AUSTRALIA AT THE CROSS ROADS: IS ABBOTT ITS MARGARET THATCHER?

The recent Australian Federal budget is surely a wake up call. Not only is it the end of entitlement: it is the end of the complacency generated by 23 years of real economic growth. That is now over, driven by a high real exchange rate and diminishing terms of trade. Real GDP growth could be zero, and with it the end of a plethora of high quality and free public services, whether they be world class art galleries or world class health care.

 

Predictably, there is a lot of squawking going on. Its always tough when things get smaller, whether its governments or companies. Much of the squawking is driven by those former Labour and Green politicians who squandered Australia's opportunity.

 

What they don't tell you, and what they did not disclose at the last Federal election, is that the Labour/Green government knew there was a massive fiscal problem. Wayne Swan, then Federal Treasurer stated "the fiscal situation is ruinous.... Federal government revenues have collapsed.." (Bob Carr: "Diary of a Foreign Minister" p. 362, 9th May 2013). The following week (May 14th 2013), Swan tells Parliament " the series of (budget) surpluses I announce tonight....". This after a subdued preview of the budget to the Labour party caucus (Carr, p. 364).

 

All of the squawking about broken promises of the new Federal Government could well rebound on the Labour party once the Australian electorate over time understands who created the fiscal problem and who tried to hide it from them.

 

Australia is at a cross roads: it could have continued to go down the southern European route, or it can have its Margaret Thatcher moment, with the benefits for Britons that stemmed from that. the choices are stark:

 

On the 24th February 2013, I published:

 

"Margaret Thatcher came to power in the UK on the 28th March 1979. It did so on the back of a decade of dysfunctional government policies driven by militant trade unions which, bit by bit, destroyed British industry. I know. My family was there and ultimately emigrated as a result. My father was a chief plannng engineer with Rolls Royce aero engines and played an important role in the development of the RB211 engine which powered the Boeing 747. My uncle (his twin) ran the foundry which manufactured the blades you see inside the cowling at the front of the engine.

Rolls Royce became bankrupt or close to, and a generation of skilled engineers, including my family, were asked to take (very) early retirement. Skills lost for ever.

I recall clearly the tales of their frustration with the destruction of their workplace by union organisers. The impact destroyed their careers and the company as it then was. This was an era where British steelmakers were forced to buy British coking coal even though it was more expensive and British car manufactures had to buy British steel, even though it was more expensive.

Not only were inputs more costly, but productivity was low. These industries, and the jobs and families they supported were forced out of business, and ultimately only were revived by foreign capital, foreign management, and the passage of the 1980 Employment Act which commenced the process of trade union reform.

This destruction of skills and a generation of families is happening here in Australia TODAY. Instead of Rolls Royce, take a look at what is happening at some of Australia's technological and manufacturing icons: Cochlear, Resmed and others. These companies run the risk of being exiled or destroyed by the abuse of trade union power. That abuse has and is being facilitated by the Rudd, Gillard, Swan, Shorten government.

Their crocodile tear response to placate those "workers" who are switching to Abbott in droves is a Manufacturing and Innovation Statement which plans to use centralised government planning and the Canberra bureaucracy to drive innovation. I don't think so. What it will do is to further drive the innovators and the much vilified entrepreneurs offshore.

There will be more of this from a government desperate for revenue as a result of four years of ill conceived spending and who believe that good policy is to hobble initiative and business as part of their class warfare strategy. There is not a dollar in the bank to encourage either innovation, entrepreneurship, or the venture capital industry to finance such admirable objectives.

The forthcoming Federal election needs to be Australia's Margaret Thatcher moment. The new government needs to emulate Singapore which is a beacon in how to turn pro-business policy into tangible benefits for the whole of the country.

These old school socialists presently in charge will have a lot to contemplate in their voter forced and well funded retirement as they try to avoid responsibility for ruining the modern progressive Labour Party which did so much to improve Australian business under the Hawke-Keating governments."

 

 

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

CAN AUSTRALIA TRANSFORM ITS ECONOMY?: VENTURE CAPITAL NEEDED

The Australian economy is in transition. The country is starting to experience aggregate declining living standards. There are two solutions: China or Venture Capital to finance a new Australian economy.

First, China. Australians used to have a saying: " if the US catches a cold, then Australia gets the flu". The risk now is, how far will deleveraging in China go, and what will happen to Chinese imports of iron ore and coal, price and volume. No one really knows.

To add to the uncertainty, since 2007, the advent of the Rudd/Gillard/Green party Governments, Australian Federal debt issuance has risen from c. AUD 50 billion to c. AUD 300 billion. This excludes State sovereign debt of a similar amount. Most of this debt is held by foreign bond holders. Further, Federal debt is likely to continue to rise substantially.

Australia is at substantial risk of China induced musical chairs. Worse than US induced flu. Especially worse since policy options are limited by the vast expansion of sovereign debt.

What are the options?

Australia has substantive numbers of world class manufacturers and innovative engineering firms. I have listed examples in previous blogs. For instance, HMAS Perth, an ANZAC class guided missile frigate, is considered to be the "most advanced vessel of its class in the world". This is because of its phased array and combat management system which is able to defend the ship against supersonic sea skimming missiles. This technology was developed in Australia.

Cochlear, commencing with a small R&D grant in 1981 now employs 2,700 people with a AUD 3 billion market capitalisation.

There are plenty of other examples and there could be hundreds more.

If the Australian economy is to transition and lessen the China risk, it will need to capitalise on all of these opportunities.

This will not be possible without a vibrant venture capital industry. Australia does not have one at present. Just AUD 111 million was invested in 2012/13. Although the country is reported to have the 4th largest funds management sector in the world, it will be a brave trustee that allocates to venture capital.

A prominent venture capitalist, Mark Carnegie, stated that "The venture capital industry has been its own worst enemy in Australia over a long period of time" and "the industry has performed incredibly poorly". That is certainly true, and with limited exceptions, the investment history of venture capital has been very poor in Australia.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

THE POLITICISATION OF SCIENCE: BACK TO THE 1970'S?

The 1970's seem a world away from 2014, especially for younger people. Those people will not remember that the politics of science then, and especially what was then the new discipline of ecology, was about Global Cooling. One of the leading exponents of the day was one Paul Ehrlich, author of the Malthusian "Population Bomb".

Recent reports from credible German scientists predict a return to global cooling to a point equivalent to the mid nineteenth century.

This analysis seems to be consistent with measured facts. These facts include increasing areas of Antarctic sea ice reported by the US National Snow and Ice Data Centre and NASA. There can be many reasons for this of course, but the fact that Antarctic ice is expanding is an inconvenient truth for those, like the ill-fated Spirit of Mawson expedition led by Professor Turney, who found themselves having to be rescued from previously ice free areas of the Southern Ocean.

Whatever the reason, the scientific community would gain much greater respect and credibility if it stuck to discovering and reporting facts, rather than following a political agenda and hoping that the facts will support it.

In Turneys' case, who boasted about being reported in Times Square NY, the facts on the ground (to be accurate, ice bound ocean), did not support his script. How inconvenient, and scientifically challenging, since climate modelling suggests that ice cover should be shrinking rather than growing.

Climate is infinitely variable, and climate science uncertain.

The costs of Professor Turney's rescue pale into insignificance against the costs of the political agendas supported by uncertain climate science.

Those costs are borne by people who do not have high paying academic or government jobs, and in Australia, are losing their jobs because of the destruction of industries caused by climate "science" driven policy.

Just how disreputable and ignored recent climate science has become, witness the reopening of lignite (brown coal) mines in Germany and elsewhere in Central Europe. These will vastly increase carbon emissions in Europe, and especially given the closure of the German non-carbon emitting nuclear power industry.

Perhaps these emissions will mitigate the suggested period of global cooling being predicted by some German scientists?

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

AUSTRALIA CAUGHT BETWEEN SHIFTING TECTONIC PLATES

My Ping Pong Pang blogs on this site generate a lot of interest. Here is my prognosis for how Australian industry is being trapped between the rapidly shifting tectonic plates of the United States, German-led Europe, and China. If this prognosis is correct, it will have profound implications for investors.

The US dollar is certain to rise against most major currencies. It is still the only safe haven currency in an increasingly volatile world and this will attract a premium. Federal budgets are becoming increasingly under control and much of the money printing replaces the money which evaporated since 2008. Hence no signs of inflation.

Add in near self sufficiency in energy, comparatively low energy costs, low unit labour costs in manufacturing, and the world's best technology base, and you have the ingredients for a strongly growing economy and a fiery US dollar rally.

US$ investments in emerging markets are likely to be repatriated with severe consequences for emerging market economies which might include the collapse of shadow banking systems in those countries. More on China in a minute.

The US today is probably at its most competitive since the 1950's consumer product revolution. It is sucking in talent and innovation from around the world, and can make and export products very competitively across multiple industries. These products include military equipment, the demand for which may supplant rapidly declining demand for mining equipment.

 

The US can also meet its own consumption of almost everything, so will not be as exposed as others to unfolding events elsewhere.

In German-led Europe, monetary policy is akin to a return to the Gold Standard of the 20th Century with a constrained supply of credit. For the moment, this is adding to the intrinsic competitiveness of German industrial exports. Unless there is a Damascene conversion of monetary policy in Frankfurt (unlikely), only rising bond yields in the US are likely to have an effect on the cost and availability of euro denominated credit.

German industry is in prime position to capitalise on the next wave of development in China: the move towards a consumer society. German vehicles, machine tools, pharmaceuticals and chemicals are sold as soon as they are made for Asian consumers with less regard to the price point than virtually any other country's exports. The value of the German brand: even in Australia, advertising for German cars includes German language. German industry captures not only manufacturing profits, but also brand profits.

 

These products are often produced by privately owned and run Mittelstand companies. These are small and medium sized enterprises often located in smaller towns and villages. Usually without external equity financing.

 

China is the big enigma. The war games are likely to generate an increase in armaments production in Japan, Sth Korea and the US. Perhaps 2014 reflects 1914, except that the players are different. Gunboats and sabre rattling to detract from major internal problems.

 

Chinese credit growth has been explosive and unprecedented. As any CEO and political leader will tell you, it is far harder to tell people to tighten their belts than it is to inflate an economy with cheap money. Many Americans have learned this lesson the hard way. Australians are about to learn.

 

So whereto for China? Probably managed devaluation of its currency. Competitively with Japan.

 

Where does this leave Australia, its industries and investors?

 

More than 40% of Australian exports go to China, and most of this is iron ore. Australia, and its governments, are massively exposed to events in China. There used to be a saying that if the US catches cold, then Australia gets the flu. Today, if China reduces Australian iron ore and coal imports, (volume and/or price) the Australian economy and its tax base will suffer enormous consequences. A heart attack, not the flu.

 

This is at a time when Australian industry has been damaged for a decade by the destruction its previous major comparative advantage (cheap and abundant energy). This destruction is a direct result of the Labour-Green government of 2007-13. Energy costs are unprecedented in Australia and are now a negative factor when companies determine whether or not to invest in new projects or continue with their present ones.

 

Recent examples including the scaling down of production of aluminium from its raw material in Gladstone, Queensland, and the likely closure of aluminium production by Alcoa at is Geelong, Victoria factory.

 

Australia will not process its raw materials any longer: raw commodities will be exported for processing. This is happening across all industries, including the recycling of plastics wastes.

 

The worlds' highest energy costs are being replicated in the LNG industry, to the point where there is uncertainty not only about high prices but also about domestic availability to industry.

 

This is leading to a downwards spiral where reduced energy consumption (industrial and household) generates further prices rises to accommodate fixed costs structures.

 

Energy costs impacts and China are likely to have profound impacts on Australia's industrial and tax bases in the near to medium term, and thence to its housing markets and banks. These impacts will include more company closures, less employment (skilled and unskilled), government fiscal problems, and increasing housing unaffordability at todays' price points. In short, no, low, or slow growth in an environment where the US and Germany will do well. Or even a contraction, depending on China. All of this suggests a markedly lower Australian dollar.

 

The tragedy is that Australian industry makes many world leading manufactures: its doesn't capture the brand value (yet) that the German brand captures, but it can. It can also compete (as Germany does) with high unit labour costs and a strong currency. The Australian Mittelstanden are the unsung heroes of the economy and its likely medium term saviour.

 

However, what will be required is a weaning of the whole country off China, and an end to the Australian complacency, including in Canberra. The country needs its "Margaret Thatcher moment" and it is likely to be painful.  Whether the new government in Canberra is up to the policy challenge will be a recurring theme in 2014.

 

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

 

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844