

MACQUARIE

Innovation is not an end in itself-

it has the purpose of creating sustainable

wealth and rewarding jobs. To achieve

these requires creation of globally

competitive goods and services which

satisfy an identified market need in a

way that customers appreciate and value.

If that product or service is able to

incorporate new knowledge or technology,

then there

is an even greater chance of

sustainable market success.

Identifying market needs and

opportunities, managing the integrated

product development process, and

optimising their manufacture and

distribution are professional skills quite

distinct from scientific research. They are

all too poorly recognised, represented and

supported in Australia.

These are the skills of the industrial

designer, product engineer and production

engineer rather than the scientist or   researcher. Without them, Australia will

not reap the rewards of innovation.

Without more companies embracing a

global perspective along with the

confidence and capacity to access the right

skills and create leading products,

Australia’s economy will continue to be

imbalanced and the next generation will

be denied the quality-jobs that would

OtherwiseJow.

It is therefore critical that Australia? few

exemplar companies are held up as role

models and partners in our common

national cause. Vision Systems has much

to teach and inspire us all.

Professor Trevor Cole

Executive Director

The Warren Centre-fir Advanced Engineering

DrJames (Jim) Fox is the Managing

Director of publicly listed Vision Systems

Limited (VSL) which incorporated the

Invetech Group founded by Dr Fox in

1987. He was the Marraging Director   (zf

PA Technology in South East Asia prior   to-forming Lnvetech.

VSL is the leading supplier   of contract

RfiD and technology commercialisation

services to Manufacturing Lndustry and

manufactures and exports high value

medical instruments, video surveillance

products and high sensitivity smoke

detection products, employs over 650   sta& has revenues running at the rate of

$150 million per annum and operates

out of ofices in Boston, London,

Melbourne, Adelaide, Shanghai,

Santiago and Kuala Lumpur. More than

85% of VSL’s revenues are now earned

in markets outside ofAustralia.

UnderJim’s leadership, VSL has grown

from sales ofA$lO million (A$2m in

exports) in 1993 to a running rate of

annual sales ofA$lSO million and

exports ofA$lZO million. The company

has a historic annual growth rate

exceeding 30%. Market capitalisation of

VSL has grown to close to $300 million

and the company is now rated in the

ASX200.

Jim has particular experience in

establishing and building international,   technology based businesses. His

involvement has covered raising-finance

through to negotiating marketing

agreements and acquisitions. In this

capacity, Jim spends-four months per

year overseas.

Jim is also a non-executive Director of

Futuris Corporation Limited and

Technology Partnership Group plc.

Futuris is a $3 billion Australian

manufacturer (automotive air

conditioning) and rural services provider

(Elders Ltd). Technology Partnership

operates out of Cambridge (UK) and

mixes technology based services to   customers in Europe,japan and the

USA with manufactured products based

on drug discovery automation, scientif?c

instruments and ink jet printer

technology. Vision Systems Limited has

a minority shareholding in Technology

Partnership arising fromjim’s personal

involvement in the startup of

the company.

P

I

WHY IS IT SO DIFFICULT TO DEVELOP GREAT IDEAS AND INVENTIONS IN AUSTRALIA:AUSTRALIA(NS) CAN MAKE IT Introduction It is a great honour to be asked to give the 2002 Warren Centre Innovation lecture. The Warren Centre makes a significant contribution to the vitally important engineering and technology sector in our country and I am delighted to be asked to support the activities of the Centre in this way. Australians have an international reputation for creativity across a wide spectrum from entertainment and the arts to science. Yet our country’s track record for turning our scientific and engineering creative into a vibrant, growing and wealth creating industrial base participating in international trade of knowledge intensive products and services has been abysmal with very few exceptions. The first and most critical missing link in the capture and conversion of this evident creative ability is a competent and sustainable indus~4as;ed research and development activity, given that while there can always be better and more science, we are not even capitalising fully on what we as a community are presently investing in public science. Without such industry based activity, there is little hope that public science and private invention can be routinely commercialised in this country. With a tiny domestic market and vast distances to major international markets, only companies with a vision to target customers outside Australia as their number one priority will ever have the scale to invest in the required R&D and the international marketing costs that go with the territory. Very few Australian companies invest anything like their international counterparts on R&D and very few have a mind set that the world is their market. While recent initiatives from the Federal Government have positive components, it is still clearly falling short in stimulating vitally necessary, industry-based R&D. My particular corner of all this is being part of Vision Systems which is a business that actually takes Australian science and technology and creates products and R&D services that are sold all over the world. Australia does have a few wonderful examples of what we should be striving for, such as Cochlear with its hearing implants and ResMed with its sleep apnoea products. They exist because there was leadership and a risk taker at the beginning. People. Australia’s critical asset, even in commercialising science, is people. Apart from our natural resources, the only competitive advantages we have are pockets of world competitive science skills and one of the lowest cost industrial R&D capabilities in the world.   Very few Australian

companies Invest

anythrng like thefr

/nternational

coonte/;oarts on

R&D and very few

have a rrunci set that

rhe world is their

market.

Combine this with the necessary ingredients of people and leadership, available

venture and seed capital, appropriate economic and taxation settings by   Government and success will follow.

Vision Systems Background   Firstly, let me take you through thevision Systems story by way of background to   at least declare my bias!

Vision Systems, as it exists today, was founded in 1987 when, with $5m of venture   capital, we started Invetech. Invetech is a contract K&D company and as a first   step, we set the objective of developing a world class K&D business (selling services   to other companies) while at the same time using the resource to springboard   ourselves into high value new product opportunities aimed at world markets. We   were inspired to have a go at a start up by the availability of venture capital, and a   strongly supportive R&D and incentive policy from the then Labor Government.   This Government policy set an environment where the industrial landscape was   waking up to the need for R&D and financiers started looking outside traditional   areas of investment. So we had Government policy actively on our side and we had

finance availability. To make it happen though we again needed people with drive   and the engineering skills.

It was a high risk venture given that it was a start up, but it was aimed at capitalising   on Australia’s low cost R&D and the indigenous science base. So at startup we   wrote down a number of rules which would keep us on this track:

1. Target at least 75% of sales from USA, Europe and North Asia

Given that our competitive edge was to be R&D, then clearly our products

were going to have to be innovation intensive. This meant high R&D   spends on each product. Given that Australia represents only 2% of world’s   GDP, it is not possible to get an acceptable return on a market around the   same size as New York. You just have to decide that you will sell in the   major international markets and not focus on Australia. Market research is   therefore also done in the USA, Europe and Asia as you define the products

that will be developed.

2. Base the business on both the manufacture and distribution of high

value (X$1,000) and high margin products (>50%) and contract

R&D services.

High R&D spends need high margins to fund them. And if you want to   compete in distant markets you must airfreight so high S/m products are   also essential.

Apar? from our   nartiral resources.

the only compemve

advantages we have

are pockets of world

compet#we science

ski/s and one of

he lowest cesf

:ndustr!al R&D

capab!Mies !I?

the worid

3. Operate the company’s R&D resource (Invetech) as a stand alone

business serving both external customers as well as being the

innovation engine for VSL.

We have achieved “l+ 1~3” out of this strategy by getting a sharing of

overheads, world scale facilities on which to draw our new products,   technology exposure and our staff have the stimulation of a wide variety   of projects.

4. Revenue mix by geography and market sector.

Our core capability is our engineering capability and technology base, ohen

common to a wide variety of products. What is always different is the route   to market. For contract R&D this is not an issue for us. Diversity is a   hedge to start up activities and we promote it.

5. Invest lo%+ of sales in new product R&D.

If the key competitive edge is R&D and the extent of innovation is in the

product, exercise it. I would also point out that we spend 20% of every sales   dollar on of&hore sales, marketing and technical support people and facilities.   This is often overlooked at the planning stages of small companies you   actually need to invest the $‘s before you generate the sales. Route to market   is actually the highest risk component of the process, higher than targeted   R&D. In fact, this yearVSL will spend $30m on R&D. This will take us   into the top 10 R&D spenders in the country which shows you what a   barren landscape

industry-based R&D is.

6. Create an environment where the top quartile of available people

seek to work.

We have been fortunate to achieve this and we have been conscious of both

individual rewards, peer group interaction and the environment where   people work.

7. Invest in intellectual property and sales and marketing and be a

virtual manufacturer.

We dedicate our capital to the creation of IP and to sales and marketing and

we outsource the fabrication of all components and sub-assemblies. We do   final assembly and test in-house only, thereby retaining the ultimate quality   check and process intellectual property in-house.

We have achieved   “li1=3” out of th/s

strategy by getting a

sharing of overheads,

world state faalit~es

on which to draw our

new products,

technology exposure

and our staff have the

st/mu/at/on of a wde

variety of projects

We have stuck by these drivers and seen the pay-off. It needs to be remembered

that all of this is in the context of being a long way from key decision markets and   market dynamics. A competent “on the ground team in overseas locations” is   therefore critical to achieving success from such a remote supply and R&D base.

Out of our contract R&D business, Invetech, we have developed two major

divisions. One isvision Fire and Security where we create and sell sophisticated   and high value laser based fire detection and video surveillance systems. Over 96%   of what we make, we sell outside the country.

The other division isvision BioSystems where we create and sell high value,   complex medical instruments used in the detection of cancer and blood disorders.   As you can hopefully sense from the product pictures, our products are high value,   high margin and high $‘s/m’. And while much of the technology is generated by   our 350 development staff, significant science has also been licensed in from public   sector research groups and commercialised, including CSIRO, DSTO and Prince   Henry’s Hospital to name a few.

Since 1993 our sales have grown at over 30% per annum and well over 80% of   our products and services are sold outside Australia. Again very few Australian   companies have a sales history like this based on engineering development.   ResMed and Co&Lear are even more spectacular examples and just look at the   wealth that has been created in Australia for all of the stakeholders in these   businesses. It can be done!

Measuring Wealth Creation

As a public company, Vision Systems is subject to regular scrutiny, in fact on at least   a six monthly basis. Yet most decisions and investments we make are on a 3-5 year   and sometimes 10 year basis. Holding the line on our strategy and maintaining six   monthly delivery is a mainstream management task, and is a reason why going   public too early for startups can be a destructive step.

One of the most visible measures of a company’s performance is share price. Just   before we backdoor listed Invetech throughVSL, in 1993, the share price was as   low as 1 cent, and hovered around 14 cents for a number of years. The price   jumped when we arrived, but it took 8 years for it to accelerate by another 300%.

Over almost a decade, the share price has risen by roughly a factor of 20, but it has   taken a decade. As an investor, if you did not hang around for the decade, you   missed out on the key returns. This is clearly a different perspective to six monthly   analysis and reporting.

Two other wealth creation measures involve market capitalisation and dividends.   Ordinary dividends have grown by a factor of 5 over the last 9 years and market   capitalisation has grown from about $4m in 1992 to close to $300m presently

I put these slides up not to blow our trumpet but to reinforce the examples of   ResMed and Cochlear which show that it is possible to create significant wealth,

ADPRP Amux   Advanced Multiplexer

jobs and Australian economic benefit out ofAustralian engineering. But it takes 10

years plus per venture.

Take the $125m per year (so far) that VSL exports, add in Cochlear and ResMed,   add only another 250 companies like us and we, Australia, go into trade surplus.   Another astonishingly small number yet apparently a very difficult one for Australia   to achieve.

So what you ask is the take on all this. Firstly, let me go back a couple of steps,

Australia’s History of Invention

It may surprise many of us to know that a century ago, Australia’s standard of living   was close to the highest in the world. As Historian Geofiey Blainey observes, the   prosperity enjoyed by a typical family in the 1890’s was not just because the   continent was a vast half-tapped resource bowl, we prospered because we applied   the latest machines and work skills enthusiastically. By 1891, Blainey notes that a   network of railways penetrated the inland: in relation to population,Australia had   5-6 times the railway mileage of England, France and Germany. In 1891, we made   more effective use of the latest transport technology than we do comparatively   today. We made steam trains on a large scale and we even supplied one ofJapan’s   first railway steam locos.

In 1891, Melbourne had taller office buildings than any city in Europe. In 1891,   Australian farms at harvest time, were close to the most mechanised in the world   with much of the machinery being ofAustralian design. Some of the world’s   deepest mines and biggest livestock farms were (and are) in Australia.

With our mining background, we were at the forefront of explosives development.   Australia took the world from blasting powder and unstable nitroglycerine to   dynamite and gelignite. It took a scientist working in Australia, Alfred Nobel, to   tame the Italian invention, nitroglycerine.

At the outbreak of the first world war, we were among the first to chemically   decipher aspirin. Australia was amongst the first to put aspirin, penicillin and   insulin into full scale production. Having made a great start to pharmaceuticals   internationally, we failed to establish world scale R&D and market presence in   later decades.

Australia broke through in the 50’s and 60’s with major advances in scientific   instruments (atomic absorption spectrometers) in which we still are a significant   world player in specific sectors.

Add only anorher

250 COJJJp3JK?S hke

us c3/Jd we,

Au.srra!ia, go into

trade surplus.

Automated Bloodfilm

maker and stainer

Australia was also

. the first to design and operate “mechanical” refrigeration (1851) and see   the opportunity for frozen, long-life shipments (Harrison - Geelong)

l the first to develop spun concrete pipes (Humes)   . the third country to launch a satellite from its own soil   . a leader in metals technologies

l a leader in photocopier technology in the 50’s   . the inventor of the thrust bearing without which cars, trucks, aircraft etc   cannot operate   . the inventors of the black box flight recorder   . . . and the list goes on.

So we have always had the inventive capacity and we still have it, yet we have built   very few world scale science based industries.

A Nation of Punters

How then can a country which was the richest in the world, a leader in resource-   based and key industrial technologies, with 6% of the world’s identified natural   resources and only 0.3% of the world’s population, be scratching to hold on to   wealth per capita levels and participate in a meaningful way in knowledge-intensive   products and services across world trade ? Obviously, the world has moved on and   the products and services that are in demand are very different to what they were   even a decade ago. Yet, while we are now strong appliers of the latest technology,   we are weak in getting into the creation of businesses in these new areas.

In a nutshell, I believe that we have an underlying culture of asset speculation and   punting on “El-Derado”, not one of systematically investing in knowledge based   industries which can generate customers across the world, skilled employment and   expert revenue.

I strongly suspect that many Company Boards are more comfortable in authorising   multi-million dollar advertising programs or outback drilling programs rather than   targeted, market driven R&D aimed at new products.

Our international debt is running up at $2 billion per month and now stands at   over $360b. Our so-called business “entrepreneurs”, lauded by the press in the 80’s   and 90’s were asset shufflers and strippers, not builders. No mention of those   people building real businesses based on real science, selling real products to   customers all over the world. So every month we mortgage the farm to buy   groceries - not a great long term strategy.   Remember every working day, somebody some where around the world has to   make a decision to invest f 1OOm in Australia to plug the deficit.

We have always

had rhe mvenWe

capaoty and we srill

have it, yet Lve have

builr very few world

scale science based

mdosfries

Does Our Government Help?

As fLrther background to the state of the Nation, it is evident that Australia’s   Business Expenditure on R&D (BERD) has been in decline since the Federal   Government cut the Tax Concession for R&D horn 150% to 125% four years ago.   This, combined with the welcomed cut in corporate tax rate to 30% (down from   46%) means that the value of the incentive has fallen Tom 26 cents in the R&D   dollar to 7 cents. There is a feeling that, for tax based incentives to work and when   weighed against the cost of compliance and reporting, the value of the incentive

needs to be around 15 cents in the R&D dollar.

On top of this is the negative feeling towards tax based incentives being generated   by the AustralianTax Office. At the outset, let me declare that much of the growth   of VSL in the early years was accelerated by Government approved R&D   syndicates. These syndicates were all formally reviewed and registered by the

Federal Industry Department of the day and had formal advance rulings from the   AT0 based on full disclosure of the investors, the R&D budget and the finance   structure in total. As a company who has sold and exported over $200m of R&D   syndicate derived products, I am amazed by the ATO’s retrospective attack on these   structures. I have no problem with attacks on those who did not undertake   bonafide R&D, but to go back and attack the few businesses that responded to the   then Government’s policy directions is deplorable.

Aside horn the specific issue of R&D Syndication, such a reversal goes to the core   of trust that must exist between industry and Government if key industry initiatives   and critical “seachange” developments are to be effective. It is simply not good   enough for Government to say that it cannot blend an arm of government such as   the AT0 into published industry development policies whether the bureaucrats like   them or not.

Industry Doesn’t Do Enough R&D

For decades,AustraliaS spending on industry based R&D has been way down the   international league table. What is clear is that our spend in the Government/   Higher Education sector R&D is at least competitive (not so for science

engineering based undergraduate funding) and indeed we run a world class basic   and applied science outfit. What is equally clear is that Business Expenditure on   R&D (BERD) is very low by world standards. Indeed out of a list of the top 24   OECD countries we ranked 17th on the BERD as a % of GDP list. Our   BERD/GDP was 0.80% (now 0.64%), the average was 1.6% and Sweden topped

the list at 2.7% or more than three times Australia’s spend.

Remember every   working day,

somebody some

where around ihe

world has ro make a

decmon to invest

$100m In

A~is;ral~a

to pkg the def/ot.

Fewer than 20 companies in Australia in 1998 spent more than 5% of their sales on

R&D! Around 3000 companies registered for the 125% tax concession in 1998 -

an astonishingly low number. It is

sobering to compare our total K&D   spend as a nation to major industrial   companies where companies such as   Siemens, IBM, Fujitsu and DuPont

United States   GN7lhW

Canada

United Kinpdm

Swedmn

Finlmd

OECO

New Zsalmd

AUSTRALIA

Ireland

Spain)riJ )

0 10 20 30 40

spend more or about the same as Australia does as a nation. For me this is not a

negative, just a reminder of the way the rest of the world thinks and competes.

Poor commercialisation of our science base in Australia is not, in my view, the result   of “un-commercial” science activities. Basic science, in the time frame of public   company reporting, is by definition pre-commercial. Beating up on those agencies   that are world class basic science operations to get “commercial” as a solution is a

nonsense. When Alexander Graham Bell invented the first telephone, it was a great   break through, but what was the first phone worth? Not much - who are you   going to call? As the network of operations grows, then the last phone of millions   is very valuable. So in an Australian context, who are the scientists going to call?   Without a healthy, world scale and diverse industrial K&D base which sells goods   and services on the international market as a primary mission - there is nobody to   answer. This in my view is the barrier to developing Australia’s “great ideas”.

Not Venture Capital, not the ASX, just too few in industry showing the way.

I would also observe that, out of close to $4b in Government outlays in science and   technology in the last budget, only 17% was aimed directly at industry where we   have the major problem. The latest innovation package from the Federal   Government is a help, but still misses this critical imbalance.

We Must Develop Our Intellectual Capital

Could I also flag another long term issue that impacts on all of this. I was surprised   to see an international comparison of education levels given that I had always   promoted the thought... well at least we have a strong education base to start from.   Admittedly old data from 1996, but it shows that Australia ranked 19th out of 24

countries on the basis of the percentage of the population aged between 25 - 64   with an education level of higher secondary or above. We may not be as well an   educated country as we think. You can only speculate what the relative numbers   for science based education might look like.

And Make Australia an Attractive Investment Destination

Another measure of our place in the world is the extent to which capital (foreign   direct investment) providers outside Australia are willing to invest here. Global   businesses link capital, technology sourcing and production seemlessly around the   world, moving from place to place in response to output per dollar invested.

International Superannuation funds and banks are also constantly on the look out   for preferred investment locations.

50 60 70 80

University-level   education   ‘$4 Non-university   tertiary education

m Upper secondary   education

hernational   Comparison of   Education Levels,   (1996)

Regrettably, Australia ranks way down the list. It is just another “barrier to entry”

for Australian business (a “market failure” by any measure) that should push   Government and Industry closer together in overcoming our distance &om the   “main game” and our lack of scale.

The Way Forward   My proposition is that it is entirely within our reach to capture, develop and grow   international, science based businesses in Australia. First, it is all about people -   leadership, risk taking, celebration of success, support for the failures. People build   businesses and people trade - not companies, not governments.

Yet government provide the environment for structural change and the basic   elements of our competitive base and they can help shift attitudes and the rate at   which investment occurs. When the industrial environment is right,   commercialisation of science occurs systematically.

You only have to look at the remarkable story of Ireland where a 15 year, bi-   partisan approach to industry policy to completely overhaul its ailing economy has   led to massive investment by major corporations, trade surpluses, employment   growth and increasing per capita community wealth. The industries targeted were   pharmaceuticals, electronics and sofiware development.

This agressive interventionist play aided in the turnaround of Ireland’s debt resulting   in wealth creation. The reality is that Australia is not far away from a flat earth   approach to industry policy. Economic rationalists of course cry foul at any kind of   investment encouragement and would hold New Zealand up as a model of the

“dry” approach. In reality, the contrary economic progress of New Zealand to   Ireland speaks for itself.

So governments can made a difference, but only if there are people willing to   capitalise on whatever government makes available. Having said all of that, there is a   tendency to focus too much on Government and on the science end of the process.   Without “receptors” in industry, commercialisation of science to the benefit of the   Australian economy falls back to high risk and isolated start ups where those that   get through the normal rates of attrition take 10 years plus to be up and going.

And at the end of the day, a vibrant ecorromy is not driven by the science base   alone. As Joseph Shaw (CEO Ambri) noted:

l USA did not invent the jet engine but it has Boeing

l USA did not discover the DNA sequence, but it is the world’s commercial   biotechnology focus

l USA did not discover antibiotics, but it now has major healthcare companies

Pulling all d this to@hrr

l USA did not invent the computer, but

it is the dominant world supplier of   computer software and hardware

It was the drive of a number of individuals   in a sympathetic environment that sparked   the start of these enterprises.

I mentioned Cochlear as an example to   also

draw fi-om earlier. Cochlear Ltd is the world

leader in hearing implant products. Based   on science conceived in the 1960’s at the   University of Melbourne, it took until 1982   until the first implant was fitted. Nucleus   Limited, founded by Paul Trainor, won the   commercialisation tender in 1979. Today,   Cod-dear is a $2 billion company which   dominates its market sector. Catherine

Livingstone, the previous CEO of Cochlear   and a previous Warren Centre “lecturer”,   nominates some of the success factors as:

l Nucleus Ltd umbrella at the   commercialisation stage   (Nucleus of course needed a leader and   entrepreneur to exist in the first place   - and Cochlear was a new division, not

a completely isolated start up)

l Global perspective

l First mover advantage

l Collaborative research around   the world

l costs in A$, revenues in US$,   Euro,Yen etc.

Do you see the common thread   yet?

So in my view, the extent of industry-based,

internationally targeted R&D is a key

driver of commercial success.

.

.

Accelerate industry-based R&D-a modified R&0 tax

concession which rewards the high R&D performers for their

total A and D spend as a % of sales and is revenue neutral to

the Government by reducing the deduction rates for low R and

D spenders -this is straight forward and will work.

Establish more consistent and long term policies on industry,

science and R and Il. Constant rule changes do not lead to

long term industry responses. A more consistent approach

between the AT0 and the Industry Department is also

essential; for the initiatives to be trusted by users. In an ideal

world we would look for a bi-partisan approach to this policy

area. However. history shows that “bi-partisan” only seems to

come about in a crisis. So we will have to wait!

Target science education programs at the schools and

encourage kids into science and engineering.

Allow scientists to directly and personally financially benefit

from the commercialisation of their work by way of a share of

royalties or equity in the venture.

Set up flexible employment conditions to allow scientists to be

seconded into industry

and start ups with the guarantee of a

return to their original posts.

Encourage all foms of public sector commercialisation -not

just start ups/spin offs.

Encourage industry-basedsmall business accelerators (too

many are university or real-estate based]

Establish a business basics program for scientists - run them

in summer as short courses at business schools.

Introduce engineering and science cadetships for industry.

Eliminate or substantially reduce HECS fees on science and

engineering degrees.

As part of a great team having a real go at this international game, clearly there

are enough company examples to show that:

Australia(ns) can make it... we just need a few more to come and join the party.



