Decoding the new economy

Australia’s entrepreneurial opportunity

Can Australia make the most of it’s entrepreneurial desires?

The recent PwC report Startup Economy – How to support tech startups and support Australian innovation focused, naturally enough, on the barriers to developing a Silicon Valley like business community in Australia.

Unlike most coverage of the report, The Economist raised an interesting point from the findings, that entrepreneurial Australians are far more likely to start up businesses than many other nations.

On one level this isn’t suprising as starting a business in Australia is easy compared to many other countries with the World Bank’s Doing Business survey rating the country second after New Zealand for the ease of setting up an enterprise.

Interestingly though, the number of Australians setting up their own businesses is falling reports Smart Company, citing the Productivity Commission’s Forms of Work in Australia report.

The Productivity Commission speculates this might be because the mining boom is encouraging workers to take resource contracts rather than set up their own businesses.

No doubt there’s some truth there, as much of the nation’s investment has been directed into the mines and associated infrastructure in recent years however there’s probably some more mundane reasons.

Top of the list would be the nation’s property obsession; it’s difficult to service a massive mortgage while running your own business.

Fifty years of mainly increasing property prices has groomed Australians into believing that having a steady job and a brace of investment properties is a much easier path to success than taking a risk with your own business.

Added to that is the increasing hostility towards businesses. As the nanny state grows, regulations that make it harder for business multiply, the latest example being a Sydney council that wants to charge professional dog walkers for using parks.

Overwhelmingly these petty regulations hurt those starting new businesses rather than bigger corporations.

The good news though is that people still want to start their own businesses. In an economy that’s increasingly concentrated in fewer hands, diversification is critical.

In a world that’s becoming increasing automated, we need smart startups finding ways to use the new tools and create the jobs to run them. If Australia can get its policy mix right, kick the property and nanny state addictions then it might open some great opportunities.

Crying over spilt Chinese milk

Australia’s missteps in the Chinese milk market are part of a far deeper malaise in the Australian business community.

East Asian based expats have many conceits – the greatest being that they understand Asia.

For a high paid executive based in Hong Kong or Singapore sitting in a comfortable air conditioned CausewayBay or Beach Road highrise it’s easy to not to know what you don’t know.

In Bangkok though the drinkers at Bangkok’s Cheap Charlies Bar are under no illusions about the complexity of Asia as every night brings another surprise.

During the 1990s it was a regular drinking haunt of those working on the ground in South East Asia – aid workers from Cambodia, oil explorers from Vietnam. gem traders from Laos or builders in Myanmar all swapped stories about their trials and tribulations.

One of the toughest jobs was setting up a diary industry in tropical Thailand, no trivial task in an environment that isn’t kind to soft, milk producing cattle.

Through the late twentieth century the Australian government spent millions helping build the Thai industry with the intention of it helping the Aussie industry build markets and expertise.

Sometime in the late 1990s, the Australian industry decided programs like these were all too hard and not only withdrew from the Thai and Malaysian markets but also let the Chinese opportunity slip through their fingers.

Today, as Business Spectator reported last week, New Zealand’s Fonterra is not only beating the Aussies in China but also has substantial holdings in Australia as the company’s website describes;

The company has NZ$11.8 billion in total assets and revenues of NZ$13 billion and employs more than 18,000 people worldwide. In Australia, Fonterra has revenues of $1.9 billion, processes 21 per cent of all Australian milk and employs over 2,000 people. This makes Fonterra very much an Australasian company.

Fonterra’s story, both in China and Australia, illustrates how something went amiss in Australia’s business sector in the late 1990s.

The point of Australia’s deregulations and industry consolidations through the 1980s and 90s was to make local businesses and industries more competitive. Instead those Australian conglomerates have been sold to overseas interests as domestic investors find they aren’t interested in investing.

Instead Australian businesses decided that having being allowed to consolidate they could use their market power to clip the tickets of the industries they controlled rather than innovating or expanding internationally.

At the same time, Australia’s compulsory savings scheme poured billions into the local share market leaving boards under no pressure to perform better than the index.

The lazy investing philosophy forced internationally focused businesses to look for overseas investors and has created the steady flow of Australian business, farming and mining assets being sold onto overseas buyers.

In the meantime, the shock jocks and populists whip up xenophobia rather than holding Australian business community to account for its failure to seek and build new markets.

This doesn’t mean bad news for young Australians, there are opportunities for smart, innovative and hard working entrepreneurs to challenge the country’s staid duopolies.

If we choose not to challenge the comfortable duopolies, it may be the next generation of Aussie expats find more opportunities at Cheap Charlies in Bangkok than at home.

Moving to a subscription economy

Customer subscription models are changing many industries which opens up opportunities for smart businesses

One of the biggest changes in business is the move to subscription based services rather than selling one-off, lump sum products. This is affecting industries ranging from the motor industry to software.

Business Spectator has a good interview with Tien Zhou of Zuora on the subscription economy and how it’s changing the business world.

We’re pretty passionate in our belief that every company will be a subscription business in the next five, 10, 20 years. That’s certainly what we’re seeing with digital companies, whether they are technology firms (software, hardware), media and publishing firms, or telecom companies. The ideas of content and access are starting to blend together and we are seeing more and more commerce companies dip their feet as well. So we’re really see this as an across the board phenomenon.

Probably the industry most focused on the subscription model right now are newspapers – subscribers have always been an important revenue stream for the print media and the loss of their advertising rivers of gold means they are looking at ways to get more money from readers.

As Tien Zhou points out, businesses moving to subscription services is an across the board phenomenon.

Yesterday I mentioned the Google Maps connected treadmill, that is a subscription model where the treadmill seller gets money from the initial purchase, but also a revenue stream from the services attached to it.

The same business model applies to connected motor cars or the social media enabled jet engine. The aim is to replace lump sum purchases with lifetime subscriptions.

Getting customers onto lifetime subscriptions has been one of Microsoft’s aims for the past decade as the company realised that software users, particularly those using Microsoft Office, hung onto their CDs for years and increasingly decades.

Perversely it took Google and Apple to show Microsoft how to wean customers onto subscription services.

That Microsoft Office is a good example of the evolution of subscription software, or Software-as-a-Service (SaaS), isn’t an accident. The enterprise computing sector is currently the most profoundly affected as companies like Google and Salesforce threaten high cost incumbents.

A good example of the changing economics of software is the supermarket chain Woolworths moving onto Google Docs.

With 26,000 seats, the reseller can expect to make $260,000 a year in commissions based on Google’s standard terms of $10 per seat per year.

That total sum is less than the commission a salesperson would have earned for a similar sized IBM, Oracle or Microsoft installation.

A whole generation of IT salespeople who’ve grown fat and comfortable on their generous commissions now find their incomes being dramatically reduced.

Similar things are happening in industries like call centres with Zendesk, point of sale systems and event ticketing with Eventbrite – incumbents are finding their incomes steadily being eroded away by online services.

At the same time agricultural and mining equipment suppliers are introducing big data services for their customers where the information gathered by the sensors built into modern tractors and bulldozers are providing valuable intelligence about the crop and ore being gathered.

The subscription business model is nothing new, King Camp Gillette perfected the strategy with the safety razor at the beginning of the Twentieth Century. The razors were cheap but the blades were where the money was.

Microsoft and the rest of the software industry tried to introduce subscriptions in the late 1990s with Software as a Service, but failed because the internet wasn’t mature enough to support the model. Today it is.

Like many things in today’s economy, the subscription model is going to change a lot of markets. It’s a great opportunity for disruptive businesses.

Subscription envelope image courtesy of jaylopez through sxc.hu

Why Australia needs foreign ownership

Foreign investment is making up for the lack of Australian interest in local assets.

Such are the vagaries of radio that I’ve been asked to comment on ABC Radio South Australia about foreign ownership based on an article that was picked up by The Drum 14 months ago.

That article was written shortly after Dick Smith came out grumbling about the prospect of Woolworths selling the electronics store chain named after him to foreign interests.

My point at the time was that foreign owners would be preferable to some poorly managed, undercapitalised local buyer as the Australian retail industry – even in a declining market like consumer electronics – needs more innovation and original thinking.

As it turned out, Dick Smith Electronics was sold to Anchorage Capital, a private equity turn around fund with an interesting portfolio of businesses.

In the meantime, the argument about foreign ownership of property and businesses, particularly farms, has ratcheted up as opportunistic politicians and the shock jock peanut gallery that sets much of Australia’s media agenda have found a cheap, jingoistic issue to score points from.

So why is foreign ownership of businesses like farms, mines and factories important for Australia?

A fair price for hard work

The main reason for supporting foreign buyers for Aussie businesses is it gives entrepreneurs a chance to get a fair price for their hard work.

A farmer or factory owner who builds their business shouldn’t have to accept a lower price because Australians don’t want to pay for the asset.

It’s not a matter of being able to pay Australians as have plenty of money to invest – a trillion dollars in superannuation funds and three billion dollars claimed for negative losses in 2009-10 show there’s plenty of money around – it’s just that Aussies don’t want to invest in farming, mining or other productive sectors.

We’re already seeing this play out in the small business sector as baby boomer proprietors find they aren’t going to sell their ventures for what they need to fund their retirement.

Access to capital

Should the protectionists get their way then the businesses and farms will eventually be sold to undercapitalised Australian investors at knock down prices.

This is the worse possible thing that could happen as not only do the entrepreneurs miss out, but also the factories and farms decline as they are starved of capital investment.

Cubby Station

A good example of both the lack of capital affecting investment and finding a fair price for ventures is Queensland’s Cubby Station.

While I personally think Cubby Station is an example of the economic bastardry and environmental vandalism that are the hallmarks of the droolingly incompetent National Party and its corrupt cronies, the venture itself is a good example of why the agriculture sector needs foreign investment.

Having been converted from cattle to cotton in the 1970s, Cubbie grew as successive owners acquired water licenses from surrounding properties.

Eventually the company collapsed under the weight of its debts in 2009 and the property was allowed to run down by the administrators until it was bought by Chinese backed interests at the beginning of 2013.

At the time of the acquisition, the company’s former chairman told The Australian, “on reflection, I would go into those things with an even stronger balance sheet — in other words, with less gearing.”

In other words, the company was under-capitalised.

Competition concerns

Another reason for encouraging foreign ownership is that Australia has become the Noah’s Ark of business with duopolies dominating most key sectors.

Bringing in foreign owners at least offers the prospect of having alternatives to the comfortable two horse races that dominate most industries.

The property market

An aspect that has excited the peanut shock jocks has been the prospect of Chinese buyers purchasing all the country’s property.

For those of us with memories longer than goldfish, today’s Chinese mania is almost identical to the Japanese buying frenzy of the late 1980s.

Much of what we read about the Chinese buying homes is self serving tosh from property developers and real estate agents and what mania there is will peter out in a similar way to how the Japanese slowly withdrew.

This isn’t to say there shouldn’t be concerns about foreign ownership – tax avoidance, loss of sovereignty and Australia’s small domestic market are all valid questions that should be raised about overseas buyers, but overall much of the hysteria about foreign ownership is misplaced.

What Australians should be asking is why the locals aren’t investing in productive industries or buying mining and farming assets.

The answer almost certainly is that we’d rather stick with the ‘safety’ of the ASX 200 or the residential property market.

We’ve made our choices and we shouldn’t complain when Johnny Foreigner sees opportunities that beyond negative geared investment units or an tax advantaged superannuation fund.

Australia’s economic Hari-Kari

As the cheap credit era comes to an end, the Australian economy acts as if the party is never going to end.

“The Golden Era of Credit is Now Over” writes Maximillian Walsh in the Australian Financial Review today.

Max’s story relies mainly on the April edition of Bill Goss’ monthly newsletter where the founder of investment firm PIMCO writes about the talents of today’s market wizards;

All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.

The credit boom of the last fifty years created many winners – investment bankers, property owners and those who sell things funded by easy finance.

One of the best examples of a fortune made through easy credit is Australia’s Gerry Harvey. Here’s one of Gerry’s ads from 1979.

Hurry into Norman Ross. You can use Bankcard or our easy credit system. You can even use cash!

Three years later Gerry was sacked from the business he founded and he set up Harvey Norman, promising John Walton and Alan Bond “I’m going to beat you.” By the end of the 1980s he had.

Gerry’s success is built on easy credit and the rise of the consumerist economy. From the hire purchase plans of the 1960s, the introduction of credit cards in the 1970s and the banking deregulations of the 1980s, Gerry was able to sell goods to eager consumers who could worry about paying later.

In the 1990s and 2000s a happy coincidence of easy credit and cheap Asian manufacturing – note the prices of electrical goods in that 1979 commercial – saw businesses like Harvey Norman grow exponentially.

Mao promised the Chinese a chicken in every pot, Gerry delivered a plasma TV in every Australian bedroom.

Today, as Bill Goss says, the credit party is over. Last drinks were called with the failure of Lehman Brothers on September 16th, 2008.

However this hasn’t stopped the Aussie economy, as the Sydney Morning Herald reports today Sales growth cheers Gerry Harvey.

In the same edition the SMH reports the government science organisation, the CSIRO, is cutting hundreds of staff. Notable in that article is a comment from the organisation’s CEO;

Dr Clark said more than 2000 companies collaborated with CSIRO but that industries were reducing the amount spent on research.

So at a time when the Australian economy is struggling with the effects of a high currency and exhibiting all the symptoms of the Dutch Disease, consumers are spending more on TVs and sofas while business cuts investment in research and development.

Karl Marx famously predicted that the last capitalist will be hanged with the rope they sold, Australians have a bunch of Harvey Norman branded credit cards for their financial seppuku.

Sports cars, the cloud and the need for broadband

How the V8 Supercar races use the internet and networks shows why businesses need reliable communications and the way organisations are using cloud computing.

My relationship with sports cars is similar to horses – I have a vague idea of which end water goes in and where not to stand.

So Microsoft’s invite to the Launceston V8 Supercars to showcase their Office 365 cloud service as the race’s official sponsor wasn’t expected but it was a good opportunity to see how a sports organisation uses modern technology.

Riding the cloud

At the opening media conference V8 Supercars CEO David Malone and Finance Director Peter Trimble described the IT problems the organisation had in the early days.

“We were penny wise and pound foolish” said Peter about their small business system that couldn’t grow with the event.

To properly meet their needs V8 Supercars would have needed a bank of servers, cumbersome remote access software and a full time team of several IT staff for their scattered workforce and constantly changing locations.

With cloud services, they eliminated many IT costs while simplifying their systems.

That staff can now access documents regardless of location is a very good case study of where the cloud works well and understandable that Microsoft wanted to show off what their services can do.

Networking the cars

When challenged about the point of car racing, enthusiasts cite how the sport is a test bed for the motor industry.

The motor industry is one sector leading the internet of machines with one car manufacturing executive recently describing the modern motor vehicle as being a “computer platforms” on wheels.

Eventually we’ll see our cars connected to the net and reporting everything from the engine’s servicing needs to the driver’s musical tastes.

That’s reality in today’s high performance racing, both the drivers and the cars are in constant contact with the crews as sensors report everything from engine performance to the foot pressure the driver is putting on the accelerator pedal.

As continuous data feeds from the cars is essential to the teams the event has its own trackside network with receivers located along the course that are used for both vehicle telemetry and the video feeds from both car mounted and fixed cameras.

Owning the rights

In what’s becoming the future of sports broadcasting, the V8 Supercars organisers run their own camera crews and provide the feed to their broadcast partners and media outlets.

This allows them to control all the rights across TV, cable and online channels.

Having full control of the pictures also gives the V8 Supercars more revenue through signage and sponsorship by guaranteeing advertising placements which wouldn’t be available if they didn’t manage the feed.

Connectivity matters

v8-supercars-launceston-communications-cable — Spaghetti Junction as the various feeds come together

Getting the images out to the media and broadcast partners along with delivering the in car data to the racing teams is major challenge for organisers. The communications centres resemble a giant bowl of cable spaghetti as various groups plug into the network.

It’s no coincidence that part of the deals the V8 Supercar management strike with track owners and governments includes providing fiber and microwave links to the venue.

That single factor illustrates how vital communications links are to a modern sporting event.

Another important factor is that everything will be packed up and taken away. Following Launceston, the entire show is packed up and moved onto Auckland, New Zealand. This in itself is a major logistic challenge which would fail without good connectivity and reliable systems.

v8-supercars-launceston-truck-fleet — the fleet of trucks ready to move on

It’s easy to dismiss the V8 Supercars as a bunch of testosterone driven rev-heads, but the challenges in staging these complex events fifteen times a year shouldn’t be underestimated.

We also shouldn’t underestimate how important communication links are to any business. It’s why debates about the need for high speed internet services are last century’s discussion.

Driving a horse and cart in a digital economy

A lack of understanding about how to use digital tools threatens businesses in the 21st Century

“There’s no point in building a highway if no-one can drive” Tasmanian business leader Jane Bennett said about the Australian National Broadband Network during an interview last week.

Jane was touching on an important point about the digital economy – that most businesses aren’t equipped to deal with it.

That half of businesses in the US, UK or Australia don’t have a website illustrates that in itself. What’s really worrying is setting up a website is the easy part and has been standard for a decade.

In many respects this isn’t new, a similar thing happened when mains electricity or the motor car arrived. Many businesses clung desperately to their oil filled lamps and horse drawn carts way past the time these were superseded.

Well into the 1970s there were hold outs who continued to ply their carts despite the costs of keeping horses on the road being far greater than buying a truck.

That failure to learn about and invest in new technologies saw all those businesses die, many of them with the owner who’d eked out a living as a milko or rag and bone man for decades.

On a bigger level, the struggles of the local milkman with his Clydesdale is a worrying reflection of business underinvestment. These folk are stuck with old equipment because they didn’t have the funds to spend on bringing their equipment up to Twentieth Century standards.

In the 1980s I saw this first hand in some of Australia’s factories. A foreman at a valve manufacturer in Western Sydney boasted to me how he had done his apprenticeship on a particular lathe fifty years earlier.

That machine still had the belt and pulley assembly from the days when the factory was powered by a steam engine at one end of the plant. It had an electric motor bolted onto it some time in the 1960s but was largely unaltered since.

It was understandable many Australian factory owners wouldn’t invest after World War II – many industries were protected and property speculation offered, and still does, better returns.

Another reason for not investing was the sheer cost of buying new equipment, major capital expenditures are risky and for most businesses it wasn’t work taking those risks.

Today there’s a big difference, hardware and software are far cheaper than they were in the 1960s or 70s with the big investment being in understanding and implementing the new technologies.

Few businesses don’t have computers or the internet but most of the things we do online are just variations on how our great grandparents worked with documents, filing cabinets and the penny post. We have to rethink how we use technology in business.

It would be a shame if we find ourselves stuck on the side of the highway wondering what the hell happened in the early years of the 21st Century.

Stage coach image courtesy of Velda Christensen at http://www.novapages.com/

Tag: business

Australia’s entrepreneurial opportunity

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