By Andrew Patterson
Drive past one of Fonterra’s major processing plants around the country and those huge storage vats usually visible from the road will have likely been engineered by a company few New Zealanders will have heard about.
What’s more, the tankers which collect the milk to put into those vats will also have been manufactured by them too.
Yet this low profile, heavy engineering conglomerate has, over the last decade, extended its reach well beyond New Zealand’s shores with a significant global footprint and a turnover these days in excess of $165 million.
Foundered in 1894, and formerly known as the National Dairy Association, a co-operative that produced all the stainless steel vats and engineering requirements for local dairy factories that previously dotted the rural landscape, the company has stuck with its three letter acronym but today is a vastly different operation.
Now privately owned, NDA Group has grown to be a world leader in the fabrication of stainless steel process vessels and heat exchangers for industry as well manufacturing and installing a range of other specialist products and services in key markets around the world.
The companies that make up NDA design, manufacture and service products for a diverse range of process industries including the dairy, wine, brewing, chemical, mining, pulp and paper, pharmaceutical and food and beverage industries in a diverse range of locations around the globe.
In fact, a quick look at some of the company’s recent installations and everything takes on a scale all of its own.
Dairy powder dryers and evaporators – including the manufacture and installation of the world’s largest facilities at both Fonterra’s Edendale processing plant in Southland and more recently at Darfield in Canterbury – along with chemical heat exchangers, oil storage tanks and bulk facilities for transport and refrigeration .
CEO Mark Eglinton, who joined the company in 2009 after several years with Fletchers, says the company’s growth has been something of an evolution over its 120 year history.
“Over the years we’ve been able to gather together a lot of history, a huge amount of institutional knowledge around how the dairy supply chain works and a detailed understanding of how mechanical engineering solutions can fit into all of that.”
“One of our challenges in the modern era has been to diversify away from our core expertise in dairy and producing stainless steel vats and take the genesis of that talent in engineering and look at other industries we can apply that to.”
“And just to balance the business, we’ve obviously sought to move into new channels on the groundthat grow at a faster rate than dairy. That's ultimately the challenge of any management team is to have the business growing faster than the cycle, so that a lot of our time we spend thinking about where we have to focus our efforts.”
Growth and market opportunities for NDA can therefore be found in a wide variety of different sectors.
“In Australia, for instance we've been focusing on the energy sector, LNG and coal seam gas industries, and that's been a reasonably tough sector in recent years. So, we've had to redesign that business to focus a lot more on specialized products.”
“These days we’re also doing a lot in processed water, which we’re seeing is a really good growth industry both in terms of filtration and cleaning industrial water. So a lot of our vessels will be going into that space in the future.”
“Then there’s the wine sector which can be a bit lumpy on the supply side and chemical in the US, which for us is probably our most exciting channel at the moment, followed by the resources sector in Australia. So they are our five major targets.”
The decision to sell off its on-farm stainless steel holding tank business to Tru-Test earlier in the year Eglinton says was a pragmatic decision.
“After a strategic review, we felt that business was likely to grow faster with another owner leaving us to focus on the heavy engineering end of the business. If you think about the things that we make, we feel we're very good at the bigger and more complex engineering requirements, the operation systems, separation systems, filtration systems, heat-exchange systems.”
“The other area that’s big for us is in the transport sector. So a large part of the Fonterra fleet of tankers and trailers are produced by NDA and that’s a very significant part of our business as well.”
Innovation in engineering
When it comes to innovation in the sector it seems mechanical engineering right now is seeing as much change as in technology space.
“There’s actually quite a renaissance going on. You only have to look at where many of these plants are going to be in a decade and a lot of that additional capacity is going to come from automation and robotics and so we’re really excited about that opportunity in the future. That means your capability and your commissary guys working on the shop floors are going to have to adjust to be able to deal with machinery more often rather than just doing everything manually.
“So the challenge has always been with a bespoke project base, within a manufacturing environment, is how you get automation to pay back? But what you’re seeing is the cost of automation coming down while on the flip side the flexibility that automation provides is going up. So we're really hitting a nice sweet spot where the investment in automation is becoming increasingly more affordable and the payback is actually quite quick.”
In the competitive space, NDA’s position varies depending on the market.
“We're the largest player in the New Zealand market; however we've got a lot of competitors operating in different spaces around us. But we're probably the only full service mechanical engineering company focusing specifically on the dairy sector and then within each of the different sub-sectors we have a range of very competent competitors.”
“In the US we've done a lot of analysis of that market and obviously by definition it’s much bigger than New Zealand. Our reading of the competitive space has us sitting at about the third largest producer of shell and tube heat exchangers in the US with less than 10% market share.”
“So it's quite a fragmented market over there because the units that we produce average around 20 tons and therefore transport cost plays a big part in the delivered costs. That’s why there are a lot of regional competitors in the US So we see quite a big opportunity to consolidate some of our position in the US and take some of our automation and our cost structure that we've got in our facilities to maybe broaden that regional network.”
NDA entered the China market in 2006 with the opening of a new plant in Shanghai; which your correspondent attended as part of series of events that were held at the time to coincide with Air New Zealand’s official launch of its new direct service to the city.
However, a recent decision to exit the market has come with a few lessons of its own, according to Eglinton.
“One thing I will say is that it’s a lot easier to enter than to exit. I think NDA entered the market at the front end of the curve and well before other businesses in NZ. Obviously NZ is still looking at China as a big opportunity but we believe we exited at the right time. Things changed for us contextually up there.”
“Our intention was to build a facility up in China that fed into our supply chain and at a lower cost so we could give our clients an Asian cost structure with a New Zealand style quality assurance and confidentiality around IP.”
However, what we found was the cost structure started going up. We were located in Shanghai, which is a more expensive part of China, with costs that were continuing to increase. For example, just before we exited we went to recruit a new financial controller in Shanghai and she had to be bilingual obviously. But the cost of that recruitment was more than it would have cost us to put that same role into Hamilton. So, that cost advantage is changing. Therefore, on an international basis, it wasn't nearly as competitive as we thought.”
“It was never our intention to be based in Shanghai serving local customers to make it work for us economically we would have had to more than double the size of that business. To do that, it would've been five more years’ investment and we'd already been at it six years at that point in time. So, it would have taken ten years in total before we would have seen any return. We decided it was better for us to put that resource into somewhere where we know we would have a tangible path to growth and so hence our decision to exit.”
Back home though, Eglinton has already identified what he believes will be a big opportunity for NDA in the future - water.
“I believe water and irrigation are major challenges for future growth in the dairy sector. If you look at where the investment has occurred it’s been the conversion of land to dairy and that requires irrigation to grow the grass fast enough to support the carrying capacity. However, there are obviously going to be issues around water rights and compliance and that’s going to quite a challenge going forward.”
|Sector:||Heavy mechanical engineering, design & fabrication|
|Founded:||1997 as NDA but originally founded as National Dairy Association in 1894|
|Growth:||10-15% (last 3-5 years)|
|Biggest market:||USA (since 2012)|
|Fastest growing market:||USA|
|International offices:||USA (Alabama & Texas) Australia (Adelaide & Melbourne)|
|Domestic / Export split:||40% : 60%|
|Staff:||600 (NZ based 300)|
|Likely to IPO:||No|
|Recent highlights:||Ranked 8th in the TIN100 (2012), sale of its on-farm stainless vat business to Tru-Test and growth in its U.S. operations|