May 16, 2024 | Change, Governance, Innovation, Leadership, retail, Strategy
The recent declaration of “A Future Made in Australia” by the Prime Minister has put the future shape of the nation’s manufacturing sector back on the agenda.
There was however, nothing specific on the importance of agricultural innovation and value adding through the manufacturing sector, or the strategic value of food security.
The decline in Australian owned manufacturing in the food industry has been close to total. The FMCG manufacturing industry has seen input prices increase by 49% over the decade to 2020, while the wholesale prices received have increased by only 24% over the same period (Source: AFGC Sustaining Australia Food and Grocery manufacturing 2030 report) This downturn, and the 20 years prior which display similar trends has seen locally owned businesses either go bankrupt, or become subsidiaries of foreign conglomerates, relegating them to mere outposts.
From an era where medium-sized businesses thrived across various product categories, employing significant numbers in quality, engineering, the trades, and R&D, today these businesses have largely disappeared. This transition has been marked by a shift towards centralisation of product development and scientific research abroad, leaving Australian operations with minimal operational and decision-making authority.
This trend raises critical questions of how we feed ourselves, and make a useful contribution to the global food supply.
Notwithstanding the international ownership of most of food and beverage manufacturing, it contributes 6.5% of GDP, 32% of total manufacturing output, and employs 240,000 people, 40% of which are in regional areas. (source AFGC)
By any measure, the food manufacturing sector is profoundly important to Australians. Its future resilience and growth of sovereign capability should be paramount.
The lack of sovereign control of the resources and capital needs to generate growth is disturbing.
Central to an innovative and resilient manufacturing industry is the capacity to generate intellectual capital that translates into manufactured product. The progressive ‘internationalisation’ of company R&D noted above, has been matched by a progressive emasculation of the sovereign capability to generate the Intellectual capital necessary for long term growth. There is a significant number of SME’s in the sector, but collectively they contribute very little to the total of manufactured product. They are typically mixing often imported ingredients in low tech environments with a few employees and casuals. Distribution is largely through secondary channels like farmers markets, and local retailers and food service. They do not have the resources to compete with the R&D capability of multinationals, and the previously available intellectual assistance from federal and state institutions has been removed.
Take for example the CSIRO that in the past worked closely with business. Often this was in an informal and personal collaboration between individuals that enabled a thriving environment for problem solving and innovation. CSIRO’s sites in North Ryde, Werribee, and Canon Hill have either been downsized or sold off, and skilled, experienced employees made redundant. Contributing to this erosion of the collaboration that in the past generated much of the ‘ideation’ that sets the stage for innovation, has been the demands of successive governments for a ‘productivity dividend’. This was typically 2% annually which compounds quickly to a killer blow to capability. It is code for removing those informal but fundamental creative collaborations with domestic companies, and encouraging the multinationals to centralise R&D elsewhere.
The power of the supermarket chains, currently under scrutiny has also played a key role in this process. SME’s simply do not have the deep pockets required to generate and maintain traction through the retail FMCG oligopoly.
To be successful, SME’s need to be able to absorb the reality of this gross power imbalance with retailers. Financial capital is necessary to enable the generation of the Intellectual Capital that underpins genuine innovation. Further investment is required to design, build and install the equipment to produce the innovative product. Deep pockets are then required to meet the retail trading term and promotional demands, as well as investment in the advertising necessary to attract consumers to a new product. As the power of the retailers has overwhelmed the diminishing group of domestic suppliers, we have been left with multinational suppliers and retailer house-brands, themselves often manufactured offshore.
The focus of government policies remains short-term, driven by electoral cycles rather than the decades required to bridge the gap between science and commercial success. Differing jurisdictions follow their own nose, resulting in a siloed and fragmented effort across the country, rather than a coherent and coordinated effort. The outcome is a mix of differing priorities, investment plans and initiatives around the country, sometimes used as incentives for business location. The commercial equivalent would be if a conglomerate allowed divisions and locations to compete for resources with declining levels of investment in the total absence of a coherent strategy. No sensible commercial board of directors would put up with such a self-defeating arrangement.
Grant programs send the wrong message and encourage behaviour that rarely delivers the outcomes touted in the press releases.
Culturally and politically risk is toxic to the body politic. However, the acknowledgement and management of risk is a fundamental element in successful innovation.
Successful risk management becomes a function of the extent to which a whole range of data, combined with qualitative assessment of what the future will look like is considered. Removing the capacity to make those assessments severely compromises the value of any conclusion reached.
The only potential solution to those institutional blockages to innovation in manufacturing industries generally is a confronting one.
Government needs to ‘upskill’ itself to be in a position to substitute early equity funding for grant funding.
Such a change requires a cohort of skills and experience not currently available within government and bureaucracies, but selectively available in industry. The early equity would be recoverable by those that are successful at a pre-agreed point, at a pre-agreed rate. This removes the inertia and rent seeking evident in grant funding, replacing it with a modified form of Venture Capital.
In addition, FIRB needs to adjust the guidelines that currently rely on an intense focus on the economics of ‘Comparative advantage’. These rely on projections of current and past quantitative models of industries that usually bear little resemblance to what ultimately evolves. They never reflect the strategic value of sovereign manufacturing.
In the absence of meaningful strategic change, what remains of the domestically owned food manufacturing industry of any scale will disappear, and current and new SME’s will have no hope of replacing them.
Notes.
- The budget delivered on Tuesday night included a number of measures that should serve to give manufacturers some confidence that the government has recognised there is a problem, and that action was long overdue.
- A slightly edited (and improved) version of this post was published on Wednesday morning on the AuManufacturing website and Linkedin group.
May 11, 2024 | Governance, Leadership
Our current politics is an intensely adversarial, short-term, zero-sum game.
Is this what is best for the country?
The federal budget is due in a few days.
Based on the selective leaking and conversations happening, the budget will be focused, or at least the political narrative will be focused, on cost of living, housing, male violence against females, and the build-up of national security assets, military and technology.
All worthy topics, demanding attention, understanding, and investment.
However, if anybody in Canberra chose to take a helicopter view of the strategy of Australia Inc, as it would be in a business, there are only two questions that should be the framework that drives the tactical choices that are made every year in the budget.
- What are we building that will deliver long term capacity, resilience, and innovation to the economy?
- What are we doing now to optimise the way we invest resource is against those long-term priorities, and the shorter-term tactical investments necessary to achieve them?
The first is a drag on current expenditure that is designed to deliver a long-term outcome.
The second is an imposition on the long-term outcome to deliver in the short term.
At the best of times this is a delicate balance, and you never have all the right answers.
However, in the absence of asking the question, there will be no answers other than a knee jerk response to whatever happens to be in the headlines today.
Let’s not worry about our children and grandchildren, they will find a way to recover the can we have so solidly kicked down the road.
On that can are the words: we have a revenue problem.
This means tax, as that is the only way governments have the resources to deliver to the country.
Unfortunately, Tax is a noxious three letter word, and no politician who desires to remain one, (they almost all do) will touch, unless accompanied by the word ‘Cut’. Besides, no politician is short of a bob, superannuation entitlement, negatively geared investments, and the largess of party donors. They live comfortably on the teat, while often complaining about how hard the job is, which is no doubt true for those few who are trying, easy for those who are just seat warmers.
The header is courtesy of DALL-E, my artful helper.
Apr 22, 2024 | Governance, Innovation
Suddenly, everyone is interested in batteries.
When mobile devices took off after the launch of the iPhone, the demand for batteries with a longer life than the then existing chemistry could deliver took off as well. Panasonic held a dominating position in this new market, being the major supplier of batteries made using Lithium as the power store.
Then along came Elon Musk. The first Tesla cars, the initial roadster and early models of the series 1 and 2 sedans used what was in effect just large-scale Panasonic batteries. Individual units were linked together with cooling tubes assembled into the pack to dissipate the heat generated by the lithium, which otherwise led to spectacular fires.
Musk in collaboration with Panasonic envisaged a ‘gigafactory’ in Nevada that would supply the packs. As has become a pattern, Panasonic found the task of working with Musk all too much, and were bought out. However, to the point, an essential part of a lithium battery is a range of rare minerals, amongst them Cobalt.
The Democratic Republic of Congo (DRC) hardly democratic, holds almost all the worlds known reserves of Cobalt. Rapid development was inevitable, as was the corruption of local power brokers, and the human rights blindness of the major corporations. Cobalt is a dangerous material, yet much of it is mined by kids in holes with a pick and shovel, dying like flies. There is a registration process designed to monitor and outlaw these practices, but they are useless.
The challenge of replacing Cobalt is therefore the focus of much scientific attention. It is the chemistry of batteries that will deliver a power to weight ratio that will guarantee longer charge life, in everything from your phone to your car, and all the other uses to which Lithium batteries are suddenly being placed.
The world as a choice of three strategies, which should be mutually exclusive:
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- Find an alternative to cobalt, and quickly.
- Find alternative sources of Cobalt, leaving the DRC out of the picture.
- Internationally strengthen and enforce the existing regulations on the mining and processing of Cobalt to remove the incentive for the current corruption and exploitation that occurs.
The first two options are clearly the best. However, the challenge of replacing Cobalt requires a scientific breakthrough that while probable, is yet to be made, and the DRC remains the primary supplier. The third option seems to be beyond our joint capability.
The first to find and commercialise a solution will reap the rewards.
Apr 15, 2024 | Governance, Leadership
We lost an intellectual giant last week, Daniel Kahneman.
Psychologist and Nobel prize winner in economics, he along with long term collaborator Amos Tversky, created what has become known as ‘Behavioural Economics’.
So what you say.
In 2010 Kahneman published research that demonstrated that income was strongly correlated with happiness at lower levels, but above a seemingly modest level (US 75K at the time) it had no effect.
In 2021, a Wharton academic Mathew Killingsworth published a paper that came to the opposite conclusion.
In order to reconcile these conflicting outcomes, Kahneman teamed up with Killingsworth and a third, neutral researcher to establish the truth.
The result was a case of diminishing returns.
It found there were substantial gains in happiness up to 200k income, but after that, diminishing returns kicked in. The ‘happiness curve’ flattens out, eventually delivering no increase in happiness with an increase in income.
This seems to make sense to me.
At a point, an increase in income does not increase happiness (I aspire to discovering that point) it just becomes a scorecard, no different from the one used on a golf course.
Given this instinctively sensible outcome, should Dr Chalmers add a level to income tax?
At a point above an income level few will ever see, impose a further meaningful tax rate on the increments?
Despite the inevitable screams, they will not miss the money, and you never know, it just might make those few happier.
Apr 5, 2024 | Governance, Strategy
Democratic governments have always spent time talking about creating regulations to control monopolies, or at least the profits that can accrue to the monopolist.
In Australia, it has only been talk, and choices to sell public natural monopoly assets to private industry for short term cash. The new monopolist then exercises monopoly pricing power, while the seller governments bleat about market power, as Sydney airport, and electricity distribution have clearly demonstrated.
Elsewhere the examples of action beyond the exercise of the Legislative power to break up monopolies are few and far between. In the US, powers under the Sherman Act were used to break up Standard Oil in 1911, and AT&T in 1984. There was a failed attempt to break up Microsoft in the late 90’s, and currently there is much bleating about the power of Tik Tok, yet to see concrete action.
Beyond those examples, and a few fines of digital platforms under European legislation, little progress has been made. We may see some action in the US to separate the ownership of TikTok from its Chinese parent at some point.
Dictatorships tend to go the other way, with the person at the top holding the whip hand and amassing the profits.
Monopolies are huge profit generators.
Governments feel compelled to control them (until they sell them). So, it seems like a pretty good idea to me to find a market niche, or product category where you can hold a monopoly, or dominate such that you have price setting power.
Be the only solution to a problem, control the best itch scratcher available, and the profits will flow.
I suspect this may be a bit politically incorrect, but think about it.
Creation of something that is so good, so far in front of the competition, so irreplaceable, that there is no viable alternative is surely the objective of all commercial enterprises.
Mar 26, 2024 | Governance, Sales
This is one of the most common questions asked, particularly when configuring a new product.
The ‘right ‘ price will be the pricing model that delivers superior value to customers while delivering optimal returns to the seller.
Developing a pricing model involves a series of strategic and market driven choices. Packaging, high Vs Low, the channels used, marketing collateral deployed, shape of your business model, identification of your ideal customer, and a host of other factors that make up the ‘marketing mix’.
However, despite most of us knowing these things, typically price is set on a cost-plus basis, mixed with what others are charging for the same or similar/substitute product.
For an entirely new product, it is a guessing game that has potentially serious consequences. At one end you kill the product, at the other, you leave money on the table.
Dutch economist Peter van Westendorp introduced a method that ended up being named for him in 1976. It has been used sparingly since, but not as widely as it should be.
It is a simple and reasonably reliable method to determine the ‘right’ price for a product or service.
There are four questions that will set your price ‘guidelines’:
- At what price would it be so cheap that you would question quality?
- At what price would you consider the product to be a bargain?
- At what price would you start to think the product is getting expensive, but you still might consider buying it?
- At what price would you consider the product to be too expensive, and you would not buy it?
Analysis of the responses will give you the point at which you are attracting the most customers who make the trade-off between buying intention, price, and quality perceptions. Putting this on a simple two-dimensional chart makes explanation easy.
Header courtesy Wikipedia
