us | Paul Wallbank - Communications Professional

Riding the rails of the global economy

A US train ride illustrates the need to stimulate private and public investment

Irish economist David McWilliams reflects on how a train ride between Boston and New York illustrates how a lack of investment in the US and over capitalisation in China has affected the global economy.

A lack of public investment is hurting the US in McWilliams view and that’s exacerbated by a reluctance of the private sector to commit to new productive assets and projects. Weak investment affects household wealth and savings, it also means the low interest rates are encouraging speculation rather than economic growth.

Meanwhile in China, the nation’s massive expansion has created a global glut in manufacturing capacity. That makes business even more reluctant to invest in plant and equipment while creating risks for the commodities based economies like Russia, Brazil and Australia that feed that machine.

One aspect that McWilliams overlooks is another shift in the global economy – the shift to smaller scale manufacturing and automation, “real investment tends to be in big machines that make big stuff,” he says.

That investment in big machines may not be the economic driver they were half a century ago as building and maintaining the machines themselves are no longer labour intensive. Furthermore, the manufacturing of tomorrow may well be much more distributed and on a local, smaller scale.

McWilliams’ points though are well made. We need to be looking at how to stimulate private investment in productive assets while looking at the public investments that will enhance our economies and improve our living standards.

Xero and the US cloud accounting challenge

Xero starts its serious push into the US cloud accounting market

Last month I wrote a piece for Business Spectator on how competition in the Australian cloud accounting market was hotting up with the re-entry of Intuit and Sage.

One of the divides between vendors was whether online accounting services scale globally with one group – including MYOB and Reckon – saying that deploying services in different jurisdictions added complexity while others believed a global product was necessary to achieve scale.

The most obvious member of the global scale camp was Xero, the company that has pioneered the growth of cloud accounting software. Two years ago we interviewed the company’s founder Rod Drury about his ambitions for the company and the direction of the cloud accounting market.

For Xero though, growing globally isn’t easy. While its most successful market has been in Australia, that country has many similarities with Xero’s native New Zealand and the company has found the UK and US markets tougher.

Renewing Xero’s US push

To deal with a much bigger and diverse market, the company appointed Russ Fujioka, a veteran of Dell, Abode and the various venture capital companies, to lead its revamped operations in the United States and Decoding the New Economy caught up with Russ recently at Xero’s San Francisco office.

For Fujioka, the key to growth in the United States market is the small business sector with the US recording nearly half a million new business registrations across the nation each year.

“You see the M in ‘SMB’? We don’t want to be playing to that market,” says Fujioka in emphasising the Xero’s focus on the small business sector.

Fujioka also sees opportunity in what he calls the ‘pre-accounting’ sector, the roughly 18 million self employed contractors and freelancers who don’t need a full fledged accounting service but need access to basic bookkeeping, invoicing and expense tracking.

Dealing with diversity

While the 28 million US small businesses represent a huge opportunity to Xero, the market also presents challenges with, unlike the New Zealand, Australian and UK markets, hundreds of banks and thousands of different state and local tax regimes.

To deal with the complexity of local tax and employment rules, Xero announced a partnership with Avalara to provide the data feeds for calculating sales taxes and payroll obligations, something that is essential to Xero’s business plans, “payroll is fundamental to our offerings.” Fujioka says.

Also fundamental are accountants and book-keepers where co-opting them as sellers of the service has been part of Xero’s success in Australia and New Zealand with Fujioka seeing a fifty-fifty split between those businesses signing up directly and those going through advisers.

The changing accounting industry

Like the rest of the world, the accounting profession is going through major changes as much of the transactional work becomes automated, Fujioka sees this as an opportunity for companies like Xero to add value to the industry and help individual firms become more akin to system integrators and technology advisers to their clients.

The ultimate aim for Fujioka is to make Xero the site, or app, that every small business starts and ends their day with, “we really want to be that single pane of glass for small business – you start your day with us, you end your day with us and during the day you check your status on your Apple Watch.”

For Xero, the key to global success is cracking the US market. The challenge for them is to capture a new generation of business owners and accountants.

Paul travelled to San Francisco as a guest of Salesforce and Splunk

Stemming the Innovation drought

Science, Technology, Engineering and Mathematics studies are essential to the future economy a PwC study shows.

When discussing how industries are changing, the constant question is ‘what will happen to today’s jobs?’

Even in the Future Proofing Your Business webinar earlier this week this question was asked by a number of the small business owning listeners.

That concern forms the basis of the “A smart move: Future-proofing Australia’s workforce by growing skills in science, technology, engineering and maths” report released by accounting firm PwC yesterday in Sydney.

PwC’s report warns 44 per cent of current Australian jobs are at high risk of being affected by computerisation and technology over the next 20 years.

The report highlights that Science, Technology, Engineering and Maths (STEM) subjects are critical in the jobs that are going to benefit, or be created, by that technological change.

Finding the right courses

Sadly for Australia, and most of the western world, STEM courses are deeply out of fashion with students preferring to study in business related courses such as accounting, commerce and law.

As PwC flag, those industries are at risk with accounting at the top of the list for job losses.

On the other hand, PwC forecasts professions in health, education, personal care and – worryingly – public relations will be in increased demand. Something that may underestimate the effects of technology on those industries.

Competing with STEM

PwC’s main contention is that economies which want to compete in the new economy are going to need more STEM graduates.

The shift to STEM education is something the OECD highlighted in its recent report, OECD report How is the Global Talent Pool Changing?

In their report the organisation forecast that the number of students studying around the world would increase from 130 million today to 300 million by 2030 with all of that growth being in Chinese and Indian STEM courses.

Already that science and engineering emphasis is clear in today’s numbers.

To counter the drift away from STEM courses among students, PwC suggests a campaign to engage young people while they are still at junior school.

The Australian conundrum

Sadly, that’s unlikely to work in Australia given the nation’s economy is built upon property speculation driven by the wealth effect of rising real estate prices.

Two nights before the PwC report one of the highest rating shows on Australian television came to its 2015 finale. The Block, which features couples renovating and flipping properties, finished its season the apartments being sold at auction at record prices and the contestants pocketing between 600 and 800,000 dollars for a few month’s work.

For young Australians the message from their parents and society is clear; don’t innovate, don’t create, just buy as much property as you can afford.

In the US on the other hand, the business heroes are the builders of new enterprises; people like Steve Jobs, Elon Musk, Bill Gates, Mark Zuckerberg and the founders of Google.

Other countries like Israel, India and China, are aspiring to be the next generation of tech leaders. That’s what’s necessary to build a dynamic economy.

Creating enduring jobs

As the PwC report claims, “the jobs most likely to endure over the next couple of decades are ones that require high levels of social intelligence, technical ability and creative intelligence”

Harnessing that combination of social, creative and technical intelligence is going to be one of the challenges for all economies in a decade of change.

Getting the supply of STEM skills right will be essential for success for all countries at a time when digital technologies will drive most industries.

Driverless cars outrun the law

Governments are going to face a number of challenges as autonomous vehicles become common on the road.

Tesla founder Elon Musk believes there will be driverless cars on US roads by the summer, the New York Times reports.

One of the key factors in whether Musk’s prediction comes to and driverless cars are on the road by the middle of the year is the law with most people assuming autonomous vehicles are currently illegal.

Some experts however believe current laws don’t prevent driverless cars, with the New York Times quoting one industry leader who suggests there’s no legal barrier to autonomous vehicles taking to the road.

Tesla is not alone in pushing the envelope. Chris Urmson, director of self-driving cars at Google, raised eyebrows at a January event in Detroit when he said Google did not believe there was currently a “regulatory block” that would prohibit self-driving cars, provided the vehicles themselves met crash-test and other safety standards.

This view raises an interesting legal argument, who is the recognised driver of an autonomous vehicle? In the event of an accident or dispute does liability rest with the owner, the manufacturer or the passengers?

What this debate over driverless vehicles illustrates is how laws specific to today’s society aren’t always applicable to tomorrow’s technologies; certainly many of the laws designed for the horse and buggy era became redundant as the motor car took over a hundred years ago.

Another consequence of autonomous vehicles are the changes to occupations supporting the motor industry; it’s obvious that panel beaters and insurance lawyers may have their jobs at risk but Jay Zagorsky in The Conversation suggests nearly half of US police numbers would be redundant if there are no more car drivers.

Given how the funds local and state governments raise from traffic offences, a shift to driverless technologies could even have an effect on city budgets.

The motor car was the most far reaching technology of the Twentieth Century in the way it changed the economy and society over those years, it’s hardly surprising that we are only just beginning to comprehend how a shift to driverless vehicles may change our lives this century.

We’re crazy, not stupid

Alibaba’s Jack Ma has a fascinating snapshot of how global trade is going through a radical period of change

“We’re crazy, not stupid” is how Jack Ma describes his Alibaba team in an interview at the World Economic Forum in Davos, Switzerland, yesterday.

Much has been written about Jack Ma and the spectacular success of Alibaba and the WEF session with Charlie Rose is an opportunity for Ma to flesh out the story and destroy some of the myths.

One of the fascinating anecdotes Ma tells is how US cherry growers are preselling their harvests to Chinese customers through Alibaba and cites various other primary producers doing similar campaigns as how American small businesses can sell into the PRC market.

Ma’s interview is a fascinating snapshot of how global trade is going through a radical period of change, the shifting of China’s economy and where the future lies for many industries.

Returns in a low growth world

GE CEO Jeff Immelt sees a different world of investing and business in coming years where growth is slower

Today GE had their At Work conference in Sydney where CEO Jeff Immelt was interviewed by Westfarmers’ boss Richard Goyder.

One of the key messages from Immelt in his interview with the Australian conglomerate’s CEO was that finding growth in a flat global economy is going to take hard work and creativity; just relying on increased domestic spending is not longer an option.

Immelt was particularly pointed about the developed world’s economies, “the US is best since the financial crisis, growth is broad based but it’s still in the two to two-and-a-half percent range. It may be that’s the new normal.”

“Europe and Japan are pretty tough, forty percent of the world’s economy is still difficult, not going downward but stable and flat.”

Preparing for a slow growth world

“We’ve prepared ourselves for a slow growth world but one where you can invest in growth.”

“There’s still opportunities out there,” Immelt observed. “We’re going to have to make our own growth.”

Part of that growth story relates to the end of the consumerist era where debt funded consumer spending, particularly in the US, drove the global economy.

“We are coming out of a time period of the last ten or fifteen years where the US grew four and half percent every year with no inflation. So the US was the dominant economy in the world during the 1980s and 1990s.”

“We knew that was not going to be the same, so we’re in a world with no tail wind where we think greater focus on things like R&D, globalisation and things like that which will be critically important.”

Changing business focus

One of things Immelt did after the global financial crisis was to change the focus of the business away from the consumer finance division that had been a river of gold over the last thirty years back to being an industrial infrastructure company.

“Everyone needs to paranoid about relevancy and what they do great in the world today. There is no shelf life for reputation or anything else.”

“The engine of growth in the US when it was growing at its best was the US consumer, both in the combination of their own wealth and in taking on leverage. That was the engine of growth from 1980 to 2007.”

“It ended badly, but those were big engines of growth. What will be the next engines of growth?” Immelt mused.

Asian consumers to the rescue

Immelt sees the rise of Asian economies as being the next growth drivers with over billion consumers rising in affluence.

Whether those Asian economies can generate the growth that the hyper-developed economies of North America, Europe and Japan were able to provide during the past thirty years remains to be seen given China’s, and most of Asia’s, consumers having nothing like the West’s spending power.

The truth is we’re decades off Asia’s huddled masses having the economic strength to carry the global economy in the way the western world’s consumers did for the closing decades of the Twentieth Century.

For economies like Australia that are largely based upon domestic consumption funded by debt, this will mean a massive redirection of the economy away from renovating houses to investing in productive industries.

Immelt’s message to business leaders is clear; don’t rely on a rising tide of domestic growth to keep you afloat. Companies are going to have to find new markets and products if they want to grow, waiting for customers to arrive is no longer an option.

Gen Y and the need for building new businesses

As baby boomers struggle to maintain their living standards, the burden will fall on younger generations to build future businesses.

The retirement of the baby boomers has been an demographic inevitability, but it’s interesting how policy makers and the population in general have ignored the ramifications of this despite the first boomers now aged beyond 65.

One of the consequences of this is we may see an entire generation being forced to become self employed entrepreneurs.

Illustrating this point are two stories from the US over the last few days; John Mauldin’s dissection of where US jobs are going and Zero Hedge’s 35 facts that should scare American baby boomers.

The 35 facts really boil down to one thing, that an affluent, middle class retirement at 65 when average life expectancy is 78 is an illusion for most people – neither their bank accounts or the state treasury can support that sort of spending.

Which is the point of John Mauldin’s column, that over 50s are taking most of the available US jobs as they can’t afford to retire.

For those over 50 who’ve fallen out of the workforce due to unemployment or illness, getting back into the workforce is proving to be tough and for many of those folk their later years are going to be a struggle.

Equally, as Mauldin points out, the younger generation is being locked out of the jobs being hogged by the over 50s.

Another aspect to that is those employed Gen-X’s and Y’s hoping to get a crack at a seniors manager’s job or their name on the partner’s list are going to find a longer wait as the boomers hold on for as long as they can.

Those young ‘uns need those high salary jobs too, a Westpac report on US student debt posits that crippling education costs are making it harder for graduates to participate in the workforce and affects their spending power when they do find a job.

What’s clear is existing government, corporate and social structures are beginning to struggle with the realities of the changing workforce and its demographic composition.

On a personal level, those Gen Xs, Ys and boomers who are locked out of the workforce have to find a new way to participate in the economy. It’s probably those locked out of today’s workplaces who will build the businesses of the future.

Ordos and Detroit – A tale of two cities and two economies

The problems of Detroit and Ordos tell us much about the differences between the US and Chinese economies

This week bought news that that two cities, one in China and one in the US, had fallen into deep financial trouble.

While the bankruptcy of Detroit is very different to the developers of the Ordos new city failing, there is a strange symmetry between the two stories.

Detroit is the biggest US city ever to enter bankruptcy with an estimated $20 billion in debts, dwarfing the previous record of Alabama’s Jefferson Country’s $4 billion default in 2011.

The fall of Detroit wasn’t unexpected as the New York Times tells.

Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

Like most industrial hubs, Detroit grew became the centre of the US motor industry due to geographic and commercial advantages along with a few historical accidents but as the economy changed, the city’s importance faded.

It’s sad for the people of Detroit but it isn’t the first industrial hub to fade away; Ironbridge, once the cradle of the English industrial revolution, is today an open air museum and a charming rural spot.

Ordos on the other hand is an example of 21st Century government planning with the Inner Mongolian provincial leaders building the city of the basis of build it and they will come.

They haven’t.

The collapse of Ordos is going to be an interesting test of the Chinese economic model. Many of the country’s local and provincial governments – like Australia’s – have become dependent on the revenues from property sales. Now the market is drying up, local councils are having trouble paying their bills as Bloomberg reports.

Some Ordos district governments had to borrow money from companies to pay municipal employees’ salaries, Economy & Nation Weekly, published by the official Xinhua News Agency, said in a July 5 report on its website.

So while Detroit illustrates the stresses in the US system, so too does Ordos tell us about the problems facing Chinese governments.

The tale of these two cities also shows the difference between the US’ industrialisation of the early Twentieth Century and today’s economic development in the PRC and reminds why the results of ‘Capitalism With Chinese Characteristics’ may be very different to the modern American consumerist economy.

For Detroit, at least there’s good news as one US city manages to works its way out of bankruptcy. For the developers of Ordos though, things must be looking very grim.

Ordos image courtesy of Bert van Dijk through Flickr.

Does closed government hurt business and the economy?

Does a culture of government secrecy make it hard for innovators and entrepreneurs to flourish?

Earlier this week I interviewed Vivek Kundra, the former US Chief Information Officer and now Salesforce executive, on innovation, technology and government with some of the Australian business perspectives run as a story in Business Spectator.

Something that stood out for me from the interview were Vivek’s views on the effects of governments making both innovations and information freely available.

“Two policy decisions that transformed the future of civilisation – GPS opening and human genome project through the Bermuda Principles.”

While it’s probably too early to draw conclusions on how the opening of the human genome data will change business, it’s certainly true the Global Positioning System has allowed whole new industries to evolve and it’s an important lesson on making technology available to the masses.

The Global Positioning System was, like the internet, a US military technology developed during the Cold War with the Soviet Union.

After Korean Airlines flight 007 was shot down by Soviet fighters in 1983, President Reagan approved civilian use of the GPS – then named Navstar – to prevent similar tragedies.

Such a decision was controversial, this was military technology being given over to the general population which could be used by enemy forces as well as airlines and truck drivers.

No doubt if the GPS technology was developed in the UK or Australia, there would have been demands to monetize the service. It almost certainly would have been sold off to a merchant bank that would have charged for the service and stunted its adoption.

By making GPS freely available, the US gained a competitive advantage which maintains the nation’s technological and economic lead over the rest of the world.

This openness isn’t just an advantage for technology companies. While US governments are no means perfect, the relatively open nature of local, state and Federal administrations is an advantage for the United States economy and society. As Vivek says,

Making data available provides three concrete functions; it allows citizens to fight corruption, it allows you to build the next billion dollar companies and it transforms government functions by breaking down silos.

When the default position of government is to classify everything as secret or ‘commercial-in-confidence’, there’s little chance of an entrepreneurial culture growing in that society – instead you have a business culture that favours connected insiders who can trade off their privileged contacts within government.

A culture of closed government reflects the business culture of a society and the reluctance of both the private and public sectors to openly share knowledge is why countries like Britain and Australia will struggle to emulate the United States.

Taxing the internet

US laws making online retailers levy state taxes are going to spread internationally as lawmakers look at closing loopholes.

One of the competitive advantages for online shopping has been the difficulty in levying taxes on internet transactions.

This has been particularly true in the United States where individual states, counties and cities have different sales taxes, meaning a consumer in Birmingham, Alabama might pay 10% more than their friends in Billings, Montana.

Amazon in particular has been aggressive in exploiting these price differentials, right down to threatening states where ‘Amazon taxes’ has been proposed.

Now the US Congress looks set to pass a law which would make online sellers responsible for buyers’ state sales tax obligations.

The next stage will be treaties between countries on the collection of sales or value added taxes.

For many retailers though this won’t be particularly good news as price differentials are more than just the 10% GST or VAT and online shopping sites compete as much on product range and customers service.

What the US Congress’ bill really shows is how online retailing is maturing – rather than thinking of companies like Amazon, eBay or niche operators like Shoes Of Prey as being disrupters they are the new normal.

is G’day China a good idea?

Can the proposed China Week be successful in promoting Australian business and trade?

Yesterday’s announcement by the Prime Minister’s of an Australia Week in China may prove far more successful than the G’day USA events the idea is based upon.

G’day USA has been run for a decade and showcases Australia’s attractions, skills and businesses at events in Los Angeles and New York.

It’s been moderately successful but an emphasis on movie stars appearing at black tie Hollywood events illustrates Australian governments’ disproportionate focus in throwing money at US movie producers.

If China Week follows the US example we can expect private, exclusive dinners where Twiggy Forrest, Clive Palmer and the BHP board entertain Chinese plutocrats over bowls of shark fin soup and braised tigers’ testicles.

Should China Week follow that model then it will probably share G’day USA’s middling successes.

The opportunity to do it differently though is great as the Chinese-Australian relationship is far younger and hasn’t been locked into Crocodile Dundee type stereotypes on both sides.

As the Chinese economy matures and evolves, there’s an opportunity for Australian businesses and industries which haven’t been available for exporters to the US.

Done properly, G’day China could help the profile of Australian businesses in many sectors, particularly in those affected by the great Chinese rebalancing.

Let’s hope they do it properly.

Image of the Chinese embassy in Canberra, Australia from Alpha on Wikimedia

Australia and the Chinese Mexican stand off

As China rebalances its economy, a new wave of change is about to sweep global trade.

Twenty years ago visitors to Sanya on the south coast of China’s Hainan Island could find themselves staying at the town’s infectious diseases clinic, converted into a backpackers hostel by a group of enterprising doctors.

The Prime Ministers and Presidents attending of Boao Asia Forum this week won’t get the privilege of staying at the infectious diseases hospital as Sanya’s hotel industry has boomed, bust and boomed again following the island being declared a tourism zone in 1999.

Instead, their focus is on the pecking order of nations and for the Australians the news is not good. As the Australian Financial Review reports, the Aussies have been seated well below the salt by their Chinese hosts.

On the Boao list, Australia is outranked by Brunei, Kazakhstan, Myanmar, Zambia, Mexico, and Cambodia – even New Zealand Prime Minister John Key gets higher billing.

Central and South East Asian countries make sense as countries like Myanmar and Kazakhstan are China’s neighbours with strong trade ties.

That the Kiwis have been given priority over the Aussies by the Chinese government is not surprising in light of this.

An unspoken aspect for the Australian attendees to the Baoa conference is how long Canberra’s political classes can continue their forelock tugging fealty to the US without offending the nation’s most important trading partner.

Mexico’s entry on that list could be one of the most important with consequences for Australia and the world.

During the 1992 US Presidential campaign candidate Ross Perot coined the phrase “the great sucking sound” in his opposition to the North American Free Trade Agreement and the risk of losing jobs to lower cost Mexico.

As it turned out, the giant sucking sound was China – it turned out China’s admission into the World Trade Organisation had far greater consequences for the United States and Mexico than NAFTA.

Mexican manufacturing was one of the greatest victims of China’s rise as US companies found it easier to subcontract work to Chinese factories rather than setup their own plants in Mexico.

Now China is finding its own costs creeping up and labor shortages developing and Mexico is attractive once again. The Chinese and Mexican governments have been working on their relationships for some time.

As manufacturing moves out of China, the shifts in world trade we’ve seen in the last two decades are going to be repeated, this time with Chinese moving up the value chain the lower level work moving to Mexico and other nations.

The leaders at the Baoa conference have their work cut out for them in dealing with another decade of global change.