A Critical Review of the Hartley Review of SA Government International Investment Attraction Strategy

Austrade Logo and branding “Australia Unlimited” really captures the folly of South Australia adopting an AUSTRADE strategy for international promotion. The logo is about all of Australia not SA. South Australia runs the risk of being left behind if an Austrade strategy is activated in isolation.

The Hartley Review of the South Australian Government international office strategy has made recommendations that the State Government outsource the role of investment attraction in international markets to AUSTRADE. Recently however AUSTRADE has released a review of their own operations and come to some important conclusions on their future strategy. This new AUSTRADE strategy discusses the need to promote Investment in a Generic manner, How is this going to be in the best interests of SA? and if investors are identified, how will the SA government be placed to facilitate the next phase, if there are no representation on the ground in these home markets?  The AUSTRADE focus is on federal objectives, and most companies that are requiring the assistance form AUSTRADE are from the Eastern Seaboard, how will the competing interests from SA be managed if this proposal is activated? The objectives available in the 2011 AUSTRADE review suggest that the new leaner AUSTRADE model that is focused upon Asia and emerging economies.  The use of AUSTRADE to promote SA companies and industries in key markets can be compromised in certain industry sectors, due to perceived conflicts of interest. One core example would be in the defence industry, AUSTRADE are compromised in their support of defence contractors due to their perceived geopolitical conflict of interest. The State Government would be better placed to facilitate introductions and assist local companies as they are not the procurers of defence materials themselves. This is just one example where an AUSTRADE representative strategy would be seriously compromised.

In relation to the Investment focus of AUSTRADE the 2011 review recommends:

Investment activity will be focused in markets where there are sources of investible funds, predominantly established markets, but increasingly, growth and emerging economies. However, a sharper focus for investment activity is also required.

Generic promotion of Australia’s attractiveness as a destination for foreign direct investment in target markets will remain a core element of the investment program.

  • Proactive investment attraction priorities will be determined through structured consultation across Government.
  • The facilitation of investors who have made a decision to consider Australia, requires close cooperation across levels of government and Austrade’s role will be concentrated in the delivery of targeted information and navigation through the Australian policy and regulatory landscape. A key goal for Austrade will be the delivery of strong investment leads to states, territories and other providers for facilitation activity, at the earliest opportunity.

Qingdao is a city of immense potential to South Australia and we are currently not leveraging our strong connections in this city to achieve the best outcomes for South Australian companies.

The recommendations to close the current offices in each of the emerging markets is poorly conceived, the arguments put forward in the review that SA needs to withdraw from these markets will affect our image in these markets in a negative manner. SA already invests less than the other states in Australia on their international strategy, and this could well be the reason that we have not achieved the outcome that the State Government would seek. I find it strange that a proposal to close everything other than the Jinan Office should be made, based on the available evidence. If anything the office in Jinan should be moved to Qingdao in Shandong, China’s third largest port city, and which has a longstanding trade relationship with SA through agricultural exports.

The proposal to move away from trade and inwards towards investment is a short-sighted and backward move, that is more in keeping with the strategies of emerging and developing economies, not mature economies such as South Australia. Pursuing this strategy in a global market, where the investors have choice, not only amongst Australia, but more broadly across Asia, Africa, the Americas and Europe, suggests that SA will be lost to the world. What benchmarking has the SA government done for our Investment potential against similar key investor markets? The Hartley Review ignores the South Australian geographic isolation from the western world, and with the macro economic factors currently leaving Australia as a poor investment location for industry and manufacturing, it is unlikely that substantial inward investment would come into the state for anything other than mining. In recent weeks the folly of the expected Mining investment boom is becoming evident, and there may not be the appetite to invest in SA, given the current macroeconomic issues and policy positions in Australia, and South Australia.

Indonesia provides a large opportunity for South Australia in trade and investment, yet the South Australian government has failed to grasp the opportunities presented.

The Investment strategy proposed will consign large components of the South Australian economy to waste, including our leading export sectors of agriculture, and education. Given the current state of the manufacturing industry in SA, how will this review address the needs of the manufacturing sector transition to advanced manufacturing? The Hartley Review does not provide any tangible way of addressing this issue, and how better use may have been made of the international offices to help our manufacturers rationalise their operations more effectively. An example SA can aspire to is Germany, which has moved its bulk manufacturing industry to an advanced manufacturing sector, through taking advantage of their international networks in Eastern Europe, and Asia. There is nowhere in this report which raises this as a value adding proposition to our current overseas offices.  An Investment Strategy which seeks to pitch SA directly against our emerging economy neighbours such as Indonesia, PNG and Burma in regards to mining investment is short-sighted, and compromised in my opinion, particularly if there is no complimentary engagement to assist our neighbours achieve economic goals, through economic partnerships and bi-lateral investment. The economic principle of comparative advantage has been ignored in this recommendation.

The recommendation that the service sector be employed in those circumstances where the “representative” title was not critical for obtaining access to investment targets ignores the cultural factors that are common to most other countries in Asia, that being the respect for status and hierarchy. In Asia particularly the title is critical, this review is culturally ignorant of these factors, and could position South Australia at the back of the queue for a generation, should a short term and reactive cost cutting measure be enacted.  Overall, the Hartley review is a dangerous document, which would fundamentally damage the South Australian Brand overseas in our key emerging markets. At a time when there is a debate about the recognition and identification of Brand SA, it is amazing that there is a parallel discussion about the removal of our international trade offices. Once a company/or government withdraws from a market, there is tangible loss of brand equity, political and social capital, and network connectedness. Such a change in direction would seriously damage South Australia’s long term trade and investment engagement in global markets, and consign us to a small corner at the bottom of Australia.

Comment on the Hartley Review of South Australia’s Overseas Representation

The proposal to close the South Australian Government Trade offices is flawed, and fails to understand the complicated needs of local SME’s in finding trade and investment opportunities in new Asian markets.

The Hartley Review of South Australian International offices unfortunately fails to adequately address the needs of South Australia in promotion of trade and investment throughout a global network. There seem to have been some fundamental errors in recommendations which have the potential to greatly impact on the ability for SA to effectively develop trade and investment for the South Australian economy into the future. I therefore would advocate a reconsideration of the approach recommended in the Hartley Review as if it is implemented it will have a serious detrimental effect upon the SA economy to engage in global markets, compete for effective investment in a global environment, and will disadvantage SA industry when they are desperately needing government assistance to transition to succeed in the “new economy”. The report does not identify which markets should be a priority based on trade, investment or the KPI’s of the existing international offices. This is a concern as it does not present an cognisant argument as to why particular markets should be retained or discarded.

Santos is a great South Australian success story, and has successfully entered the Indonesian market. This is not the only SA company to have succeeded in this emerging market, and it wont be the last.

There is also no mention of other markets around the world that SA currently does not have a market presence, which suggests the intent of the report was always to downsize, rather that objectively review the international office strategy. There is absolutely no mention of Indonesia anywhere in the Hartley Review, despite Indonesia being Australia’s closest neighbour, our favourite tourist destination. Indonesia is the world’s 4th Largest country by population, is rapidly expanding, and has a consistent positive growth rate commensurate with China and India in excess of 6%. Indonesian is also actively being approached by major SA companies as a target market from companies such as SANTOS, and HillGrove. Yet there is zero mention of this market in the review. This is also despite our state neighbours in WA expanding their representation in Indonesia to Two representatives, and Victoria recentlyt engaging an Indonesian Representative in the past 6 months. These examples seem to be at odds with the findings and recommendations of the Hartley Review.

The recommendation to partner with AUSTRADE is a strange proposal due to the 2011 AUSTRADE review mentioned in the Hartley Review, does not mention the promotion and embedding of State representatives in their operations, but does instead discuss the need to focus solely upon “Internationally Ready Firms” and states:

Succeeding in Asian markets is no easy objective, and for a state government it takes perseverance and patience to succeed. It is not about getting by on a wing and a prayer, but more to do with lighting many candles so that the investors can see the way to the South Australian economy.

Because Austrade’s greatest value lies in international markets, Austrade services will be more clearly directed to those companies ready to tackle international business opportunities. Where companies are not ready for export, Austrade will make referrals to alternative enterprise development programs (government or private sector).”

This may pose some challenges for many SA companies in developing their market preparedness for international markets, and more so there is an expressed expectation from AUSTRADE that these services will be provided by state governments. The Hartley review fails to review the current international strategy objectively, and ignores the market potential of South Australia’s large Asian neighbours. If South Australia is to succeed in these global markets and adequately compete against companies from around Australia and the globe there is a need to expand our involvement in international markets, and not withdraw from these markets. The future of the South Australian economy depends upon the export and trade success of our companies, and we must ensure that we provide the necessary tools to help our SA based companies to succeed in the global market. In the next article I will outline how the Hartley review has failed to adequately address the opportunity to attract investment on a global stage.

Australia: we need to reassess our manufacturing needs

Australia needs to accept the challenges of the Advanced manufacturing future

Australia and the traditional manufacturing states of South Australia, Victoria and New South Wales have struggled in recent years to help their traditional economic drivers transition to a new comparative and competitive advantage. In Australia we are still under the “illusion” that we can compete broadly as a manufacturing centre with the rest of the world. This illusion is unachievable due a variety of factors, and there are some key community expectations which mean maintaining our manufacturing heritage as it was in the 1970’s, 80’s or 1990’s is just not possible. The goal of maintaining this bulk manufacturing base is not compatible with our Australian standards of living and expectations. In Australia we have mortgages, rent payments, spending and consuming expectations which mean that any reduction in our labour costs will come at a substantial societal cost to the broader Australian community. Australia can compete on a global scale if we increase productivity. This would require increased output compared to cost of labour. We can achieve this in a couple of ways in Australia. The first is if we lower the minimum wage to levels like the US – $5 per hour for example, this would allow our productivity to increase to a comparable level to our competitor manufacturers in North and South America, although still putting us at a disadvantage compared with our regional neighbors in Asia. The alternative would be to reduce our workforce numbers through increased investment in automative manufacturing. These two options would neccessarily result in reduction in the manufacturing workforce, and more than likely see adverse reactions from Unions, not to mention the political difficulties associated with these moves. There is also a significant cost expenditure associated with the up-tooling of the manufacturing facilities for bulk manufacturing. Australian manufacturers do however need to address the reduction in productivity on the global platform, and corporate boards, management teams, and state and federal governments should be seeking to help their home grown manufacturers rationalize their investments, operations and manufacturing into areas where we in Australia can maintain our competitive advantage.

Low cost manufacturing from Asia has meant that it is no longer cost effective to manufacture in Australia in bulk products. We must transition to a high technology, advanced manufacturing future.

An alternative option for Australian manufacturers to address the issues of reduced manufacturing productivity and cost effectiveness should be to strategically manufacture in Advanced High technology sectors. Australian state and federal governments should bite the bullet and help our manufacturers rationalize their bulk manufacturing to our Asian neighbors in a manner that allows us to focus on the advanced value adding and R&D components of Manufacturing. Outsourcing and relocating bulk manufacturing will lower our cost burden in Australia, and allow Australian manufacturers to remain competitive on a global scale. It has the added benefit of helping these same manufacturers to rationalize their operations so that they have control over the intellectual property and R&D components of there businesses. This is the realistic path to maintaining a sustainable manufacturing industry in Australia. Our friends in Asia should be seen as our partners not our foes when it comes to our manufacturing future.

The main issue we have across Australia at the moment is that our political leaders at both a state and federal level are risk adverse and in the main lack the leadership and strength of conviction required to help our economies transition to a new advanced manufacturing and sustainable level. The sooner we realise this the sooner our Australian economy, and manufacturing industry will become a strength once more.

The Indonesian Wine Market: Exploring Wine Export Opportunities Beyond China

There is an emerging export opportunity in Indonesia for Australian Premium Wine.

The Australian wine industry was for many years concerned about export markets eroding in the traditional wine markets in Europe and North America, particularly as a combination of rising Australian Dollar, Increased competition from other “New World” wines from South Africa, South America and North America started to compete at the lower price point with which Australian wines had been successfully marketed in the UK and Europe.  This challenge for shelf space, market share and profits was further impacted by the growth in grape output, and consolidation of wine companies in Australia through companies such as Treasury Wines (Formerly Southcorp, and Fosters) and Constellation Wines which standardised the Australian wine industry, and helping to entrench Australian wine industry perception of international export markets as low-end consumers. This industry perception and attitude was a short-sighted and a recipe for disaster. Something had to change, to snap the thinking of the Australian Wine industry.

The Indonesian Wine Market is open for business. Ignore this market to your detriment. The time is ripe for a new investigation of the wine export opportunities in Indonesia

In recent years there has been an explosion of wine sales/exports/ and investments in China. There is undoubtedly a great opportunity in China as the 1.3 billion people start to develop a taste for wine. This is not to say however that wine is saleable to all of the 1.3 billion people, as the favoured alcoholic drinks are still beer and spirits ( rice and barley wine drinks such as MaoTai, Beiju etc). Wine consumption is rising, and taping into the 5% of the population that currently drink wine is a boon for the Australian wine industry, and many successful Australian wineries are now exporting good and profitable volumes into China. There is of course a growing Chinese Wine industry, which is increasing in quality and exposure throughout China. This will likely become a competitive force in the future, for which Australian Wine Companies will need to strategically prepare. So what alternatives are out there in Asia?

There are obvious opportunities throughout South East Asia, in markets such as Vietnam, Thailand, and Singapore. These markets are in the main receptive to wine, and Australian Wine companies should be looking to export into these markets. However there is another market that Australian and other Western Wine companies overlook – Indonesia. There is  broad perception that Indonesia as a predominantly Muslim country holds no opportunities for Australian wine. This is a short-sighted view in my opinion and Wine Companies need to broaden their perspective.

A Wine Store in Jakarta is not uncommon, and increasingly provide premium wine to a rapidly developing domestic wine market.

Indonesia is a challenging place to sell wine, not least because of the Muslim cultural influence. There is however, a large opportunity emerging in Indonesia for wine sales in the right market segment. Opportunities in bulk wine and low-cost wine sales to Indonesia are non-existent. These price points do not work politically for Indonesia. This is not the same for premium wine  sales, for the US$15-50 price point on an Australian wine shelf . In Indonesia these wines would be sold at an added premium of between $40-150. People pay for these wines, and they are consumed by the emergent middle class in cities like Jakarta, and are sought after in restaurants and Hotels across Indonesia. It must be remembered that Indonesia is a moderate Muslim country, and there is no ban on alcohol sales. There is however some restrictions on the number of importers allowed to bring in wine. My main message here is that, Indonesia is a market of opportunity for the Australian wine industry, and it should not be ignored out of hand.

If your company is looking to tap into the increasing demand for wine in the Indonesian market, please feel free to send me an email (nathan@asiaaustralis.com), and we can have a chat about how AsiaAustralis can assist your company meet the needs of the Indonesian market. Alternatively come along to the Australia Indonesia Business Council Business Forum – “Identifying opportunities for primary industries in the Indonesian market”  in Adelaide on Friday 30th March, to learn more about the opportunities for food exporters in Indonesia.

Consider the Risks before developing your future International Manufacturing Strategy

Manufacturing is complicated, make sure all your manufacturing cogs are lined up to maximise the returns

Australian manufacturers are facing high costs of production, and a high A$ beyond parity with the US$, which has resulted in a loss of competitiveness in international markets. If Australian manufacturers are to survive then the need to address these cost of production and regain the international markets. It is not in Australia’s long term Interest to have the manufacturing sector just get up and leave, as companies have developed years of knowledge and expertise, and in many cases have created substantial intellectual property invested in manufacturing in Australia. Manufacturers planning for the future need to consider how to effectively manage the international markets in which they will manufacture, and addressing the cost pressures and protecting intellectual property will be fundamental to developing a sustainable and effective international manufacturing strategy.

 Australia can no longer compete in low cost manufacturing with other countries in our region such as China due to our comparative high costs of production. As a consequence many Australian manufacturers have looked to China as the answer to cost of production issues, and moved manufacturing to China in recent years. This can be a great way to lower production costs, and many Australian companies have managed their Chinese operations successfully, however there are some downside risks to manufacturing in China. It is important to consider that the cost of production in China has been rising consistently over the last few years, with labour costs rising in excess of 10% a year for the past couple of years. To add to these cost pressures is the gradual appreciation of the Chinese RMB, which is making Chinese made products more expensive. These cost pressure, alone, suggest that China may not be the medium to long-term answer for absolute low cost manufacturing. Additionally another risk to manage is a loss of your intellectual property, which could result in either a competitor product entering the market, or a direct replica of your product which may erode brand confidence.  Can you be certain that your product designs won’t reappear around the corner for a fraction of the price? I know of many manufacturers who have been confronted with this very issue. Be careful.

Investing in Advanced manufacturing may allow your company to maintain its competitive advantage

One way of managing this risk is through maintaining the advanced manufacturing phase of production in Australia. In order to make Advanced Manufacturing work it is important to undertake Bulk manufacturing abroad while at the same time protecting your intellectual property. Assembling the bulk components, and installing the high technology components of the product in SA will go a long way towards protecting the most important assets Australian manufacturers possess: Intellectual Property. This can be a complicated task, particularly in relation to Australia’s geographic proximity to the low cost manufacturing centres in Asia. If manufacturing is undertaken in China it is important to consider the logistics time to freight components from China to Australia. It can take up to 5 weeks to get products from manufacturing facilities in China to the warehouse in Australia. Can your business cope with that time delay? In order to make Advanced Manufacturing work for Australian companies it is important to undertake bulk manufacturing of components in geographic locations that do not pose a substantial time disadvantage. 

The growing costs of production in China in recent years, and the need to protect intellectual property mean that manufacturers need to look beyond a reliance on the China solution if they are to find sustainable low cost manufacturing to compliment the advanced manufacturing in Australia.  I would advocate a look at other markets in South East Asia to undertake bulk manufacturing, and reduce the freight time.  The advantage South East Asia possesses is that the freight transport corridor stops in Singapore on the way to and from Australia. The closer the manufacturing centre to Singapore the faster it can be on a ship heading to Australia, where advanced manufacturing can then be undertaken.  Australian companies planning their international manufacturing strategy must plan for an Advanced Manufacturing future if it is to manage the intellectual property risks, while it is important to look north and consider the bulk manufacturing opportunities on Australia’s relatively closer northern doorstep.

The markets are demanding more accountability of national governments: but are they challenging the democratic political system around the world?

The "Markets" are made up of people who sometimes act without reason...and sometimes they act because they can

The “markets” attack on Greece and Ireland, have forced both these countries to accept economic bailout packages from the EU-IMF, and with it a series of strict austerity measures which restrict the spending of governments. The austerity measures force the government to shut down spending, and raise economic rationalism to a new level. It is tough times for the citizens of these countries as the absorb the impact of lower wages, less government services and lower asset values.

Ireland was encouraged by all and sundry in Europe to request an EU-IMF bailout package, and the chief reason amongst many was that it would give stability to the European financial system and prevent the failure of other European economies. I don’t accept this position, as it wasn’t proved accurate when US banks started to collapse in 2008, and it wasn’t true when European Banks started collapsing in 2008/09, and equally it wasn’t proved to be true when Greece accepted the bailout package and the associated austerity package. If acceptance of a bailout package was evidence of stopping the rot, then surely the “markets” would not have attacked Ireland, and demanded the same outcome. In all these cases the financial “markets” have been out for blood, and the forces at play on the floors of the exchanges and bond “markets” have focused their energies on one target until it has fallen, only for their scope to be moved to the next target. The market analysts tell us that it is more the case of the market correcting, and assessing the competence of companies and countries, and that serious concerns have been uncovered. In reality it is a domino effect, with one falling, the next one to fall is the next in line.

The Domino EffectThis domino effect is what the bailout packages are trying to prevent, through providing financial stability and assurance to a vulnerable economy. The problem seems to be that, the “market” wants these economies to have the financial stability and assurance provided by bailouts. The “market” is treating economies and countries as corporations. Publicly listed companies have their management, strategies, implementation, and financial stability assessed by the market in terms of their share price, and other capital raising tools. The markets have previously not been interested or at perhaps not been able to have a meaningful effect on the management decisions of sovereign states (countries), as that is the domain of the constituents of the country – or the electors. This is what politics is all about, we get to vote in the management (Politician or Party) we want, and the politicians who win essentially take a short term approach to managing the country, and make management decisions based upon the ability to please enough of the electorate to get re-elected….whether it is financially sound, economically feasible, commercially justified or not.

The "markets" are made up of individuals who are by no means influence free

We think and speak of “Markets” as if they are an automated and influence free mechanism that weighs up the relative strengths and weaknesses of an organization, currency or country; however we must remember that markets are made up of people, who provide this analysis and people are not influence free. The people that work or are the “market” are now demanding to have a say in how sovereign states are financially managed. This financial oversight of the financial decisions of sovereign states probably came about when these same sovereign states essentially nationalized failing banks that were “too big to fail”, and incorporated their debt and bad management decisions into the overall debt of a country. This is exactly what Ireland did, when their major banks were too heavily indebted and were potentially about to collapse. The Irish government stepped in and bailed out the banks…..the problem is that the Irish government couldn’t actually afford to be burdened by the banks debt. The markets were in a position where they were required to refinance the Irish debt, and they decided that it was too much, and would only be financed at a premium…..unless Ireland accepted a Bailout package. The poor financial decisions of governments who have bailed out large institutions such as Ireland are now being punished by the markets….one country at a time. So the question is; are the markets exacting a greater influence over national governments than they have before? And will the constituents of these countries accept the new market controlled oversight of financial management?

Will 2011 be the year of European Economic Collapse?

Will Portugal need to catch a Baliout tram to escape economic and financial collapse?

It is a new year and we have an exciting year in front of us, yet already there are questions being asked about the Portuguese economy and its ability to pay its debts. If 2008/09 were the years for Banks to fail and need bailing out, then surely 2010 and 2011 are the years of European sovereign states facing economic and financial collapse. In 2010 we saw the collapse of three small economies in Europe, Greece, Iceland, and right at the end of the year…Ireland. We can separate Iceland off from Greece and Ireland for the moment, as they have decided to default on their liabilities and effectively “flipped the bird” at the Dutch and British Governments who were owed billions of dollars. Iceland has decided to revert to being a windswept island in the middle of nowhere, with a small population. Greece and Ireland are a different kettle of fish.

I discussed the emerging problem of Greece and the likelihood it would need to be bailed out by the EU at the end of April 2010 in “Is this the beginning of the End for the Euro?” (http://wp.me/pS6DN-1j), and then again the potential consequences of the Greek bailout in early May “Will Greece lead the world into a double dip recession” (http://wp.me/pS6DN-21). In this article I described the likely scenario of a string of economies across the EU and Euro zone failing. At the time I didn’t mention the likelihood of Ireland facing financial collapse, but I did discuss the potential failure of Portugal, Spain and Italy. 2011 is shaping as a year when we will see whether the Eurozone and the EU have the resilience to withstand the collapse or potential collapse of these economies.

We are only into the second week of 2011 and there are already concerns about the financial and economic viability of Portugal to service its national debt. There have also been some rumblings about the ability for Spain and Belgium to do the same. The big question is can the EU sustain itself financially, and politically if it is required to bailout these countries as well? There is a bit of a difference here between the Greek and Irish situation, with Portugal and Spain. Greece and Ireland are small economies in Europe, and their debt although picked up by many of the European banks; it is still a relatively small amount (in national debt terms). The debt sold through government bonds, were owned by a number of banks throughout Europe (both government banks and private banks). This debt has been spread wide and thin. The problem with Portugal and Spain is that much of the Portuguese debt is owned by Spanish Government and Private Banks, so if Portugal has an economic collapse then much of the debt burden will fall upon Spain. This is why there have been calls for Portugal to request an EU-IMF bailout, and manage the potential losses to other European banks. Already the short term Bond price has risen to above 7% which is the threshold that precipitated Greece and Ireland to request and accept bailout packages. If you think about it in terms of your house mortgage then it is easy to understand why Portugal will be under pressure to seek a bailout. Government’s sell bonds to banks in order to raise money. The bond rate is the government equivalent of the home loan interest rate, so as it goes higher, the more you have to pay back each week, and the harder it is to pay. At some point you realize that you don’t have enough income to repay the interest, and so you have to sell the house….or in the case of a country…restructure the economy and accept a bailout or default on you loans.

If Portugal fails then Spain may be the next economy at risk

The problem for the EU is that if Portugal goes down, the next country that will be in the market sights will be Spain. Spain has one of the largest economies in Europe, and their collapse would be catastrophic for the EU and Eurozone survival. So 2011 may well be the year of further economic bailout packages and sovereign debt defaults. If that is the case then we may yet see the end or a restructuring of the Eurozone. In any case 2011 will be an exciting year, and it wouldn’t surprise me if we see Portugal, and at least one other European country accepting a bailout.

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