economy | Paul Wallbank - Communications Professional

Can Australia continue the mining employment boom?

Assuming the mining industry will drive Australian employment may turn out to be risky.

The Prime Minister’s comments at the ADC China Forum last week raised an important question about Australia’s mining boom – can the industry sustain employment as the construction of mines, ports and railways are completed?

After her keynote speech at the event’s gala dinner the Prime Minister was interviewed by Busines Spectator’s KGB – Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz – about the country’s relations with China.

In that interview, the Prime Minister was upbeat about the continued employment bonanza from the resources boom.

I think overwhelmingly the prospects are good for resources. There is nothing to fear here. The absolute peak of the price cycle has probably passed, but we will still be doing good business in resources. It will be supporting jobs.

A few days earlier Fortescue Mining Group’s CEO, Nev Power, spoke to Alan Kohler on Inside Business.

Nev was a little more circumspect about the prospects for continued booming employment in the mining sector.

our capital expenditure program and expansion is coming to an end around mid-year. And then we’re into a very high volume phase and it’ll be a matter of driving the maximum efficiency out of the business through that phase.

So even if the iron price and export volumes do hold up, it looks like the resources employment boom may be reaching its end as mining projects move from the labour intensive construction phase to being relatively hands off production mines.

If Nev gets his way with ‘maximum inefficiencies there may be fewer jobs to go around.

The Prime Minister – along with all of Australia’s political leaders – remains hopeful, as she said in her speech.

So we are not, indeed we have never been, simply a quarry or a beach; ours is a diverse and sophisticated economy and a valued trading partner with the biggest global economies.

As the expansion phase of the mining boom tails off, that economic diversity is going to be tested. Hopefully there is a Plan B.

There is no China Inc

The ADC China forum asked how foreigners view China as a nation.

“There is no China Inc” was the message from the first day of the Australian Davos Connection’s 2013 Future Summit in Melbourne last week.

For 2013, the annual two day ADC Future Summit was themed “China – where to from here?” with both international and Australian speakers discussing the Peoples’ Republic of China’s future and it’s effects on the world, particularly Australia.

Opening the speakers was Martin Jacques, Senior Visiting Research Fellow at the London School of Economics and Author of ‘When China Rules The World.’

Martin Jacques has been on the wrong side of history before, having been the last editor of Marxism Today before its closure in 1991, giving his overview of China’s development an interesting flavour.

Returning to the historical norm

History has never seen a country so big grow, so fast in Jacques view. The US and British economic revolutions featured lower growth rates and much smaller populations compared to the modern Chinese experience.

Jacques quotes leading Chinese economist Hu Angang’s belief that China is returning to its global position of two hundred years ago where the nation made up a third of the world’s global economy – double today’s share.

The resilience of China’s society in Jacques’ view is driven by four factors; its two thousand year old culture, the legitimacy of its government, the competence of the civil service and its lack of desire to build colonies.

Despite China’s historical reluctance to build overseas empires the nation’s rise is still going to dramatically change regional politics.

Australia’s Challenge

Jacques raises the question of Australia making the jump from being in the US political camp to engaging with China and America on an equal basis.

“Australia has an important role to play in the region but only if it chooses to express its own views and interests,” says Jacques. The nation’s interests are not necessarily those of the United States.

The US is uncomfortable with China’s rise and Jacques believes the Obama administration’s policies in the Pacific are destined to fail because the United State’s Asian Pivot is essentially a military response while the PRC’s rise is due to economic dynamism.

Jacques main point was that the west misunderstands China by viewing the country as a nation-state when in fact it is a civilisation. This was a question that troubled the following panel.

Culture or nation?

Dr John Lee of the University of Sydney thought the idea of China as a civilisation would worry its neighbours were that view taken to the logical end point, “would that mean that China views the region in fundamentally hierarchical terms?”

“Australia is in a strategic holding pattern,” says Lee. “Australia like every other country in the region is hedging closer to America and each other just in case China doesn’t turn out benign.”

For Hugh White, Australian National University Professor of Strategic Studies, this insecurity surrounding China comes down to choices.

“China wants to be healthy and strong,” says White. “To do so, China has to face choices, but so too does America.”

“For Australia the choice is are we prepared to be a spectator in the process.”

Maintaining growth

How China can continue its economic dynamism was the biggest question facing the panel.

Patrick Chovanec, Chief Global Strategist of Silvercrest Asset Management, thinks China cannot sustain its current level of economic growth and points out that prior to the Global Financial Crisis in 2008, China’s exports made up 8% of the country’s economy.

With the collapse in international trade following the 2008 crisis, that proportion dropped to 2%.

China made up that drop in demand by stimulating the economy and triggering the investment boom that sent global commodity prices – particularly iron ore and coal – soaring.

This infrastructure splurge is what Chovanec sees as unsustainable, and he challenges the view that Chinese urbanisation will drive the economy and imports.

“If you look around the world,” Chavonec says, “urbanisation has not driven economic growth.”

The problem with China’s infrastructure funded growth model is that building rates have to grow to maintain growth rates – if you build 100 high rises this year, you have to build 108 next year just to maintain the 8% growth rates.

Balancing sectional interests

Shifting from an export to a consumption based economy means a different China. “it creates a different set of winners and losers,” says Chovanec.

Balancing those interests of winners and losers is one of the key tasks for the Chinese leadership, “Various competing interests groups – the Party has to juggle the interests of those groups” says Linda Jackobson of the Lowy Institute for International Policy.

“We shouldn’t talk about China if it’s ‘China Inc.’” Jackobson says, “I don’t think China has a grand strategic plan. It has strategic goals but not a grand strategy.”

Jackobson sees there being three key objectives for the Chinese leadership; political stability, protecting territorial integrity and economic stability.

The role of the Communist Party

That political stability is an important factor when considering China’s leadership as stability is seen as maintaining the power of the Communist Party.

“We tend to assume an identity between the current communist government and the people.” Says Chovanec, “raising this issue is forbidden in many forums.”

Chovanec agrees with Jackobson that thinking about ‘China Inc’ and the assumption, or myth, of long term strategic thinking.

“When we look at Chinese companies going abroad we talk about the long term game plan.” Chovanec points out, “in fact if you look at the haphazard movements of Chinese companies moving abroad it’s been in fits and starts.”

The common factor from the first session’s speakers at the ADC’s China Forum was that the People’s Republic can’t be seen as a monolithic entity.

Should we accept Jacques’ view that China is a civilization and not a nation state, then understanding the relationships that underpin the cultural identity are key to working with the PRC.

On the other hand the panellists see China as a modern nation state with the government, like any other attempting to balance competing interests within society.

Both are more nuanced view of Chinese politics and the nation’s economy than what’s presented by the media and politicians.

Which was fitting as the Prime Minister gave the gala dinner keynote that evening which will be the subject of another post.

Crying over spilt Chinese milk

Australia’s missteps in the Chinese milk market are part of a far deeper malaise in the Australian business community.

East Asian based expats have many conceits – the greatest being that they understand Asia.

For a high paid executive based in Hong Kong or Singapore sitting in a comfortable air conditioned CausewayBay or Beach Road highrise it’s easy to not to know what you don’t know.

In Bangkok though the drinkers at Bangkok’s Cheap Charlies Bar are under no illusions about the complexity of Asia as every night brings another surprise.

During the 1990s it was a regular drinking haunt of those working on the ground in South East Asia – aid workers from Cambodia, oil explorers from Vietnam. gem traders from Laos or builders in Myanmar all swapped stories about their trials and tribulations.

One of the toughest jobs was setting up a diary industry in tropical Thailand, no trivial task in an environment that isn’t kind to soft, milk producing cattle.

Through the late twentieth century the Australian government spent millions helping build the Thai industry with the intention of it helping the Aussie industry build markets and expertise.

Sometime in the late 1990s, the Australian industry decided programs like these were all too hard and not only withdrew from the Thai and Malaysian markets but also let the Chinese opportunity slip through their fingers.

Today, as Business Spectator reported last week, New Zealand’s Fonterra is not only beating the Aussies in China but also has substantial holdings in Australia as the company’s website describes;

The company has NZ$11.8 billion in total assets and revenues of NZ$13 billion and employs more than 18,000 people worldwide. In Australia, Fonterra has revenues of $1.9 billion, processes 21 per cent of all Australian milk and employs over 2,000 people. This makes Fonterra very much an Australasian company.

Fonterra’s story, both in China and Australia, illustrates how something went amiss in Australia’s business sector in the late 1990s.

The point of Australia’s deregulations and industry consolidations through the 1980s and 90s was to make local businesses and industries more competitive. Instead those Australian conglomerates have been sold to overseas interests as domestic investors find they aren’t interested in investing.

Instead Australian businesses decided that having being allowed to consolidate they could use their market power to clip the tickets of the industries they controlled rather than innovating or expanding internationally.

At the same time, Australia’s compulsory savings scheme poured billions into the local share market leaving boards under no pressure to perform better than the index.

The lazy investing philosophy forced internationally focused businesses to look for overseas investors and has created the steady flow of Australian business, farming and mining assets being sold onto overseas buyers.

In the meantime, the shock jocks and populists whip up xenophobia rather than holding Australian business community to account for its failure to seek and build new markets.

This doesn’t mean bad news for young Australians, there are opportunities for smart, innovative and hard working entrepreneurs to challenge the country’s staid duopolies.

If we choose not to challenge the comfortable duopolies, it may be the next generation of Aussie expats find more opportunities at Cheap Charlies in Bangkok than at home.

Cheap coffee and the changing service sector

The rise of cheap automated coffee machines in service stations and convenience stores shows how the assumptions about the service economy are being challenged.

I noticed the queues one morning when calling into the local service station to grab a carton of milk at 5am.

There was a line of tradesmen out the door waiting to buy a $1 self serve coffee. Freshly ground with your choice of espresso, latte or cappuccino.

No messing around, no being patronised by snobby barista – just a cheap, decent quality cup of coffee.

For the last few years these machines have been popping up in convenience stores and service stations, freshly grinding beans to order and delivering a reasonable cup of coffee for a dollar or two.

Cheap coffee at the local convenience store

None of the machine made cups will beat a coffee made by a good barista, but are half or a third of the price being charged by many cafes whose product often isn’t much better (and sometimes worse) than that made by the machines.

With the rise of the service economy in the 1970s it was assumed employment would move from factories to jobs like baristas and serving in cafes, now we’re seeing automation taking over those jobs as well.

The 1970s assumption that the service industries would become the mainstay of the economy turned out to be true with over two thirds of the workforces in countries like the US, UK and Australian employed in them them by the end of the Twentieth Century.

Now industries are restructuring again and the assumptions that worked well for the last fifty years are being challenged by automation and increased outsourcing.

The idea we could build an economy based upon us all making coffee and waiting tables for each other was always problematic and so it is proving to be.

It’s worth thinking about the opportunities this presents for your business.

Australia’s economic Hari-Kari

As the cheap credit era comes to an end, the Australian economy acts as if the party is never going to end.

“The Golden Era of Credit is Now Over” writes Maximillian Walsh in the Australian Financial Review today.

Max’s story relies mainly on the April edition of Bill Goss’ monthly newsletter where the founder of investment firm PIMCO writes about the talents of today’s market wizards;

All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.

The credit boom of the last fifty years created many winners – investment bankers, property owners and those who sell things funded by easy finance.

One of the best examples of a fortune made through easy credit is Australia’s Gerry Harvey. Here’s one of Gerry’s ads from 1979.

Hurry into Norman Ross. You can use Bankcard or our easy credit system. You can even use cash!

Three years later Gerry was sacked from the business he founded and he set up Harvey Norman, promising John Walton and Alan Bond “I’m going to beat you.” By the end of the 1980s he had.

Gerry’s success is built on easy credit and the rise of the consumerist economy. From the hire purchase plans of the 1960s, the introduction of credit cards in the 1970s and the banking deregulations of the 1980s, Gerry was able to sell goods to eager consumers who could worry about paying later.

In the 1990s and 2000s a happy coincidence of easy credit and cheap Asian manufacturing – note the prices of electrical goods in that 1979 commercial – saw businesses like Harvey Norman grow exponentially.

Mao promised the Chinese a chicken in every pot, Gerry delivered a plasma TV in every Australian bedroom.

Today, as Bill Goss says, the credit party is over. Last drinks were called with the failure of Lehman Brothers on September 16th, 2008.

However this hasn’t stopped the Aussie economy, as the Sydney Morning Herald reports today Sales growth cheers Gerry Harvey.

In the same edition the SMH reports the government science organisation, the CSIRO, is cutting hundreds of staff. Notable in that article is a comment from the organisation’s CEO;

Dr Clark said more than 2000 companies collaborated with CSIRO but that industries were reducing the amount spent on research.

So at a time when the Australian economy is struggling with the effects of a high currency and exhibiting all the symptoms of the Dutch Disease, consumers are spending more on TVs and sofas while business cuts investment in research and development.

Karl Marx famously predicted that the last capitalist will be hanged with the rope they sold, Australians have a bunch of Harvey Norman branded credit cards for their financial seppuku.

Driving a horse and cart in a digital economy

A lack of understanding about how to use digital tools threatens businesses in the 21st Century

“There’s no point in building a highway if no-one can drive” Tasmanian business leader Jane Bennett said about the Australian National Broadband Network during an interview last week.

Jane was touching on an important point about the digital economy – that most businesses aren’t equipped to deal with it.

That half of businesses in the US, UK or Australia don’t have a website illustrates that in itself. What’s really worrying is setting up a website is the easy part and has been standard for a decade.

In many respects this isn’t new, a similar thing happened when mains electricity or the motor car arrived. Many businesses clung desperately to their oil filled lamps and horse drawn carts way past the time these were superseded.

Well into the 1970s there were hold outs who continued to ply their carts despite the costs of keeping horses on the road being far greater than buying a truck.

That failure to learn about and invest in new technologies saw all those businesses die, many of them with the owner who’d eked out a living as a milko or rag and bone man for decades.

On a bigger level, the struggles of the local milkman with his Clydesdale is a worrying reflection of business underinvestment. These folk are stuck with old equipment because they didn’t have the funds to spend on bringing their equipment up to Twentieth Century standards.

In the 1980s I saw this first hand in some of Australia’s factories. A foreman at a valve manufacturer in Western Sydney boasted to me how he had done his apprenticeship on a particular lathe fifty years earlier.

That machine still had the belt and pulley assembly from the days when the factory was powered by a steam engine at one end of the plant. It had an electric motor bolted onto it some time in the 1960s but was largely unaltered since.

It was understandable many Australian factory owners wouldn’t invest after World War II – many industries were protected and property speculation offered, and still does, better returns.

Another reason for not investing was the sheer cost of buying new equipment, major capital expenditures are risky and for most businesses it wasn’t work taking those risks.

Today there’s a big difference, hardware and software are far cheaper than they were in the 1960s or 70s with the big investment being in understanding and implementing the new technologies.

Few businesses don’t have computers or the internet but most of the things we do online are just variations on how our great grandparents worked with documents, filing cabinets and the penny post. We have to rethink how we use technology in business.

It would be a shame if we find ourselves stuck on the side of the highway wondering what the hell happened in the early years of the 21st Century.

Stage coach image courtesy of Velda Christensen at http://www.novapages.com/

Australia welcomes the multi generational mortgage

Australia starts to repeat Japan’s experience with multi generational mortgages. With a twist that might be more debilitating than the Japanese lost decades.

At the height of the Japanese property boom in the 1980s, the hundred year mortgage came into being.

Pushing payments onto children and grand-children was the only way home prices could continue to rise once they hit levels which the average Japanese worker could ever afford with a more traditional twenty or thirty year mortgage.

Twenty five years later Australia finds itself in a similar position as parents guarantee their childrens’ mortgages.

Repeating the Japanese mistake

While the Japanese looked to sticking their mortgages onto their kids and grandkids, Down Under the kids are fighting back and getting mum and dad to underwrite their unaffordable loans.

This weekend’s Sydney Morning Herald features in its property section the story of how Sharon and Graeme Bruce guaranteed their son’s and his fiance’s mortgage in Sydney’s inner suburbs.

While the story isn’t clear on the size of the deposit (which isn’t surprising given the SMH’s shoddy editing), it appears the Bruces’ have guaranteed around $300,000 so his son and future daughter-in-law can grab a five bedroom, 1.45 million dollar mansion.

One wonders what great businesses Matt and Hannah could build if mum and dad were prepared to stump up a similar amount to invest in a start up?

Australia’s property obsession

Sadly we’ll never know – in Australia, the smart money gets a job, pays off a mortgage and accumulates wealth through investment properties. What cows are to African tribesmen, negatively geared units are to the Australian middle class.

The hundred year strategy hasn’t worked too well for Japan, with a declining population those mortgages entered into a boom level 1980s values now don’t look so attractive and are one large reason for the nation’s lost decades.

In Australia, things aren’t likely to work so well either. The Baby Boomers and Lucky Generationals – those born from 1930 to 1945 – guaranteeing their kids’ and grandkids’ mortgages are relying on ever increasing property prices.

This is understandable given that few of them have any experience of long term stagnation, let alone decline, of property values but it leaves them incredibly exposed should the Aussie housing market slump.

Can an Aussie property decline happen?

Many Australians, particularly those with vested interests, maintain such a decline can’t happen but the prospects aren’t good as the SMH story shows;

The couple had attempted to buy a small terrace in Newtown but kept getting pipped at the post by other young professional couples. At a higher price point they had no competition.

Despite his parents’ generosity he said he would still need to rent out a few of the rooms to help pay for the mortgage.

So Matt can’t afford the mortgage. That’s not good starting point and one that could cost his parents dearly, which they don’t seem to care about much.

”Obviously my dad guaranteeing the loan was the only way we were going to purchase this,” Mr Bruce said. ”You need to have a 20 per cent deposit otherwise the banks want you to pay insurance … it’s a bit of a rort really.”

It’s fair to call mortgage insurance a rort – as it certainly is – but its purpose is to protect the banks should a mortgagee default and the financiers find themselves out of pocket.

With Matt’s parents getting him out of paying that insurance his bank has much better default protection, equity in his parents’ property.

Guaranteeing risk and misery

I’m not privy to the finances of Sharon and Bruce, but most of their contemporaries can ill afford to lose several hundred thousand dollars in home equity in their later years.

That is where Australia’s multi-generational mortgages could turn very nasty, very quickly as older Australians find themselves having to deliver on the guarantees they gave on behalf of their over committed offspring.

In Japan, it’s taken a long time for the population to realise their national wealth has been squandered on twenty years of propping up unsustainable property prices and economic policies.

One wonders how long it will takes Australians to realise the same has happened to them and what the political reaction will be.

Graphs, damn lies and the middle class

Graphs can give us a misleading picture of our society, particularly when we’re looking at the middle classes

Graphs are great for illustrating a story, and also excellent at misleading people.

A good example of where a graph can give an incorrect impression is the Sydney Morning Herald’s story Whatever Happened to the Middle Class.

The story is a very good explanation of the predicament Australia’s political classes have put themselves into – exacerbated by their 1950s view of dividing the workforce into poorly paid ‘blue collar’ workers and affluent ‘white collar’ office staff – but it suffers from the selective use of headline graphs.

Viewing the big picture

The first graph shows how Australians are identifying themselves as middle class and the trend looks staggering,

Now if we add those who identify themselves as working class, the picture looks even more dramatic with some pretty volatile swings,

However if we now add in those who identify themselves as rich, or upper class, we get a better perspective as the entire range is now shown,

Selective choosing the Y, or vertical, axis will always give an exaggerated view of a trend or proportion. Once we take the full range in we see the real extent of things. It also has the benefit of showing the trends aren’t as volatile as first appear.

Middle class perceptions

When we look at the graph showing the full picture there’s a number of interesting trends and characteristics about Australian society that come out of it which are worthy of some future blog posts.

Most notably is the identification of Australians being middle class as their property values increased.

On this point, it’s worthwhile contrasting the Australian experience with the US, here’s a Gallup poll from last year on how Americans see themselves,

While the definitions are different – that Americans differentiate ‘working class’ and ‘lower class’ is interesting in itself – it’s clear that the same trend happened in the US with more people identifying themselves as being members of middle class when their property values were increasing.

In 2008 and 9 there’s suddenly a sharp increase in Americans identifying themselves as working class as the property downturn bites. The steady increase in those claiming to be ‘lower class’ from 2006 onwards is worth closer examination.

What this means for Australia

The implications of the US trends is that any Australian politician intending to dismantle John Howard’s middle class welfare state will have to wait until the property market falls before trying to win any popular support.

For this year’s Australian election though, what’s clear is that any attempt to stoke the fires of class warfare is going to fail dismally in the outer suburban marginal seats so coveted by both parties.

We’re going to see a lot more selective graphs during the course of this year, it’s worthwhile taking time to look at them closely. The stories may be different, and a lot more nuanced, than the headlines tell us.

Australia’s software disadvantage

What does Australia’s high software prices tell us about the nation’s economy?

This morning ABC Radio 702 asked me to comment on Adobe, Apple and Microsoft being summonsed to appear before the Federal Parliament’s IT Pricing enquiry.

As has been widely reported, the committee has asked the software giants to explain why there are such price differentials between Australian and overseas prices.

By way of example, Adobe Creative Suite 6 is available on the company website for $1299 US which is AUD 1263 on today’s exchange rate. The listed Australian price is AUD 1974 – a mark up of 56%.

This is not new

Australia has long been an expensive place to buy things, I remember my parents in the 1970s asking relatives to send over Marks and Spencer underwear as prices in Melbourne were so expensive.

Books and music have long been overpriced, the publishing industry openly printed the price of books in various countries and the Australian price has always been substantially higher than UK and US charges given prevailing exchange rates.

The high exchange rate has focused attention on the high prices, while the Aussie dollar was low consumers were tolerant of the rip-off. With the Aussie dollar high, consumers are wondering why the prices of many imported goods, particularly software, has remained so high.

A lack of competition

One of the biggest reasons for Australians being overcharged for many items is the lack of competition in the domestic marketplace. Most distribution channels are dominated by one or two players which lends itself to price gouging in areas ranging from technology to food.

A good example of this is the brewing industry, a revealing Fairfax article examined the Australian beer sector and exposed the failings and lack of competition in the market which results in the multinational duopoly extracting five times the profits of local retailers.

The conservative nature of Australian consumers is their own worst enemy as locals, including corporations and governments, prefer to buy major brands rather than experiment with local or lesser known providers.

Where alternatives exist, the price differentials rapidly fall. The price differential for an iPad is far less than the software apps that run on it. The reason for this are the range of alternatives available to the Apple product.

If Australian buyers were to explore open source alternatives, smaller suppliers or locally developed products then the prices of imported goods would fall.

Structural weaknesses

The pricing inquiry illustrates the structural weakness in the Australian economy where the nation has become a price taker both in the domestic consumer sector and bulk export industries.

Where Australia finds itself is an expected consequence of a generation of economic policies which favours debt driven consumer spending underpinned by selling assets and raw commodities.

Hopefully Australians are realising the price of software is just one of the consequences of current policies and start demanding the nation’s political and business leaders have a clear vision for what the country’s role will be in the 21st Century.

If that vision for Australia is a quarry with a few retirement homes clinging to the edge, then we’re well on the way to achieving that. At least software prices will be the least of anyone’s worries.

Managing unemployment perceptions

Why did we accept one in twenty workers being unemployed as a good thing?

Stephen Koukoulas has a look at the changing composition of the Australian economy in Business Spectator today where he looks at how things have evolved over the last 50 years.

One of the notable things is unemployment and how our perception of what an acceptable level is;

Australia’s unemployment rate is 5.4 per cent at present, it was 0.9 per cent in August 1970 while in August 1951 it was a staggering 0.3 per cent.

In the 1961 Federal election the Menzies government hung on by one seat, having been punished for allowing the unemployment rate to reach the dizzying heights of 3.5 per cent.

Through the Twentieth Century, Australia’s unemployment rate averaged around 5% as shown in this Treasury graph.

What’s notable in that graph is how high unemployment became the norm in the last quarter of the century. When it became obvious politicians and economists couldn’t move the needle below 5%, the process of convincing us that five percent was ‘good’ began.

One wonders what the acceptable level of unemployment will be for the next generation. Will they consider us the failures that our grandparents would?

Image of unemployed carpenters in 1935 courtesy of the NSW State Library via Flickr

Australia’s grapes of wrath

The Australian wine industry is a good example of where the country’s industrial policies and business leadership have failed.

In a great post, The Wine Rules looks at what ails the Australian wine industry after the news of Cassella Wine’s problems.

Three things jump out of Dudley Brown’s article – how industry bodies are generally ineffectual, the failure of 1980s conglomerate thinking and how fragile your position is when you sell on price.

Selling on price

It’s tough being the cheapest supplier, you constantly have to be on guard against lower cost suppliers coming onto the market and you can’t do your best work.

Customers come to you not because you’re good, but because you’re cheap and will switch the moment someone beats you on price.

Worse still, you’re exposed to external shocks like supply interruptions, technological change or currency movement.

The latter is exactly what’s smashed Australia’s commodity wine sector.

A similar thing happened to the Australian movie industry – at fifty US cents to the Aussie dollar filming The Matrix in Sydney was a bargain, at eighty producers competitiveness falls away and at parity filming down under makes no sense at all.

Yet the movie industry persists in the model and still tries to compete in the zero-sum game of producer incentives which is possibly the most egregious example of corporate welfare on the planet.

When you’re a high cost country then you have to sell high value products, something that’s lost on those who see Australia’s future as lying in digging stuff up or chopping it down to sell cheaply in bulk.

Industry associations

“It’s like a Labor party candidate pre-selection convention” says Brown in describing the lack of talent among the leadership of the Australian wine industry. To be fair, it’s little better in Liberal Party.

There’s no surprise there’s an overlap between politics and industry associations, with no shortage of superannuated mediocre MPs supplementing their tragically inadequate lifetime pensions with a well paid job representing some hapless group of business people.

Not that the professional business lobbyists are any better as they pop up on various industry boards and government panels doing little. The only positive thing is these roles keep such folk away from positions where they could destroy shareholder or taxpayer wealth.

Basically, few Australian industry groups are worth spending time on and the wine industry is no exception.

Australia conglomerate theory

One of the conceits of 1980s Australia was the idea that local businesses had to dominate the domestic market in order to compete internationally.

A succession of business leaders took gullible useful idiots like Paul Keating and Graheme Richardson, or the Liberal Party equivalents to lunch at Machiavelli’s or The Flower Drum, stroked their not insubstantial egos over a few bottles of top French wine and came away with a plan to merge entire industries, or unions, into one or two mega-operations.

It ended in tears.

The best example is the brewing industry, where the state based brewers were hoovered up in two massive conglomerates in 1980s. Thirty years later Australia’s brewing industry is almost foreign owned and has failed in every export venture it has attempted.

Fosters Brewing Group was, ironically, one of the companies that managed to screw the Australian wine industry through poorly planned and executed conglomeration. Again every attempt at expanding overseas failed dismally.

In many ways, the Australian wine industry represents the missed opportunities of the country’s lost generation as what should have been one of the nation’s leading sectors – that had a genuine shot at being world leader – became mired in managerialism, corporatism and cronyism.

All isn’t lost for the nation’s vintners or any other Aussie industry, Dudley Brown describes how some individuals are committed to delivering great products to the world. There’s people like them in every sector.

Hopefully we’ll be able to harness those talents and enthusiasm to build the industries, not just in wine, that will drive Australia in the Twenty-First Century.

Picture courtesy of Krappweis on SXC.HU

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