Tag: economy

Reading the global tea leaves

What can we learn about the global economy from the world’s biggest corporation.

Where is the world economy heading? An interesting exercise by the website Business Insider looks at the earnings reports and announcements by some of the world’s biggest corporations to get an idea of the the direction of the global business world.

The results of Business Insider’s article are interesting and worthwhile of a closer look as we can see some real trends along with some risky bets by management who seem reluctant to acknowledge we’ve moved out of the 1980s.

China’s western water shortage

This is an interesting curve ball; one of the central planks of the China Cargo Cult that believes unfettered Chines growth will drive the world economy indefinitely is that the country’s inland provinces will grow in a similar pattern to that of the coastal provinces.

Anyone who has travelled in those provinces, particularly in the poorer Northern regions like Gansu, has seen first hand the serious erosion, desertification and water problems these areas face.

It shows the China story is not as simple as many of the cargo cultists believe.

Europe is not dead

Even in the darkest days there are opportunities for innovative organisations and regardless of what we think of McDonald’s products, they aren’t afraid to experiment and take risks.

McDonald’s move to “value meals” in Europe replicates what worked in the United States in both the 2001 and 2008 economic downturns. This appears to be working in Europe just as it did in North America.

We should also keep in mind that Europe is a diverse collection of cultures and economies so despair in Athens doesn’t necessarily mean pessimism in Arnhem.

The bottom of the US housing market

In his investor briefing, JP Morgan Chase CEO Jamie Dimon indicated the bank thought the US housing market is at the bottom subject to the American economy not going back into recession.

While it’s possible that the US housing market has bottomed, it’s highly unlikely we’re going to see the US housing market roar back to 2005 levels even if there is a US recovery so we shouldn’t be expecting hockey stick style growth in the US domestic sector driving the world economy as it did through the early 2000s.

Louis Vuitton confirms that the global market for ultra luxury goods is healthy

The entire luxury goods boom is a side effect of the massive amount of money pumped into to the world economy to deal with the 2008 economic crisis.

Like Macao casinos and Silicon Valley venture capital bubbles, this is transitory and at best a marginal influence on overall growth and employment.

It’s interesting how many presentations I’ve seen recently citing the luxury goods markets as evidence all is good in the world economy. This shows the desperation of those whose businesses rely on mindless consumerism.

China’s middle class will save us all

If you were searching for a corporate example of the economic cargo cult surrounding China, then Yum Foods would be one of the best.

The idea that China’s “consuming classes” will number half the nation’s population is some sort of economic Lake Wobegon, where everybody is above average.

Even if Yum’s prediction proves to be true, the nature of China’s economy and the nation’s stage of growth means consumption patterns of the country’s middle – or “consuming” – classes are going to more like those of Americans in 1912 rather than 2002 which undermines any business model based upon the late 20th Century’s profligate spending.

Businesses are once again investing in IT

Microsoft suprised us all last week with their profit results. Earnings from Windows, servers and office suites were all up on improved personal computer sales.

That businesses are investing in IT makes sense as one of the things that is cut early by organisations looking for savings is IT. That happened in 2009 in response to the economic crisis.

Even before the 2009 financial shock, businesses had been under-investing in IT partly because of Microsoft’s failure with the Vista operating system.

Now many businesses have decade old desktop computing systems and the pressures to upgrade are becoming intense.

The worry for Microsoft is Apple’s domination of mobile devices and the rise of cloud computing means that its not necessarily Microsoft will benefit from most of the IT investment.

Electricity prices will rise and low natural gas prices are unsustainable

Energy prices are a riddle within an enigma, however there’s certainly some distorting effects in these markets. CSX’s views on natural gas markets illustrate this.

We can expect more convulsions in energy prices as demand hinges on China, the US and European economic growth coupled with the threat of more conflict in Iran and Iraq.

Should China deliver the growth that the cargo cultists believe then energy prices will continue to climb, which may happen anyway.

The end of the telephone

Again Business Insider’s headline is a little misleading, as Verizon see the decline of the POTS – Plain Old Telephone System – networks that were designed around voice data and a switch to data based networks that don’t treat all traffic as information packets.

Data matters more than voice and we don’t want to be tied to a phone line.

That the telcos see mobile data as their main revenue drivers shouldn’t be a surprise as this has been the trend for two decades.

Consumers are borrowing again

This claim is a worry as it indicates some consumers – along with many lenders – are falling into the habits that nearly bought them unstuck in 2008.

A superficial view of the Amex announcement actually raises more questions than it answers and there’s a suspicion that the credit card provider is driving growth through special offers or reforming their excessive merchant charges.

Like JP Morgan, much of Amex’s optimism is based upon the US economy moving out of recession and American consumers resuming their credit binge. The latter may prove to be a bridge too far.

Winning in diverse European markets

Like McDonald’s, IBM sees plenty of opportunity in Europe and makes the point that, like Asia, the European markets are diverse.

IBM may turn out to be a more of a beneficiary of the increased IT spending that Microsoft is relying upon as Big Blue’s consulting services and cloud technologies are more attuned with where the enterprise computing market is going.

Also in an era of government austerity, IBM may be able to offer process savings to cash strapped agencies and authorities.

Asian consumers save the cigarette industry

There’s no doubt East Asian societies like a smoke so the idea that international tobacco brands see great opportunities in markets like South Korea, the Philippines and Indonesia shouldn’t be a surprise.

Interestingly China doesn’t feature in these projections as their market is largely closed to foreign manufacturers.

While the short term looks good for tobacco companies in East Asia, it’s difficult not to see that rising affluence starts to see public health and anti smoking campaigns similar to those in the West developing over the longer term.

Yahoo parties like it’s 1999

Web surfers want relevant content according to Yahoo’s management. Next month we’ll see these business giants claim social networks and cloud computing are the next big thing.

You can’t help but thing Yahoo’s management are very well qualified to tell us when horses have bolted and vanished over the horizon.

The problem for Yahoo is that customised content is expensive unless you’re going to “crowdsource” it with a social layer as Facebook does and Google is trying to do.

If Yahoo can pull something like this off – and there is no indication they can – then the business has a chance of surviving. Right now the smart money would be betting on the being broken up in the near future.

So where is the world economy going?

One unsurprising thing from these corporate projection is that some businesses are better prepared than others for the changes that are happening.

IBM and McDonald’s stand out as those prepared to innovate and change their business models to suit the prevailing situations.

Companies that believe the 1980s are just around the corner again seem to be the ones most vulnerable – its not surprising that its finance organisations like JP Morgan and Amex are betting the farm on continued massive growth in consumer debt.

The China Cargo Cultist are also vulnerable. If it turns out that Chinese growth – like US consumer spending in the 1980s – can’t go on forever then companies like Yum Foods are going to struggle with growth rates far lower than they expect.

One thing is clear, that there are a lot more nuances in the world’s economy that what you’d pick up from media headlines. The key for big and small entrepreneurs is figure out where these nuances present a business opportunity.

Black tea image courtesy of Zsuzsanna Kilian and SXC storck photos.

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Taking care of our own

Our governments can’t fix every problem or address our every need. We need to take matters into our own hands.

“The council ought to do something” growled a friend who’d been stuck in a peak hour traffic jam.

That innocuous comment illustrates the fundamental challenge facing the developed world’s politicians – that we expect our governments to fix every problem we encounter.

In the case of the local traffic jam, the cars creating gridlock are parents driving their children to two nearby large private schools.

Despite the problem being caused by the choices of individuals – those decisions to send their kids to those schools and to drive them there – our modern mindset is “the government aught to do something” rather than suggesting people should be making other choices.

Socialising the costs of our private decisions is one of the core beliefs of the 1980s mindset.

Eventually though the money had to run out as we started to expect governments to solve every problem.

We’re seeing the effects of this in the United States where local governments are now having pull up black top roads, close schools and renege on retirement funds as those costs become too great.

As a society we have to accept there are limits to what governments can do for us.

Increasingly as the world economy deleverages, tax revenues fall and the truth that a benign government can’t fulfill our every need starts to dawn on the populace, we’ll realise that expecting politicians and public servants to save us is a vain hope as they simply don’t have the resources.

Bruce Springsteen puts this well in his song “We Take Care Of Our Own.”

The truth today is the cargo cult mentality of waiting for governments or cashed up foreigners to come and save us is over.

We’re going to have to rely more on our own businesses, families and communities to support us in times of need.

The existing institutions of the corporate welfare state are beginning to collapse under the weight of their own contradictions.

Joe Hockey knows this, but as a paid-up agent of the establishment he doesn’t dare nominate the massive cuts to middle class welfare and big business subsidies that are necessary to reform those institutions.

Waiting for the council to fix the local roundabout is nice but it doesn’t address the bigger problems.

It’s up to us to build the new institutions around our local communities and families. This is not a bad thing.

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Is small business too pessimistic?

The small business sector doesn’t seem to be too confident about the future.

The MYOB March 2012 Business Monitor report is a disturbing document; not only does it show how low confidence is among Australian business owners, it also portrays a group that are making sacrifices for an uncertain future. Is this what small business has come to?

One of the most disturbing aspects of the survey is how long company founders go without a break. With one third reporting they had not taken holidays since starting their business, this statistic is constant regardless of how long the operation has been going.

As somebody who went a decade without taking a holiday, I have a lot of sympathy for business owners in that situation.

What really jumps out is the pessimism of business owners – a quarter don’t expect the economy to improve for at least two years and only 39% expect their revenues to rise.

That business owners would be so negative about the future is disturbing; they should be the most optimistic.

It’s also interesting that more than half are disappointed with levels of support from the government, does anyone expect different?

Quite frankly, if you want money or support from the government then get a job with the public service. I tried that for a few months and there’s plenty of pessimistic people there.

That small business owners are becoming as disillusioned as public servants is a concern for our economy and society. Hopefully it’s not a permanent condition.

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What if Bill Gates had been born in Australia?

Can a society that puts property speculation before innovation succeed in the 21st Century?

Microsoft founder Bill Gates is today one of the world’s biggest philanthropists having built his business from an obscure traffic management software company to what was at one stage the world’s biggest technology corporation.

But what if he’d been born in Sutherland, New South Wales rather than Seattle, Washington? How different would things have been for an Australian Bill Gates?

The first thing is he would have been encouraged to study law; just like his dad. In the 1970s lawyers had far more status and career prospects than software developers in Australia.

Causing more concern for his parents and career counselor would have been his determination to run his own business. It’s far safer to get a safe job, buy a house then start buying investment properties to fund your retirement.

The Funding Drought

If Bill still persisted with his ideas, he’d have hit a funding problem. No bank wouldn’t be interested in lending and his other alternatives would restricted.

In the Australia of the 1970s and 80s they’d be few alternatives for a business like Micro Soft. Even today, getting funding from angel groups and venture capital funds depend upon luck and connections rather than viable business ideas.

Bill Gates’ big break came when IBM knocked on his door to solve their problem of finding a personal computer operating system; the likelihood of any Australian company seeking help from a small operator – let alone one run by a a couple of twenty somethings – is so unlikely even today it’s difficult to comprehend that happening.

Eventually an antipodean Bill Gates would have probably admitted defeat, wound up his business and gone to work for dad’s law firm.

Invest in property, young man

Over time a smart, hard working young lawyer like Bill would have done well and today he’d be the partner of a big law firm with a dozen investment properties – although some of the coastal holiday properties wouldn’t be going well.

While some things have changed in the last thirty years – funding is a little easier to find in the current angel and venture capital mania – most Australians couldn’t think about following in Bill Gates’ path.

Part of the reason is conservatism but a much more important reason are our taxation and social security systems.

Favoring property speculators over entrepreneurs

Under our government policies an inventor, innovator or entrepreneur is penalised for taking risks. The ATO starts with the assumption all small or new businesses are tax dodges while ASIC is a thinly disguised small business tax agency and assets tests punish anyone with the temerity to consider building an business rather than buying investment properties.

At the same time a wage earner is allowed to offset losses made in property or shares against their income taxes, something that those building the businesses or inventing the tools of the future are expressly forbidden from doing.

Coupled with exemptions on taxing the capital gains on homes, Australian households – and society – is vastly over invested in property.

Making matters worse, the ramping up of property prices over the last thirty years has allowed generations of Australians to believe that property is risk free and doubles in value every decade.

That perception is reinforced by banks reluctant to lend to anyone who doesn’t have real estate equity to secure their loans.

So we have a society that favours property speculation over invention and innovation.

Every year in the run up to Federal budget time tax reform becomes an issue, the real effects of negative gearing and other subsidies for housing speculation – the distortion of our economy and societies investment attitudes – are never discussed.

In Australia there are thousands of smart young kids today who could be the Bill Gates’ of the 21st Century.

The question is do we want to encourage them to lead their generation or steer them towards a safe job and an investment property just like grandpa?

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Common interests

A successful business partnership relies upon respecting each party

KFC is booming in the world’s emerging markets. From Shanghai, China to Accra, Ghana, crowds are lining up to eat and the fast food chain is opening new outlets across the world.

Yet in KFC’s home market, the United States, the chain is shutting outlets and infuriating franchisees.

A Bloomberg BusinessWeek profile looks at the success of Yum! foods, KFC’s parent company, and the contradiction of overseas success while their domestic business fades.

One thing is absolutely clear, Yum Food’s vainglorious Chief Executive David Novak and his board have made a clear decision to focus on expanding the core business of deep fried chicken in emerging markets while making little effort to adapt to changes in their domestic operations.

At least Yum are keeping their US based KFC operations, many of their other brands are being sold off as the company responds to changes US tastes and economic circumstances.

For the US KFC franchisees, this is a difficult process as their interests are not the same as those of Yum’s management.

At the heart of every business agreement are people acting in their own interests. The most successful partnerships are those where everybody’s interests are recognised and respected.

In their US operations, the big question is how long Yum can neglect their US franchisees and markets without affecting their international operations.

For Yum’s international operations it’s going to be fascinating to see how the partnerships and joint ventures underpinning their expansion in emerging market evolve.

Yum will probably find in some of these markets that their local partners don’t share their interests. Then they may find themselves in the same position of their US franchisees.

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Overselling technology

Do technologists promise too much?

“We’d like to allow remote band members – say a violinist in the Australian outback – be able to participate in an orchestra as if they were there. We hope the NBN will be able to do this.”

When the band organiser said this at a business roundtable all the technologists, myself included, choked.

There are many things the Australian National Broadband Network will deliver but the ability to teleport a violinist from the outback to downtown Sydney or Melbourne isn’t one of them.

One of the problems with technology is we tend to oversell the immediate effects; as Bill Gates famously said “The impact of all new technologies is overestimated in the short term but under estimated in the long term.”

Because we tend to sell the immediate sizzle, customers are disappointed when our promises don’t eventuate. In the decade it takes to win them back, those initial benefits we didn’t deliver in six months have become commonplace.

This is probably one of the reasons why businesses are reluctant to invest in new technology or online services; they’ve heard the promises before and they don’t trust what they can hear.

In the late 1990s businesses spent tens of thousands – sometimes millions – establishing websites that didn’t work. Those financial scars still hurt when they hear talk, some of them are still paying off those sites. So it’s barely surprising they are reluctant to return to a sector that has now matured.

Perhaps it’s best to underpromise; instead of cloud computer vendors committing themselves to 80% savings and social media experts promising millions of customers from their new viral video, it may be better to be more realistic with the expectations.

Customers have become deaf to wonderful promises, they are expecting us to deliver. Promising the world is no longer a business strategy.

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Building a digital economy

How does a state build new industries?

Yesterday the NSW Government hosted the Sydney leg of their Digital Economy Industry Action Plan forum meetings.

The aim of the action plan, one of a series for targeted industries, is to develop “a vision and strategy for the Digital Economy over the next decade in NSW.”

So how do we build a “digital economy industry” in a country that seems to be hell bent on staking everything on China’s continuing demand for coal and iron ore?

Picking winners

One of the things implicit in forums and plans like this is that the government has identified the ‘digital economy’ as a priority for economic development.

To help identify the opportunities the New South Wales plan breaks the sector into various industries;

  • Digital content and applications
  • Information services and analytics
  • Smart networks and intelligent technologies
  • Autonomous systems
  • E-research
  • ICT service innovation
  • ICT biomedical innovation
  • ICT safety and security innovation
  • Locally developed technologies and applications

The underlying assumption is the state has some sort of natural advantage in these areas or the potential to develop into a leader.

If these are the foundations of a region’s digital industries then we have to understand how they were identified as it’s difficult to build an industry if we don’t know what we can do.

The role of government

An important question is the role of government, an unfortunate thing with bureaucrats and politicians is they sometimes over estimate the influence they have on industry and the economy in general.

In NSW the state government’s role is going to be at best marginal, they can establish policies and offer financial incentives but business needs access to essential skills, finance and infrastructure.

Walking the talk

It’s all very well for governments to proclaim they support local businesses but if they prefer to buy from multinationals – even if the big boys are more expensive and have a less than stellar delivery record – then the domestic industry cannot thrive.

To be fair to governments, this reluctance to buy from local suppliers is shared by Australian corporations and on its own is probably one of the biggest obstacles for innovative companies and entrepreneurs to thrive in Australia.

Until this attitude changes among governments and corporations, it’s  difficult to see how local businesses can develop and survive.

Open data

For the digital industries, open data is probably the most important aspects. Unfortunately the current generation of Australian public servants, managers and politicians share an almost Stalinist view about access to taxpayer owned information.

Without making public data accessible so entrepreneurs can develop new applications and existing industries can improve productivity, governments are only giving lip service to building a digital economy.

A good example of this is the expressed desire of successive state and Federal governments to build Sydney as a global financial centre.

To do this, free and open investment information is essential yet company and stock exchange data that is assumed to be public information in the United States and much of Europe or Asia is propitiatory and locked away behind paywalls.

Government and corporate obsessions with controlling information makes it unlikely any Australian state or city can be global centre in the digital economy or the banking sector which the NSW government sees as an other priority sector.

Consistent standards

Another area governments can improve is by having open standards across government agencies so, for instance, land information can be properly matched with health data or public transport details.

Right now policies on data and things like social media or content platforms is fragmented making the cost of government and doing business more expensive and convoluted than it should be.

Promote advantages

One of the weaknesses in Australia’s overseas marketing is the nation is portrayed as a bunch of alcohol swilling beach bums cuddling koalas.

Google Maps founder Lars Rasmussen once said Google’s head office reaction when he suggested establishing a development office in Sydney was “what are you doing to do? Sit on Bondi Beach and drink Fosters?”

A missed opportunity in Australia’s disjointed tourism and investment campaigns is ignoring the nation’s diverse ethnic and skills base. We need more emphasis on the multilingual skills of the state’s workers and less on bikini babes.

Capital Problems

Whenever a group like the forums gather, there’s always complaints about Australian business’ access to capital.

Australia’s taxation, finance and social security system favours speculation on the share and property markets rather than long term investments or taking risks on new business ideas.

Three generations of these policies have a created a population who, understandably, see owning property as the safest way to provide for retirement. The banking system has responded to this and is reluctant to lend for anything not secured by real estate assets.

At the same time we’ve allowed the compulsory superannuation system to be dominated by flaccid ticket clippers who are content to charge working Australians outrageous fees for hugging the stock indexes.

Sadly what should have been a source of capital for innovative businesses largely spends its time lobbying governments for more protection and a bigger cut of workers’ incomes.

The access to capital is a serious problem for Australian business and one that can’t be kicked up the road for ever by Liberal or Labor Federal governments but it isn’t something the states can fix.

Not only do the distorted investment priorities of Australian society damage developing industries, it almost certainly guarantees the dream of making Sydney a global financial centre unattainable.

Education

One of the canards that always pops up at industry development forums is that educators aren’t in touch with employers’ needs.

There’s a certain type of business manager or owner who believes the roles of schools, technical colleges and universities is a sausage machine popping out perfectly formed young workers who can pick up a spanner, hair clippers or a copy of Photoshop and start productive work straight after being shown where the tea room is.

Those business owners are deluded.

None of that’s to say educators shouldn’t be adapting to their times as well as being open and transparent but the idea that the role of schools is to equip kids with the skills we need today would see them unprepared for next decade’s economy.

Equally however, Australia’s universities and training colleges have been encouraged to offer third rate courses to overseas students attracted by the prospect of getting permanent residence in the country. That bums on seats model had hurt the quality of the nation’s education sector and the skill levels of graduates.

Attitudes

The most essential part of building any nation’s industry is the attitude of people – if the prevailing view is it’s too hard, or threatens established interests then it won’t happen.

Probably the best advantage New South Wales, and all of Australia have, is a comparatively young, diverse and outward looking population.

The best thing the government can do in trying to build new sectors, be they in the digital economy or anywhere else, is to fix what they can such as procurement, open data or taxation and get out of the way.

A constant dreams of governments is to build the next Silicon Valley, just as it once was to build the next Detroit or Birmingham.

The era of the big engineering works passed, at least in the Western world, and the age of venture capital driven social media platforms will probably be over soon as well.

Aping someone else’s success – while ignoring the historical factors and accidents that created it  – seems a guaranteed way to disappointment.

The best part to build a digital economy, or any thriving society, is to encourage the risk takers and the inventors. Bring them together, let them loose and you build the next economic powerhouse.

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