Category: economy

Six billion pairs of socks

How shallow beliefs don’t substitute for economic analysis or business sense

Ever since the days of Napoleon business people have lusted over the idea of selling into the Chinese market – the idea of a billion people clambering to buy just one widget each brings a gleam to the eyes of even jaded entrepreneurs.

When Deng Xaioping opened the Chinese economy in the mid 1980s Australian brewers, Swiss watchmakers and German motor manufacturers rushed into the country believing that a billion liberated peasants would rush to buy expensive beer and watches.

As it turned out, the real opportunities for foreigners were in the other direction. When China joined the World Trade Organisation in 2001 the boom that had already started in the Special Economic Zones along the southern Chinese coast spread across the Eastern provinces as manufacturing from Hong Kong, Japan and Taiwan to find cheaper labour.

300km South-West of Shanghai the city of Datang became “sock town” where local companies manufactured a third of the world’s sock supply.

Chinese sock manufacturers became so competitive that their Japanese counterparts were forced to move upmarket in an effort to secure a position in an industry awash with cheap products.

Today the Chinese sock industry is looking sick as manufacturers go broke and inventories pile up reports The Observer.

Excess capacity is a problem in many industries, particularly motor manufacturing where governments around the world have supported their local producers resulting in a glut of cars and trucks. Socks are no exception to the laws of supply and demand.

The travails of China’s sock industry are a cautionary tale for those who project straight lines for Chinese growth.

Facile assumptions that every man, woman and child on the planet needs to buy two pairs of socks a year, or that China will build millions of steel hungry apartments each year, is not economic analysis and any business built on such shaky beliefs is leaving itself vulnerable when things don’t work out.

The same is true for nations. Hollow assumptions can put an entire economy on shaky ground. Just thinking that every Chinese family needs six pairs of socks doesn’t guarantee economic success.

Moving on from the gadget era

Amazon reinvent their business to suit changing economic times

Yesterday at the launch of the next generation of Kindle e-readers Amazon’s CEO Jeff Bezos observed why the various Google Android based tablets have failed.

Why? Because they’re gadgets, and people don’t want gadgets anymore. They want services that improve over time. They want services that improve every day, every week, and every month.

Throughout the industrial revolution progress and innovation was about creating products that improved people’s lives – whether it was Josiah Wedgwood making affordable crockery, Thomas Edison commercialising the light bulb or Henry Ford making cheap motor cars available to the masses – these innovations changed the way we lived or did business.

In the late Twentieth Century business focused more on creating gadgets and our lives became a race to accumulate more useless tat to store in our big McMansions to store the junk in.

We wore out our credit cards and home equity in “buying stuff we don’t need to impress people we don’t like” throughout the 1990s and early 2000s.

Today that’s changed, consumers are now more cautious and, despite the efforts of governments to prop up the broken system, the great credit boom is over.

Jeff Bezos is onto this, instead of Amazon offering me-too products that don’t add value,  “people don’t want gadgets anymore. They want services that improve over time.”

The word ‘service’ is notable — one of the things Amazon have achieved is changing how customers use books and DVDs from outright purchases that they can trade and sell to licensed products where Amazon and publishers control distribution.

Amazon are consolidating their position as one of the big four Internet empires. How Google, Apple and PayPal respond to Amazon’s suite of services will define much of the online economy.

Goodbye to the electronics store

As the economy and society change, the era of the big box retail store is coming to an end.

“Can Electronics Stores Survive?” asks the Wall Street Journal.

The future doesn’t look good with the liquidation of Circuit City in the United States and the exit of Australian giant Harvey Norman from the electronics markets.

Yet Apple Stores are growing and while it’s tempting to dismiss their sales training as brainwashing the truth is their staff are among the most profitable retail employees on the planet.

The real problem is the Big Box category killer store featuring wide product lines but poorly trained staff motivated only by commissions is a business model whose time has passed.

Customers can now go online, research website that are far more informative and honest than the staff at the megastore then get the appliance delivered and often installed for less than the shelf price at the mall.

The earliest industry this has affected is the computer sector – long ago companies like Dell and Gateway changed how people shopped for PCs.

Given the economics, it’s surprising the low margin big box stores survived as long as they could and the main reason they did was because appliances were an ideal channel for pushing profitable finance plans and extended warranties.

Often the store and sales assistant made more money out of the “interest free 72 months” deal, the three year warranty and the connector cables than they did from selling a top end laptop or plasma TV.

Now the easy credit era is over, those add-ons aren’t so profitable and with Amazon leading an army of e-commerce retailers changing customer expectations, those businesses locked into Big Box, easy credit way of doing things have to rethink how and what they are selling.

Harvey Norman’s founder Gerry Harvey said recently that people would still buy big items from his store. The reality is they are moving across to sites like Winning Appliances where they can choose the items, have them delivered installed and the old appliance taken off, a godsend when you’re dealing with a 50Kg washing machine or fridge.

Apple’s success shows retail does have a future. It just doesn’t lie in the low service, Big Box model that grew out of the easy credit and cheap energy economy of the late twentieth Century.

Short sharp shocks

China’s changes will catch us by surprise regardless of whether they are good or bad.

In Atlantic Magazine’s China’s long history of defying the doomsayers, Stephen Platt and Jeffrey Wasserstrom put the case that the Chinese Communist Party is unlikely to fall in our lifetimes.

China’s military is presently powerful enough and its diplomacy stable enough that the Communist Party faces no realistic threats from outside. Internally, its control over society is effective enough that, while unrest and discontent may be widespread, there are neither well-organized opposition parties nor rebellious armies that might seriously challenge the central government.

They are probably right, it’s difficult to see any immediate threat to the power of China’s current leaders.

Although we should keep in mind that only a few decades ago it was inconceivable that the Soviet Union would disintegrate or the Warsaw Pact dissolve.

Had someone wrote in 1986 that within five years both would happen, they would have been written off as being foolish. But that’s what happened.

In the stock market it’s said “the market can stay irrational longer than you can stay solvent” and it’s true for any pundit – you may be right that property is overvalued, the US is in decline or the Eurozone will break up, but the powers that be will may be able to kick the can down the road and sustain the unsustainable for a lot longer than any of us expect.

Steve Keen found this with the ‘walking to Kosciusko” bet where he was railroaded into giving a fixed date of when the Australian property market would fall. He, nor anyone he made the wager with, had any idea of the billions of dollars governments would throw at the market to maintain prices.

All too often people make the right calls about property markets, economies or the fall of regimes but get their timing wrong.

In his book The Sun Always Rises Ernest Hemmingway’s character Mike Campbell describes how he went bankrupt – “Two ways. Gradually, then suddenly.”

And so it is with empires, nations, ideologies and even the most powerful corporation. When the change happens it’s sudden and unexpected.

Google announces eTown awards for Australian towns

How prepared are communities for the digital economy?

I don’t normally post media releases onto the site, but it appears there’s no posting of the Google eTowns announcement. As I’m writing a story for Technology Spectator on it, here’s the release.

One thing that leaps out when reading the media reports on this is how many outlets just copy and paste. Only the Fairfax entertainment reporter went to the effort of rewriting the release and adding some additional context. You have to wonder how long ‘churnalism’ can survive given readers are onto this laziness.

 

EMBARGOED UNTIL THURSDAY 30th AUGUST, 4:30PM (EST)

 

Perth wins top spot in Google’s eTown Awards

Western Australia capital beats out eastern states as centre of digital boom

Perth leads the list of Australia’s top 10 eTowns, Google announced today. This new Google award recognises and ranks those communities which are outpacing the rest of the country in having its small businesses use the web to connect with customers and grow.

The web is transforming all businesses in Australia, not just those typically considered to be “Internet businesses”. The digital economy is already worth as much as Australia’s iron ore exports, according to Deloitte Access Economics, and it’s forecast to grow by $20 billion to $70 billion by 2016.

To provide a snapshot of this vital economic activity, Google looked at more than 600 local government areas to analyse which communities are contributing the most to the digital economy. The top 5 metropolitan and top 5 regional eTowns for 2012 are:

Metropolitan

  1. City of Perth, WA
  2. City of Yarra, VIC
  3. City of Adelaide, SA
  4. North Sydney, NSW
  5. Ryde, NSW
 Regional

  1. Byron Shire, NSW
  2. Meander Valley, TAS
  3. Cessnock, NSW
  4. Wingecarribee Shire, NSW
  5. Scenic Rim Regional Council, QLD

Federal Small Business Minister Brendan O’Connor, who is launching the inaugural eTown Awards at an event in West Perth today, said;

“The digital economy is fuelling Australia’s economic growth and it’s important businesses of every size are well equipped to take advantage of the potential.  I hope this award encourages other small businesses to get online to connect with people who are actively looking for their products and services.”

Perth’s Lord Mayor Lisa Scaffidi said, “Perth may be known for its mining boom but this award shows that our businesses are actively grabbing hold of the digital boom. The City of Perth is proud of its eTown Award and I am delighted to represent an area whose businesses are so connected with both their local community and the entire world thanks to the web.”

Online advertising is a growing phenomenon and Google, through its online advertising and other services, is in a good position to act as a barometer for the strength of this commercial activity – particularly in small businesses. To come up with the eTown Awards list, Google analysed data on the number of local businesses in each local government area which are advertising with Google AdWords and/or have created a free website using Google and MYOB’s Getting Aussie Business Online initiative.

Byron Shire, home to the popular holiday destination, leads the regional eTowns list with a high proportion of accommodation, recreational hire and tours providers using the web to drive their businesses.

Claire Hatton, Head of Local Business for Google Australia said, “The eTown Award winners show that anyone anywhere can reap the benefits of the digital economy. These days being on the web is as important as having a phone. Australians expect to be able to seek out products and services online, and local businesses need to be found to compete.”

For more information about the eTown Award winners and for case studies on how local businesses are succeeding online and driving economic growth, visit www.google.com.au/ads/stories [NB: website will be available after embargo lifts].

Media are invited to attend the announcement of the eTown Awards with the Minister for Small Business, Perth’s Lord Mayor and Google Australia.

Local businesses located in each eTown may be available for interviews.

Thursday, 30th August at 2:00pm – 3:00pm
The Yoga Space
Shop 11, Seasons Arcade,
1251 Hay Street, West Perth.

To RSVP to the event or for interviews please contact:

Redacted

Notes to Editors

  1. AdWords is Google’s online advertising system which enables businesses of all sizes to advertise relevant text ads next to Google search results. Businesses decide the text and their budget and only get charged when someone clicks on their ad.
  2. The Google eTown award top ten list was created by comparing the number of small and medium sized enterprises that used AdWords in each local government area and/or have created a website using Google/MYOB’s Getting Aussie Business Online. The results have been normalised for the relative population of each LGA.

Risk free fallacies

Can we really build a risk free world?

One of the conceits of the late Twentieth Century was that we can engineer risk out of our lives.

Derivatives like Collateral Debt Obligations were thought to overcome financial risks, think contracts would eliminate business risks and wise central banks would massage the economic cycle to banish the risks of economic crises.

In schoolyards, the kids are banned from doing cartwheels and playing ball games – in response to a recent edict prohibiting physical activity at a local school an education department spokesman said the ban was to prevent, and not in response to, playground injuries.

So nothing’s happened to provoke a ban, just someone decided there was risk and the first reaction is to eliminate it rather than manage it.

In a litigious society where a culture of blame has developed this reaction is understandable. If a kid gets hurt in the playground then the parents might blame the teacher and one should be under no illusion that in the NSW state education system, the industrial concerns of teachers will always trump the welfare of students.

So the cartwheels must stop.

The strange thing with our culture of blame is that when something goes seriously wrong, such as the implosion of the banking system due to greed and misunderstanding of risk, no-one is held responsible.

For lawyers, this culture is understandable. After all, their job is to warn clients of legal risks and it’s true that every time we walk down the street or jump in our car we might make a mistake that could see us in court.

But we learn to manage that risk and we accept the odds every time we choose to drive down to the supermarket.

The danger in believing we can eliminate risk is that removing one element of risk often results in unexpected consequences – they are even more unexpected when you don’t understand the risks in the first place. CDOs and the shadow banking system are a good example of this.

Government seek to pass laws eliminating risks and in doing so create new risks, particularly when the Acts they pass are poorly written and badly thought out.

There is always the question of what risk we are addressing – in the modern corporatist political system, the PR risk to a government always takes priority over a real risk to citizens. Passing a law to protect the minister’s backside might make life more risky for others.

As helicopter parents, always hovering over our children and blaming teachers, schools, neighbours and other parents when something goes wrong, we’re creating a whole set of risks we don’t understand.

For politicians, managers and leaders their main responsibility is to manage risk, not pretend it’s been eliminated by the latest memo, law or silly schoolyard ban.

Fleeing the group buying market

The air deflates from the group buying bubble

As Apple becomes the highest capitalised stock in US market history, former daily deals site and market darling Groupon continues to sink into misery.

Groupon led the group buying mania of 2011 and its stock market float in November of that year valued the business at 13 billion dollars, ten months later the business has a capitalisation of three billion, wiping out three quarters of its IPO shareholders’ investment.

To make matters worse for the daily deals site the New York Times features a story looking at deal fatigue, where customers tire of the daily emails offering discounted cafe meals or personal training while businesses find the deals just aren’t worth the trouble.

“I pretty much had to take a loan out to cover the loss, or we would have probably had to close,” the Times quotes Dyer Price, owner of Muddy’s Coffehouse in Portland, Oregon. “We will never, ever do it again”

In a straw poll, the Times correspondent visited neighbouring businesses who had similar stories.

The common factor with all the business horror stories surrounding group buying or deal of the day sites is high pressure sales tactics that blind the merchant to the downsides of these offers.

For these services, it’s essential to move through as many deals as possible so salespeople are driven to sign up as many merchants as possible. When you put pressure on sales teams, they tend to behave in ways that aren’t always good for customers.

Most of the customers Groupon attracts – or those of other deal of the day sites – are price sensitive and fussy. Having demanded their deal, most of these customers are not coming back so it may well be that daily deals are the most expensive, disruptive and pointless marketing channel ever invented.

The results of the high pressure tactics are shown in a Venture Beat story which claims Groupon is now threatening to sue unhappy merchants as payments slow and the daily deals struggle to attract customers.

What was always misunderstood during the group buying mania was that Deal Of The Day sites weren’t really technology plays – they were reliant on good sales teams driving deals. The technology being used was incidental to the core business concept.

In this respect, services like Groupon had more in common with the Yellow Pages or multi-level marketing schemes. It was about salespeople delivering orders and taking a percentage off the top.  To compare Groupon with Google, Facebook or any tech start up was really missing the point.

This isn’t to say that group buying or deals of the day services don’t have a role in business. For retailers clearing inventory, hotels working around quiet periods or new businesses wanting to get attention in a crowded marketplace, there’s an argument for offering a deal on one of these sites.

For most though it was an expensive and pointless exercise that attracted the picky, price sensitive customers that most business would avoid rather than encourage. That’s the harsh lesson learned by many of the businesses who fell Groupon’s fast talking salesteams.

Is Australia’s blue sky future making way for a red sunset?

Australia’s political and business leaders are not prepared for Chinese risks to the nation’s economy

Australia’s political and business leaders are convinced the nation will ride on the back of a fast growing China for the foreseeable future.

Having climbed off the sheep’s back during the 1980s and moved from being an economy dependent on agricultural exports to a ‘clever country’ exporting high value services and products, in the late 1990s Australia turned its back on building a modern economy and decided to stake the future on a never ending coal and iron ore boom driven by Chinese industrialisation.

Smarter than Bill Gates

Australia’s success in riding China’s coattails allowed the Reserve Bank Governor Glenn Stevens in 2010 to boast how he and the nation’s politicians were smarter than Bill Gates who nine years earlier warned Australia about being over reliant on commodities.

Despite the hubris, there are real risks in the Chinese economy that the blue sky mining school of Australian economic management needs to plan for.

China warnings

The warning to US Presidential candidates on trade with China by Professor Patrick Chovanec of Beijing’s Tsinghua University’s School of Economics and Management is a good starting point.

In his warning Professor Chovanec points out that Chinese growth in recent years has been driven by the construction sector, even if building activity were to stay constant this would shave off half of China’s growth rate. The options for stimulating the economy in manner similar to 2008 have narrowed.

China’s economy is not just slowing, it is entering a serious correction.  The investment bubble that has been driving Chinese growth has popped, and there are no quick “stimulus” fixes left.  There is the very real possibility of some form of financial crisis in China before year’s end.

China’s stimulus package was the world’s biggest response to the 2008 Global Financial Crisis, followed by the South Koreans (another Australian commodities customers) and Australia itself.

While the Chinese commodities boom drove most of Australia’s trade, it was domestic spending driven by the Rudd government’s stimulus package that saved Australia from entering recession.

Squandering a century’s boom

One of the notable things about Australia’s commodity success in the 2000s is just how little a dent the booming coal and iron ore exports put in the trade deficit. Despite record terms of trade, Australians still manage to spend as much on imports as they make on exported goods.

Not that this worries Australia’s leaders who seem to spend all of their time worrying about pandering to a tiny number of marginal seat voters who listen to fear mongering talkback radio hosts which is what has driven the last two weeks’ obsession with a few hundred asylum seekers.

Professor Chovanec points out the Chinese leadership is distracted as well with their struggles over a messy change of Politburo leadership, risking that the policy makers might miss any opportunity they have to engineer a ‘soft’ landing for their economy.

The biggest risk is that of a crisis engineered to distract a discontented population warns Chovanec;

in a worst case scenario, China may be tempted to provoke a conflict in the South China Sea to redirect popular discontent onto an external enemy.

Already such things are happening, as anti-Japanese demonstrations step up around China over an island dispute.

There are no shortage of island disputes in the South China Sea and almost all scenarios involve allies of the United States – the only one feasible dispute that doesn’t is Vietnam and China’s leadership has had their nose blooded in such disputes with their southern neighbour before.

Even if we don’t see military tensions between the US and China, we certainly are going to see trade and political disputes in the next few years as both countries adapt to their places in a changed world.

For Australia’s business and political leaders, it means being prepared for a world more complex than one where a country can get by just lazily skimming a few dollars of easy iron ore exports to China.

We have to hope Australia’s leaders are capable of dealing with the challenges of a much more dynamic and difficult world where huge growth of one friendly trading partner is not assured. The stakes are too high to be distracted by suburban apparatchiks scoring meaningless political points off each other.

Is Small Business Whingeing its way to irrelevance

Are small businesses worrying about the wrong issues?

“Is small business whingeing its way to irrelevance?” first appeared in Smart Company on August 16, 2012.

Last week, TripAdvisor announced the results of a worldwide hospitality survey. One of the things that leapt out of the survey was how large hotel chains are using social media while smaller Australian establishments are languishing.

Following on TripAdvisor’s survey was the release of accounting software company MYOB’s regular index that showed businesses are retreating from the online world with reduced usage rates of social media, eCommerce and online payments.

At an Australian Israel Chamber of Commerce lunch in Sydney on Tuesday, MYOB’s CEO Tim Reed and Google Australia’s Tim Leeder discussed small business and the web with their Getting Australian Business Online program missing its target of 50,000 sign ups since its launch in March last year.

The fact more than half of Australian businesses don’t have a website despite free services from Google, WordPress, Weebly and a host of others indicates a deeper apathy among small businesses towards a whole range of issues.

Earlier this year the New South Wales state government abolished the popular Small Business September program with barely a squeak from the SME sector, with some small business groups actually welcoming what was a dramatic cut to support programs.

Compare this to the Olympic athletes, not only do we see the AOC coming out swinging with demands for more funding but the yachting team are staging an effective campaign to reinstate NSW government programs to support their sport: The total opposite to the small business community.

Small business, on the other hand, rolls over and accepts cuts to programs, poorly thought out regulations and government procurement policies that favour multinationals over local companies which are capable of the job.

When small business is given a chance to have a voice, the community blows it with whingeing. At the NSW Small Business Commissioner’s roadshows earlier this year it was notable how much time was spent whingeing about group buying services, traffic clearways and council permits for coffee tables rather than sensible and achievable wins for the SME sector.

So it wasn’t a surprise that the result of that roadshow was the cutting of useful programs and little effective change.

The best example of this whingeing rather than action is the current campaign to increase the GST threshold and abolish penalty rates.

Instead of focusing on the real problems facing businesses such as high rents, profit gouging from distributors and poorly thought out state and federal regulations imposed by both sides of politics – the small business and retail sectors manage to demonise their staff and customers and increase the suspicions of consumers and workers that they’re being ripped off by big, bad employers.

In reality, the shopkeepers and other small businesses are struggling to adapt to a rapidly changing economy. They are feeling those changes earlier than the rest of the economy because they don’t have the cushions of fat margins, political connections or guaranteed incomes of the corporate, public or political sectors.

Those struggles will give the small business sector an advantage over the bigger and slower groups – having adapted to the changed economy, those smaller businesses will be stronger and fitter than their bigger competitors.

Chris Ridd, of cloud computing accounting service Xero, one of MYOB’s biggest competitors, puts this best.

“Technology is an enabler and can actually help small businesses gain efficiencies, reach new customers and generate new revenue streams. Why turn your back on the one thing that can turn your business around.”

It’s the proactive business people adopting new technologies who are going to thrive over the next decade. Whingeing about TripAdvisor, the GST or dumb government policies isn’t going to save an enterprise that’s become irrelevant.

So make sure your website’s up to date, check what customers are saying about you on social media or review sites and have a look at those cloud computing services that can improve your business’ profitability and efficiency.

The time to do it is now, before your business becomes irrelevant.

Economic cholesterol

How Australia’s property prices are the real reason for the country’s poor productivity.

Australia’s productivity isn’t growing and it’s fashionable among business community to blame Australia’s productivity decline on high labour rates.

While there’s an argument that the cafe worker earning $25 an hour is overpaid – although we don’t hear the same criticism of multimillion dollar packages paid to executives with at best mediocre track records – the argument is far more complex.

In the McKinsey report linked to above, the mis-investment is put down to the recent resource boom, but is this really true?

To really understand why Australia hasn’t performed well, we need to look at why the country is so reluctant to invest in assets that will increase our productivity.

The role of property

Underlying the recent Australian “economic miracle” is the property industry. The country’s domestic building sector is one of the most efficient job generators in the world. Stimulate the Aussie property market and job growth ripples quickly through the economy.

This was one the lessons learned in the 1990s recession – successive governments and bureaucrats have learned the mantra “go early, go hard and go residential” when it comes to cutting interest rates and introducing home building incentives like the first home owners grants.

It was no coincidence that when the Rudd Government was faced by the Global Financial Crisis they launched a wave of initiatives to boost the property industry and shore household wealth. Just as the Howard and Costello governments did in response to the Long Term Capital Bank collapse, Asian economic crisis or the 2001 US recession.

While those stimulus measures have kept Australia out of recession for two decades, the failure to unwind the measures after the economic shock has passed leaves the nation’s property market remains “hyper stimulated” and over valued. That over investment in property has sucked funds away from other areas which affects the competitiveness of Aussie industry.

The great property squeeze

One of the great tragedies of the 1990s was Sydney’s East Circular Quay precinct which could have been one or two of the world’s greatest hotel sites, literally on the steps of the Sydney Opera House.

Instead, high priced apartments were built on the site and Sydney’s tourism and convention industries are crippled by a shortage of top end hotel rooms.

Tourism isn’t the only industry affected by the Australia’s obsession with residential property – across the country service stations, sports clubs and convention centres are being demolished to make way for high rise apartment developments. No economic activity seems to trump property speculation when it comes to attracting Australian investors.

Ideological beliefs

Adding fuel to the property obsession are the ideologies of the 1980s which are still closely held by the nation’s business and political leaders.

Capital gains tax concessions introduced by the Howard government in the late 1990s made property and share speculation far more attractive that invention, innovation or entrepreneurship.

To make matters worse, Australia’s social security policies and taxation laws favour capital gains – any Australian over thirty who has tried to build a business has plenty of mates who did far better out of negatively geared property than those who foolish enough to create new enterprises.

For those older entrepreneurs facing retirement, they are in for a nasty shock if their businesses don’t sell for what they hope. They would have been far better staying in a safe corporate job and buy a few negatively geared investment properties.

Again, this ideological belief that capital gains trumps wage or business income means investment is steered away from productive assets and into residential property that can be held for a capital gain.

The Ticket Clipping Culture

Australia’s failure to invest in productive assets is not just a feature of the household investor, the corporate sector has a lot to answer for as well.

While good in theory, the superannuation system has been a failure in providing a capital pool for new and innovative businesses and productive investments.

The superannuation trustees have largely focused on hugging the index, the ticket clipping funds management culture means that any real investment for productive assets is restricted to funding toll roads where fat management fees and guaranteed commissions mean an easy life for those fund managers.

In a perverse way, the short term appearance of the ticket clipping might mean increased productivity as costs are cut to improve profits. In the medium and long term, the lack of investment in these assets means in the long term these assets too cease to add productive capacity to the economy.

Of course there’s more to infrastructure investment than toll roads and airports with crippling parking charges, but the ticket clipping classes of Australia’s investment community don’t see a quick buck in that.

Increasingly the boards of Australia’s major companies are appointed by those running the superannuation funds and these people have the generational bias away from productive investment. Instead they see slashing IT, training or asset investment as costs to be cut in the quest of boosting bonus delivering profits.

More fundamentally, three decades of consolidation in most of Australia’s industries has seen a generation of Australian executives whose main expertise is that of maximising their market power at the expense of their competitors. Investing in productive capacity is not a major concern for those corporations.

Fixing the problem

Getting Australians – whether mom and dad property speculators or high paid fund managers parking money in the ASX 200 or plonking money in the latest toll road boondoggle – to change attitudes and invest in productive capacity is going to take a generational change.

As long as the attitude persists that property is a safe investment that doubles in real value every ten years then Australians are going to continue to ply cash into apartments and houses.

It is possible that a period of Australian Austerity that suppresses property prices may force that change in investment attitudes. An weak property market is one of the unspoken effects of the spending cuts advocated by many right wing commentators,

The question is whether those commentators, or the political classes who derive their much of their policies from right wing ideologues, view have the stomach for disruption that will come when weaning Australians from the teats of corporate ticket clipping and property speculation.

Stranded markets

Businesses with old, declining markets are going to slowly fade away

“Stranded assets” are an accounting term for property that’s worth more on the books than it is in the marketplace.

Often the valuation problem has come about because of market, legislative or physical changes – what was a valuable and useful asset becomes isolated from the rest of a business.

Customers are biggest asset we have in our business – so what happens if our customer base becomes a “stranded asset”?

This situation isn’t far-fetched in a time when technology changes a marketplace – a blacksmith providing services to stagecoach companies would have been in this situation a hundred years ago.

In response to Are Businesses Fleeing the Online Space?, Xero’s Australian CEO Chris Ridd made some points about the problems MYOB have in the accounting software marketplace.

We see that going online to the cloud is finally allowing many small businesses the opportunity to avoid the “walk into Harvey Norman and fork out hundreds of up-front dollars on on-premise software” experience and instead go straight to the simplicity and cost efficacy of the cloud.

This is evidenced in our numbers and the fact that 40% of new customers signing up to Xero are coming from no software. (I mentioned last week at the NBN Forum that it was 30%, but we doubled checked and were staggered to find it was actually a lot higher). So we are creating a new market and cloud is therefore increasing the addressable market for accounting software. The cloud changes the economics of doing IT and makes automation of the business accessible and attractive to  a whole new category of SMEs.

Chris’ point is interesting – the new generation of businesses aren’t going to the computer superstore and buying box software. Which is a problem for those who sell box software such as MYOB and Harvey Norman.

What’s more, customers have moved away from those same superstores along with things like phone directories and classified ads, which is the problem companies like Sensis and Fairfax have to deal with.

A decade or so ago, MYOB, Sensis and Fairfax were dominant in their markets with a loyal band of customers. Today the remaining customers – many of whom have not changed their business plans for decades – are”stranded markets” made up of holdouts who won’t move to new technologies.

Those holdouts aren’t particularly profitable and they are slowly leaving their industries through retirement or, increasingly for these slow adopters, going broke.

Being dominant in a market that’s declining in both profits and sales is not the place to be for any business.

It’s difficult for the managers of these enterprises to move as their existing products are their core business, which is the classic innovators dilemma, but the alternative is to end up like Kodak or Sony.

One thing missed in the eulogies for Steve Jobs is how he overcame the innovator’s dilemma problem within Apple. When it became apparent the old Mac OS was a barrier to innovation, he killed it along with the floppy disk and Apple Device Bus.

Apple’s customers hated it as most of them had a substantial investment in the hardware which Jobs had made obsolete overnight. But almost all of them came back and became greater fans.

News Corporation are trying a different tack to Steve Jobs in splitting the operation into an “old” business and a “new’ business. That way the old business can find a way to make money or quietly fade away without affecting the newer, more dynamic entertainment and electronic arms of the organisation.

The challenge for MYOB – along with Harvey Norman, Fairfax and Sensis – is to move their customers to the new technologies, those who won’t go are the past and those stranded customers will isolate the business from the mainstream.

Are Aussie Businesses fleeing the online space?

Business confidence is dragging down online engagement according to a new survey.

Every quarter accounting company MYOB releases its Business Monitor surveying the SME sector’s confidence and how they are using technology along, usually these show more businesses moving into e-commerce, setting up websites and adopting social media.

The July 2012 monitor (PDF File) is unusual as it shows a decline in various online business activities, the main areas that slumped were the following;

  • Paying bills on suppliers’ websites: fell from 44% of respondents to 37%
  • Buying products/services online: fell from 37% to 24%
  • Using internet search engines to promote their business: fell from 31% to 24%
  • Conducting email marketing to potential or existing customers: fell from 26% to 24%
  • Accepting online payments from customers: fell from 25% to 19%
  • Using any form of social media for business purposes: fell from 21% to 16%

All of these are a bit odd, particularly the first three, and it may be an errant group in the 1,000 businesses surveyed.

Of the others, email marketing’s fall isn’t surprising as businesses have been finding returns in this field falling for sometime with customers unlikely to open messages unless there is a compelling reason.

Social media isn’t surprising as there’s a feeling of fatigue among business owners confronted with a new hot platform every few months – increasingly it’s getting harder to become enthusiastic about Pinterest or Google+ when existing experiments in Facebook or LinkedIn haven’t really shown results.

Accepting online payments from customers declining really does indicate a hiccup with the surveyed group, with more online payment services than ever available to small business, it doesn’t make sense that this service is declining.

MYOB’s CEO Tim Reed puts the decline down to economic uncertainty saying, “We also found more business operators are experiencing revenue falls than are experiencing rises, and the majority lack confidence in a short term economic recovery. I suspect this has seen many shy away from online activities as they focus on the health of their business.”

If that is the case, then the small business community is in bigger trouble than we thought. Hopefully MYOBs result is just an errant survey result. We’ll be watching to see what the next index shows.