Australia’s bigger companies, with a few exceptions such as BHP, Rio and News Corporation, are awful at globalisation. This is becoming obvious with the Australian dollar at such high levels. Global companies adapt to high currencies by relocating production elsewhere, acquiring offshore, manipulating their cross border value chains. That way they can at least respond, often they can profit. But Australia’s cosseted cartels have never understood this game. The occasional attempts to internationalise, such as the banks, are usually ill fated, offshore nibbles. But the real challenge, which is to manage across borders, is far beyond their management skills. Australians love to say they punch above their weight, but in this contest most of our bigger companies don’t even know where the ring is.
A report by Macquarie traces the cost of this ignorance. It suggests that those companies at least wrestling with globalisation and its demand for world class specialisation are showing better signs of coping. There are three types here: global, international and domestic. The miners are mostly international, and are under pressure. The domestically focused players are struggling. But global players like Amcor, Resmed, CSL, Computershare are adapting better:
Companies with significant non Australian markets and international operations in the main presented a view of strong recoveries, with top lines growing and still low cost pressures, especially wages. Where there were concerns expressed, these tended to centre on operations exposed to stronger commodity prices. The major problem for these companies is the AUD translation in prospect.
The picture in Australia, however, was extremely mixed. The resources outlook (volume in particular) remains strong. The challenges for resource companies is how to manage the long list of capacity expansions, while trying to control rampant cost inflation in an environment of severe skills shortages and government inaction on this front.
This is a frustration for virtually all stocks exposed to the mining sector, including engineers and contractors, with skills shortages and associated labour costs increasing as education and required skill levels increase. Several stocks across a range of industries are outsourcing manufacturing offshore (UGL, FWD, OSH, etc) in order to deal with rising domestic labour costs. For several stocks, even offshore labour costs, particularly in China, are increasing (albeit from a lower base). This has driven further expansion into other markets, including Thailand, Vietnam, India and Bangladesh.
Hence, for domestic Australia, the picture is one of weak top-line growth and an associated sustained earnings slowdown in the consumer and manufacturing spaces. The consumer is reticent and saving, with little sign of any change. Manufacturers are in the middle of a perfect storm from the strong AUD, flat to declining demand, wage growth of 4%+ and cost increases in commodity and utility costs. For some, further capacity shutdowns seem inevitable.
Stocks with strong business models and dominant positions within specific markets or market niches are the exception to this trend, driving growth through incumbency, continued R&D and technological advances and significant barriers to entry.
Amcor, which combines a domestic cartel with the pursuit of a global niche, is especially singled out:
With these themes in mind, AMC impressed with its clarity of strategy both from the point of view of both the positioning of its product and the rationalisation gains from recently well-timed acquisitions. Again, like many stocks presenting at the conference, the overseas operations stood out for their strong momentum, including those in Europe, the US and Asia. By contrast, Australia was the laggard with an overvalued AUD and cost increases, especially for vulnerable customers.
The lesson is clear. It is time corporate Australia stopped congratulating itself for being lucky enough to have massive domestic markets shares and instead started to address the real challenges of globalisation. After all, the domestic stock market, which is two fifths owned by foreigners, is already globalised. Some humility and a willingness to learn would not go astray. The challenge is to be the best in the world at something you do, not just good at milking market dominance.