economy | Paul Wallbank - Communications Professional

Google and Microsoft show how online business is changing

Google and Microsoft’s quarterly reports show how all businesses are vulnerable in times of change.

Both Microsoft and Google yesterday reported their second quarter earnings for 2013 and both missed the targets expected analysts. Does this really mean anything?

Microsoft’s earnings were particularly notable as they included a $900 million dollar write off on Surface RT inventories, this almost certainly means a key part of the company’s tablet strategy has failed.

What’s striking in Microsoft’s earnings report is the terrible performance of the Windows Division which saw sales increase 10% year-on-year to 4.4 billion dollars, but earnings collapse by over 50%. Excluding the Surface RT write off, the division would still have seen a ten percent fall.

The company’s statement emphasised how the division is struggling with increasing costs.

Windows Division operating income decreased $1.3 billion, primarily due to higher cost of revenue and sales and marketing expenses, offset in part by revenue growth. Cost of revenue increased $1.2 billion primarily reflecting product costs associated with Surface and Windows 8, including the charge for Surface RT inventory adjustments of approximately $900 million. Sales and marketing expenses increased $344 million, reflecting advertising costs associated with Windows 8 and Surface.

At Google, the company’s 2nd Quarter report show trend is still upwards but the core business of online advertising is showing some cracks as the total number of paid clicks grows, but the value of each falls. At the same time traffic aquisition costs are rising at the same rate as revenues.

This could indicate that advertisers’ appetite for online links is fading. For smaller businesses, the cost of adwords campaigns has been escalating to the point where the old days of newspaper classifieds and Yellow Pages listings start to look cheap.

Couple the cost of advertising with the inevitable ‘ad blindness’ that web surfers have developed and a worrying trend for Google starts to appear. Overall Google’s net profit margin was 26%, down from 31% a year earlier.

While both companies remain insanely profitable – Google earned $14 billion this quarter and Microsoft $6 billion – both businesses are showing stresses as their markets evolve. It proves no business can afford to be complacent in these times.

Why Australia is losing the digital race

Despite the best intentions of government, Australia is falling behind in the digital economy. What can the nation’s political leaders do?

This story originally appeared in Business Spectator on 17 June 2013
At the beginning of this century, Melbourne hosted a meeting of the World Economic Forum. Among the visiting luminaries was Microsoft founder Bill Gates who laid out his vision for governments in the digital economy.

“The Government itself needs to become a model user of information technology,” Gates said at the time.

“Literally seeing government work with its citizens, with its businesses will change how we do our taxes, licences, registrations, all these things, on a basis where you don’t have to know the organisation of government and its various departments, you don’t have to stand in line, you don’t have to work with paperwork.”

Last month in Brisbane, the Federal government re-released their Digital Economy Strategy with the ambitious goal to make Australia a “leading digital economy by 2020”. A key part of the strategy is for the government to allow citizens to “fully complete priority services online”.

Thirteen years after Bill Gates articulated the need for governments to move services online – and he was by no means the first person to do so – the Federal government has posted a target to partly achieve this by the end of the decade.

It’s hard to see how achieving such a belated objective will put Australia in a position of leadership in a rapidly changing world, although this is a direct consequence of deliberate decisions made by the nation’s leaders, and society, over the last thirty years.

Thirty years ago the debate on Australia’s position in the global economy resulted in the Hawke government’s Clever Country policies. In many ways, today’s Digital Economy Strategy is an echo of the Labor’s halcyon days under Paul Keating.

Keeping things in perspective

In Sydney on the day before re-releasing the strategy, Minister Conroy channelled Paul Keating in talking about the J-Curve of technology adoption at a lunchtime panel with the Australia Israeli Chamber of Commerce.

Preceding Senator Conroy’s panel was Anna-Maria Arabia, general manager of the Questacon National Science and Technology Centre in Canberra, who described her trip to Israel to look at how the nation that derives 40 per cent of its export incomes from high tech industries is nurturing its technology sector.

Arabia was accompanying Federal minister Bill Shorten and she described a meeting with the chief scientist of the Israeli Ministry of the Economy, Avi Hasson, where Shorten asked him about the success rate of Israeli government research and development projects.

Hasson’s reply was very different to the risk averse response often heard from Australian bureaucrats, ministers and business leaders.

“Had I been told that we enjoyed an 80 per cent success rate I would have concluded the government was investing in the wrong projects,” Hasson is quoted as saying. “Such a success rate would have meant we were investing in low risk projects and, quite frankly, the private sector could have taken care of that.”

The risk-reward equation

In Australia, there is no such vision or appetite for risk. At best the Federal government has announced another review of tax rules and industry support programs while the opposition is vague on its plans to support innovation and R&D should it occupy the Treasury benches later in the year.

While it’s easy – and fair – to criticise both sides of politics, the business sector is equally negligent with its reluctance to invest in research and development while claiming R&D tax credits for projects that are closer to capital improvements rather than real innovation.

Two weeks ago the ABC Business Insiders program had featured an interview between Business Spectator’s Alan Kohler, Dow Chemical CEO Andrew Liveris and Australian Business Council chief Tony Shepherd where they discussed Australia’s role in the modern global economy.

Australian born Liveris, who is also chairman of the US Business Council and sits on the Obama’s board of innovation, said Australia needs a vision building on the country’s strengths.

At present he warns the country is in a state of rigor mortis having “lost the will to innovate.”

Thinking beyond mining

When Gates visited Australia in 2000, he warned that the nation needed to think beyond mining and agriculture and secure a place in the high tech economy.

That warning was disregarded and Australia as a nation made the decision to focus on domestic consumption driven by rising property prices and mining exports.

Reserve Bank of Australia governor Glenn Stevens summed up that national decision in a speech made to the Australian Industry Group in 2010 where he dismissed Bill Gates’ warning about ignoring high tech industries at the beginning at the decade.

“Ten years on, though, it does not seem to have been to Australia’s disadvantage not to have built a massive IT production sector,” Stevens sneered. “On the contrary, the terms of trade are at a 60-year high, the currency just about equals its American counterpart in value and we face an investment build-up in the resources sector that is already larger than that seen in the late 1960s and that will very likely get larger yet.”

Stevens’ speech illustrates the Australia we have today – high-tech industries along with the research, development and innovation are something other countries do.

The vision for Australia being a global leader in the digital economy by 2020 is a laudable and equal to any of the noble objectives proposed in the Gonski education review or the Asian Century report.

Unfortunately to achieve those aims, and to overcome the deliberate national decisions we’ve made over the last thirty years, it’s going to take more than the modest and belated objectives of last week’s re-released Digital Economy Strategy.

Can mobile networks build Myanmar’s economy?

Myanmar, or Burma, is emerging from being a backward economy, can mobile networks help the nation’s economic development?

Fifty years ago Myanmar, or Burma, was one of Asia’s most affluent nations, but a succession of poor governments have seen the country become one of the world’s poorest. Can mobile phone networks be part of Myanmar’s econmic recovery?

The potential economic impact of mobile communications in Myanmar is a report prepared by Deloitte Consulting for network equipment vendor Ericsson claiming that rolling out cellphone networks across the nation will create 90,000 jobs in the emerging economy.

Myanmar is starting from a low base with only 2% mobile penetration rates, compared to over 40% in Timor-Leste and Laos while the average across South-East Asia is over 100%.

To address this the Myanmar Post and Telecommunications Department is looking a splitting the existing phone monopoly into three or possibly four licenses.

Ericsson’s report looks at the economic effects of rolling out these networks and some of the opportunities for local entrepreneurs and communities.

The biggest employment effect identified in the Ericsson/Deloitte report is through the reseller networks with 50,000 of the 90,000 jobs created by new mobile services being in the sales channel.

What’s striking about that prediction is how it doesn’t look at the broader effects of modernising the country’s phone network. The report’s authors do mention they believe the overall benefits could boost the Burmese economy by over 9% in a best case scenario but don’t fully delve into where they believe that growth will come from.

It can be expected there’ll be many more indirect benefits as Myanmar’s communications networks jump into the 21st Century, the report itself has a chapter citing various benefits mobile networks have delivered to countries as diverse as Kenya, Chile and Bhutan.

Particularly interesting with Myanmar’s development will be the Chinese influence in rolling out these networks – the PRC is already the biggest foreign investor in the country having largely ignored western sanctions on the military regime and it can be expected players like Huawei and China Mobile will be well positioned in bidding for licenses and contracts.

For local entrepreneurs the complex Burmese language is a natural opportunity for app developers and programmers to develop localised versions of successful applications, the lack of English and Chinese language skills among the population – another terrible neglect by successive governments – will hamstring Myanmar’s digital media export opportunities.

Probably the biggest risk to Myanmar’s success though is the role of the military who are expected to get one of those mobile licenses.

Burma’s terrible economic performance over the last fifty years has been largely due to the incompetence, greed and corruption of various military rulers and, while their continued influence in the nation’s economy may be necessary to placate them and their cronies, the legacy of these people may act as a break on a really open economy or fair markets.

For Myanmar, the opening of cell phone networks is great opportunity. Hopefully the vested interests that have held this nation back for so long will resist the temptation to further damage the country’s prospects.

Burmese landscape image by ZaNuDa through sxc.hu.

Australia’s startup challenge

Creating a startup culture in Australia is tough when the nation is addicted to property speculation.

While I’ve been using CNet’s story on Kansas City’s startup community to compare Google’s Fiber project with the Australian National Broadband Network, the US article touches on something far more fundamental about Australia’s ability to build new businesses and industries.

The fundamental problem is property prices.

In Kansas City, local entrepreneurs wanting to set up a startup house can afford to take a chance.

The house is the pet project of Web designer and Kansas City local Ben Barreth, who did the insane last fall and cashed in his savings and liquidated his retirement account to put a down payment on a $48,000 house in the city’s Startup Village. Why? Barreth, a husband and father of two small children, wanted to be among the first to buy a house in a Google Fiber neighborhood.

$48,000 for a house is unthinkable in Australia. Even if we disregard Sydney and Melbourne, regional centres are vastly more expensive than their US counterparts. Geelong in Victoria for instance has an average house value of $390,000 while in Wagga Wagga in the New South Wales Riverina district houses sell for a median of over $300,000.

This pattern is true across almost all of populated Australia – it is very, very difficult to find a property under $250,000 and there are few, if any, regions in the country where a house can be bought for less than five times the average local income.

Expensive property comes at a price, it discourages people from starting businesses as the risk of being left out of the property market is so high. Leith van Onselen, co-founder of the Macrobusiness blog, made a very good point about this effect on his decision to set up a business.

Indeed, the main reason why I took the risk of leaving Goldman Sachs to concentrate on MacroBusiness full-time (a start-up business) is that I had all but paid-off my house and was in the fortunate position not to be saddled with onerous mortgage repayments. Had I a large mortgage, like many Australians, there is no way that I would have left a high paying, relatively steady job, to work on a business where pay is much lower and irregular, and where the outcome is unknown.

Leith was commenting on an article in the Sydney Morning Herald reporting the risks to Australian business should property prices fall. In this respect, Australia has managed to paint itself into an economic corner.

The Sydney Morning Herald article illustrates Australia’s predicament – Michael Pascoe (the ‘Pascometer’) reported how Reserve Bank bureaucrat Chris Aylmer had warned of the dangers of falling property prices.

With most Australian businesses dependent on bank finance guaranteed by their proprietor’s home equity, falling property prices would see a nasty economic spiral as lines of credit were called in, forcing companies to slash expenses, including wages, which in turn would drive further real estate falls.

Property also makes up the bulk of Australians’ retirement savings, so a fall in property prices would smash consumer confidence.

It’s no surprise that in the face of a recession or economic shock the first thing Australian governments do is prop up the property market.

Another damaging effect of high property prices is that it turns the country conservative. This graph from Business Spectator’s Philip Soos does much to explain why Australians turned insular in the late 1990s.

Having a population locked into paying their mortgages guarantees a conservative, risk adverse culture and that’s exactly what Australia has achieved over the last fifteen years – much of the opening up from the 1970s through to 1990s has been undone as the country looks inward at protecting its housing prices and bank repayments.

That safe, insular society has its attractions. However if you want to build an entrepreneurial culture, it’s safe to say you can’t get there from here.

While it’s not impossible to build a startup nation in a society addicted to property speculation, it won’t be easy either.

Michael Dell’s struggle to transform his business

The Rationale for a Private Dell states some stark truths about the PC manufacturing industry and global management in general

Michael Dell continues to press on with his buy out bid for the computer manufacturing giant he created with a presentation to shareholders stating his case why Dell Computers would have a better future as a private company.

Dell’s assertion is the company has to move from being a PC manufacturer to a Enterprise Solutions and Services business (ESS) as computer manufacturing margins collapse in the face of a changing market and more nimble, low cost, competitors.

What’s telling in Dell’s presentation is just how fast these changes have happened, here’s some key bullet points from the slide deck.

Dell’s transformation from a PC-focused business to an Enterprise Solutions and Services (ESS) -focused business is critical to its future success, especially as the PC market is changing faster than anticipated.

The transition to the “New Dell” is highly dependent on challenged “Core Dell”performance.

The speed of transformation is critical, yet “Core Dell” operating income is declining faster than the growth of “New Dell” operating income.

Dell’s rate of transformation is being outpaced by the rapid market shift to cloud.

The market is shifting quickly against Dell’s core PC manufacturing and sales business and the company’s founder is under no illusions just how serious the problem is.

Should Michael Dell succeed, the challenge in transforming his business is going to be immense – Dell Computing was one of the 1990s businesses that reinvented both the PC industry and the vast, precise logistics chain that supports it.

It was PC companies like Dell and Gateway who showed the dot com industry how to deliver goods quickly and profitably to customers around the world. Businesses like Amazon built their models upon the sophisticated logistics systems and relationships the computer manufacturers created.

A lesson though for all of those companies that followed Dell and Gateway is that those supply chains may turn around and bite you in the future, as Michael says in his presentation;

Within the PC market, Dell faces increasingly aggressive competition from low cost competitors around the world and shifts in product demand to segments where Dell has historically been weaker.

Those low cost competitors were many of Dell’s suppliers as over time the company’s Chinese manufacturers, Filipino call centres and Malaysian assemblers have developed the management skills to compete with the US retailers rather than just be their contractors.

Something that’s being missed in the debate about globalisation at present is that its not just low value work that can be done offshore – increasingly sales, marketing and legal are moving offshore along with programmers and engineers. Now the same thing is happening with management.

The same thing is also happening with corporations as Asian giants like Samsung, Huawei, Wipro and others displace US and European incumbents.

Dell Computing has been a much a victim of that move as it has been of the decline in the PC market which means its more than one battle Michael Dell has to fight.

It may well be that Dell can survive, but we shouldn’t underestimate just how great the challenge is as the company faces major changes to its markets and the global economy.

The myth of the baby boomer

Are we making a mistake when we talk about the demographics of baby boomers?

Yesterday I was at the release of Deloitte’s State of Media Democracy report when something that’s been bugging me for a while became clear – have we got our definitions of baby boomers wrong?

In the report’s demographic breakup was the usual breakdown of age groups with the interesting twist of separating ‘leading Millennials’ and ‘trailing Millennials’.

Such separation makes sense, how a sixteen year old uses the media is very different from that of a 26 year old, however there’s a good argument breaking up the baby boomer group the same way.

While there’s no denying the post World War II baby boom in most Western countries that lasted roughly from 1945 to 1965, lumping the entire group into one demographic bubble with the same economic characteristics seems mistaken.

If nothing else, the baby boomers should be broken into two groups – those born before 1955 and those afterwards.

Those born between 1945 and 55 had the benefit of being born into the a world rebuilding from the second world war and the massive improvement in living standards that accompanied the reconstruction.

For those born after 1955 their work experience was very different; the 1973 oil shock marked the end of the post war economic certainties and also saw the beginning of increased casualisation of the workforce through the deregulations that accelerated under the Reagan, Thatcher and other Western governments in the 1970s and 80s.

In many ways, the 1955-65 cohort of baby boomers have more in common with the generation who followed them – the Generation Xers, the term coined by the author Douglas Coupland who was born in 1961.

Equally, the earlier half of the baby boomers have much more in common with those born between 1935 and 45, the ‘war babies’ were too young to fight in World War II and they benefited greatest of all from the post war economic boom.

So perhaps we should be talking of the ‘Lucky Generation’ – those born between 1935 and 55 – and redefining ‘Generation X’ as those born 1955 and 80.

While it’s easy to say “who cares”, there’s an important aspect to this. Much of our discussion about the aging population revolves around the boomers retiring and the load this puts on the community.

Not to mention the foibles, beliefs and voting patterns of the boomers which again differ markedly between the ‘early boomers’ and ‘late boomers’.

If we accept that the tipping point wasn’t in 2010 when the first baby boomers reached retirement, but in 2000 when the ‘lucky generation’ started retiring then this discussion about how we service a growing – and demanding – group of retirees becomes even more pressing.

As in many things, life is a lot more complex than the lazy assumptions of demographers and economists would have us believe.

The myth that the baby boomers are one big fat group with equal demands, needs and assets is something may turn out to fool many of our business and political leaders.

Australia’s economic rigor mortis

Australia has become too complacent in a competitive world warns one US business leader.

This is worth watching, Dow Chemical CEO Andrew Liveris and Australian Business Council chief Tony Shepherd spoke on Sunday with Alan Kohler on the ABC’s Inside Business.

At 5.40 Andrew Liveris says Australia is suffering a state of economic rigor mortis – “we’ve lost the ability to innovate” – with no plans and a great complacency. It’s something all Aussies should reflect upon, although don’t expect these blokes to be any help.

Enniskillen and the G8’s Potemkin Village

Britain puts on a brave, if false, face for the G8 leaders summit

In the middle of this month the G8 group of world leaders will meet in Northern Ireland when the UK takes their turn to host the annual conference.

With the leaders of eight of the world’s biggest economies – which includes Canada but not China – coming to visit the Northern Irish government is anxious to present a prosperous face to the world, including allocating £233,000 to give Enniskillen’s town centre a ‘facelift’.

It seems a good chunk of the facelift money has been spent on creating fake shops in the distressed town’s centre.

In a little over two weeks they and other leaders will gather for a G8 summit at a golf resort in Enniskillen. And as the date approaches the cleanup is moving into high gear. It includes new coats of paint on houses, tidying up lawns, and putting up fake storefronts on shuttered businesses.

For the visiting dignitaries, their advisors and the media caravans that follow them, Enniskillen’s shops will be looking prosperous when the reality is very different.

“The County of Fermanagh has suffered terribly as a result of the credit crisis and the resulting recession,” says Dan Keenan of the Irish Times.

Fermanagh County’s efforts to present a brave, if false, face to the world is symptomatic of the Western world’s refusal to accept the consumer based economy that drove the Corporatist model of government over the past fifty years is over.

Just as the fall of the Berlin Wall in 1989 signalled the end of the Soviet experiment, the global financial crisis of 2008 marked the end for the big spending, big debt era which had driven the Western economies through the last half of the Twentieth Century.

Unlike the Soviets, we refused to accept the game is up and have kept a failing economic philosophy alive with massive borrowing and money printing. In this respect, we’re dumber the Russian communist leaders who accepted the reality of the world they found themselves confronting in 1989.

All of which will probably amuse Russian President Vladimir Putin as his motorcade speeds past the repainted shopfronts of Enniskillen and no doubt he’ll be thinking of the face Russia will present next year when they host the G8 Summit.

Perhaps its time for the G8 leaders to invite the People’s Republic of China to join their privileged club – at present Japan is the only non-‘white’ nation.

If the G8 decide to let the Chinese join, there’s the South China Mall that would be a perfect counterpoint to the Potemkin Village of Enniskillen and the world’s great leaders can continue to believe that the business rules of the 1980s still hold true today.

Yesterday’s men are still pursuing yesterday’s dreams, dressing up Enniskillen may cater to their fantasies but it won’t help today’s economy.

Picture of a propped up facade courtesy of Ingolfson through Wikipedia Commons.

Are Australians becoming apathetic towards retail?

Have Aussies given up on retailers?

This morning IBM launched their Retail Therapy report where they looked at the state of online shopping around the world.

One interesting aspect to the report is that Australians seem to have become indifferent to stores with 60% of the 2000 respondents claiming they were ‘apathetic’ towards their choice of retailers.

At least this is an improvement on the 2011 report where 46% of those survey said they were ‘antagonistic’, this year that proportion is a mere 5%.

So, have we gone from hating our retailers to simply not caring any more? The answers should be focusing the minds of Australian CEOs if they are hoping for consumers to reopen their wallets.

Image of a bored girl by ChristieM through sxc.hu

Rethinking the middle class

Has the internet destroyed the western world’s middle class lifestyles?

Technologist Jaron Lanier says the internet has destroyed the middle classes.

He’s probably right, a similar process that put a class of mill workers out of a job in the Eighteenth Century is at work across many industries today.

Those loom workers in 18th Century Nottingham were the middle class of the day – wages were good and work was plentiful. Then technology took their jobs.

Modern technology has taken the global economy through three waves of structural change over the past thirty years, the first wave was manufacturing moving from the first world to emerging economies as global logistic chains became more efficient.

The second wave, which we’re midway through at the moment, is moving service industry jobs and middleman roles onto the net which destroys the basis of many local businesses.

Many local service businesses thrived because they were the only print shop, secretarial service or lawyer in their town or suburb. The net has destroyed that model of scarcity.

The creative classes – people like writers, photographers and musicians – are suffering from the samee changed economics of scarcity.

Until now, occupations like manual trades such a builders, truckdrivers and plumbers were thought to be immune from the changes that are affecting many service industries.

The third wave of change lead by robotics and automation will hurt many of those fields that were assumed to be immune to technological forces.

One good example are Australia’s legendary $200,000 mining truck drivers. Almost all their jobs will be automated by the end of the decade. The days of of relatively unskilled workers making huge sums in the mines has almost certainly come to an end.

So where will the jobs come from to replace those occupations we are losing? Finance writer John Mauldin believes the jobs will come, we just can’t see them right now.

He’s almost certainly right – to the displaced loom worker or stagecoach driver it would have been difficult to see where the next wave of jobs would come from, but they did.

But maybe we also have to change the definition of what is middle class and accept the late 20th Century idea of a plasma TV in every room of a six bedroom, dual car garage house in the suburbs was an historical aberration.

Just like the loom weavers of the 18th Century, it could well be the middle class incomes of the post World War II west were a passing phase.

If so, businesses and politicians who cater to the whims and the prejudices of the late Twentieth Century middle classes will find they have to change their message.

Training for mediocrity

Australian treasurer Wayne Swan’s cap on education expenses is a path to mediocrity

In researching the tech angle of the 2013 Australian Federal budget for Technology Spectator last night one thing kept really bugging me – the government’s cap on tax deductible education expenses.

The decision to cap self education deductions was made earlier in the year by Treasurer Wayne Swan.

The Government values the investments people make in their own skills and recognises the benefits of a tax deduction for work related self-education expenses. However, under current arrangements these deductions are unlimited and provide an opportunity for people to enjoy significant private benefits at taxpayers’ expense.

So the government is going to save $500 million dollars over the next few years by capping legitimate educational expenses on the grounds they were ‘unlimited’.

We could ask why negative gearing continues to be unlimited where taxpayers claiming the expenses of property speculation cost the Federal government eight billion dollars last year.

So Treasurer Wayne Swan says a salaried worker has effectively no limits on claiming losses from property speculation against their taxes but is subject to a ludicrously low limit for claiming education expenses.

This one comparison – between negative gearing and self education expenses – shows the magic pudding fairyland that Australia’s political leaders live in and their cowardice.

What’s bizarre about this policy is that most industries are undergoing major changes and almost every worker will have to reskill a number of times through their careers.

Many of those workers will be able to get their courses and education expenses under the limit, many others won’t.

As the New Australian points out, Wayne Swan – like most lifetime Australian political apparatchiks – has never to worry about reskilling as the party has nurtured and cared for him all his adult life.

In the real world though, Australia’s economic future will depend on the workforce picking up the skills to operate in rapidly changing times.

That Australia’s politicians and economic policies are focused on encouraging property speculation over skills only guarantees mediocrity.

Although mediocrity might be the world that suits Wayne Swan, Tony Abbott and the rest of Australia’s political classes.

Snapping out of Australia’s China Dreamtime

China analyst Patrick Chavonec has a wake up call for Australia’s business and political leaders

Australia’s leaders need to snap out of their China dreamland analyst Patrick Chovanec told the Australian Davos Connection’s China Forum two weeks ago.

What triggered this comment was a speech by Australian Treasurer Wayne Swan to the Financial Services Council in Sydney last September where the Treasurer compared China’s economic performance to sprinter Usain Bolt;

It’s like Usain Bolt easing off a bit at the end of the 100 meters because he’s 10 meters in front and has already smashed the world record.

“My response was that if that’s the way Australia’s leaders are thinking about China’s economy, if that’s the dreamland that they are in, then they need to snap out of it really fast,” Chovanec said in his keynote.

“Because China is facing a very serious and potentially disruptive economic adjustment. A realistic idea of where this adjustment is going is essential to countries like Australia.”

Chovanec’s view is that China cannot sustain current growth rates by “providing the fodder of the consumerist economy.”

This was borne out in the Global Financial Crises where exports fell from 8% of GDP to 2%. To make up for the drop the PRC government stimulated the economy and investment went 42% of the economy to half.

It was this stimulus that drove the soaring commodity prices in recent years and underpins the Blue Sky Vision of Australia’s political and business leaders.

The establishment view is that China will move from infrastructure spending driving the economy to a consumption driven society.

Moving to a consumption driven economy though means a very different Chinese society which means a different group of winners and losers, Chovanec warns.

He also doesn’t see urbanisation as the real driver of the Chinese economy, “If you look around the world, urbanisation has not always driven economic growth.”

“It’s based on a premise that moving people from a rural environment to an urban environment generates productivity gains.”

“Now for China over the past thirty years that has proven largely true,” says Chavonec, “but going forward most of that hanging fruit has been picked.”

“In order to realise productivity gains, China is going to have to discover new areas of competitive advantage.”

The biggest risk that Chovanec sees at present though is the level of bad debts in the economy and the rate of credit expansion with a trillion dollars pumped into the Chinese economy over the last quarter.

“You’re getting less and less bang for the buck from credit expansion.”

Chovanec doesn’t see China’s future as bleak though, “the China growth story doesn’t have to be over.”

“There are a lot of sectors in China where there’s real potential for true productivity gains – agricultural, logistics, health car, services, consumer branding, retail.”

“The challenge for China is not that the growth story is over but the engine of that growth story is going to have to change.”

Dealing with those changes is also a challenge for countries like Australia who have staked all on the current growth story.

Chovanec’s wake up call to Australia’s leaders is timely – the question is how quickly they can wake up to the changes in China.