Since 2020, the New Zealand construction industry has faced a significant plasterboard shortage. This shortage has been driven by multiple factors: manufacturing sites forced to close or reduce production under Covid-19 restrictions; a coincident renovation boom fuelled by New Zealanders being (literally) stuck at home; the Government encouraging residential building to increase housing availability and developers stockpiling plasterboard as news of the shortages spread through the building industry.
These factors contributed to orders across the sector being delayed months. The knock-on effect has been that builders have been unable to complete projects on time, leading to penalties and declarations of bankruptcy within the construction industry, which have ultimately resulted in projects and houses remaining unfinished.
In New Zealand, the locally manufactured plasterboard brand, Gib, owned by Fletcher Building, has approximately 95% market share. Considerable criticism has been directed at Fletcher Building, with claims it is abusing a monopoly position to extract high margins from a beleaguered industry.
However, arguments about whether Fletcher Building’s control of Gib constitutes a monopoly actually miss the real question: how did this situation develop?
The answer to that question is surprisingly simple but has been missed by most industry and political commentators: intangible assets. Intangible assets are non-monetary assets which have no physical substance. They include business assets such as brands, content, data and software. Intangible assets today account for the vast bulk of all company value. They are almost universally the primary source of a company’s competitive advantage and, in extreme cases, the origin of its monopoly power.
Fletcher Building has quite clearly and methodically built up an extremely strong intangible asset portfolio over decades to protect its position in the market. Its intangible assets around Gib include:
- Brand reputation, utilising both registered and unregistered trademarks, including colours associated with Gib products.
- Data related to process, manufacture, product performance and required specifications within industry.
- Regulatory and standards compliance, including Building Research Association of New Zealand (“Branz”) certifications (which are typical contingent on the aforementioned data)
- Building consent forms which specifically denote the Gib trade marked product which are notoriously difficult to amend post-approval.
- Marketing materials and other content so pervasive that the use of Gib has become ubiquitous.
- A network of relationships through retail, wholesale, and distribution channels.
- Multiple patents directed to plasterboards and various attachment means for plasterboard and/or framing systems.
- Registered designs directed to wall cavity battens and associated fasteners.
There are at least eight of the 12 standard categories of intangible assets at work here. Further, these assets work in concert (the whole is greater than the sum of its parts) so Fletcher Building’s overall position is stronger still.
In addition, six of these eight assets do not expire, which means Fletcher Building will continue to enjoy its position for an extended period. Finally several of these intangible assets (such as brand reputation, relationships and networks and data) tend to strengthen over time, which will ensure Fletcher Building’s moat around its Gib products will tend to widen rather than narrow.
The result of this extremely deep and wide moat (or monopoly as critics prefer) is that Fletcher Building can extract high margins from its business model – such as its 41% net profit increase in the December 2021 half year from $121 million to $171m. It also means that even extremely well-resourced competitors from offshore struggle to compete with Fletcher Building in the New Zealand market.
Competitors, industry participants and politicians alike might not like the situation, but they need to face three important facts. First, this was clearly not an accident – in fact, this situation evolved from a deliberate (and commercially astute) strategy. Second, it did not happen quickly and nor did it happen in secret – Fletcher Building has been building its intangible asset position over decades and most of its activity is publicly available if you knew where to look. Third, it reveals that successive governments and the industry at large were behind the eight-ball in allowing a major player to (quite legally) build an intangible asset position so dominant it is effectively an (alleged) monopoly.
Again, while you or I might not like Fletcher Building’s behaviour the reality is that it is doing precisely what you would expect an astute, commercially motivated player to do: it has built an incredibly strong, even text book, intangible asset position. This is reflected in the fact that despite looking like a physical asset based company intangible assets account for roughly 51% of Fletcher Building’s value.
For context, if the materials do not hold a compliance certification, such from Branz, there are crippling flow-on effects. As described by Woods “we will end up in a situation where buildings do not get issued with code of compliance. The flow-on effects of that is they will not be insured, banks will not lend on them, and the buildings will not be able to be sold.”
While it is no silver bullet, if the Government wishes to solve the “Gib crisis” reform of the building code should be the first place it should look. However, it is critical to acknowledge two things. First, even if the Gib regulatory moat was destroyed entirely it still has seven other intangible assets on which it can rely. Secondly, Fletcher Building has acquired its intangible asset position in an entirely legal fashion and there are serious implications when governments attack companies because they are too successful and it is politically favourable to do so.
The core lesson here is this: Fletcher Building is earning superior margins because it built an extremely strong constellation of intangible assets over decades. Regulators and competitors should take note: even in an extremely tangible industry the winning strategy is always all about your intangibles.
As first published on Stuff.co.nz.
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