Tag: Australia

Australia and the Dutch Disease

Australia’s greatest management challenge is dealing with the country’s dose of the Dutch Disease

This week sees the launch of the annual G’Day USA festival where Australian exporters and various celebrities extol the virues of the country across the United States.

One of Australia’s success stories of the last decade has been Yellowtail Wines which carved a niche for Australian wines in the US in the same way Jacob’s Creek did a decade earlier in the UK.

Today the Australian Financial Review reports that Cassella Wines, the maker of Yellowtail, is in breach of its banking covenants due to the high Australian dollar.

Cassella Wines is another victim of Australia’s Dutch Disease infection.

Dutch Disease owes its name to the Netherlands’ gas boom of the 1960s. By the early 1970s the strong Guilder damaged the rest of the Dutch economy which didn’t profit from extracting natural gas.

Having sleepwalked into the Dutch Disease, it’s fascinating how Australia’s electorate, policy makers and business leaders are in denial about the effects as successful exporters like Cassella Wines struggle with a high dollar and accelerating costs.

When commodity prices and the dollar turn, and they always do, its going to be tough for the economy to adapt as much of the industry capacity that was competitive at lower rates won’t be available to take advantage of the lower costs and to pick up the slack from a declining mining sector.

For Australian businesses, the onus is on managers and proprietors to protect their organisations from the short term effects of a high currency and the medium term effect of a falling dollar pushing up the input prices of imports.

In other words, getting costs down without becoming too reliant on offshored labour or suppliers. The companies that manage this are going to be very strong after the initial adjustment, but it’s a tough management task.

While that task can, and will be, done by smart and hardworking leaders no-one should expect any recognition of the scale of this task from governments, media or business organisations who seem to be in denial of reality.

The Dutch and Australian flags image is courtesy of Emilev through SXC

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How Australia’s nanny state hurts business and society

Australia has changed in the last quarter century as governments of both persuasions have found it easy to legislate rather than lead. The nanny state has had effects on business and society in general.

It’s becoming popular to describe Australia as a ‘Nanny State’ as governments respond to moral panics and the need to do something about anything from bicycle helmets to unpasteurized cheese.

Unquestionably Australia has changed in the last quarter century as governments of all persuasions have found it easier to legislate rather than lead. This has had effects on business and society in general.

A good example of how the regulations have built up over the last twenty years in Australia is a sign at my local beach.

the Australian nanny state is shown in signs at balmoral beachThat’s a fine welcome and it compliments the $7 an hour parking fees the local council levies. In itself, those parking fees are a good example of the price pressures driving Australia’s high cost quandary.

Drinking on Sydney ferries is banned in Australia's nanny state

Possibly the saddest regulation is the alcohol ban on ferries. Twenty years ago it was normal to see a group of friends unwinding on the way home from work with a cold beer or wine. Today you can’t do that because some bureaucrat decided drunks were a problem and rather than enforce existing laws it was easier to ban drinking entirely.

The press and moral panic

Much of this nannyism is being driven by the media who drum up hysterical reports demanding ministers do something. In turn the government’s panicky PR obsessed apparatchiks respond with pointless and unnecessary laws and rules. Often duplicating those that already exist.

A good example of cynical media hysteria was the story of Malea, a Sydney mum minding her own business while legally cycling with her child in a trailer.

While out riding a discredited journalist filmed Malea and passed the footage onto a current affairs TV show which portrayed her as a reckless mum and demanded such behaviour be banned.

Fortunately in that case the politicians ignored the confected outrage, but that’s the exception rather than the rule.

Doing something

The media though doesn’t have to force Australian politicians into adopting the nanny reflex. Often governments will create their own outrage in order for attention deprived politicians to get press coverage.

A good example of this was the incompetent Carr government which decided its contribution to the War On Terror after the 9/11 attacks would be to turn the Sydney Harbour Bridge into something similar to what welcomes Guantanamo Bay detainees.

The Australian nanny state is shown by the Sydney Harbour BridgeIt’s worthwhile comparing the same view on San Francisco’s Golden Gate Bridge and ask which is the greater terrorist target?

San Francisco's Golden Gate BridgeWhen Sydney genuinely was a larrikin city, climbing the Harbour Bridge in the dead of night was a rite of passage. Today, if you can get around the security guards, barbed wire, CCTV and motion detectors you risk a $3,300 fine and being branded a terrorist.

If you try to climb the bridge and get caught, the fine is only half that of stepping on the hallowed turf of the Sydney Cricket Ground.

At the cricket, if you’re foolish enough to bounce a beach ball, start a Mexican Wave or sing out of tune and you’ll be out before you can say “Shane Warne is a safe driving ambassador.”

The Age newspaper gave a good example of Australian sports administrators’ Stalinist mindset in this fawning article which gloats over the efforts MCG staff go to in harassing their customers.

On level three of the Members’ wing is a secure room with the best seats in the house, although the occupants only manage an occasional glance at the game on hand. It is the MCG command post, where ground security, police and Securecorp officers constantly watch a bank of computer monitors and camera screens.

…

Dohnt says the camera operators will check the froth on a punter’s cup of Coke to see if it has been topped up with smuggled grog.

Forcing cricket fans to buy overpriced drinks or visitors to spend over $200 to climb the Harbour Bridge brings us to the core motivation behind many of Australia’s nanny state regulations – protectionism.

Hidden protectionism

Many Australian Nanny state rules are to protect businessThis sign, which is attached to the back of the one at the beginning of this story, bans vendors who sell from boats. It’s questionable whether the council actually has the power or resources to enforce this ban but if it helps the local shopkeepers then so be it.

One of the hubristic traits of Australian exceptionalism is that the nation is a ‘free trade’ economy hard put upon by sneaky Japanese, American and European protectionism. The reality is Australia is just as good as Japan or the EU in introducing sneaky regulations to protect the well-connected locals.

A very good example of this is bananas where the Australian domestically produced product is substantially dearer than imported bananas sold in the US, UK or Europe.

In early 2011, Cyclone Yasi devastated Australia’s banana crop and prices soared. Not one imported banana was allowed in to ease the shortage. Remember that the next time you hear a politician or journalist boasting about Australia’s free trade credentials.

business is hurt by nanny state rules

Banana prices are another example of the costs passed onto Australian households and industry through nanny state regulations. Compliance costs are real and add to the cost of production and employment. They are another reason why Australia has become a high cost economy.

More importantly, those regulations tend to favour incumbents making it harder for entrepreneurs and new entrants into markets making the economy even less flexible.

The burden of regulation is also unfairly dropped upon the smaller business who don’t have the resources to comply with or challenge unfair rules. The Howard government was very good at this with slapping small business with the responsibilities of raising the GST and complying with draconian laws like Workchoices.

At this stage it’s worth noting that the Australian nanny state isn’t a Labor party creation, it’s come from both sides of politics and often because poorly drafted laws require mountains of regulations to overcome the legislative flaws.

Workchoices was probably the best example of badly thought out laws where the Howard government panicked into slapping a whole level of punitive rules for businesses who failed to keep log books of staff hours worked – the legislation was so bad that had it not been repealed by Rudd, the sight of bundy clocks would have become common in Australian offices.

Nanny and risk

One of the unfortunate effects of the nanny state is that it saps the entrepreneurial spirit – why take risks when nanny is there to support you?

There is an unintended effect of this though – because we think nanny will always protect us we lose the ability to evaluate risk.

Where this is most obvious is in financial matters. Too often people are fooled into investing in dodgy schemes because they think that regulators will protect them. They find out this isn’t the case when the money is long gone.

That failure to understand risk though becomes pervasive through the community as the nanny state mentality becomes established. We could argue that inability to identify risk was the core reason for the global financial crisis.

The future nanny state

While the nanny state has been rampant around the world for the last fifty years, its days are numbered as cash strapped governments find they can no longer bear the cost of maintaining armies of bureaucrats to enforce silly rules.

As society deleverages from the excesses of the credit boom, governments are going to find revenues falling short and while it won’t be the first casualty of the new austerity, the nanny state will almost certainly be a victim.

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Australia’s high cost quandary

Is property the answer to keeping Australia’s high cost economy afloat?

“Around the world our towncars are usually 30% more expensive than taxis, in Sydney it’s 20% as the cabs are pretty expensive,” said Travis Kalanick on launching the Sydney version of Uber’s hire care booking service.

It’s not just hire cars which are expensive in Sydney – the soaring cost of living in Australia is bourne out by Expatistan, a web site that crowdsources the cost of living in various cities.

Expatisan’s comparisons find Sydney up with Tokyo and London as the most expensive towns on earth.

That conclusion means Australian businesses, governments and policy makers have some important decisions ahead of them.

Cholesterol in the veins

High property prices have been the norm for two decades in Australia, the middle class welfare state that both political parties support gives tax and social security concessions to property owners while the banking system requires most business lending to be secured by property.

As a consequence, generations of Australians see property as the only path to financial success. If Bill Gates, or any of today’s entrepreneurial wizz-kids, had been born in Australia, they’d be encouraged to get a safe job and buy property than to take the risk of starting a new business.

The property obsession has another perverse effect in that it creates a short term outlook for Aussie business owners who have to consider getting,  and paying off, a mortgage quickly to secure their financial foundations.

A few weeks ago a business owner was profiled in the Sydney Morning Herald, which some call the Sydney Morning Property Spruiker, who paid 1.1 million Aussie dollars (a million US) for a property in Redfern – which is Sydney’s Bronx.

That poor guy not only has a fat mortgage to pay off, but he has to pass those costs onto his customers. Just to pay the bank is a fat chunk out of his business before he pays his staff, landlord and the various other expenses before he can take his profits.

Having to pay the bank for living costs is the main reason why Aussie businesses don’t invest in capital equipment, which in turn makes  them less competitive than overseas competitors.

One of the myths in Australian business is that competitiveness is solely due to labor costs, what the ideologues preaching this miss is that even if Aussie workers were paid a bowl of rice a day, Chinese and Mexican factories would still be more productive due to the investment in modern equipment.

For the sake the argument, we won’t even discuss German, Japanese or Swiss manufacturers who are still competitive despite Australian level cost structures.

This last point is what’s missed in much of the discussion about Australia’s economic future – apologists for Reserve Bank governor Glenn Stevens and the self congratulatory Canberra monoculture say that the high Aussie dollar is here to stay and mining will be driving the economy.

Should the mining sector stall, which currently seems to be the case, then housing development will pick up the slack according to the policy-makers’ groupthink.

That housing development is going to come at a high price, with Australian land and homes already among the world’s highest. Given Australia’s private sector debt is among the highest in the world already, it’s hard to see where the money will come from to fuel further property speculation.

Right now Australia has a serious problem in determining what the future will be for the country.

If the future is a high cost economy underpinned by massive property property prices, then the future has to lie in high value added sectors.

The question is ‘what sectors’? Australian business, governments and society in general seem to think that property speculation is the future.

Property speculation turned out not to be the future for Spain and it looks like China’s speculative boom is meeting its obvious end.

Australians are going to have to hope that it really is different down under and that young people and immigrants are prepared to spend huge amounts of money to keep the economy afloat.

If the policy makers are wrong, then the worry is that there is no Plan B.

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Stumbing into recession

An obsession with surpluses and satisfying the ratings agencies is going to have harsh consequences for Australians

The Committee for Economic Development Australia (CEDA) today released its 2012 Big Issues survey looking at the responses of 7000 business people on the issues confronting Australian industry in 2012.

One of the notable results is that business people don’t care about government surpluses. A third are neutral on the question “do you believe maintaining a government surplus is important” while 35% disagree that it is a high priority.

Q10

Yet despite the electorate and business saying the deficit is not a priority, the politicians still obsess about maintaining their surplus.

Now Australia’s mining boom has come to an end – along with the blue sky economic assumptions that underlie both sides of politics’ spending plans – governments are desperately trying to fudge the books and continue the pretense that their budgets are in the black.

Driving this obsession with avoiding deficits is the religious belief among Australia’s political classes that Triple – A credit ratings from the discredited Wall Street ratings agencies is more important than educating the nation’s children, caring for the country’s sick or building the infrastructure to compete in the 21st Century.

The real danger with this deficit obsession is that there is a very high possibility that state and Federal governments are going to tip Australia into a recession driven by European style austerity. Already we see this developing as various states start slipping backwards according to the ABS’ latest accounts.

graph courtesy of Macrobusiness

Another interesting result from the CEDA report is how business’ view the Australia in the Asian Century report with nearly 80% of respondents saying the issue is important or critical.

It is questionable whether Australian business is prepared to face the realities of an Asian Century as David Llewellyn-Smith writes at the Macro Business Blog, Australia’s businesses are looking more at getting help from the government to cut domestic costs rather than sell into Asia. That inward focus of Australian business since the mid-1990s is the topic for another blog post.

The sad thing is that the government aspects of Asian Century report is stillborn as surplus obsessed politicians carve into skills training and innovation programs in a vain attempt to balance the books while failing to reform the tax system or address the middle class welfare that’s squandered most of the returns from the last decade of prosperity.

Australia’s politicians are very soon going to have to decide who they govern on behalf of, the corrupt and incomptent ratings agencies or the people who vote for them and pay the taxes which support them and their political parties. For some, this might be a tough choice.

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How the film industry cons governments

Do government incentives really build a sustainable movie industry?

“I would never make a movie where I didn’t get an incentive and I don’t ever intend to” states Michael Benaroya, producer of the movie Margin Call, in a New York Times story on movie studio subsidies.

While we focus on the cost of subsidies to motor manufacturing, one sector that beats all others for playing governments for suckers is the global film industry.

“Incentives” are a huge factor in determining where studios will film their latest blockbuster, Australia’s learning this the hard way as rent seekers looking for fat subsidies parade Hollywood stars in an effort to convince publicity hungry ministers that giving fat payments to the major production houses is good for jobs.

The problem with this is that these susbidies aren’t that great for employment – Accompanying the New York Times’ video is a story on how Michigan’s dream of building a film industry has foundered.

“Film is one of the few industries that’s really well subsidised and that’s a really attractive thing” Michael Benaroya says in the video.

Before Michael even made the movie, he sold the rights to the New York production subsidies to investors. Who says financial engineering is the purview of Wall Street?

The question for governments, taxpayers and those who want to build a sustainable movie industry in their city, state or country is do you want to attract “entrepreneurs” like Michael Benaroya who are shopping around the world for the best deal.

New York might be the flavour today, but tomorrow it might be Sydney, Toronto or Prague. If the incentives aren’t fat enough then the movie productions may not come back for decades.

In the meantime the crews, production assistants and catering companies who make up most of the employment on a major production move onto other jobs so the skills and industry infrastructure is lost.

The biggest challenge is for governments, it’s estimated that New York state gives away over $400 million in subsidies and it’s difficult to see how that sort of expenditure can be justified as politicians face cuts to basic spending in today’s austere times.

For the taxpayers, we need to be demanding fair value and real long term plans behind the subsidies doled out to the film, motor manufacturing and other industries.

During the good times it was easy for opportunist politicians to dole out money to rent seekers for a media opportunity or to boost votes in a key electorate, but today that spending has to be strategic with real value and outcomes.

As Michael Benroya shows, when an entire industry is based around government subsidies and incentives the leaders are those who know how to manage the bureaucracy and fill in the forms properly. Is that what we want our industries to become?

If the answer is ‘yes’, then the next question is ‘can we afford it?’

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Disruption and leadership

Smartphones and the internet are shifting power between suppliers, companies and customers. The new breed of leaders has a tough task.

As new communications tools appear, the challenge for managers is to deal with the disruptions these technologies bring to their businesses.

Launching Deloitte Digital’s release of Taking Leadership in the Digital Economy last week the Executive Director of Telstra Digital Consumers, Gerd Schenkel, described how business is changing as consumers are being empowered by smartphones.

A good example of this is the taxi industry where applications like GoCatch, InGoGo and Uber give passengers the opportunity to fight back against poor service from protected operators.

Sydney is an attractive market for taxi industry disruptors as the current protected market fails both passengers and drivers. Travis Kalanick, the CEO of Uber, said at the Sydney launch of his service earlier last week that the city is one of the more ‘problematic” markets they’ve entered alongside San Francisco and Paris.

That letting down drivers along with passengers is an also an important point – drivers get 80% of Uber’s charges while InGoGo and GoCatch free operators from poor booking systems that frustrate everybody involved in the industry while making the system as unaccountable as possible.

Similar changes are happening in other industries as technology changes the way suppliers, customers and staff work.

A good example of changing work practices is the adoption of Bring Your Own Device (BYOD) policies in the workplace. A few years ago in most businesses it was unthought of that staff could be allowed to bring their own computers to work. Today it’s common and soon the companies that don’t have a BYOD policy will be exception.

BYOD has happened because of the arrival of cheap consumer devices like smartphones and tablets along with IT departments rolling out web based services.

We’ve seen this before – probably the greatest influences on the shape of modern society had been electricity and the motor car. These, and many other technological changes have shaped today’s workplace.

Many businesses though suffer for those changes as we’re seeing with the drying up of the newspapers’ “rivers of gold”.

For Telstra this is seen in the demise of their phone directory business; Sensis was a true river of gold in the days of printed phone directories, but a number of management mis-steps over the last 15 years meant they totally missed the transition to digital.

The tragedy for Telstra that Sensis’ strength in the local advertising market should have been a positive given Google’s failure to execute on their local search strategy.

On reflecting about the struggle to deal with transitions to new technology, just how many business are like Sensis and Fairfax in having leaders that aren’t equipped to deal with these changes.

The leaders of the 1980s whose business models were based on the assumption of economic growth underpinned by easy credit, cheap energy and demographic growth and now finding those factors are moving against them at the same time technology change is disrupting their industries.

For the upcoming generation of leaders, both in business and government, having the ability to adapt to the changed power relationships between customers, suppliers and workers is going to be essential. For those steeped in last century’s certainties, it’s going to be a tough time.

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Desperate Ken and market realities

Adam Smith’s invisible hand of the market is giving some people a nasty slap over the head.

Ken Slamet has a problem, his in-laws are trying to sell the family house and no-one will give them the price they want.

The house at 228 Warrimoo Ave has been on the market through an agent for more than 100 days, pulling in ridiculously low offers, Mr Slamet said.

Depending on the deposit, Mr Slamet is seeking between $1.5 million and $1.6 million for the house his wife grew up in.

One would argue that those “ridiculously low offers” are actually Mr Market giving Ken and his in-laws a slap of reality. They are simply asking for too much money.

St Ives, a suburb on Sydney’s Upper North Shore, is going through demographic change. In 1960s and 70s St Ives was the suburb for successful stock brokers and bankers, however in the 1980s and 90s that demographic decided they wanted to live closer to the city and Harbour and suburbs like Mosman and Clontarf became their areas of choice.

For Ken’s in-laws and their neighbours, this is bad news as few other people can afford 1970s mansions on large blocks within 30km of Sydney. Those who do manage to sell often find the buyers are developers who sub-divide to build townhouses or apartment blocks, madness in a congested, car-dependent suburb with poor public transport links.

Adam Smith’s invisible hand of the market is giving those holding properties that were attractive to stockbrokers in 1972 a nasty slap over the head in 2012.

Ken though has a solution for his problem – he’s offering a rent to buy scheme at a mere snip of $2297 per week. An amount 70% higher than the average Sydneysider’s gross income and a whopping four and half times the city’s average rent of $500.

Good luck with that.

The real problem is that Ken’s in-laws are stuck with expectations higher than the market reality. Like many of us in the Western world, they believe their assets are worth more than they really are.

As the global economy deleverages there will be many more people like Ken’s family. For many the transition to a less wealthy lifestyle is going to be tough.

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