Decoding the new economy

Does the motor industry matter in the 21st Century?

Is the automobile industry the driver for 21st Century economic growth?

One of the key drivers of Twentieth Century industrialisation was the motor industry. Today it’s an industry plagued by over production, distorted by government subsidies and increasingly dominated by a small group of major players.

In Australia, the Productivity Commission examined how the motor industry was evolving and its preliminary report (PDF) is a good snapshot of the current state of play in the global automobile sector.

Chronic worldwide overcapacity is what stands out most starkly in the report with most of the world’s manufacturers operating at less than the 80% production break even point that’s assumed in the industry.

Australia is a good example of how the motor industry was held as being essential to a country’s development. Like most of the world, the early Twentieth Century saw dozens of small automobile manufacturers pop up in the backyards of enthusiastic tinkerers – it’s like the surge in smartphone apps today.

Eventually only a handful survived the industry shakeout following the Great Depression and by the end of World War II the industry was largely dominated by US, British and European manufacturers, today that consolidation has increased with East Asian producers replacing the UK carmakers.

The lessons of World War II

One of the lessons from World War II was that having a strong domestic manufacturing industry was a nation’s strategic advantage. So governments around the world protected and subsidised their automobile industries along with other factories.

For Australia, bringing in the required labour to run those manufacturing industries was a seen as a key to the nation’s post World War II growth and it was one of the contributors to the country’s ethnic diversity that started to flower in the late 1970s.

Today the echoes of those policies remain with governments around the world still subsidising their motor industries despite the economic and strategic military benefits of automobile manufacturing being dubious at best.

Australia’s failure

In Australia the modest incentives provided by governments hasn’t been enough to keep local car plants operating, which was the reason for the Productivity Commission’s report into the future of the industry.

The report’s message is stark for Australia, as a high cost nation that hasn’t invested in skills or capital equipment there’s little reason for the world to buy Australian technology as there’s little being built that the world wants or needs.

With the nation’s advantages in agriculture and mining – not to mention solar power – Australia should be leading in technologies that exploit these advantages but instead the nation is a net technology importer in all three of those sectors.

To be fair to Australian industrialists, they responded rationally to government policies that favour property and share speculation over productive investment. Coupled with the drive to create duopolies in almost every sector of the Aussie economy, it didn’t make sense to invest when they could exploit domestic markets rather than invest in new technologies.

Becoming high cost economies

For nations moving up the value chain such as China, Thailand and Brazil; Australia’s failure to develop high tech manufacturing and inability in adapting to being a high cost economy is a powerful lesson in the importance of framing sensible long term economic policies.

The Australian Productivity Commission report illustrates how the motor industry does have a role in helping countries move into being industrial powerhouses, but once a nation becomes a high cost economy it takes more than dumb subsidies to maintain a competitive advantage.

Germany and the US illustrate this, and the fact both countries’ motor industries are running at greater than 80% capacity shows how their automotive sectors are evolving. It’s no co-incidence that electric car manufacturer Tesla Motor’s plant in Fremont, California was a former GM-Toyota joint venture factory.

As motor vehicles become increasingly clever so too are their manufacturers; unless car builders and governments are prepared to invest in the brains of their workers and modern technology then they have little future in the 21st Century.

For nations, the question is whether the Twentieth Century model of building a car industry is relevant in this century. It may well be that other industries will drive the successful economies of the next hundred years.

Finding the smart money

Can events like Sydney’s AngelEd and London’s City Meets Tech help those cities become global startup centres?

Around the world startup communities are working to connect with local investors, in Sydney and London two groups are showing how it is done.

“We’re looking at turning idle money into start money,” is the aim of Sydney AngelEd says one of its founders, Ian Gardner.

Fitting startup companies’ capital needs into the established criteria of investment managers is an ongoing problem that AngelEd’s founders want to resolve. “We see startups becoming an asset class,” says Gardiner.

AngelEd, to be held on November 7, aims to educate high wealth investors and asset managers on understand the risk, benefits and hype around angel investment, particularly in tech companies.

The global search for funds

Startups around the world are struggling to engage with investors – in London, the local tech community has set up City Meets Tech to introduce British investors to high growth companies.

London should have an advantage in this field given its leading role in the global finance industry, however the challenge for the tech community is to find financiers who are prepared to accept higher levels of risk than mainstream investments.

“The City is generally risk adverse and doesn’t understand tech and tech start-ups,” says the City Meets Tech website, “though really it’s about understanding the business and managing risk though unfortunately innovation requires at least some risk.”

Australia’s trillion dollar superannuation system should similarly give Sydney an opportunity that to become a global centre however it suffers from a similar, if not worse, conservative investment culture to London’s.

Turning Sydney into a global finance centre has been an objective successive state and Federal governments for twenty years but the sleepy, comfortable and risk averse culture of Australian fund managers offers little to attract foreign investors or companies.

Much of Australia’s is problem is the insular nature of local fund managers with all but a tiny part of the nation’s retirement savings being put into the top local stocks, listed property funds or domestic infrastructure projects that are notable for their lousy returns and extortionate management fees.

Breaking that mentality is going to be the key to both AngelEd and the Sydney’s success as a financial centre.’

Competing with the world

While London and Sydney are struggling with the challenges of encouraging investors into the high growth sectors, cities like Singapore and New York are developing investor communities that are attracting entrepreneurs to their cities.

Many governments dream of being the next Silicon Valley and while it isn’t likely anyone can recreate the circumstances that led to Northern California becoming the computer industry’s world centre , a vibrant and accessible capital market will be necessary for any place hoping to be a global cnetre.

For Sydney and London, the success of initiatives like AngelEd and City Meets Tech may be critical for both centres’ future in the global digital economy.

An expensive place to do business

The cost of doing business in different countries is illustrated by one infographic

Job search site Staff.com has an infographic showing the cost of setting up a startup business in selected cities around the world.

Staff.com founder Rob Dawson looked at the cost of hiring two developers and one designer and paying rent on an office in eight cities around the world.

Of the six Zurich came in the most expensive followed by Sydney, New York, San Francisco, London and Paris. Manila and Mumbai were obviously the cheapest.

Staff.com – Connecting Great Companies with Global Talent

While the wages are the headline in this admittedly unscientific survey, the rents are a factor worth examining. If we arrange those cities by rents, then London jumps to the highest spot while Sydney remains second.

Cost of renting in each city

London	63,984
Sydney	47,616
New York	45,600
Paris	38,400
Zurich	36,000
Mumbai	29,184
San Francisco	22,080
Manila	9,984

This table illustrates a number of things; that Mumbai is a very uncompetitive location by Indian standards, being an app developer with a London startup is a miserable existence and that Australia is a very expensive place to do business.

Last week at The Hub Sydney discussing the global workforce with O-Desk’s Matt Cooper, expatriate Aussie and founder of The Fetch Kate Kendall emphasised the high cost of doing business in Australia.

“You don’t realise how expensive Australia has become until you get off the plane,” said Kate who pointed out the burden of massive mortgages mean labour rates have to be high so people can afford to meet their bank repayments.

I’ve argued in the past that those high property prices are a form of economic cholesterol that sap Australia’s economic strength and these discussion illustrate that point.

The bizarre thing is that Australian property prices are expected to go higher and, most worrying of all, the consensus among mainstream economists and business writers is that current levels are not overpriced at all.

If we accept that the current high property prices are the long term normal for Australia, then the Aussie economy has a major adjustment to make.

The problem for any industry that is internationally exposed, which is almost the entire service economy, is that Australian producers are hopelessly uncompetitive at current wage and cost levels.

For startups the question is what value are they actually getting from being based in Australia and that is a question being asked by many businesses.

Those deciding to stay in Australia are going to have to figure out how they can deliver high quality value from a cost base equal to Switzerland’s.

At present most Aussie businesses are not prepared to deal with the problem and it’s a question that’s going to be faced by the nation’s workers, retirees and governments.

Solomon Lew and Australia’s perfect storm

Australia’s retail leaders are helpless in the face of change they don’t understand, the rest of the nation faces the same problem.

One of Australia’s leading retailers, Solomon Lew, joined the conga line of business whiners this week with complaints that the recently departed Labor government had been bad for his industry.

Yesterday I posted an interview with Susan Olivier of Dassault Systemes about how the retail and fashion industries – Solomon Lew’s businesses – are being radically changed by technology and changing consumer behaviour.

Lew, along with most Australian retailers, has completely missed these changes and instead remained focused on their 1980s model of screwing down suppliers while charging customers high prices for poor goods and substandard service.

Now that 1980s business model has come to an end Lew and his other retailers like David Jones’ Paul Zahra, Myer’s Bernie Brookes and, most vocal of all, Gerry Harvey bleat about government taxes, high labour rates and almost anything else apart from the obvious factors they can fix themselves.

Bigger storms ahead

Along with the two factors Olivier identified, there’s two much bigger factors threatening Australian retail – the tapping out of the credit boom and the aging population.

The aging population is simple, consumer tastes are changing as the population ages and the need for conspicuous consumption and the latest fashions tapers off as one gets older. The demographic boom of the late Twentieth Century is over.

More immediate though is the tapping out of the credit boom, since the Global Financial Crisis Australians have swung around to be net savers which immediately pulls a large chunk out of the discretionary consumer spending pie which had kept the retail industry ticking along through the 1980s and 90s.

Another aspect is the end of the home ATM – while Australian Exceptionalists deny this happened down under, it certainly did as banks sought to ‘liberate’ the equity householder had locked in their properties. This too fuelled the credit boom.

Perversely we may be seeing the home ATM receiving a reprieve as Australian property prices accelerate from their already bubble-like levels, however that short term sugar hit for retailers and the economy is only creating bigger problems for the country’s merchants.

Funding an uncompetitive economy

Contrary to the bleating of Australian retailers, the biggest problem facing the sector is the nation’s high rents and property prices.

For consumers, those huge rents and huge mortgages take money that could otherwise be buying more consumer goods, at the same time retailers are being slugged by some of the highest rents in the world, pushing up their costs and reducing competitiveness.

That lack of competitiveness is affecting all parts of the Australian economy, particularly tourism, and the retail industry isn’t immune to those forces.

Anyone who visits an Australian eating establishment will have experienced this, personally I had another experience last night at a pub that charged $4 (3.70 US) for a soda water.

This wasn’t a trendy downtown bar but a pub in a lower middle class suburb with two overworked and under trained young bar staff. During the three hours there, our table of six was cleared once.

Swiss prices coupled with service that would be barely acceptable in a 1970s outback Queensland roadhouse is not the formula for a successful economy.

The business challenge

Which brings us back to Solomon Lew’s whinge about the government, Sol handily overlooks the previous government’s stimulus packages which kept the nation out of recession and put money straight into his and other retailers’ pockets.

There’s a lesson there for the Australian Labor Party that the tweedle-dum, tweedle-dumber strategy of offering near identical corporate and middle class welfare policies to the Liberal Party is not going to win you friends with the nation’s business sector and its entitled leaders.

For the incoming Liberal government, it is faced with the challenge of making Australia a competitive, high-cost economy along the lines of Japan, Switzerland or Germany.

It’s hard to be optimistic about the Abbott government meeting this challenge given the bulk of its ministers are holdovers from the previous Howard Liberal government that was largely responsible for Australia flunking the transition to being a high cost economy along with institutionalising a middle class welfare culture into Australian society.

Even if Abbott does genuinely attempt to address Australia’s lack of competitiveness, he can be sure he will get absolutely no help from the whingeing captains of the nation’s industries, as Solomon Lew has shown.

While Solomon Lew and the Australian managerial class struggle with their perfect storms of economic, demographic and technological change, the nation also faces those headwinds.

Hopefully for Australia there are capable leaders who can navigate those storm waiting to take the helm.

Kinkabool – the highrise past and future

A visit to the Gold Coast’s oldest high rise raises some questions about sustainability.

Today high rise buildings are the norm on Queensland’s Gold Coast, but just over fifty years ago in Surfers Paradise, nine storey Kinkabool was the first of the breed to be built. Its condition today is a warning on how skyscrapers can turn into expensive liabilities for owners.

ABC Open has an interview with one of the workers on the building and in the accompanying video Bob Nancarrow shows just how Kinkabool dominated the then sleepy seaside resort of Surfers Paradise in 1960.

A visit to Kinkabool today reveals a building struggling in the face of poor maintenance and an undercapitalised ownership. Luckily for the owners’ corporation, the Queensland government pitched in to repair the roof but much of the rest of the complex is showing its age.

The rabbit warren lobby with its orange tiles indicate some of the building was upgraded in the 1970s but apart from a lick of paint, it hasn’t seen much love since.

The lift is are where the building’s age and owners’ lack of investment really shows. An old, slow elevator that hasn’t been upgraded since the first residents moved in clunks its way up the building. Even Hong Kong’s Chunking Mansions – the world’s best example of a dysfunctional high rise – gets its lifts upgraded sometime.

Inside the lift, it’s a depressing scene and one wonders if the antiquated equipment would meet today’s building standards. Even if it does meet the regulations, the dispiriting ride on its own would knock a big chunk off the asking prices for buyers or renters.

Stepping out of the lift, the view in the stairwell isn’t much better. The lack of maintenance or investment begins to show in old fittings, damaged glass and hints of painted over graffiti.

While standing on the ninth floor, music from unit 1B drifts through the building – it’s lucky the occupant has a taste in cheesy 1970s music as some thumping headbanger music could to serious damage to the building along with the residents’ sanity.

One wonders just how noisy the building would be with a party happening or a young, crying baby although it seems families aren’t really interested in these apartments or the central Surfers Paradise location.

Though a very undistinguished building, it does have one touching little architectural feature in the different tile patterns on each floor, although probably not enough to redeem it in the eyes of most people.

Probably the saddest thing about Kinkabool is how a building that once dwarfed everything in the region is now overshadowed by its much bigger neighbours.

Across the road, and blocking out most of Kinkabool’s sunlight, is the 1980s Paradise Centre.

Time isn’t proving any kinder towards the Paradise Centre with the lack of maintenance beginning to show on the thirty-year old complex as this vent across the street from Kinkabool illustrates.

Generally, if the landlord or owners’ corporation is too stingy to afford a coat of paint, then you can be sure there are more nasty surprises

Both the Paradise Centre’s and Kinkabool’s declines illustrate a much more fundamental problem in an economy driven by property speculation and taxation allowances — there isn’t a lot of money to go around for maintaining older buildings.

While Kinkabool’s residents can get by with a clapped out lift, inhabitants of larger and more modern complexes like the Paradise Centre will find the costs of running and maintaining their buildings an increasingly difficult burden.

It could just turn out that Kinkabool, should it escape the wrecker’s ball, may well turn out the more desirable dwelling than its bigger, more modern neighbours.

For the meantime though, Kinkabool marks the beginning of a far more sophisticated era in Australian and Gold Coast history. Whether that era became too sophisticated for itself remains to be seen.

We came, we saw, we were ripped off.

What a greasy schnitzel tells us about Australia’s economy in the 21st Century.

One bad schnitzel on Queensland’s Gold Coast illustrates the biggest economic problem facing Australia.

As we approach the 2013 Australian election, it’s notable how the debate – if it can be described as that – hasn’t touched on the biggest issue facing the country, the hollowing out of the nation’s economy.

In the 1980s the Gold Coast was going to be the centre of a Japanese led tourism boom.

That boom petered through a combination of greed and incompetence on the part of Australian tourism and hotel operators, a process being repeated with Chinese tourists twenty years later.

Like the rest of the Australian economy, in the 1990s the Gold Coast looked inwards with a focus on property speculation and construction that kept the workforce employed pouring concrete and fitting out kitchens.

In the meantime, the Gold Coast’s tourist assets were left to rot through under investment. Jupiter’s Casino is a good example of this, a building stranded in the 1980s and in desperate need of a capital injection.

The Gold Coast was not alone in this, a review of Perth’s Rendezvous Grand Hotel — built by Alan Bond in the 1980s — illustrates exactly the same problem at the other end of the country.

A lack of investment plagues all of Australia’s hospitality industry, a dinner at the Bavarian Bier Cafe on the Gold Coast’s Broadbeach* was a disaster as poorly trained staff were overwhelmed by a half full establishment and let down by poor business systems.

That shocking meal — which saw the staff struggle to get out a salad and two beers in over two hours with the greasy, overcooked mains arriving nearly three hours after the diners arrived — is not untypical in Australia.

Soviet style service is fine when beer and a poorly cooked, mostly breadcrumbs, schnitzel costs fifty kopecks, however at modern Australian prices the service, food and cooking should be world’s best.

That high prices rarely translate to superior standards in Australian establishments shows how poorly the nation has adapted to being a high cost nation.

While it’s fashionable to blame the mining industry for the down under manifestation of the Dutch disease, the answer to what has driven Australia’s under investment in tourism, agriculture and manufacturing lies in the cities and suburbs.

On the same day as the disastrous Bier Cafe meal, the Gold Coast media was reporting that relaxed zoning restrictions would allow unrestricted high rise building heights.

While the real estate industry welcomed this, the reality for local property speculators hasn’t been pretty with buyers in the twin tower Gold Coast Hilton development being hit with forty percent losses.

Part of the reason for the poor performance in property speculation is that Gold Coast industry has been hollowed out with local office vacancy rates varying between 27 and 14% percent.

While much of the rest of Australia’s property markets have been spared similar declines to date, the emphasis on real estate speculation over investment in industry has been similar across the nation.

That lack of investment in productive industries, whether in tourism or manufacturing is already hurting Australia, more critically it’s preventing Australian businesses’ from dealing with the transition to being a high cost economy more akin to Switzerland, Japan or Germany than the United States.

One bad schnitzel on the Gold Coast might not tell us much in itself, but the under investment in systems, training and staff is a bad omen for Australia’s economy.

Regardless of who wins Australia’s federal election on Saturday, it’s unlikely the group of pampered apparatchiks occupying the Treasury benches will have any idea of helping business or society transition to the realities of the Twenty-first Century.

*Paul travelled to the Gold Coast and ‘dined’ at the Broadbeach Bavarian Bier Cafe as a guest of Microsoft Australia

Living in an age of grey boxes

What does modern architecture tell us about our suburbs and society in today’s Australia?

If an era’s architecture tells us about the times, what do today’s houses tell us about modern society and values?

On Sydney’s North Shore lies a collection of old army bases, from the 1980s onwards the military started moving out and some of the land was handed over as national parks, other parts were converted into office parks or cafes while the disused married quarters were sold off to private home builders.

The old stores and administrative buildings have been adapted into artists’ studios and elegant, if expensive, offices. Overall, that’s been a success which has created quite a thriving businesses and creative community.

old army store converted into an art gallery

Many of the colonial officers’ and NCO’s quarters, impressive sandstone and wood structures, have become offices, restaurants or function centres. Although some are still looking for a purpose.

What happened to the functional three bedroom 1960s and 70s brick veneer homes that housed a generation of army brats is less encouraging and tells us much about the times in which we live.

A few of the old post World War II homes remain for Navy families in the still operating, and expanding, HMAS Penguin and these show us the houses that once lined Middle Head Road in Mosman.

old-mosman-military-family-home — 1960s Mosman military home

old-mosman-militrary-family-home-2 — Another old Mosman military family home

These are perfect examples of the functional family homes that covered Australian suburbia during the 1960s and 70s. While nothing exciting or particularly pretty, they were adequate for their task as baby boomers built their families in the post war prosperity.

When they were sold by the Federal government most those modest family homes on Middle Head were bulldozed to make way for the grey behemoths of the 21st Century.

new-grey-mosman-mansion — New grey mosman mansion

Like the Mc Mansions that crowd today’s suburbia, these feature four, five or even six bedrooms with on-suites, multicar garages and games rooms. Just as every child today has to win a prize, every room has to have a plasma TV.

These monuments to the modern consumerist economy triumphantly march along a road that once featured modest homes with gardens, trees and lawns.

In many ways these modern buildings represent the ethos of our time – grey, non-descript, poorly built, overcapitalised and dependent on cheap, never ending debt.

A striking aspect about them is their hostility to the pleasant surroundings and the 1930s mansions that make up most of the street. With their battleship grey, security features and blocky air raid shelter lines they look much more like some sinister military installations than the red brick army homes they replaced.

What’s also notable about these new buildings is many are empty. Some of them are being refurbished, only a few years after being built, and many are undergoing substantial repairs – a testament to how Australian building standards have declined in the past two decades.

Strolling along Mosman’s Middle Head Road its hard not to imagine that if Dorothea Mackellar were writing her iconic My Country poem today, she would have included the lines;

I love a sunburnt country
a land of capital gains

The tragedy for Australia is those old three bedroom houses could have been used by a visionary government to help low income families in Sydney’s increasingly unaffordable suburbs.

However we don’t live in visionary times and government assets today exist to be sold off as quickly as possible to Australia’s rapidly growing rentier classes.

There was little chance those modest housing blocks would become anything more than expensive, over capitalised gin palaces for bankers and the city’s well connected business elite who are never slow to see a coal mine or old military property going cheap.

Architecture tells us a lot about our times and the abandoned Middle Harbour army base is a good commentary on the phases of Australian development through the twentieth Century and the beginning of this century.

The houses also tell how Australians see speculating on overcapitalised property as a safer investment than building the technologies and businesses necessary to prosper in this century. How that will turn out remains to be seen.

What will be interesting is how our great-grandchildren see us and our legacy when they look upon the grey, hostile buildings we built to celebrate our good fortune in the early 21st Century.

Tag: Australia

Does the motor industry matter in the 21st Century?

The lessons of World War II

Australia’s failure

Becoming high cost economies

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Finding the smart money

The global search for funds

Competing with the world

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An expensive place to do business

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Solomon Lew and Australia’s perfect storm

Bigger storms ahead

Funding an uncompetitive economy

The business challenge

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Kinkabool – the highrise past and future

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We came, we saw, we were ripped off.

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Living in an age of grey boxes

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