Paul Wallbank – Brilliant Communications

Tag: investment

Australia’s economic Hari-Kari
“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.

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April 18, 2013
Should Amazon focus on shareholder returns?
“Shareholder returns” has the been the mantra for the modern manager – particularly when justifying fat salaries and bonuses.

Amazon though is very different – despite the company’s massive market position it doesn’t make profits, founder Jeff Bezos claims he prefers to focus on customer needs.

On a fundamental level Bezos is right – the business that delivers what customers want will succeed. The market doesn’t give a fig about shareholders’ returns or management’s KPIs.

Although making a profit is helpful.

That Amazon is spectacularly unprofitable should worry shareholders, it’s fair enough for a startup in its early days to incur losses but Bezos’ baby is nearly 20 years old and it still isn’t capable of walking on its own.

Yet this doesn’t deter shareholders. Comparing Amazon’s stock price against Apple’s and Microsoft’s is instructive.

Microsoft currently trades at a Price/Earnings ratio of 15.8 while Apple’s is 9.7 – Amazon trades at an infinite P/E.

A school of thought is that Amazon will reap monopoly profits once it conquers the world’s online retail and owns a big chunk of the cloud computing market.

However these are big markets and its unlikely any one company can ever dominate them. Indeed Amazon has failed to do so for nearly two decades despite undercutting most competitors and buying out nimble new rivals.

It’s tempting to think of Jeff Bezos being a modern day Nelson Bunker Hunt.

Bunker Hunt and his brother William spent most of the 1970s trying to corner the global silver market. At the peak of their attempt, silver prices went from $11 an ounce in September 1979 to $50 an ounce in January 1980 only to crash back down to $11 by Easter 1980.

The brothers were bankrupt by the end of the 1980s.

It’s doubtful whether Amazon’s shareholders want to follow that example, so it’s going to be interesting to see how long Jeff Bezos can continue to see the story of putting customers before owners.

Image by By The Cuba Company, New Jersey [Public domain], via Wikimedia Commons

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April 13, 2013
Penny wise and pound foolish
“We were penny wise and pound foolish” says Peter Trimble, Finance and Systems director of the V8 Supercars, about the IT setup he found when he started with the motor sport organisation 18 months ago.

The V8 Supercars were like many businesses who had outgrown their basic IT setup and were struggling as a result.

A touring organisation – “a travelling circus” as described by CEO David Malone – with 15 races in Australia, New Zealand the US has some fairly unique challenges as contractors, teams and a dispersed workforce put demands on the businesses which a basic small business system struggles to cope with.

What Trimble found at the business were employees struggling with cheap internet connections and antiquated, inadequate servers.

Focusing on the pennies and missing the bigger picture is a common problem when managements skimp on technology which leaves their staff spending more time on IT problems than getting their jobs done.

Basically the $80 a month home internet connection doesn’t cut it when you have more than two or three workers and the server that worked fine when those people were in the same office becomes a security risk when a dozen a people are trying to login over the Internet.

It wasn’t surprising the V8 Supercars management decided to go with a cloud computing service – in this case Microsoft Office 365 – and invest in proper, reliable internet connections.

What the Supercars found that being penny proud and pound foolish with IT doesn’t work for a business, office tech is an essential investment.

Paul travelled to the V8 Supercars in Launceston courtesy of Microsoft Australia.

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April 7, 2013
Corporate palaces and the new Ceasars
One of the key traits of managerialism is executives spending vast quantities of shareholders’ money on opulent corporate headquarters, is Apple the latest company to succumb to this disease?

Building a new headquarters is fun for managers. One company I worked for in the early 1990s was debilitated for months as executives spent most of their time moving walls, rearranging desk positions and changing lift designs to reflect their status as grand visionaries.

For the company gripped with delusions of management grandeur a flashy head office is the must have accessory. It’s the corporate equivalent of the Skyscraper Index and is almost as good a predictor that a change in fortunes is imminent.

Apple’s new headquarters is nothing if not impressive. Bloomberg Newsweek reports the building which, at two thirds the size of the Pentagon, will house 12,000 employees is currently estimated at costing five billion dollars, sixty percent over the original budget.

The plans call for unprecedented 40-foot, floor-to-ceiling panes of concave glass from Germany. Before the Cupertino council, Jobs noted, “there isn’t a straight piece of glass on the whole building?…?and as you know if you build things, this isn’t the cheapest way to build them.”

With over a $120 billion in cash, Apple can certainly afford to spend five or ten billion on new digs despite the grumbling of shareholders who have had to settle for a stingy 2.4% dividend from their shares.

The big question though for Apple shareholders though is whether a project like this indicates a company that has peaked with management more intent on building monuments to itself or its genuinely visionary founder rather than deliver returns to owners or products to customers.

On the latter point, there’s no evidence of Apple losing their way with their products yet, but it’s something worth watching in case management becomes distracted with their building project.

For the company I worked for, the distracted managers all vanished one day when the main shareholder of the Thai-Singaporean joint venture discovered they’d been fiddling the books. They probably needed to pay for the office fit out.

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April 5, 2013
Are Australians too risk adverse for startups?
Last week I had coffee with Clive Mayhew who chairs the board of Sky Software, a Geelong based student management cloud service.

Clive covered a lot of interesting aspects about Sky’s business; including the opportunities for regional startups, government support and his experiences in Silicon Valley during the dot com boom. All of which I’ll write up in more detail soon.

One notable point Clive raised was how he struggles to get Australian staff to take equity in the business – people want cash, not shares.

The question Clive raises is why and that question is worth exploring in more depth.

My feeling is that it’s a cultural thing related to property – four generations of Australians have been bought up believing housing is the safest way and surest way to build wealth.

As a consequence young Australians are steered into getting a ‘safe’ job and plunging as much money into accumulating property equity as early as possible. Just as mum and granddad did.

Even those who don’t want to play the property game are affected as property speculation pushes up prices and rents; the landlord or bank won’t accept startup stock to pay the bills so employees need cold, hard cash to keep a roof over their heads.

The other angle is tax and social security policies, through the 1970s and 80s various business figures used share option schemes to minimise their taxes and successive Australian governments have passed laws making it harder for businesses to offer these incentives.

Interestingly this not only affects the Silicon Valley tech startup business model but also hurts the aspirations of Australia’s political classes to establish the country, or at least Sydney, as a global financial centre.

Putting aside the fantasies of Australia’s suburban apparatchiks – which if successful would see the country being more like Iceland or Cyprus than Wall Street or the City Of London – it’s clear that the existing government and community attitudes toward risk are reducing the diversity of the nation’s economy.

That the bulk of the nation’s mining and agricultural investment, let along startup funds, comes from offshore despite the trillion dollars in compulsory domestic superannuation savings is a stark example of risk aversion at all levels of Aussie society, government and business.

For those Australian entrepreneurs prepared to take risks, the risk adverse nature of most people becomes an opportunity as it means there’s local markets which aren’t being filled.

The problem for those local entrepreneurs is accessing capital and that remains the biggest barrier for all small Australian businesses.

How this works out in the next few decades will be interesting, it’s hard not to think though that Australians are going to have to be weaned off their property addiction – whether this takes a harsh recession, retired baby boomers selling down their holdings or government action remains to be seen.

In the meantime, don’t base your business plan on staff taking equity as part of their employment package.

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April 2, 2013