It’s going to be tough out there for Australian companies not in the mining sector. A Macquarie report shows that companies are battening down the hatches as they are faced with higher costs and weaker demand. While this is hardly a surprise finding in an economy, ex-mining, that is close to recession it is clear that defensiveness is becoming the order of the day. Capital gains are not likely to be easy to find. Macquarie Equities has conducted an ‘operating cost’ survey of management and the results are not encouraging:
Greater uncertainty leading to more conservative management.
The survey revealed the negative impact of the more uncertain environment is a less direct but no less negative impact than the effect of higher costs. All of the companies surveyed expressed a high level of concern with regards a wide range of issues:
- Post the GFC the uncertainty of economic outlook, both here and offshore, which a number suggested had increased not decreased in the last year,
- the uncertain political environment with constant changes in policy and increasing government intervention, and
- the volatility of the A$ (a higher but stable A$ was preferred over the significant volatility seen in the currency over the last year),
- Each of these factors was cited as having a significant effect on company decision making particularly with regards to major investment decisions. Management is reacting to this uncertainty by operating with lower debt, higher levels of liquidity, and with a great deal more conservatism generally in all aspects of their businesses. This of course is a more hidden and insidious cost of the current environment, on top of the significant and more easily observed cost and productivity pressures that were highlighted directly through our operating cost survey.
Macquarie’s description of “the more insidious cost” of managerial conservatism is spot on. Management defensiveness does not lend itself to finding good avenues for growth. Cost control, as the saying goes, is a discipline, not a strategy. A distinction that escapes most of our cartels. The usual tactic of Australian senior management — reward yourself at all costs, in difficult times use as little imagination as possible and above all blame your staff whenever anything goes wrong as a pretext to reduce wage costs — can be expected to kick in with a vengeance (literally and figuratively). This does not augur well for shareholders. There are some glimmers of what Australian companies should be doing. Globalising:
- The combination of lower demand (particularly if seen as more structural rather than cyclical), combined with the lower productivity and higher A$ was driving the consideration of some key strategy changes. This was an area of the discussion that was of particular note. Some companies the survey revealed were now realising that continuation of the current dynamics in the domestic environment would require a shift of strategy and that this may result in actions that would not have been considered previously.
- Mentions of either “off-shoring”, or increasing capital expenditure to reduce the amount of labour input i.e. the replacement of labour with capital, were mentioned to be already under consideration by a few of the companies surveyed. Clearly the appreciation of the A$ was increasingly a key catalyst to consider these as business options.
- A number indicated that they were reviewing the opportunity to move some part of their operations offshore, not only to lower operating costs but to tap into a greater pool of highly skilled labour. A couple of participants highlighted that the rising A$ was in fact reducing the cost of new capital investment (clearly when the capital investment is non A$ denominated), and that this was a clear positive. There appeared also to be for some a focus on searching for ways where low skilled lowly productive labour might be replaced with capital to reduce the labour input with again the higher A$ a positive factor in this option.
Trouble is, Australian management is simply not up to the job. There is not a single Australian company in the ASX100 with a regional Asian strategy (with the possible exception of ANZ, which is so far just a nibble). Where is the growth in the world economy? (Hint: it’s to our immediate north and has China in it).
There are some global companies on the ASX100, maybe about 15-20. But not many. The second rate quality of Australian management is in the process of being horribly exposed.