Paul Wallbank – Brilliant Communications

Category: economy

Bringing manufacturing home
In the 1980s General Electric, like most US companies, sent most of its appliance manufacturing offshore.

Now its coming home.

The Atlantic Magazine looks at how General Electric is resuscitating manufacturing at Kentucky’s Appliance Park as management finds US workers are more skilled and productive than their equivalents in Mexico or China.

An important part of the article is how critcal supply chains are; manufacturing hubs rely upon having a community of skilled service providers and suppliers around the factories while being close to customers improves and simplifies logistics.

In the latter case, it now take hours or days to deliver products to customers’ stores or warehouses rather than the five weeks it takes from China.

The cost of those goods is lower too, the Kansas made GeoSpring heater sells for $1299 while the Chinese product sells for $1599.

What is most notable though is how designers and managers now have a better understanding of the manufacturing process; where under the oustourced model the difficulties in assembly were none of their business, now they are far more deeper and directly involved.

This really goes to the core of what an organisation does – in the 1980s it was fashionable to talk of the “virtual corportation” where everything the business did was outsourced except for the managers who were employed solely to pocket their bonuses.

In the 1990s and early 2000s that “virtual corporation” became a reality as manufacturing and customer support were offshored and logistics was outsourced.

One of the best examples was customer support where looking after the needs of those who buy the company’s products were secondary to the need to cut costs.

This focus on cost cutting over customer service hurt Dell badly in the 2000s and it continues to hurt many organisations – particularly telcos and banks – today.

The weakness in the “virtual corporation” model was the company ended up adding little more value than the brand name and eventually those offshored manufacturers and call centres took control of the business’ goodwill and intellectual property.

Eventually the hidden costs of offshoring became too obvious for even the most craven, KPI driven manager to ignore and suddenly manufacturing in the Western world became competitive again.

Sadly, the fixation on dirt cheap labour has damaged many industries beyond the point where they can be salvaged with too many skilled workers lost and the ecosystem of capable suppliers destroyed. These are costs where tomorrow’s managers will rue the short sighted actions of yesterday’s corporate leaders.

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December 1, 2012
Disrupting the disrupters
Two days ago, iconic venture capital investor Fred Wilson, wrote about the changing nature of the tech industry’s VC investments.

Fred puts the changes down to three factors; maturing markets where big players increasingly dominate, the move to mobile which Cristina Cordova examines in more detail and the shift in focus from the consumer market to the enterprise sector.

The last factor bears more examination as consumer and enterprise are very different and there’s no guarantee that businesses built around thousands of people downloading apps or accessing websites can pivot into selling into corporations and government agencies.

Probably the biggest problem is the consumer or small business freemium model doesn’t cut it in the enterprises who are prepared to pay big sums for highly reliable and secure services.

Similarly the enterprise model of fat sales commissions paid for by big implementation costs and expensive support contracts doesn’t quite fly either for these start up business. There’s also a good argument that high margin enterprise model is doomed anyway as cloud services displace costly in-house installations.

In the transition from consumer to enterprise is difficult and most companies have struggled to make the jump, even Google Docs has been a hard sell into the corporate sector.

At the enterprise end, cloud services are cutting margins as IBM and Oracle are finding. Both companies are moving across to cloud products and now a lot of salespeople and consultants in those organisations are looking at a substantial drop in their standards of living.

More importantly for the startup and VC communities, the “greater fool” model doesn’t work in the enterprise space. Hyping a business which has barely made a cent in revenue but does have a million users is very different to building a stable corporate platform.

It may well be the move to the enterprise by Silicon Valley is because the consumer model has run out of “greater fools” who’ll buy overhyped photo sharing apps or social media platforms of dubious value.

This change in investment behaviour also has lessons for governments trying to copy Silicon Valley. The puck moves fast in the investment community while governments, by definition, are slow.

By the time governments have setup their programs, the markets have moved on and many of the hot technologies of two years prior are now old hat. This is exactly what we’re seeing in the apps world.

We often hear about technology causing disruption, often though we forget that those disruptive technologies can be ephemeral as they are disrupted themselves.

As these industries evolve, we’ll see how well the disrupters deal with being disrupted.

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November 27, 2012
Newly normal in the English Midlands
On their metal, a story from BBC Radio’s In Business program looked at how the English Midlands is dealing with the toughest economic conditions the beleaguered region has suffered for decades.

Once the centre of the industrial revolution, The Midlands have had a tough time of the last fifty years as the region caught the brunt of Britain’s de-industrialisation and the loss of thousands of engineering jobs.

Today, the surviving engineering companies are struggling to find new markets as orders from Europe dry up and many Midlands workers find they are confronting the ‘New Normal’.

The ‘New Normal’ for British industry is described by Mark Smith, Regional Chairman, Price Waterhouse Coopers Birmingham who points out that UK industries have to sell to the fast growing economies.

Interestingly this is similar, but very different in practice, to the Australian belief – where the Asian Century report sees Australia continuing being a price-taking quarry for Asia rather than selling much of real value – the Brits see some virtue in adding value to what they sell to Asia’s growing economies.

The British experience though shows the realities of the ‘New Normal’ for Western economies – the cafe owner featured in story now offers no dish over £3 and the idea of overpriced five quid tapas are long gone. The customers can’t afford it.

Part of this is because of the casualisation of the workforce as people find salaried jobs are no longer available and become freelancers or self-employed. One could argue this is the prime reason why unemployment hasn’t soared in the UK and US since the global financial crisis.

That ‘new normal’ features the precariat – the modern army of informal white and blue collar workers who have more in common with their grandparents who worked for day wages at the docks and factories in the 1930s than their parents who had safe, stable jobs through the 1950s and 60s.

For the precariat, the idea of sick leave, paid holidays or a stable career started to vanish after the 1970s oil shock and accelerated in the 1990s. The new normal is the old normal for them, there just happens to be more of them after the 2008 crash.

With a workforce increasingly working for casual wages without security of income, the 1980s consumerist business model built around ever increasing consumption starts to look damaged.

The same too applies to the banking industry which grew fat on providing the credit that unpinned the late 20th Century consumer binge.

When the 2008 financial crisis signalled the end of the 20th Century credit binge, the banks were caught out. Which is why governments had to step in to help the financial system rebuild its reserves.

The effects of that reserve building also affected businesses as bank credit dried up. Early in the BBC program Stuart Fell, the Chairman of Birmingham’s Metal Assemblies Ltd described how his bank decided to cut his line of credit from £800,000 to £300,000 which forced the management to find half a million pounds in a hurry.

That experience has been repeated across the world as banks have used their government support and easy money policies to recapitalise their damaged accounts rather than lend money to entrepreneurial customers to build businesses.

Businesses are now looking at other sources to find capital from organisations like the Black Country Reinvestment Society which is profiled in the story that raises money from local investors to provide small businesses with working capital.

Communities helping themselves and each other is the real ‘New Normal’ – waiting for the banks to lend money or hoping that surplus obsessed governments will save businesses or provide adequate safety will only end in disappointment as the real austerity of our era starts to be felt.

The New Normal is declining income for most people in the Western world and we need to think of how we can help our neighbours as most of us can be sure we’re going to need their help.

Just as the English Midlands lead the world into the industrial revolution, it may be that the region is giving us a view of what much of the Western world will be like for the next fifty years.

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November 24, 2012
Desperate Ken and market realities
Ken Slamet has a problem, his in-laws are trying to sell the family house and no-one will give them the price they want.

The house at 228 Warrimoo Ave has been on the market through an agent for more than 100 days, pulling in ridiculously low offers, Mr Slamet said.

Depending on the deposit, Mr Slamet is seeking between $1.5 million and $1.6 million for the house his wife grew up in.

One would argue that those “ridiculously low offers” are actually Mr Market giving Ken and his in-laws a slap of reality. They are simply asking for too much money.

St Ives, a suburb on Sydney’s Upper North Shore, is going through demographic change. In 1960s and 70s St Ives was the suburb for successful stock brokers and bankers, however in the 1980s and 90s that demographic decided they wanted to live closer to the city and Harbour and suburbs like Mosman and Clontarf became their areas of choice.

For Ken’s in-laws and their neighbours, this is bad news as few other people can afford 1970s mansions on large blocks within 30km of Sydney. Those who do manage to sell often find the buyers are developers who sub-divide to build townhouses or apartment blocks, madness in a congested, car-dependent suburb with poor public transport links.

Adam Smith’s invisible hand of the market is giving those holding properties that were attractive to stockbrokers in 1972 a nasty slap over the head in 2012.

Ken though has a solution for his problem – he’s offering a rent to buy scheme at a mere snip of $2297 per week. An amount 70% higher than the average Sydneysider’s gross income and a whopping four and half times the city’s average rent of $500.

Good luck with that.

The real problem is that Ken’s in-laws are stuck with expectations higher than the market reality. Like many of us in the Western world, they believe their assets are worth more than they really are.

As the global economy deleverages there will be many more people like Ken’s family. For many the transition to a less wealthy lifestyle is going to be tough.

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November 13, 2012
Australia in the Asian Century – Chapter 9: Deeper and broader relationships
This post is one of the series of articles on the Australia in the Asian Century report.

Australia in the Asian Century’s final chapter looks at how Australia can deepen relationships with its Asian neighbours. The chapter is full of fine ideas which don’t quite match the reality of government policies and spending.

Early in the chapter the white paper proposes increasing the number of Australian diplomats in Asia along with opening a new embassy in Ulan Baator, a Jakarta based ambassador to ASEAN and consulates in Shenyang , Phuket and eastern Indonesia.

Fine words, however Australia’s diplomatic corps has been shrinking for the last twenty years so staffing these facilities will require a withdrawal from other regions. The white paper doesn’t identify which countries Australia’s representation would be cut from and the consequences of that.

More importantly, it doesn’t identify how Foreign Affairs and Trade staff will be skilled up to man these facilities, instead we get another worthy ambition.
National objective 22. Australia will have the necessary capabilities to promote Australian interests and maintain Australia’s influence.
- Australia’s diplomatic network will have a larger footprint across Asia.
Again, one would surely expect that Australia would already have the necessary capabilities to promote its national interest and maintain influence. Is the white paper suggesting we don’t?

Which leads us to the next national objective;

National objective 23. Australia will have stronger and more comprehensive relationships with countries across the region, especially with key regional nations—China, India, Indonesia, Japan and South Korea.

If we accept the assumption which underlies the entire paper, that Asia is going to continue to grow both economically and in influence then this will happen regardless of what governments do. It’s a meaningless and silly statement which once again ignores most of Asia and simplifies the dynamics.

The Australia Network

One of the great wastes of the Howard years was the dismembering of Radio Australia which was a cheap and effective way of projecting ‘soft power’ across the region. I personally came across this as a backpacker in China where many manual workers in the hard seat carriages practiced their Australian accented English that they’d learned on Radio Australia’s programs.

This was shut down by one of the spiteful, stupid and poorly thought out decisions that were the hallmark of the Howard government.

Replacing this was a new Australia network that replaced the previous awful overseas television service which had been a niche product on Asian cable TV channels – I had it on my Thai cable subscription when I lived in Bangkok. It was rarely watched.

The Australia Network hasn’t been a great success and that is largely due to the funding – the 2011-21 contract was costed at $221 million in the budget papers.

A break out box in the white paper boasts about the Australia Channel and its “mandate to encourage awareness of Australia, promote cross-cultural communication and build regional partnerships.”

Listed is the funding for some other services – Al Jazeera, $359 million in 2009; CCTV, $280 million in 2009 and NHK World/Radio, $226 million in 2008.

With the Australia Network receiving less than a tenth of this funding, it’s no surprise the station looks amateurish and irrelevant. Once again we see the difference between government words and government deeds.

Which brings us to the final two national objectives;

National objective 24. Australia will have deeper and broader people to people links with Asian nations, across the entire community.

National objective 25. Australia will have stronger, deeper and broader cultural links with Asian nations.

Again these are more motherhood statements and barely worth considering. The section itself skates over some of Australia’s most important assets – the cultural diversity and immigrant communities.

That the final chapter spends just a few pages on this aspect probably sums up the entire project – simple, full of motherhood statements and missing the critical strengths and threats to Australia’s, and Asia’s growth.

Overall the paper is a disappointment that tells us little we didn’t already know while stating some big ambitions which successive governments have shown they aren’t capable of delivering.

The message for those building Australia’s 21st Century links with Asia is not to wait for government but to get on and do it.

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November 8, 2012