Paul Wallbank – Brilliant Communications

Tag: Australia

Australia’s grapes of wrath
In a great post, The Wine Rules looks at what ails the Australian wine industry after the news of Cassella Wine’s problems.

Three things jump out of Dudley Brown’s article – how industry bodies are generally ineffectual, the failure of 1980s conglomerate thinking and how fragile your position is when you sell on price.

Selling on price

It’s tough being the cheapest supplier, you constantly have to be on guard against lower cost suppliers coming onto the market and you can’t do your best work.

Customers come to you not because you’re good, but because you’re cheap and will switch the moment someone beats you on price.

Worse still, you’re exposed to external shocks like supply interruptions, technological change or currency movement.

The latter is exactly what’s smashed Australia’s commodity wine sector.

A similar thing happened to the Australian movie industry – at fifty US cents to the Aussie dollar filming The Matrix in Sydney was a bargain, at eighty producers competitiveness falls away and at parity filming down under makes no sense at all.

Yet the movie industry persists in the model and still tries to compete in the zero-sum game of producer incentives which is possibly the most egregious example of corporate welfare on the planet.

When you’re a high cost country then you have to sell high value products, something that’s lost on those who see Australia’s future as lying in digging stuff up or chopping it down to sell cheaply in bulk.

Industry associations

“It’s like a Labor party candidate pre-selection convention” says Brown in describing the lack of talent among the leadership of the Australian wine industry. To be fair, it’s little better in Liberal Party.

There’s no surprise there’s an overlap between politics and industry associations, with no shortage of superannuated mediocre MPs supplementing their tragically inadequate lifetime pensions with a well paid job representing some hapless group of business people.

Not that the professional business lobbyists are any better as they pop up on various industry boards and government panels doing little. The only positive thing is these roles keep such folk away from positions where they could destroy shareholder or taxpayer wealth.

Basically, few Australian industry groups are worth spending time on and the wine industry is no exception.

Australia conglomerate theory

One of the conceits of 1980s Australia was the idea that local businesses had to dominate the domestic market in order to compete internationally.

A succession of business leaders took gullible useful idiots like Paul Keating and Graheme Richardson, or the Liberal Party equivalents to lunch at Machiavelli’s or The Flower Drum, stroked their not insubstantial egos over a few bottles of top French wine and came away with a plan to merge entire industries, or unions, into one or two mega-operations.

It ended in tears.

The best example is the brewing industry, where the state based brewers were hoovered up in two massive conglomerates in 1980s. Thirty years later Australia’s brewing industry is almost foreign owned and has failed in every export venture it has attempted.

Fosters Brewing Group was, ironically, one of the companies that managed to screw the Australian wine industry through poorly planned and executed conglomeration. Again every attempt at expanding overseas failed dismally.

In many ways, the Australian wine industry represents the missed opportunities of the country’s lost generation as what should have been one of the nation’s leading sectors – that had a genuine shot at being world leader – became mired in managerialism, corporatism and cronyism.

All isn’t lost for the nation’s vintners or any other Aussie industry, Dudley Brown describes how some individuals are committed to delivering great products to the world. There’s people like them in every sector.

Hopefully we’ll be able to harness those talents and enthusiasm to build the industries, not just in wine, that will drive Australia in the Twenty-First Century.

Picture courtesy of Krappweis on SXC.HU

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January 18, 2013
Australia and the Dutch Disease
This week sees the launch of the annual G’Day USA festival where Australian exporters and various celebrities extol the virues of the country across the United States.

One of Australia’s success stories of the last decade has been Yellowtail Wines which carved a niche for Australian wines in the US in the same way Jacob’s Creek did a decade earlier in the UK.

Today the Australian Financial Review reports that Cassella Wines, the maker of Yellowtail, is in breach of its banking covenants due to the high Australian dollar.

Cassella Wines is another victim of Australia’s Dutch Disease infection.

Dutch Disease owes its name to the Netherlands’ gas boom of the 1960s. By the early 1970s the strong Guilder damaged the rest of the Dutch economy which didn’t profit from extracting natural gas.

Having sleepwalked into the Dutch Disease, it’s fascinating how Australia’s electorate, policy makers and business leaders are in denial about the effects as successful exporters like Cassella Wines struggle with a high dollar and accelerating costs.

When commodity prices and the dollar turn, and they always do, its going to be tough for the economy to adapt as much of the industry capacity that was competitive at lower rates won’t be available to take advantage of the lower costs and to pick up the slack from a declining mining sector.

For Australian businesses, the onus is on managers and proprietors to protect their organisations from the short term effects of a high currency and the medium term effect of a falling dollar pushing up the input prices of imports.

In other words, getting costs down without becoming too reliant on offshored labour or suppliers. The companies that manage this are going to be very strong after the initial adjustment, but it’s a tough management task.

While that task can, and will be, done by smart and hardworking leaders no-one should expect any recognition of the scale of this task from governments, media or business organisations who seem to be in denial of reality.

The Dutch and Australian flags image is courtesy of Emilev through SXC

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January 14, 2013
How Australia’s nanny state hurts business and society
It’s becoming popular to describe Australia as a ‘Nanny State’ as governments respond to moral panics and the need to do something about anything from bicycle helmets to unpasteurized cheese.

Unquestionably Australia has changed in the last quarter century as governments of all persuasions have found it easier to legislate rather than lead. This has had effects on business and society in general.

A good example of how the regulations have built up over the last twenty years in Australia is a sign at my local beach.

That’s a fine welcome and it compliments the $7 an hour parking fees the local council levies. In itself, those parking fees are a good example of the price pressures driving Australia’s high cost quandary.

Possibly the saddest regulation is the alcohol ban on ferries. Twenty years ago it was normal to see a group of friends unwinding on the way home from work with a cold beer or wine. Today you can’t do that because some bureaucrat decided drunks were a problem and rather than enforce existing laws it was easier to ban drinking entirely.

The press and moral panic

Much of this nannyism is being driven by the media who drum up hysterical reports demanding ministers do something. In turn the government’s panicky PR obsessed apparatchiks respond with pointless and unnecessary laws and rules. Often duplicating those that already exist.

A good example of cynical media hysteria was the story of Malea, a Sydney mum minding her own business while legally cycling with her child in a trailer.

While out riding a discredited journalist filmed Malea and passed the footage onto a current affairs TV show which portrayed her as a reckless mum and demanded such behaviour be banned.

Fortunately in that case the politicians ignored the confected outrage, but that’s the exception rather than the rule.

Doing something

The media though doesn’t have to force Australian politicians into adopting the nanny reflex. Often governments will create their own outrage in order for attention deprived politicians to get press coverage.

A good example of this was the incompetent Carr government which decided its contribution to the War On Terror after the 9/11 attacks would be to turn the Sydney Harbour Bridge into something similar to what welcomes Guantanamo Bay detainees.

It’s worthwhile comparing the same view on San Francisco’s Golden Gate Bridge and ask which is the greater terrorist target?

When Sydney genuinely was a larrikin city, climbing the Harbour Bridge in the dead of night was a rite of passage. Today, if you can get around the security guards, barbed wire, CCTV and motion detectors you risk a $3,300 fine and being branded a terrorist.

If you try to climb the bridge and get caught, the fine is only half that of stepping on the hallowed turf of the Sydney Cricket Ground.

At the cricket, if you’re foolish enough to bounce a beach ball, start a Mexican Wave or sing out of tune and you’ll be out before you can say “Shane Warne is a safe driving ambassador.”

The Age newspaper gave a good example of Australian sports administrators’ Stalinist mindset in this fawning article which gloats over the efforts MCG staff go to in harassing their customers.

On level three of the Members’ wing is a secure room with the best seats in the house, although the occupants only manage an occasional glance at the game on hand. It is the MCG command post, where ground security, police and Securecorp officers constantly watch a bank of computer monitors and camera screens.

…

Dohnt says the camera operators will check the froth on a punter’s cup of Coke to see if it has been topped up with smuggled grog.

Forcing cricket fans to buy overpriced drinks or visitors to spend over $200 to climb the Harbour Bridge brings us to the core motivation behind many of Australia’s nanny state regulations – protectionism.

Hidden protectionism

This sign, which is attached to the back of the one at the beginning of this story, bans vendors who sell from boats. It’s questionable whether the council actually has the power or resources to enforce this ban but if it helps the local shopkeepers then so be it.

One of the hubristic traits of Australian exceptionalism is that the nation is a ‘free trade’ economy hard put upon by sneaky Japanese, American and European protectionism. The reality is Australia is just as good as Japan or the EU in introducing sneaky regulations to protect the well-connected locals.

A very good example of this is bananas where the Australian domestically produced product is substantially dearer than imported bananas sold in the US, UK or Europe.

In early 2011, Cyclone Yasi devastated Australia’s banana crop and prices soared. Not one imported banana was allowed in to ease the shortage. Remember that the next time you hear a politician or journalist boasting about Australia’s free trade credentials.

Banana prices are another example of the costs passed onto Australian households and industry through nanny state regulations. Compliance costs are real and add to the cost of production and employment. They are another reason why Australia has become a high cost economy.

More importantly, those regulations tend to favour incumbents making it harder for entrepreneurs and new entrants into markets making the economy even less flexible.

The burden of regulation is also unfairly dropped upon the smaller business who don’t have the resources to comply with or challenge unfair rules. The Howard government was very good at this with slapping small business with the responsibilities of raising the GST and complying with draconian laws like Workchoices.

At this stage it’s worth noting that the Australian nanny state isn’t a Labor party creation, it’s come from both sides of politics and often because poorly drafted laws require mountains of regulations to overcome the legislative flaws.

Workchoices was probably the best example of badly thought out laws where the Howard government panicked into slapping a whole level of punitive rules for businesses who failed to keep log books of staff hours worked – the legislation was so bad that had it not been repealed by Rudd, the sight of bundy clocks would have become common in Australian offices.

Nanny and risk

One of the unfortunate effects of the nanny state is that it saps the entrepreneurial spirit – why take risks when nanny is there to support you?

There is an unintended effect of this though – because we think nanny will always protect us we lose the ability to evaluate risk.

Where this is most obvious is in financial matters. Too often people are fooled into investing in dodgy schemes because they think that regulators will protect them. They find out this isn’t the case when the money is long gone.

That failure to understand risk though becomes pervasive through the community as the nanny state mentality becomes established. We could argue that inability to identify risk was the core reason for the global financial crisis.

The future nanny state

While the nanny state has been rampant around the world for the last fifty years, its days are numbered as cash strapped governments find they can no longer bear the cost of maintaining armies of bureaucrats to enforce silly rules.

As society deleverages from the excesses of the credit boom, governments are going to find revenues falling short and while it won’t be the first casualty of the new austerity, the nanny state will almost certainly be a victim.

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January 6, 2013
Australia’s high cost quandary
“Around the world our towncars are usually 30% more expensive than taxis, in Sydney it’s 20% as the cabs are pretty expensive,” said Travis Kalanick on launching the Sydney version of Uber’s hire care booking service.

It’s not just hire cars which are expensive in Sydney – the soaring cost of living in Australia is bourne out by Expatistan, a web site that crowdsources the cost of living in various cities.

Expatisan’s comparisons find Sydney up with Tokyo and London as the most expensive towns on earth.

That conclusion means Australian businesses, governments and policy makers have some important decisions ahead of them.

Cholesterol in the veins

High property prices have been the norm for two decades in Australia, the middle class welfare state that both political parties support gives tax and social security concessions to property owners while the banking system requires most business lending to be secured by property.

As a consequence, generations of Australians see property as the only path to financial success. If Bill Gates, or any of today’s entrepreneurial wizz-kids, had been born in Australia, they’d be encouraged to get a safe job and buy property than to take the risk of starting a new business.

The property obsession has another perverse effect in that it creates a short term outlook for Aussie business owners who have to consider getting, and paying off, a mortgage quickly to secure their financial foundations.

A few weeks ago a business owner was profiled in the Sydney Morning Herald, which some call the Sydney Morning Property Spruiker, who paid 1.1 million Aussie dollars (a million US) for a property in Redfern – which is Sydney’s Bronx.

That poor guy not only has a fat mortgage to pay off, but he has to pass those costs onto his customers. Just to pay the bank is a fat chunk out of his business before he pays his staff, landlord and the various other expenses before he can take his profits.

Having to pay the bank for living costs is the main reason why Aussie businesses don’t invest in capital equipment, which in turn makes them less competitive than overseas competitors.

One of the myths in Australian business is that competitiveness is solely due to labor costs, what the ideologues preaching this miss is that even if Aussie workers were paid a bowl of rice a day, Chinese and Mexican factories would still be more productive due to the investment in modern equipment.

For the sake the argument, we won’t even discuss German, Japanese or Swiss manufacturers who are still competitive despite Australian level cost structures.

This last point is what’s missed in much of the discussion about Australia’s economic future – apologists for Reserve Bank governor Glenn Stevens and the self congratulatory Canberra monoculture say that the high Aussie dollar is here to stay and mining will be driving the economy.

Should the mining sector stall, which currently seems to be the case, then housing development will pick up the slack according to the policy-makers’ groupthink.

That housing development is going to come at a high price, with Australian land and homes already among the world’s highest. Given Australia’s private sector debt is among the highest in the world already, it’s hard to see where the money will come from to fuel further property speculation.

Right now Australia has a serious problem in determining what the future will be for the country.

If the future is a high cost economy underpinned by massive property property prices, then the future has to lie in high value added sectors.

The question is ‘what sectors’? Australian business, governments and society in general seem to think that property speculation is the future.

Property speculation turned out not to be the future for Spain and it looks like China’s speculative boom is meeting its obvious end.

Australians are going to have to hope that it really is different down under and that young people and immigrants are prepared to spend huge amounts of money to keep the economy afloat.

If the policy makers are wrong, then the worry is that there is no Plan B.

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December 24, 2012
Stumbing into recession
The Committee for Economic Development Australia (CEDA) today released its 2012 Big Issues survey looking at the responses of 7000 business people on the issues confronting Australian industry in 2012.

One of the notable results is that business people don’t care about government surpluses. A third are neutral on the question “do you believe maintaining a government surplus is important” while 35% disagree that it is a high priority.

Yet despite the electorate and business saying the deficit is not a priority, the politicians still obsess about maintaining their surplus.

Now Australia’s mining boom has come to an end – along with the blue sky economic assumptions that underlie both sides of politics’ spending plans – governments are desperately trying to fudge the books and continue the pretense that their budgets are in the black.

Driving this obsession with avoiding deficits is the religious belief among Australia’s political classes that Triple – A credit ratings from the discredited Wall Street ratings agencies is more important than educating the nation’s children, caring for the country’s sick or building the infrastructure to compete in the 21st Century.

The real danger with this deficit obsession is that there is a very high possibility that state and Federal governments are going to tip Australia into a recession driven by European style austerity. Already we see this developing as various states start slipping backwards according to the ABS’ latest accounts.

graph courtesy of Macrobusiness

Another interesting result from the CEDA report is how business’ view the Australia in the Asian Century report with nearly 80% of respondents saying the issue is important or critical.

It is questionable whether Australian business is prepared to face the realities of an Asian Century as David Llewellyn-Smith writes at the Macro Business Blog, Australia’s businesses are looking more at getting help from the government to cut domestic costs rather than sell into Asia. That inward focus of Australian business since the mid-1990s is the topic for another blog post.

The sad thing is that the government aspects of Asian Century report is stillborn as surplus obsessed politicians carve into skills training and innovation programs in a vain attempt to balance the books while failing to reform the tax system or address the middle class welfare that’s squandered most of the returns from the last decade of prosperity.

Australia’s politicians are very soon going to have to decide who they govern on behalf of, the corrupt and incomptent ratings agencies or the people who vote for them and pay the taxes which support them and their political parties. For some, this might be a tough choice.

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December 6, 2012