678.0, November 2004

Australian Government, Commonwealth Procurement Guidelines, January 2005, 5.3-5.6

Australian Trade Commission, Knowing and Growing the Exporter Community, ISBN 0-9580741-0-0, 2002

Department of Industry, Tourism and Resources, Technology-based SMEs, Special Report for the Department of Industry, Tourism and Resources, Sensis Business Index, May 2004. Will be made available at http://www.dest.gov.au/science/pmseic/meetings/ 13thmeeting.htm

Industry, Research and Development Board: SMEs: Taking Innovation to the Global Market, a study of a small number (25) of selected participants in the R&D Start and Biotechnology Innovation Fund programs, February 2005

Team Canada Inc Annual Report 2002, www.exportsource.ca

The Coalition’s Election Commitment, Trade – Creating Jobs for Australians. issued 1 October 2004

The Hon. Mark Vaile MP, media release, Historic Agreement to Boost Exports, 4 April 2002

k 62 PHASE 2 REPORT: GROWING EXPORT CAPABILITY — MARCH 2005 - CONTENTS

Executive Summary 65

Summary of Policy Recommendations 68

1 The Working Group’s Task 69 2 The Growth Challenge 71 3 Profile of Technology-Based SMEs 74 4 Key Findings: Meeting the Growth Challenge 77 5 The Export Imperative 79 Recommendation 1 81

CASE STUDY: ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED 83

6 Business Innovation Underpins International Competitiveness 84 Recommendation 2 85

CASE STUDY: PROTEOME SYSTEMS LIMITED 86 7 Australian Capital for Growing Australian Business 87 L Recommendation 3 89

CASE STUDY: GEOSIM TECHNOLOGIES PTY LTD 90

8 Experienced Management is Essential 91 Recommendation 4 93

Recommendation 5 93

CASE STUDY: IMMERSIVE TECHNOLOGIES PTY LTD 94

9 Data on Technology-based SMEs 95 Recommendation 6 96

10 Additional Work should be Undertaken 97 Recommendation 7 97 11 Conclusion 98 Attachment A: PMSEIC Working Group Membership 99

Attachment B: Definitions 100

Attachment C: Submissions to PMSEIC Working Group 101

Attachment D: Technology-Based Company Interviews 102

Index of References 103

Photo from the previous page courtesy of CSIRO Plant Industry EXECUTIVE SUMMARY

The Working Group’s vision is for the Australian economy to provide fertile ground for the rapid generation of technology-based small and medium enterprises (SMEs) to seed the formation of many large internationally successful and export-led Australian-based technology companies.

Technology-based SMEs are critical for Australia’s success in the global economy. Given Australia’s location and size, business innovation is an imperative to transform Australian firms into global suppliers. Innovation is an important driver of economic growth. The use of knowledge to create new products, processes and services generates wealth and accelerates the pace of economic development. Current government policy is addressing the challenge of generating new technology-based SMEs.

The Working Group’s vision is for the The next and most critical challenge is to sustain Australian economy to provide fertile ground and grow Australia’s technology-based SMEs, and for the rapid generation of technology-based to link them with global markets. This challenge can small and medium enterprises (SMEs) to be met by growing more Australian SMEs into seed the formation of many large multinational enterprises (MNEs) and better linking SMEs with existing MNEs. Overseas 1 and local studies have internationally successful and export-led concluded that technology-based SMEs are fast growing, Australian-based technology companies. create high value jobs and have high export potential, renew established industries and create new industry sectors.2 They contribute directly to economic growth by being catalysts for knowledge diffusion and by introducing new technology products in response to market demands. We need to achieve better business outcomes from the Government’s substantial investment in innovation. We need to grow Australia – not seed other economies. This is a business challenge, not a scientific challenge.

In Australia, SMEs comprise 99.8 per cent of the estimated 1.16 million companies, contribute 26 per cent to our Gross Domestic Product (GDP) and employ 3.3 million people. While technology-based SMEs comprise only 13 per cent of all SMEs 3, they constitute two thirds of all SMEs that perform research and development (R&D), spending $1.48 billion in 2001–02 4 — suggesting an untapped resource for growth. Sensis

1 OECD, Enhancing SME Competitiveness, The OECD Bologna Ministerial Conference, p 71-86, 2001 2 The Allen Consulting Group, Winning Companies and Jobs: How High Growth and Knowledge-Intensive Industries Create Jobs, p 8-9, 1997 3 Department of Industry, Tourism and Resources, Technology-based SMEs, Special Report for the Department of Industry, Tourism and Resources, Sensis Business Index, May 2004 4 Department of Industry, Tourism and Resources analysis of ABS Business R&D database data 2001-02, commissioned April 2004. File titled: Final ABS File for First Phase Analysis 8 Feb 2005.xls – worksheet ‘R&D Spend $’000”

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 65 k data reveals that overall, 16 per cent of SMEs reported quarter of the OECD average, ranking Australia 26th that they had exported in the past year (with 4.4 per among OECD countries. Initiatives are needed to support cent of all SMEs being high /medium high technology technology-based SMEs to facilitate market entry and exporters).5 Global trends in manufacturing exports of development of export markets, ideally in tandem with developed countries indicate high technology products industry-led collaboration. ‘Piggybacking’ on the are the area of growth.6 resources of established industry partners is an important strategy for growing SMEs.8 Australia has a stable and strong economic environment to grow and sustain technology-based SMEs. However, Business innovation underpins international the relatively limited number of Australian global competitiveness. Innovation is about solving customer companies and MNEs constrains the ability of SMEs to problems, but it takes time and money. Scientific grow by leveraging the knowledge and international invention is only a small part of innovation – and the markets’ access of these enterprises. other elements are far more costly. A greater policy emphasis is required on strategies that enable Many small Australian companies with growth potential technology-based SMEs collectively to drive commercial are isolated and struggling to overcome start up and export success in their industries. problems and the challenges posed by Australia’s scale and location. While distance to markets is not as costly Business innovation requires significant and patient to Australia as it used to be, geographic remoteness is capital. International venture capital offers access to still a significant obstacle in the pursuit of world-class global networks and in many cases is needed to productivity.7 Small Australian companies are prone to commercialise Australian technology. However, no nation licence or sell technology early and move offshore to can rely on foreign capital alone to develop its raise capital. Worse still, many fail to realise the potential technology industries. While current Government of their ideas, resulting in loss of income, jobs and programs focus on start-up funding, there is a shortage economic growth. of expansion capital for technology-based SMEs in the range $5 million to $30 million, with the majority of The Working Group’s findings based on research, committed, expansion capital being directed to non- consultations with key stakeholders and interviews with technology-based firms. The recent Innovating Australia the CEOs of leading Australian technology-based SMEs, report noted that: “In almost no country other than suggest four critical factors influence the growth of Australia does the stock market attempt to finance technology-based SMEs. These are the ability to export; innovation in its early phases.”9 a focus on developing innovative solutions to customer problems; having access to domestic expansion capital; Growing global businesses requires high-quality, and possessing experienced and skilled management. experienced, entrepreneurs and managers, with This task necessitated new analysis on technology-based skills that can only be learnt ‘on-the-job’. There is SMEs as well as additional commissioned survey work. limited availability of experienced managers for Some of the data on technology-based SMEs appears technology-based SMEs in Australia. In the short term, for the first time though more data is still required. we should repatriate experienced entrepreneurs, encourage experienced managers of large companies to Exports are vital for the Australian economy and run growing companies, and support local entrepreneurs the potential for technology-based SMEs to deliver with high-quality mentoring and support. A prerequisite valuable, sustainable exports is especially high. for attracting the best people will be the availability of Technology-based SMEs must export to gain the top class business opportunities and the opportunity for economies of scale needed to develop world leading experienced entrepreneurs and managers to share technology. The value of our high-technology exports is a equitably in the future wealth they may create.

5 Department of Industry, Tourism and Resources, Technology-based SMEs, Special Report for the Department of Industry, Tourism and Resources, Sensis Business Index, May 2004 6 OECD, Science and Technology Innovation Scoreboard 2003 7 Department of the Treasury, Budget Papers 2003 8 Austrade makes this point in relation to strategic alliances and notes that it is particularly relevant to biotechnology-based industry http://www.austrade.gov.au/australia/layout/0,,0_S2-1_CLNTXID004-2_-3_-4_-5_-6_-7_,00.html – Austrade website – New Exporter Services – Different Ways to Take Your Business Offshore 9 West J., Financing Innovation: Markets and the Structure of Risk, in Innovating Australia, Committee for Economic Development of Australia, (CEDA), April 2004 k 66 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 The Working Group believes that a few key policies coupled with the adaptation of existing successful policies could significantly increase the expansion and development of technology-based Australian SMEs in the medium-term. Robust data will be essential for tracking the impact of polices on innovation outcomes.

To grow Australia, we must become world-class business builders and exporters. We need to create the knowledge-based jobs future Australians will require. We must place greater emphasis on achieving commercial and export success – otherwise, the benefits of our investment in science, technology and education will be enjoyed, not in Australia, but overseas.

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 67 k SUMMARY OF POLICY RECOMMENDATIONS

RECOMMENDATION 1 RECOMMENDATION 4 RECOMMENDATION 7 (a) Introduce a Collaborative Reform the tax treatment of To build upon a key finding that Export Marketing Solutions Employee Share Options to support increasing the export capacity of program to complement the the attraction and retention of technology-based SMEs is critical, Export Market Development skilled and experienced managers, the Working Group should be Grants program, providing by making tax payable on the capital continued and be tasked with competitive, merit-based grants gain only when options or shares are exploring this issue in more detail for SME-driven export cashed-out. in consultation with industry and marketing initiatives. government agencies. Areas to be RECOMMENDATION 5 (b) Fund the appointment of investigated may include technology additional, domestic and Through the extended COMET demonstration programs, international, Austrade Industry program, support firms at the enhancements to the Export Export Advisers to facilitate expansion stage by introducing a Marketing Development Grants technology-based SMEs to national and an overseas mentoring program, supporting the increased develop collaborative export network, contracting-in mentors to use of industry collaborative opportunities. assist in building management skills networks and addressing domestically and for export markets. impediments in the tax system to the RECOMMENDATION 2 Austrade should be involved in development of export-oriented technology-based SMEs. Ensure that the new Commercial building the network of mentors Ready program supports companies overseas. engage external assistance to develop RECOMMENDATION 6 products to market readiness. Upgrade business and innovation RECOMMENDATION 3 surveys to track and analyse the Increase the availability of domestic performance of knowledge intensive, expansion capital for technology- including technology-based, based SMEs in the $5 million to industries, in all key areas $30 million range by creating a tax- including exports. In conjunction, advantaged, privately managed fund develop a framework to map into which individuals can directly Australia’s business innovation. commit a portion of their s superannuation contributions.

k 68 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 THE WORKING GROUP’S TASK

The Working Group has been asked to consider the 1 growth of Australian technology-based firms with particular reference to the following:

m Identify the key success factors that drive growth in technology-based SMEs.

m Describe the impediments or hurdles to growth faced by technology-based SMEs including accessing global markets. In this report, a technology-based company m Advise how Australia can best support the growth of is defined as: one which acquires or creates new sustainable Australian technology-based SMEs. technology that it integrates to develop new products, m Develop case studies of technology-based SMEs processes and services as the basis of its business which are at different phases of growth to highlight competitiveness. These companies occur in many key issues. Case studies should be drawn from a industry sectors and not just in industries number of sectors such as mining, defence, that have been traditionally regarded as high agriculture, energy, IT and biomedical technologies. technology industries such as aerospace and m Discuss the implications of these findings for electronics. government, industry and other stakeholders.

Working Group members are high-achieving business people who are actively leading the growth of technology-based SMEs. A list of members is included in Attachment A.

In this report, a technology-based company is defined as: one which acquires or creates new technology that it integrates to develop new products, processes and services as the basis of its business competitiveness. These companies occur in many industry sectors and not just in industries that have been traditionally regarded as high technology industries such as aerospace and electronics.

Small and medium enterprises (SMEs) are defined as follows: small business is a business employing less than 20 people; medium business is a business employing 20 or more people but less than 200 people.10 A multinational enterprise (MNE) is defined as: a large enterprise operating in a number of countries and having at least one production or service facility outside its country of origin.11 The key definitions used in the report are listed in Attachment B.

In developing the report, the Working Group has drawn on research from Australia and overseas, including

10 Australian Bureau of Statistics, Cat. No. 1321.0 Small Business in Australia, 2001 11 Penguin Dictionary of Economics

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 69 k Australian Bureau of Statistics (ABS) and Austrade data. The report also draws on new data commissioned from Sensis Pty Ltd and from the ABS.

The Working Group also sought submissions from key stakeholders, with submissions being received from technology-based SMEs; industry associations; the finance sector; and both State and Federal Governments. Submissions are listed in Attachment C. Working Group members also conducted face-to-face interviews with senior executives of 12 Australian technology-based SMEs. Companies interviewed are listed in Attachment D. Some case studies have been developed based on these interviews.

The Working Group notes that the Government has received several earlier reports on issues related to technology-based SMEs and the Working Group has taken the findings and recommendations of previous reports into account. The reports include: the PMSEIC reports on Management Skills and Public Research Commercialisation; the House of Representatives Standing Committee on Science and Innovation report, Riding the Innovation Wave: The Case for Increasing Business Investment in R&D, released in June 2003 (the Nairn Report); the Government response to the Nairn Report released in March 2004; and the Committee of Economic Development of Australia report, Innovating Australia, (the CEDA Report), released in April 2004.

The Nairn Report focused on identifying R&D drivers in small and medium-sized businesses and the needs of fast-growing companies. The Government’s response to the report agreed that a number of the recommendations would be considered within the Government’s Backing Australia’s Ability policy development framework. Several of the Nairn report’s key findings and recommendations are consistent with the findings of this Working Group and could be addressed by implementing this report’s recommendations.

k 70 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 THE GROWTH CHALLENGE

Innovation is a key driver of economic growth and 2 accelerates the pace of economic development “Excellence in science and innovation is critical if Australia is to maintain its high productivity growth… and to turn great ideas into Australian jobs and income.” The Hon John Howard MP, 25 February 2004, address to the Committee for Economic Development of Australia.

“Excellence in science and innovation is Achieving high productivity growth through science and critical if Australia is to maintain its high innovation requires growing world-class businesses for productivity growth… and to turn great the benefit of Australia. If Australia does not rise to this ideas into Australian jobs and income.” challenge and realise its potential, then the nation risks The Hon John Howard MP, 25 February 2004, address to seeing its invention and creativity ‘seed other economies’ the Committee for Economic Development of Australia. at the expense of its own in a fiercely competitive world.

Innovation is not invention – it is the successful exploitation of ideas. It often involves new technologies or applications of existing technologies. Innovation is important to all Australians because it will deliver better products and services, more efficient processes and a higher standard of living. Improving productivity growth through technological innovation – finding smarter, quicker ways of doing things – is vital for Australia’s future prosperity.

Links between innovation, growth and productivity are well documented There is a close relationship between investment in technology at the firm level and national economic productivity. Links between innovation, growth and productivity are well documented and governments throughout the world are responding.12

For instance, the UK Treasury has set out a 10 year investment framework which firmly anchors innovation policy as one of the British Government’s wider growth and productivity strategies.13 The British Government sees innovation as the key to higher productivity and prosperity for all.14 It has made whole-of-government action a top priority, including a National Technology Strategy to encourage businesses to produce globally competitive technologies. This initiative should be closely monitored.

12 For example, OECD, The New Economy: Beyond the Hype 2001 13 HM Treasury, Science and innovation: working towards a ten-year investment framework, March 2004 14 Department of Trade and Industry, Innovation Report: Competing in the global economy: the innovation challenge, December 2003

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 71 k Productivity growth will help meet Australia’s current and percentage of GDP; and share of high and medium-high future challenges: such as ongoing external competitive technology industries in manufacturing exports. pressure; environmental sustainability; and an ageing Relative innovation performance in the knowledge population. According to Gary Banks, Chairman, economy needs to take account of industry structure Productivity Commission, “If Australia is to surmount and not focus solely on growth factors. Professor Keith these challenges, we need to continue to find ways of Smith from the European Commission Joint Research raising our productivity performance.” 15 Centre, notes that the knowledge economy often Australia’s innovation performance focuses on ‘frontier technologies’ and science based industries, with high levels of direct R&D and patenting An OECD 2004 international benchmarking report including in computer manufacturing, identifies areas of strength and opportunities for telecommunications, scientific instruments and bio- improvement in Australia’s relative innovation pharmaceuticals.16 Research suggests that these performance. See Figure 1. It confirms Australia’s robust industries contribute less than 3 per cent of Gross macroeconomic performance, scientific output and use National Product (GNP) in most OECD economies. of human resources in Science and Technology. Areas for improvement include: business expenditure on On the other hand, manufacturing and service industries research and development (BERD) as a percentage of such as food processing, hospitality, timber products, GDP; patents; science-industry linkages; technological textiles and clothing, mining, wine, mechanical entrepreneurship; investment in venture capital as a engineering and transport are large, often growing,

Figure 1: Profiling the Australian Innovation System (2001 or latest year available data)17

500 Performance range of OECD countries

450 Performance range of G7 countries Australia 400

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0 123456 78910 11 12 13 14 15 16 17 18 19 2021 22

Macro R & D Human Scientific Innovative Science-industry International Technological Industrial economic activity resources output output linkages linkages entrepreneurship structure performance in S&T

1 Annual GDP per capita in USD 10 Scientific and technical articles per million 16 Share of firms with co-operation arrangements 2 Annual growth rate of GDP population with government or higher education institutes 11 17 3 Annual growth of multi-factor productivity Publications in the 19 most industry-relevant Scientific papers cited in US-issued patents scientific disciplines 18 4 GERD as a % of GDP Percentage of scientific publications with a foreign 12 Share of firms introducing new or technologically co-author 5 BERD as a % of GDP improved products or processes 19 Share of foreign affiliates in manufacturing R&D 6 R&D performed by the non-business sector as a 13 Number of patents in the 'triadic' patent families 20 Entrepreneurial activity % of GDP per million population 21 7 Scientists and engineers employment share as a Investment in venture capital (early stages and 14 Business-financed R&D performed by government expansion) as a % of GDP % of the labour force or higher education as a % of GDP 22 8 Business researchers per 10,000 labour force Share of high- and medium-high-technology 15 Business-financed R&D performed by higher industries in manufacturing exports 9 PhD graduation rate in science, engineers and education as a % of GDP health

15 PC Update, April 2004 Issue 24, quarterly Productivity Commission newsletter 16 Smith, K., European Commission Joint Research Centre, Seville, Spain, The Knowledge Economy in the Australian Context, Presentation to the National Europe Centre, Australian National University, 2004 17 OECD, Public-Private Partnerships for Research and Innovation: An Evaluation of the Australian Experience 2004 k 72 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 knowledge-intensive and innovative. Indeed, around 47 per cent of Australian exports are associated with manufacturing. Mature industries may perform little or no direct R&D and rarely patent. However, new product development and sales in these industries are significant and they often have high growth sub-sectors such as the Australian wine industry.

We contend that technology-based SMEs drive the technological upgrading of Australian industries. While technology-based SMEs can drive the creation of new industries, it is not the only source of growth. Technology-based SMEs can equally assist incumbent industries which often have complex, science-using knowledge bases – the mineral exploration sector is a leading example.

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 73 k PROFILE OF TECHNOLOGY-BASED SMES

3 Australia’s technology-based SME sector Australian industry is characterised by a large number of small firms, the dominance of foreign-owned firms in some industries and few large firms that operate as home-based multinationals. SMEs comprise 99.8 per Figure 2: Technology profile of SMEs cent of Australia’s 1.16 million companies, and generate

Medium to High Technology 26 per cent of GDP. Around 50 per cent of these are 6% High Technology single-person businesses; 96 per cent are small 7% businesses18; and 3.38 per cent are medium-sized.19

An up-to-date snapshot of Australia’s technology-based Medium SME sector is provided below from the May 2004 Technology 20 17% Sensis Business Index. A sample of 1800 SMEs were asked to identify whether they were high, medium-high, Low Technology medium or low technology-based businesses. The results 70% indicate 13 per cent of SMEs consider themselves to be technology-based businesses that fall within high and medium-high technology categories. See Figure 2.

Sensis data reveals that overall, 16 per cent of SMEs reported that they had exported in the past year (with Figure 3: Growth by Technology Level 4.4 per cent of all SMEs being high /medium high

66% technology exporters). A much higher proportion of 64% 60% technology-based SMEs plan to export than other firms. 55% 51% As a group, technology based firms are twice as likely to 42% 36% actively seek significant expansion, compared with the medium and lower technology group. In addition, fewer 25% 22% 19% 17% technology based firms have no plans to expand. See 15% 12% Figure 3. 7% 9%

A proxy was used, based on OECD work to estimate the high medium medium low average technology to high technology technology research expenditure of technology-based firms.21 technology Summary results of the analysis for manufacturing and significant growth moderate growth no growth relevant services industries are presented in Table 1.

18 For the purposes of this report a small business is defined as a business employing less than 20 people. Categories of small businesses include: - single person businesses: sole proprietorships and partnerships without employees; - micro businesses: businesses employing less than five people, including non-employing businesses; - other small businesses: businesses employing five or more people, but less than 20 people 19 Australian Bureau of Statistics, Small Business in Australia: Cat. No. 1321.0, 2000 20 Department of Industry, Tourism and Resources, Technology-based SMEs, Special Report for the Department of Industry, Tourism and Resources, Sensis Business Index, May 2004 21 Department of Industry, Tourism and Resources analysis of ABS Business R&D database data 2001-02, commissioned April 2004. File titled: Final ABS File for First Phase Analysis 8 Feb 2005.xls k 74 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 Table 1: R&D invested by technology-based firms (2001-02) Table 2: Change in R&D Invested by technology-based firms (1992-2002) Technology- Other based firms firms Technology- Other Key Measures SMEs Large SMEs Large based firms firms

Number of firms 2129 212 1099 319 Key Measures SMEs Large SMEs Large

R&D Business Number of firms 34.83% 2.91% 54.14% -7.08% Expenditure 1.48 2.07 0.61 1.39 R&D Business Research Effort Expenditure (person years spent ($ Billion) 138.71% 148.23% 66.67% 63.15% on R&D) 11434 11104 3463 4387 Research Effort (person years spent on R&D) 69.2% 72.49% 64.05% -16.37% The data indicates that technology-based SMEs spent around 72 per cent ($1.48 billion) of the level of R&D expenditure spent by large technology-based firms. Potential gains from technology-based SMEs Technology-based SMEs spent more on research effort SMEs make a disproportionately large contribution to than large technology firms (by person years of full-time economic growth and to industrial development in research). SMEs in non-technology industries also Australia, generating 26 per cent of GDP. According to invested substantially in R&D, for example, in the the Commonwealth Scientific and Industrial Research aquaculture and the wine sectors. Organisation (CSIRO), SMEs accounted for 70 per cent of job growth over the past decade.23 Data for the last 10 years (in Table 2) 22 shows that technology-based SMEs’ rate of business expenditure on Technology-based SMEs are critical for Australia’s R&D was double that of other SMEs, and has also kept success in the global economy. OECD and Australian pace with large technology-based firms. research suggests these firms are fast growing, create high value jobs, have high export potential, renew For 2001-02, all industries analysed spent $5.5 billion established industries and help create new industry on R&D, including the mining industry. Note that the sectors. They contribute directly to economic growth by mining industry was not classified as technology-based in being catalysts for knowledge diffusion and by developing Table 2. Detailed analysis revealed the introducing new technology products in response to relative importance of some service industries. market demands. Computer services companies made up one in three of the technology-based SMEs conducting R&D. Of the SMEs that export, knowledge-based firms, such as technology-based SMEs, were the fastest growing in the decade 1992-1999.24 Furthermore, global trends in manufacturing exports of developed countries indicate high technology products are the area of growth.25 According to the Nairn Report, fast growing companies 26 are motivated by fear of “technological obsolescence”, as they face “constant pressure to improve and innovate in order to maintain their commercial viability. On average, 70 per cent of (their) current revenue was from new products developed within the last five years.”27

22 Department of Industry, Tourism and Resources analysis of ABS Business R&D database data 2001-02, commissioned April 2004. File titled: Final ABS File for First Phase Analysis 8 Feb 2005.xls 23 CSIRO, Australian Growth Partnerships, 2004 24 Austrade, Knowing and Growing the Exporter Community, 2002, p 17 25 OECD, Science and Technology Innovation Scoreboard 2003 26 The Nairn Report defines fast-growing companies as companies that display high employment growth and/or rapid turnover growth, p 49 27 Australian Electrical and Electronic Manufacturers’ Association Ltd, Riding the Innovation Wave, Submission to the House of Representatives, 2003, p 49

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 75 k The 2003 DeloitteTechnology Fast 50 survey which ranks Australia’s fastest growing technology companies supports these findings.28 Some 37 per cent of survey respondents intend to increase their staff complement by at least 20 per cent in 2003. Around 45 per cent of survey respondents expected a similar increase in 2004.

The Deloitte Survey also paints a picture of optimism with 84 per cent of companies either very confident or extremely confident about their growth prospects over the next twelve months.

May 2004 Sensis data confirms this finding, with a strong relationship between technology use by SMEs and future growth expectations.

But despite high confidence levels, the Deloitte Survey reported that 35 per cent of companies surveyed still regarded managing growth as their biggest challenge following by market expansion and related competitive forces.

28 Deloitte Touche Tohmatsu, Technology Fast 50 Australia, 2003 accessed via www.deloitte.com k 76 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 KEY FINDINGS: MEETING THE GROWTH CHALLENGE

The Australian SME sector is diverse and growing but 4 still faces significant challenges. “There is a rich constellation of emerging new firms, often in specialised niches, although few appear to be major new trajectories. Such firms are in a diverse range of sectors and include firms bringing new technology solutions to growing markets….”29

“There is a rich constellation of The Working Group’s research suggests that, while there emerging new firms, often in specialised is cause for optimism, a vibrant technology-based SME niches, although few appear to be major sector is still a long way off in Australia. In particular, we new trajectories. Such firms are in a are constrained by the limited number of Australian diverse range of sectors and include MNEs, which means fewer opportunities for SMEs to leverage large-company knowledge and to access firms bringing new technology solutions international markets.30 to growing markets….” There are only a few large internationally successful and export-led, Australian-based technology companies. Australian also has a very low proportion of domestic medium-high technology manufactures.31 There are many smaller, growing companies, but they are isolated and struggling to overcome start-up problems and the challenges posed by Australia’s scale and location.

The result? Australian companies are prone to licence or sell technology early and move offshore to raise capital. Worse still, many fail to realise the potential of their ideas, resulting in loss of income, jobs and economic growth.

We therefore need to create a climate in which Australian SMEs can create linkages with existing MNEs and grow into MNEs in their own right. This is a business challenge – not a scientific challenge. Dr Ben Greene, CEO, Electro Optic Systems, stated:32

“It is in Australia’s interests to keep growth companies including their IP and talented people onshore for as long as possible.”

29 Scott-Kemmis, D., Innovation Systems in Australia, Innovating Australia, Committee for Economic Development of Australia, 2004, p 70 30 Committee for Economic Development of Australia, Policy Statement, April 2004, Innovating Australia 31 In 2000, Australia ranked 25th amongst OECD countries for its share of gross value-added technology-based manufacturing (high and medium-high technology manufacturing). Australia’s share was less than 4 per cent of total value added, against an OECD average of more than 8%, OECD Science Technology and Innovation Scoreboard 2003 32 PMSEIC Case Study, 2004, Electro Optic Systems Holdings Ltd

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 77 k The Working Group’s findings based on research, consultations and interviews with the CEOs of leading Australian technology-based SMEs, suggest four critical factors influence the growth of technology-based SMEs:

m the ability to export;

m a focus on developing innovative solutions to customer problems;

m having access to domestic expansion capital; and

m possessing experienced and skilled management.

k 78 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 THE EXPORT IMPERATIVE

Exports are vital for the Australian economy Exports are critical to Australia’s growth. They help pay 5 for our imports, particularly technology imports that drive productivity gains needed for Australian economic growth. Exports account for one fifth of our GDP and for one in five Australian jobs. There were close to 31,000 businesses that exported goods during 2002-03 together yielding over $115 billion in export revenue. The 2,300 businesses that exported services (excluding businesses providing services to tourists and students in Australia) contributed export revenue of $18 billion.33

ABS data reveals that exporters are more innovative, pay better wages and provide more training for their employees.34 Exporters are more likely to introduce a new good or service or use advanced management techniques than non-exporters.

ABS data reveals that exporters are more Exposure to world markets facilitates the adoption of innovative, pay better wages and provide innovations from other countries. It generates an more training for their employees. Exporters understanding of international best-practices and are more likely to introduce a new good or exposes companies to leading edge innovations and service or use advanced management international competitors leading to more effective techniques than non-exporters. domestic business innovation. Currently, around 16 per cent of Australian SMEs are exporters and 4.4 per cent of all SMEs are technology-based SMEs.35

Domestic market for technology-based products and services is too small The growth potential of many technology-based SMEs is limited by Australia’s small domestic markets and impediments to accessing global markets. Australia’s domestic market can be too small to warrant the investment needed to develop world-class technology for export. To begin to export, technology-based SMEs require capital, business and marketing skills as well as opportunities to network and showcase their products and services.

According to Austrade research, increasing numbers of younger firms are ‘born globals’.36 These, mostly technology-based firms, develop their products for sale in global markets and export within two years. There are a number of reasons for the increased emergence of ‘born globals’, including improved global intellectual

33 Australian Bureau of Statistics, Cat. No. 5368.0, International Trade in Goods and Services. Feature Article -Australia’s Exporters 2002-03 34 Australian Bureau of Statistics, Cat. No 8154.0, A Portrait of Australia’s Exporters: A Report Based on the Longitudinal Survey 35 Department of Industry, Tourism and Resources, Technology-based SMEs, Special Report for the Department of Industry, Tourism and Resources, Sensis Business Index, May 2004 36 Austrade, Knowing and Growing the Exporter Community, 2002, p 4

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 79 k property protection, the internet, and development of The Australian economy can make significant gains from ‘mass customerisation’ processes in manufacturing and growth in technology-based exports. Diversifying Australia’s services. ‘Born globals’ have traditionally been export mix to include a greater proportion of technology- manufacturing firms – but increasingly include services based products and services is a strategic imperative. firms in IT, digital content and professional services. The The most recent ABS longitudinal study of Australian ‘born global’ trend must be encouraged and accelerated. exporters shows that technology-based SMEs 40 are more likely to persist as exporters compared with lower Technology-based SMEs – a natural and more technology or service-based exporters. The ubiquitous sustainable export potential application of technology around the world means The Australian Government has set a target to double technology-based companies must export to reach their the number of exporters by 2006, and has clearly potential. Technology-based SMEs have a natural and identified SMEs as the priority target group. Meeting this more sustainable export potential. They are therefore of target could increase export revenues by $40 billion by critical importance to improving Australia’s future export Austrade estimates.37 growth. To achieve this goal, government policy must focus on SMEs that can generate real value. At the 2003 Warren Increasing the proportion of technology-based Centre Innovation Lecture, Mr Evan Thornley, Chairman SMEs among Australian exporters of LookSmart, noted that the export opportunity for For SMEs the idea of exporting can be daunting. They Australian technology companies is in adding value to have markedly reduced access to information and fewer existing technologies. Producing technology that meets resources than large established firms. the needs of an existing customer base, rather than sun- The evidence suggests that a major part of a vision to rise technology, can minimise the cost of exporting. grow SMEs into MNEs, is greater support to grow Partnering with traditional industries that already have a markets, especially in new geographic locations. Case major market share and an international distribution study interviews and submissions suggest that export network will also assist in penetrating international assistance to SMEs is essential. They also highlight the markets. important role of Austrade, particularly the Export We all perceive Australian businesses to be strong Market Development Grants (EMDG) program developers of innovative new technologies, products and complemented by State and regional support, in processes. However, nine of Australia’s top ten introducing market opportunities to SMEs and making merchandise exports are in the primary products them ‘export ready’. category. According to the OECD, for most advanced Currently, the EMDG program assists new and emerging economy countries, export growth in manufacturing is exporters and small business (67 per cent of EMDG concentrated in higher technology industries. It is recipients had export earnings of $1 million or less). exports of the higher value-added products and services The Working Group notes that changes to the EMDG that can have the greatest impact on Australia’s program, effective June 2004, mean EMDG grants will economy. no longer provide extended funding to promote exports Australia’s exports of high technology manufactures were in new markets. valued at $8.53 billion in 2002, representing 6 per cent It is clear from case study interviews and submissions, of all exports. As a percentage of GDP, the value of that current overall Government assistance stops short these high technology exports is a quarter of the OECD of what is needed in terms of: average – ranking Australia 26th in the OECD.38 However, when knowledge-based service exports are m reach of export promotional programs; included, the value of exports from all technology-based m incentives for collaboration to build critical mass to 39 firms is in excess of $20 billion. penetrate markets;

37 Austrade, Knowing and Growing The Exporter Community, 2002, p 10 38 OECD, Main Science and Technology Indicators, OECD, Paris, November 2002 39 Based on research from Austrade, Knowing and Growing the Exporter Community, Exhibit 7, 2002 40 Austrade, Knowing and Growing the Exporter Community, 2002 k 80 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 m opportunities to showcase technology-based exports onshore and offshore; and r RECOMMENDATION 1 m tax incentives. (a) Introduce a Collaborative Export Marketing The EMDG program should be broadened to promote Solutions program to complement the Export collaboration, provide export market intelligence and Market Development Grants program, create showcasing opportunities. Building links with providing competitive, merit-based grants for MNEs is also important for Australian firms to SME-driven export marketing initiatives. understand how best to develop and build awareness of (b) Fund the appointment of additional, domestic Australian capabilities. Where close links with the head and international, Austrade Industry Export offices of MNEs have been developed, Australian Advisers to facilitate technology-based SMEs industry has been alerted to opportunities and develop collaborative export opportunities. subsequently won major contracts. Austrade’s capacity to facilitate these linkages should be expanded. To illustrate how this might work, a group of SME mining technology innovators would create a marketing Collaborative export marketing for SMEs campaign targeting the South American gold and copper Technology-based SMEs require ongoing access to new sector. A promotional campaign would be developed and knowledge to be sustainable and to grow into MNEs. delivered for a targeted list of companies. Austrade and Collaborative networking accelerates innovation, industry association representatives would play a key competitiveness and growth.41 In this regard, the Working liaison and facilitation role. This collaboration would Group notes that the EMDG program includes a Special improve efficiencies in areas such as translation, Approvals category for the collaborative export printing, postage, site visits and mailing lists and present promotion activities of ‘Approved Bodies’ and ‘Approved Australia in the role of market leader in innovation. This Joint Venture’ applicants. While this provision is available would support local networks, and educate and assist to cater for peak industry associations and groups of export-inexperienced SMEs. SMEs cooperating in joint venture-style arrangements, under existing arrangements its potential is untapped. Showcasing technologies There could be several reasons for this including There are other aspects of exporting that could not be awareness issues. addressed in the time available, without greater The Working Group recommends complementing the consultation with industry and government departments. Special Approvals element with a Collaborative Export For instance, technology-based SMEs seeking to export Marketing Solutions program. This program would often need to showcase products and promising provide grants for SME-driven export marketing technology. One mechanism that could be expanded is initiatives, including generic industry association Invest Australia’s promotion of national showcasing marketing. Importantly, this program would offer activities to include technology-based SMEs. competitively-based funding for grant applicants rather As existing Austrade programs are orientated towards than the staged funding approach where applicants product promotion, one of the few avenues for cannot be sure of the actual amount Austrade will fund. promoting promising technologies is to compete for To leverage the export impact of industry-led SME limited funds from technology showcasing programs collaborations, the Working Group also recommends the such as the Innovation Access Program, or those under appointment of more domestic and international State/Territory governments. The Working Group Austrade Industry Export Advisers to provide assistance considers the case for expanding EMDG to provide to technology-based SMEs. These advisers would specific funds for technology-based SME exporters to provide ongoing market intelligence and overseas showcase products and promising technology should be contacts and help to build links with MNEs. investigated.

41 OECD, Small and Medium Enterprise Outlook 2002, p 64–74

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 81 k Another area of export promotion that warrants further investigation is the demonstration of technology and prototypes ‘in situ’. These could, in effect, act as reference sites for ongoing export activity. To win market share, it is important that an SME can demonstrate to prospective customers that its technology has gone through the full cycle of development, implementation and provision of long-term support. The Defence, Science and Technology Organisation highlighted the value of Capability Technology Demonstrator programs. These enable SMEs to minimise the risk of failure while developing and showcasing their technologies. The Working Group considers there is merit in investigating how this program could be extended to other industry areas.

Tax disincentives inhibiting exports? Case studies and submissions have highlighted tax disincentives for exporting SMEs, and the potential to expand exports through more favourable tax treatment. SME exporters can incur losses developing overseas markets, only to find that the loss cannot be deducted from local income but is quarantined against future foreign income. Such tax treatment compounds the cash-flow crunch that many SME exporters encounter.

For example, in Hong Kong, SME export income is non- taxable. The territory’s government has an aggressive financing program to encourage SMEs to develop new export markets.

The Working Group believes the Australian Government needs to investigate the removal of tax rulings that act as disincentives for SME exporters. Furthermore, tax concessions, based on export performance, should be encouraged to encourage SME exports – an idea which has been advanced in submissions and interviews to the Working Group.

However, the Working Group recognises that taxation is a complex area, and that proposed changes would require consultation within Government (including the Department of Foreign Affairs and Trade regarding World Trade Organisation compliance issues), and with industry, to explore a range of incentive mechanisms such as concessional tax rates and tax rebates, based on SME export growth performance and SME company growth. The Working Group therefore recommends that tax-based incentives for exporting SMEs be the subject of future study.

k 82 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 CASEt STUDY 1 ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Electro Optic Systems (EOS) is an Australian–owned company based in Queanbeyan, NSW. EOS specialises in the design, development and production of sophisticated laser technologies including supporting software and electronic sub-systems. The technologies are applied to a variety of space systems, defence products and space surveillance. EOS is also a developer, manufacturer and marketer of robotic weapon systems to approved military customers.

The company, which was established in 1985, earns virtually all its revenue from exports. It has grown rapidly with revenue in the order of A$30 million, and 88 staff employed in Australia and Arizona, USA.

CEO, Dr Ben Greene, considers assistance and incentives for R&D are critical to the growth of companies. His view is that, without them, there is a risk companies sell off their IP early on, or are the victims of venture capitalists who strip the company of its assets. EOS has received approval for $11 million in support under two R&D Start grants.

For EOS, the current business model works off an existing customer base that has emerging product requirements, therefore research and development are important for sustained growth.

Demonstrator facilities are an important mechanism to build markets, and the Reference site scheme, drawing on National Procurement Development Program Grants, helped establish the company’s credentials.

In contrast there is not the same support for building overseas markets, for example, Austrade does not adequately exercise its powers to be a guarantor to overseas customers for supply of products. Likewise the Australian Defence organisation could help market products, as is done by UK and French Defence representatives to demonstrate capability of technologies.

EOS aims to be a company with a $100 million turnover. If it were based in the USA, then it could aim to be a $1 billion company, but, for EOS, remaining based in Australia has been a lifestyle choice. www.eos-aus.com

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 83 k BUSINESS INNOVATION UNDERPINS INTERNATIONAL COMPETITIVENESS 6 Business innovation is the process by which the ideas and outcomes of R&D are converted to goods and services, or enhance the operation of a business. Business innovation generates a measurable change in output, such as new products or services, increased productivity or reduced costs.42

SME skills in developing competitive final Business innovation involves discerning and meeting the products and marketing-related activities, needs of customers. It can relate to the development of such as market study, marketing tests and new products and manufacturing processes. However, preliminary market analysis, are not as improvements in marketing, distribution, and service are advanced and require further development. innovations that can be as important as new products and processes. Innovation can also relate to the organisation of the firm, management practices and the way a firm does business, including supply chain management and use of e-commerce.

Knowledge diffusion and product development by Australian SMEs Australian SMEs are proficient in technology-related activities, such as prototype development, in-house product testing and technical analysis. However, SME skills in developing competitive final products and marketing-related activities, such as market study, marketing tests and preliminary market analysis, are not as advanced and require further development. These marketing-related activities are important in developing successful, new products.43

Technology-based SMEs face obstacles in working effectively with public sector research institutions. Many of these were identified by submissions to the Working Group; and in interviews in the recent review of the CRC program. There is a mismatch in time horizons where public sector research bodies have a long-term research focus but SMEs must develop and bring new technology to market in the short term.

Structural inhibitors often prevent research institutions from collaborating productively with SMEs. The cost and time constraints faced by institutions and the risks of investing in small companies for uncertain gains work against successful partnering with technology-based

42 Department of Industry, Tourism Resources, Business Innovation, Working Paper for the Mapping Australian Science and Innovation, 2003, p 11 43 Journal of Small Business Management, January 2002, New product development processes in small and medium-sized enterprises: Some Australian evidence, Vol. 40, Iss 1, p 27 k 84 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 SMEs. Public research institutions and universities should allow more intellectual property to flow through to RECOMMENDATION 2 r industry. Companies should control their intellectual property as they take products to market. Ensure that the new Commercial Ready program supports companies engage external assistance to The Working Group considers that SMEs are in the best develop products to market readiness. position to identify and address these impediments to the commercialisation of Australian R&D. To resolve the impasse between SMEs and the research sector, the Working Group recommends that assistance be provided to SMEs to overcome obstacles in their late-stage technology development. Such measures can build on the not insignificant capabilities of Australia’s publicly funded research organisations and universities to help accelerate SME growth. This approach would enable SMEs to take the initiative in collaboration for product development, collectively drive commercial and export success, and influence the time horizon culture of research institutes.

The Working Group welcomes the Government’s recent announcement 44 of the new Commercial Ready program to encourage collaboration between Australian businesses and public research providers to develop competitive new products and processes with strong commercial potential. The Working Group notes that before the design of the program is finalised, industry will be consulted to ensure that the program provides commercial outcomes and jobs for Australia. The Working Group strongly recommends that the new program helps technology-based SMEs to engage external assistance to develop products to market readiness.

44 This initiative was part of the Backing Australia’s Ability – Building Our Future through Science and Innovation package announced by the Prime Minister, 6 May 2004 www.backingaus.innovation.gov.au

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 85 k CASEt STUDY 2 PROTEOME SYSTEMS LIMITED

Proteome Systems Limited (PSL) develops, manufactures and commercialises innovative technology solutions comprising instruments, software and consumables that enable proteomics research. The Company uses its expertise in proteomics to discover proteins that may be used to develop new diagnostics for therapeutics in the areas of respiratory disease, neurobiology and aging, cancer and infectious disease. PSL employs 140 staff, and has research and development and manufacturing facilities in Sydney, Australia and in Boston, USA and joint ventures (Proteome Systems Japan KK) with Itochu Corporation in Tokyo, Japan and Charles River Laboratories (Charles River Proteomic Services Inc) in Worcester, USA.

A $7 million funding grant under the Australian Government’s Major National Research facility program led to the construction of APAF, (Australian Proteome Analysis Facility) the world’s first national proteomics facility under the directorship of Professor Keith Williams at Macquarie University. Dr Keith Williams subsequently founded Proteome Systems in 1999 through a program with Dow AgroSciences.

Understanding that biotechnology SMEs have a very limited market in Australia, Proteome Systems was born global with a focus on the major markets of USA and Japan. The business was built through forming strategic alliances and joint ventures with large overseas firms, for example, IBM, and Japanese engineering firm (Shimadzu).

Keith Williams concludes that early funding assistance from Government is helpful to enable spin-off companies to develop initial products, but in Australia capital for scaling up and sustaining the company through the manufacturing and commercialisation stages is a problem: “Many companies hit a brick wall when it comes to the growth stage. The R&D Start scheme does not support late stage commercialisation.”

www.proteomesystems.com

k 86 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 AUSTRALIAN CAPITAL FOR GROWING AUSTRALIAN BUSINESSES

7 Technology-Based SMEs are growth SMEs In order to fund their growth, 9 per cent of technology- based SMEs are actively seeking external capital, and another 15 per cent are planning to seek external capital in the near future. In the past three years, 63 per cent of technology-based SMEs sought funding in the $50,000 to $500,000 range and 15 per cent had sought $500,000 to over $5 million.45 As these companies continue to grow they expect to require expansion capital in the $5 million to $30 million range.

“Because breakthrough technology can at Technology-based SMEs require significant first appear absurd to even the smartest expansion capital resource gatekeeper, innovators must be Expansion capital is critical to support a company’s able to pitch to many potential sources of formative commercial development. The ability to access support…. There is a need for diverse adequate capital, preferably ‘smart capital’ from venture capitalists, was identified as the single most important sources of funding, particularly ‘smart success factor for technology-based SMEs in 43 per money’.” cent of submissions to the working group.

“Because breakthrough technology can at first appear absurd to even the smartest resource gatekeeper, innovators must be able to pitch to many potential sources of support…. There is a need for diverse sources of funding, particularly ‘smart money’.”46

Existing government programs such as the Innovation Investment Fund and Pre-Seed Fund programs aim to address the gap in seed capital funding that occurs in the $100,000 to $4 million range, rather than providing expansion capital.

To allow technology-based SMEs to fulfil their potential and grow into large, international businesses, they need access to patient expansion capital. Mr Christopher Newell, CEO, Mediaware Solutions stated:

“Companies like ours require a major, material capital boost to realise our potential and develop our markets. Without significant financial support, many high-potential technology companies won’t make it.”

45 Department of Industry, Tourism and Resources, Technology-based SMEs, Special Report for the Department of Industry, Tourism and Resources, Sensis Business Index, May 2004 46 Innovation Xchange Network Submission, p 2

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 87 k Expansion stage capital is growing, but not for be appropriate that foreign commercial partners are technology-based SMEs sought. Working Group submissions and interviews identified a A strong and viable domestic venture capital market is shortage of expansion capital for technology-based needed to help Australian SMEs negotiate a fair deal SMEs in the $5 million to $30 million range, as the when partners are sought. Relying excessively on majority of expansion capital is being directed to non- offshore capital will see Australian ideas and the technology firms. By way of international comparison, 19 Government’s substantial investment in innovation per cent of expansion/development capital in the UK is benefiting other economies at the expense of our own. allocated to high-technology companies. The comparable allocation in Australia is estimated to be much lower by Australian venture capital market is growing, but the Working Group. still relatively underdeveloped The shortage of expansion capital will severely restrict “While the Australian venture capital market is Australia’s ability to grow large, domestically-based growing, it is still relatively immature, especially technology businesses. Dr Keith Williams, CEO, when compared with the USA or UK.”49 Proteome Systems Limited, said:47 Compared with other OECD countries, Australia’s venture “Early funding assistance from Government is capital market is relatively underdeveloped. It ranks 15th important to generate start-up companies, but in among 27 OECD nations in terms of venture capital Australia capital for scaling up and sustaining the investment as a percentage of GDP for the period 1998- company through this stage is a problem. Many 2001. technology-based companies hit a brick wall The venture capital market is a major source of finance when it comes to the growth stage.” for new technology-based firms and plays a crucial role in promoting the radical innovations they often produce. Reliance on offshore capital will ‘seed other Venture capital backed companies were responsible for economies’ an estimated 10 per cent of US industrial innovations in The increasing numbers of start-ups now being created the past decade. will exacerbate the shortage in expansion capital for technology-based SMEs. As a result, promising SMEs While the overall level of venture capital in Australia has may fail, not achieve their potential, or be obliged to grown, this growth has not flowed to the technology relocate offshore at an early stage. sector. In OECD countries, high-technology firms attract half of venture capital investment on average, but in “While international VC may offer strong access Australia they account for less than 25 per cent. By to a quality global network, they may also be contrast, the sector receives more than 80 per cent of more inclined to ‘flip-up’ the start-up company in total venture capital in Canada and Ireland. the USA or UK capital market than to further develop it as an Australian commercial entity. As a result, the Working Group estimates that Australian This is really early stage IP transfer from the high-technology firms have access to a pool just one Australian economy into USA and/or European tenth of the size available to comparable US firms, even 48 usage of Australian inventions.” after adjusting for the size of our economy. Hence, domestic growing firms must often seek expansion The Working Group considers that the longer we can capital overseas, or from the domestic public equity maintain the investment of Australian money in Australian markets which have a focus on short-term results. The SMEs, the greater the economic return will be to the recent Innovating Australia report noted that: nation. However, it is recognised that this is not always feasible. Local industry may sometimes have insufficient “In almost no country other than Australia does capacity to develop the intellectual property owned by the stock market attempt to finance innovation in Australian technology-based SMEs on its own, and it may its early phases.”50

47 PMSEIC Case Study, Proteome Systems Limited, 2004 48 Sciventures Submission, p 3 49 Sciventures Submission, p 3 50 West J., Financing Innovation: Markets and the Structure of Risk, in Innovating Australia, Committee for Economic Development of Australia, (CEDA), April 2004 k 88 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 A large and growing proportion of investible funds The Fund should appeal to individual taxpayers on a are under the control of large superannuation number of levels. Firstly, it would allow Australians to funds invest in technology-based SMEs that are integral to Superannuation funds control a large and growing Australia’s future. These companies are often not listed proportion of investible funds that could be invested in on the share market and investment in them is generally SME expansion. As at 30 September 2003, Australian restricted to institutional investors or wealthy individuals. superannuation entities had $548.5 billion in assets and The chief benefit to individual taxpayers would be the had received a net inflow of $24.5 billion in funds over potential to earn venture capital-style returns, which the year. Asset allocation of pension funds to venture typically represent a 5 per cent premium on those capital is less than 1 per cent in Australia compared with offered by listed equities. The tax-advantages offered by around 7 per cent in the US according to OECD data. A the Fund would also be attractive. 1 per cent increase in the amount of capital allocated to Individuals would directly commit a portion of their Australian venture capital by superannuation funds would superannuation contributions to the Fund which would double the total amount of venture capital available. subsequently invest in venture capital funds specialising In its response to the Nairn Report, the Australian in technology-based SMEs. There is a wide variety of Government noted that it cannot actively intervene to mechanisms to enable individuals to directly commit influence the investment strategies of individual their superannuation contributions. Most have a limited Australian superannuation funds which are set to and capped impact on tax revenues, and many would maximise returns to members. The Government noted stimulate additional superannuation contributions. For that recent reforms give Australian widely-held example, superannuation contributions to the Expansion superannuation funds an exemption from Capital Gains Capital Fund of Funds in excess of the 9 per cent Tax on investments through Pooled Development Funds minimum could be taxed at a concessional rate of 7.5 which should encourage greater investment in venture per cent rather than the current 15 per cent. capital. Tax concessions should be limited for each individual and The Working Group agrees that the Government should the total concessional contributions pool should be not dictate investment allocations. However, the Working capped at $200 million per annum, leading to Group believes people have the right to invest their $15 million in forgone tax revenue annually. This strategy superannuation as they wish and the Government could would make $1 billion in expansion capital available to reward investments that benefit the economy through Australian technology-based companies over five years. limited, targeted tax advantages.

Increasing the pool of domestically managed RECOMMENDATION 3 r expansion capital for technology-based SMEs The Working Group considers individual Australian Increase the availability of domestic, expansion taxpayers should be encouraged and enabled, through capital for technology-based SMEs in the $5 incentives, to direct superannuation savings to venture million to $30 million range by creating a tax- capital. This would address the current problem of low advantaged, privately managed fund into which portfolio allocations to venture capital investments by individuals can directly commit a portion of their superannuation funds. superannuation contributions.

To enable individual Australian taxpayers to direct superannuation savings to venture capital, the Working Group supports the creation of a tax-advantaged, privately managed, Expansion Capital Fund of Funds.

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 89 k CASEt STUDY 3 GEOSIM TECHNOLOGIES PTY LTD

Geosim Technologies is an innovative Queensland company established on 3 September 2002 that has developed a helicopter Part Task Trainer. The Part Task Trainer has Civil Aviation Safety Authority Certification (FSD2 cat B) to count for 20 hours of the 40 required for instrument flying time for helicopter pilots as well as recency and currency credits. The software program uses visualization of local Australian airports and topographical reference points as part of its training function.

Geosim received a Government COMET grant in 2003 of $52,000 to assist in the commercialization of their product and was supported by the Queensland Department of State Development via Aviation Australia.

“The key to GeoSim’s success in developing our product has been gaining adequate access to finance and skills,” Charles Du Plessis, Managing Director of GeoSim Technologies, said.

“Access to adequate early and expansion capital is critical for technology- based SMEs.”

“In addition, access to some kind of working capital to assist the innovator develop and commercialise the innovation without having to be concerned about the basic need to place food on the table will ensure that projects develop at a much faster rate.“

In order to have access to the necessary skill base, GeoSim has collaborated with various specialists and drawn them into the GeoSim fold. GeoSim has also established strategic alliances with four, specialist, micro-companies in the aviation field, with the intention of establishing an aviation cluster which will then support and stimulate growth in the simulation environment.

“Our ambition for the company is to expand internationally through export of products, creating employment and building wealth for the company’s founders through company growth.”

Geosim is focused on continued product development to expand their product range and keep them at the forefront of their industry. They are currently developing a Fixed Wing Part Task Trainer in collaboration with Jabiru, an aircraft manufacturer. Once complete, Jabiru will assist in the deployment and promotion of the Fixed Wing Part Task Trainer in the Aviation industry worldwide.

www.geosim.com.au

k 90 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 EXPERIENCED MANAGEMENT IS ESSENTIAL 8 Growing global businesses requires high quality, experienced entrepreneurs and managers. A motivated and experienced management team with strategic technical skills was identified as a critical factor necessary for a technology-based company to grow in 40 per cent of submissions received by the Working Group. Managers need specific knowledge and skills to develop and market products, including for export, and manage the demands of research and commercial reality.

“Quality management is the most important “Having the best idea, or being first to ingredient for success. The old saying ‘a great market with a unique technology, is not manager can take a bad idea and turn it into a the most important element for success, good business, while a bad manager can take a although it is sometimes assumed to be great idea and turn it into a failure’ definitely the case. Without world-class commercial holds true. Having the best idea, or being first to market with a unique technology, is not the most leadership, even the best ideas and important element for success, although it is technologies are likely to fail in the global sometimes assumed to be the case. Without marketplace.” world-class commercial leadership, even the best ideas and technologies are likely to fail in the global marketplace.”51

A survey of 600 chief executives and senior technology managers from Australia and a range of OECD countries concluded that management skills and personal qualities are often in shorter supply than technical knowledge in innovative firms.52

In Australia, there is limited availability of experienced managers for technology-based SMEs. This is due both to a shortage of large technology companies and the limited number of MNEs conducting global product development operations in Australia. These companies are the leading source of future managers for Australian SMEs.

The management skills necessary to successfully grow a technology-based SME come largely from ‘on-the-job’ experience, rather than formal education and training. Structured training and acquisition of formal skill sets are important and are catered for by the formal education system and specialist training infrastructure. Business schools and other educational institutions provide formal training, as do private trainers in company-building skills such as Achaeus, Corporation Builders and SEA.

51 Mediaware Solutions Submission, p 3 52 Arthur D Little, The Innovative Company: Using Policy to Promote Development of Capacities for Innovation: 2001 (Prepared for members of the OECD Focus Group on the Innovative Firm)

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 91 k Australia must attract experienced managers to This recommendation was not implemented at the time technology-based SMEs and should be revisited. Over 23 per cent of submissions to the Working Group supported initiatives to repatriate experienced Employee Share Options entrepreneurs; encourage experienced, managers of Employee share options (ESOs) are the international large companies to join SMEs; and provide high quality ‘industry standard’ for providing entrepreneurial mentoring to develop local entrepreneurs’ management incentives to managers in technology-based SMEs. ESOs skills. allow Australian SMEs that would not otherwise have sufficient cash-flows to offer internationally competitive “Support is needed in business mentoring – remuneration to experienced managers. Australian policy bringing real experience from those that have should be tax neutral towards innovative employee been successful, or have learned from failure, to ownership/remuneration schemes. current technology SMEs…the challenge will be finding top quality mentors and getting sufficient “It is difficult to find and retain good people given dedicated time from them.”53 limitations to Employee Share Ownership Plan as a means of remuneration within the Australian tax “The best way to support the growth of system.”55 Australian technology-based SMEs is to provide incentives to repatriate Australian senior ESOs are not widely used in Australia because the managers with experience in technology current tax treatment contains major disincentives. Some commercialisation.”54 20 per cent of submissions to the Working Group suggest reforms on ESOs, with the Australian Venture Background interviews with successful technology-based Capital Association identifying two problem areas in the SMEs also identified the need to increase the migration current ESOs regime: of highly skilled managers from overseas and assist m SMEs to obtain support from larger domestic Ordinary income: gains arising from the holding corporations in the areas of business management and period in respect of options are taxed as ordinary risk management. income unless circumstances permit the application of the discount capital gains tax concession. The PMSEIC working group on Management Skills for m Capital gains tax concession: this requires the High-growth Start-up Companies (December 2001) also employee electing to be taxed upfront on the value of recommended an incentive scheme to fund the return of the options at the time of issue and then holding expatriates to work with SMEs and encourage MNEs and underlying shares for at least 12 months after large companies to mentor Australian SMEs. The exercise of the relevant options.”56 scheme aimed to: The Government has previously received representations “offer competitive salary or tax breaks for on the reform of the tax treatment of ESOs. The Working experienced entrepreneurs to return to Australia Group supports the broad thrust of these to mentor start-up companies. Expatriate representations and does not see effective alternatives entrepreneurs, particularly in the US, are highly to them. remunerated both in salary and stock option plans. It may not be possible to match US or Reform of the tax treatment of ESOs should reflect two European salaries in absolute terms but there principles:

may be a greater willingness to accept lower m tax becomes payable only when options or shares are Australian salaries if a significant compensation cashed out; and component would be in tax advantaged stock m returns are taxable as capital gains, not ordinary options or equity.” income.

53 CHAMP Ventures Submission, p 1 54 GBS Venture Partners Submission, p 1 55 GBS Venture Partners Submission, p 3 56 AVCAL Submission, p 1 k 92 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 The Working Group believes these reforms are as Accessing mentors “When you’re the boss – who relevant to all employees as they are to managers. do you call?” Submissions to the Working Group highlighted the need for The Government has previously considered some guidance to managers from people who had experienced aspects of ESOs but these have not resolved the tax success and failure in technology-based SMEs: impediments to technology-based SME growth. In its 2003 response to the Nelson Report, the Government “We hope that future government initiatives will… set a target of doubling employee participation in ESOs, provide high quality mentoring skills aimed at the and set up the Employee Share Ownership Development improvement of the key executives of SMEs.”57 Unit in the Department of Employment and Workplace The Nairn Report recommended that the Australian Relations. In 2004, both the Nairn Report and the Government expand the mentoring services available to Government’s response to it referred specifically to small and medium-sized enterprises beyond those ESOs but in the context of start-up companies rather currently offered by the COMET program. than technology-based SMEs seeking to grow. The Government’s response to the Nairn Report noted The Working Group believes that this issue is important that after a review of the COMET program in 2002, and unresolved and should be urgently considered by the changes were underway to introduce an expanded Employee Share Ownership Development Unit. However, mentoring element under the program’s Management as advised to the Working Group, the current work Skills Development stream. The Small Business program of the Employee Share Ownership Development Assistance Program also assists firms obtain mentoring Unit does not give a priority to resolving the specific services through its Small Business Enterprise Culture issue of impediments to technology-based SME growth. grants. The initial cost of reform of the tax treatment will be low, However, there is a significant gap in mentoring support though it is not easily quantifiable by the Working Group for firms entering export markets and for those at the because option plans are not widely used and tax expansion stage, which the Working Group believes can receipts are low. Ongoing revenue effects are likely to be be bridged. A national network could assist at least 50 neutral or positive because new tax revenues will be technology-based SMEs to employ a mentor at $25,000 generated from greater business activity and profit per annum, with mentors being employed for up to two growth by technology-based SMEs. Econometric years. Similarly, an international network could assist at modelling could provide a more precise estimate of least 25 technology-based SMEs to employ a mentor revenue effects. based overseas at $50,000 per annum, with mentors The risk of abuse of ESOs by large companies can be being employed for up to two years. mitigated by rules on company size and the nature of its The Working Group welcomes the recent Government activities such as those governing Pooled Development announcement to extend the COMET program and Funds. recommends that a portion of this additional funding be used to address this gap in mentoring support. RECOMMENDATION 4 r Reform the tax treatment of Employee Share Options to support the attraction and retention of RECOMMENDATION 5 r skilled and experienced managers, by making tax Through the extended COMET program, support payable on the capital gain only when options or firms at the expansion stage by introducing a shares are cashed-out. national and an overseas mentoring network, contracting-in mentors to assist in building management skills domestically and for export markets. Austrade should be involved in building the network of mentors overseas.

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 93 k CASEt STUDY 4 IMMERSIVE TECHNOLOGIES PTY LTD

Immersive Technologies is a Western Australia based company that produces Computer Based Training (CBT) systems for the Mining Industry. The company’s simulators are in use around the world and have trained and assessed thousands of personnel. Immersive Technologies invests in ongoing R&D to ensure its products remains a benchmark of Simulator technology.

The company started out as a very small computer based training business in the mining sector, run out of the founder’s garage in collaboration with his brother and father. Later, customer familiarity led to the identification of the big opportunity in simulators.

“We built a prototype with only $20k of accumulated reserves, plus we had the profitable computer based training business to pay salaries until sales came in”, said Peter Salfinger, CEO.

“The key to our success is our tenacity, our ‘never say no’ attitude and our willingness to find a solution to any problem. But the key to our continued growth was our recognition that we needed extra management skills. So we brought them in.”

The backing of Immersive Technologies by a venture capitalist provided the company with credibility and made it much easier to attract staff from large companies.

“In hindsight, we should have sought access to venture capital earlier, as it makes it much easier to access good staff during a company’s growth phase.”

An impediment to the growth of the company has been the very slow take up of their product by the Australian industry. In fact, they are amongst the last worldwide, despite the large local mining sector. The majority of Immersive Technologies’ customers are from overseas.

The ambition of the company is to treble in size and become a multinational company, while retaining Perth as their headquarters. Immersive Technologies also wants to be a business that top quality staff wants to work in. When their simulators are the standard training tool in mining and other sectors then Immersive Technologies will know that they have been truly successful.

www.immersivetechnologies.com

k 94 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 DATA ON TECHNOLOGY-BASED SMES

9 Future data collection should occur through comprehensive regular innovation surveys. A critical prerequisite for accelerating the rapid diffusion of knowledge and technology integration in Australia is the ability to identify and track the performance of technology-based firms.

The Working Group strongly recommends One of the key impediments the Working Group faced that the Government commit to biennial was the lack of data on Australian’s technology-based innovation surveys incorporating a definition companies. Data is dispersed across various ABS of technology-based firms to provide a subject areas and the agency is now looking at ways of performance benchmark for assessing capturing technology related information both in its incentive programs in the future. Innovation survey and use of Information Technology Surveys.

Data collection on technology-based firms also suffers from a lack of agreed definitions and the absence of a co-ordinated approach among agencies for collecting information. The Working Group sees robust data on these firms as vital for tracking growth and innovation performance and resolving this issue should be a top priority for Government.

The Working Group notes that the ABS is currently conducting an Innovation Survey but that this will not provide detailed data on Australian technology-based firms. The Government noted in its response to the Nairn Report that the ABS currently has no firm plans for future surveys beyond 2004. The decision on future surveys will be based on demand, relative priorities and the ABS’s overall funding.

Some current data on Australian technology-based SMEs was obtained from the May 2004 Sensis Business Index Quarterly Survey of Small Business. In addition, information was obtained from analysis of ABS data on the R&D investment made SMEs during the period 1992–2002.

The Working Group strongly recommends that the Government commit to biennial innovation surveys incorporating a definition of technology-based firms to provide a performance benchmark for assessing incentive programs in the future. Better data will improve policy development, allow more robust evaluation of

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 95 k innovation outcomes, and promote more rigorous monitoring and measurement frameworks for policies RECOMMENDATION 6 r and programs. Upgrade business and innovation surveys to track ABS initiatives and analyse the performance of knowledge The Working Group supports ABS initiatives and intensive, including technology-based, industries, proposals for improved systematic data collection and in all key areas including exports. In conjunction, recommends including classification across the whole-of- develop a framework to map Australia’s Business government and industry so that knowledge intensive Innovation. and technology-based industries can be identified and tracked for their performance. An important initiative proposed by ABS is the introduction of an integrated statistical database, which would draw on tax data. A change to tax legislation is needed and the Working Group urges Government to support this legislative change.

The range of industries covered by the current Innovation Survey and related surveys should be expanded to include more industry divisions. Data collection should integrate measures of technology including enabling technologies such as biotechnology and nanotechnology. Supplementary questions on use of these technologies could be added to future ABS surveys to complement the currently proposed ABS Biotechnology survey. Future data collection via innovation surveys should be comprehensive and regular and allow reporting on technology integration and diffusion, and export performance.

Framework to map Australia’s business innovation The task of mapping Australia’s science and innovation system carried out by the Government in 2003 found a shortage of data on business innovation. A framework to map Australia’s business innovation building on the data from the mapping study and future innovation and technology surveys should be developed.

k 96 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 ADDITIONAL WORK SHOULD BE UNDERTAKEN

The Working Group believes that a more detailed 10 examination of some of the issues is warranted, particularly exports. Given the importance of exports to Australia’s future and the limited time available to tackle such a complex task, the Working Group recommends that its work be continued to enable greater consultation on issues with industry and relevant agencies.

RECOMMENDATION 7 r To build on the key finding that increasing the export capacity of technology-based SMEs is critical; the Working Group should be continued and be tasked with exploring this issue in more detail in consultation with industry and government agencies. Areas to be investigated may include technology demonstration programs, enhancements of the Export Marketing Development Grants program, supporting the increased use of industry collaborative networks and addressing impediments in the tax system to the development of export-oriented technology- based SMEs.

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 97 k CONCLUSION

Technology-based SMEs have enormous potential to increase economic growth in Australia through their 11 ability to grow new industry sectors and renew established industries.

The Working Group has identified the key success factors that drive growth for technology-based SMEs, particularly at the expansion stage. These are: the ability to export; a focus on developing innovative solutions to customer problems; having access to domestic expansion capital; and possessing experienced and skilled management.

At a cost to Government of $48 million per annum for five years, the Working Group believes that accepting the recommendations would produce over the life of the program:

m a dramatic upsurge in technology-based exports as 75 national and international mentors work directly with companies in generating export capability;

m an increase in companies developing market-ready technology products;

m a new technology-focused domestic expansion capital sector with $200 million per year to invest; and

m much needed growth in the management skills required for future Australian-based technology industries.

In summary, a combination of new initiatives and the modification of existing initiatives have the potential to have a significant impact on the growth of technology- based Australian SMEs and the Australian economy. Strengthening Australia’s capacity to generate and grow technology-based SMEs will increase its international competitiveness by forming many large and globally successful, export-led Australian-based technology companies in several, competitive sectors.

To grow Australia, we must become world-class business builders and exporters. We need to create the knowledge-based jobs future Australians will require. We must place greater emphasis on achieving commercial and export success – otherwise, the benefits of our investment in science, technology and education will be enjoyed, not in Australia, but overseas.

k 98 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 ATTACHMENT A PMSEIC WORKING GROUP MEMBERSHIP

Working Group Members Mr David Miles, Chairman, PMSEIC Working Group; Chairman, Industry Research & Development Board; Chairman, National Innovation Council

Mr Gareth Dando, CEO, Uniseed

Dr Mark Dangerfield, CEO, BioTrack Australia Pty Ltd

Dr Jackie Fairley, CEO, Cerylid Biosciences Limited

Mr David Gaul, President, CEA Technologies

Dr Laurence Hammond, Director & Founder, Timsco Pty Ltd

Ms Elizabeth Lewis-Gray, CEO & Managing Director, Gekko Systems

Ms Catherine Livingstone, Chairman, CSIRO Board

Dr Katherine Woodthorpe, Director, People & Innovation Corporate Advisers Pty Ltd

Working Group Support Ms Carolyn Jenkins, Manager, Innovation Taskforce, Department of Industry, Tourism and Resources

Mr Jared Henry, Assistant Manager, Innovation Taskforce, Department of Industry, Tourism and Resources

Mr Karl Rumba, Assistant Manager, Innovation Taskforce, Department of Industry, Tourism and Resources

Ms Julie Walding, Manager, Office of the Chief Scientist, Department of Education, Science and Training

Ms Tammy Pavelic, Office of the Chief Scientist, Department of Education, Science and Training

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 99 k ATTACHMENT B DEFINITIONS

Business Innovation: Business innovation is the Types of equity capital: process by which ideas and the outcomes of research Pre-seed capital: ‘proof of concept’ funding to and development are converted to goods and services, establish whether the idea will work and if there is a or enhance the operation of a business. Business potential market. Innovation generates a measurable change in output, Seed capital: product is in development. Usually in such as new products or services, increased productivity business less than 18 months. Funding used for or reduced costs.58 prototyping, testing, IP protection, business plan Large Enterprise: A large enterprise is defined as an development and other requirements to ready the enterprise employing 200 or more people.59 product for market.

Multinational Enterprise (MNE): An MNE is defined as Start-up capital: product in pilot production. Usually a large enterprise operating in a number of countries in business less than 30 months. Used to get the and having at least one production or service facility business licensed, set up and operating as a going outside its country of origin.60 concern.

Small and Medium Enterprise (SME): A small Early expansion capital: product in market. The enterprise is defined as an enterprise employing less 1st round of growth funding for the business. than 20 people. A medium enterprise is defined as an Expansion capital: provides capital for further enterprise employing 20 or more people, but less than rounds (2nd, 3rd) of growth funding as business plan 200 people.61 milestones are met. Technology-based company: A technology-based company is defined as one which acquires or creates new technology that it integrates to develop new products, processes and services as the basis of its business competitiveness. These companies occur in many industry sectors and not just those that have been traditionally regarded as high-technology industries such as aerospace and electronics.

58 Department of Industry, Tourism Resources, 2003, Business Innovation, Working Paper for the Mapping Australian Science and Innovation, p 11 59 Australian Bureau of Statistics, 1321.0 Small Business in Australia, 2001 60 Penguin Dictionary of Economics 61 Australian Bureau of Statistics, 1321.0 Small Business in Australia, 2001 k 100 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 ATTACHMENT C SUBMISSIONS TO PMSEIC WORKING GROUP Ms Narelle Kennedy Mr Grant Kearney Dr Nick Yazidjoglou Chief Executive Chief Executive Director, Science External Policy and Australian Business Foundation Innovation Xchange Network Programs Defence Science and Technology Mr Gary Reed Mr Chris Newell Organisation Manager Chief Executive Officer Department of Defence Australian Business Angels MediaWare Solutions Pty Ltd Australian Government Australian Business Limited Mr Mitch Hook Dr John Kapeleris Mr Tim Reardon Chief Executive Director Senior Advisor – Industry Policy Minerals Council of Australia Regional Commercialisation Services Australian Chamber of Commerce and Mr Andrew Littlejohn Australian Institute for Industry Group Product Manager Commercialisation Ms Lyndal Thorburn MYOB Pty Ltd Mr Rob Durie Managing Director Mr Michael Hirshorn Chief Executive Officer Advanced Consulting and Evaluation Chief Executive St George Innovation Australian Information Industry Pty Ltd Fund Association Ltd Mr Eddy Lee Nanyang Ventures Mr Colin Scully Chief Executive Mr Michael O'Neill Chief Operating Officer Amcom Telecommunications Limited Managing Director Australian Stock Exchange Ms Hyejin Lee Pacific Capital Corporation Ltd Mr Jake Burgess Industry Policy Adviser Professor Peter Andrews AVCAL Projects Manager Government Industry and Policy Group Queensland Chief Scientist Australian Venture Capital Association Austrade Queensland Government Ltd Australian Government Dr Greg Smith Mr David Nathan Mr Trevor Wykes Director COMET Business Advisor Manager, Coordination Unit SciVentures Investments Pty Ltd Principal Department of Communications, BASIX Pty Ltd Information Technology and the Arts Mr Robert Mitchell Australian Government Chief Operating Officer Mr Robert Beaumont The Warren Centre COMET Business Advisor Mr Mark Bonner General Manager Manager, Energy Technology Policy Ms Wendy Spencer Beauchamp Pty Ltd Australian Greenhouse Office Assistant General Manager Australian Government Innovation Science and Technology Mr Stuart Wardman-Browne Department of Economic Development Director Mr Gavan Cattanach Tasmanian Government CHAMP Ventures Pty Ltd Manager Science and Innovation Policy Mr John Loney Mr Peter Mogg Department of Agriculture, Fisheries Deputy Director-General Managing Director and Forestry Business and Trade Services Group Compucat Research Pty Ltd Australian Government Department of Industry and Resources Western Australian Government Ms Brigitte Smith Managing Director GBS Venture Partners

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 101 k ATTACHMENT D TECHNOLOGY-BASED COMPANY INTERVIEWS BY PMSEIC WORKING GROUP

COMPANY PERSON INTERVIEWED

BresaGen Limited Dr Meera Verma, COO

Electro Optic Systems Holdings Limited Dr Ben Greene, CEO

GBC Scientific Equipment Pty Ltd Mr Ron Grey, Managing Director

Geosim Technologies Pty Ltd Mr Charles Du Plessis, Managing Director

Grain Biotech Pty Ltd Dr Ian Edwards, CEO

Immersive Technologies Pty Ltd Mr Peter Salfinger, CEO

Intellection Pty Ltd Mr Calvin Tracey, CEO

Metal Storm Limited Mr Ian Gillespie, General Manager, Australia

Proteome Systems Limited Dr Keith Williams, CEO

Protocom Development Systems Pty Ltd Mr Jason Hart, CEO

Radiata Communications (Cisco Systems) Dr David Skellern, co-founded Radiata Communications

UTS Navigation Systems (DTI) Mr Neil Goodey, CEO

k 102 PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 INDEX OF REFERENCES Department of Trade and Industry, Innovation Report: Competing in the global economy: the innovation Allen Consulting Group, Winning Companies and Jobs – challenge, December 2003 How High Growth and Knowledge-intensive Industries Create Jobs, 1997 Department of the Treasury, Budget Papers, 2003

Arthur D. Little, The Innovative Company: Using Policy to HM Treasury, Science and innovation: working towards a Promote Development of Capacities for Innovation, 2001 ten-year investment framework, March 2004

Austrade, Knowing and Growing the Exporting House of Representatives, Riding the Innovation Wave, Community, 2002 2003

Australian Bureau of Statistics, Cat. No. 5368.0, Journal of Small Business Management, January 2002, International Trade in Goods and Services. Feature New product development processes in small and Article -Australia’s Exporters 2002-03 medium-sized enterprises: Some Australian evidence, Vol 40, Issue 1 Australian Bureau of Statistics, Cat. No 8154.0, A Portrait of Australia’s Exporters: A Report Based on the OECD, The New Economy: Beyond the Hype, 2001 Longitudinal Survey OECD, Enhancing SME Competitiveness, The OECD Australian Bureau of Statistics, Cat. No. 1321.0 Small Bologna Ministerial Conference, 2001 Business in Australia, 2001 OECD, Main Science and Technology Indicators, OECD, Australian Electrical and Electronic Manufacturers’ Paris. November 2002 Association Ltd, Submission to the House of OECD, Public-Private Partnerships for Research and Representatives, Riding the Innovation Wave, 2003 Innovation: An Evaluation of the Australian Experience, Backing Australia’s Ability – Building Our Future through 2004 Science and Innovation, May 2004. OECD, Science and Technology Innovation Scoreboard, backingaus.innovation.gov.au 2003 Committee for Economic Development of Australia, OECD, Small and Medium Enterprise Outlook, 2002 Innovating Australia, April 2004 Penguin Dictionary of Economics CSIRO, Australian Growth Partnerships, 2004 Productivity Commission quarterly newsletter PC Update, Deloitte Touche Tohmatsu, Technology Fast 50 Australia April 2004 Issue 24 2003, February 2004. www.deloitte.com Scott-Kemmis, D., Innovation Systems in Australia, from Department of Industry, Tourism and Resources analysis Innovating Australia, Committee for Economic of ABS Business R&D database data 2001-02, Development of Australia, 2004 commissioned April 2004. File titled: Final ABS File for First Phase Analysis 8 Feb 2005.xls Smith, K., European Commission Joint Research Centre, Seville, Spain, The Knowledge Economy in the Australian Department of Industry, Tourism and Resources, Context, Presentation to the National Europe Centre, Technology-based SMEs, Special Report for the Australian National University, 2004 Department of Industry, Tourism and Resources, Sensis Business Index, May 2004 West, J., Financing Innovation: Markets and the Structure of Risk, in Innovating Australia, Committee for Economic Department of Industry, Tourism Resources, Business Development of Australia, April 2004 Innovation, Working Paper for the Mapping Australian Science and Innovation, 2003

PHASE 1 REPORT: GROWING TECHNOLOGY-BASED SMES — JUNE 2004 103 k