Australia’s Big Freeze, part 3: how to boost investment

BHP chief. executive Andrew Mackenzie speaks at the Melbourne Mining Club. Pic: Stuart McEvoy

How do we get Australian companies to invest? And how do we stop a serious exodus of research and science-based and other industries to the US because of the Trump taxation package.

Earlier this week I set out why Australians companies were not investing and yesterday detailed the Trump tax package, which goes way beyond the headline corporate tax reduction.

The easiest thing to do is to prescribe government action (and I will do that later) so I want to start with the action required at the private sector to boost investment.

To reach my conclusions I have been helped by the remarkable Melbourne Mining Club speech by BHP CEO Andrew Mackenzie and by yarning with Ben Bryant, the Switzerland based director of the IMD Learning Centre. Bryant interviews CEOs around the world on participating in the 21st century industrial revolution.

And let’s be very clear the world is deep into a 19th century-style industrial revolution and those that don’t participate are likely to fail---that’s why this series is so important.

But first some anecdotes.

In the US, smart companies are discovering that they can make clothing and a vast array of other products at a cost equal to, or lower than, that of China. (We can do the same thing.)

In the past American manufacturing and retail companies have based their strategies on the desirability of making goods offshore.

Australian companies have embraced a similar strategy both in manufacturing and in service sectors like call centres. In call centres computerisation is going to automate much of the work currently undertaken by overseas, so work will come back to Australia.

Whether it be manufacturing or service activities, global and local companies require a different executive mindset and need to invest capital.

By talking with global senior executives as well as chief executives Bryant has made an alarming discovery: the best way to describe the management state of many large global companies is “dissonant” — they lack harmony.

At the top, boards usually appoint chief executives and other senior people on the basis of their past performance and not on their ability to engineer change. Among many lower ranking executives there is a belief in the need to embrace the new technologies and create a totally different company. This creates a vastly different view of a company’s management capability, depending on which executive you talk with.

Bryant says some 70 per cent of executive knowledge comes via experience. The best executives have often benefited greatly from a major reverse or by overcoming difficult situations. But usually the CEO has obtained the job as a result of success, rather being the beneficiary of reverses.

So how do we drive corporate change? It won’t come from the institutions because too many are more interested in their management fees and don’t want companies to take risks.

In the case of BHP, corporate change came as a result of a huge reverse in commodity prices, overpaying for US shale oil and narrow escapes from disastrous decisions.

That set of reverses enabled Andrew Mackenzie to first slash costs but then invest in new technology so BHP could participate in the 21st century industrial revolution. And that investment will not just be in mine automation but a revamp of administrative costs. The revamped BHP is going to emerge as a company with a different cost structure.

Rio Tinto had its own set of reverses and is undertaking a similar process.

Changing the mindset of companies will not be easy but some of our major banks and big miners are showing the way.

On the investment front our self-managed funds will be important in demanding companies don’t sit on their hands as the institutions want them to do.

But what will really change Australian companies is what is set to happen in the US, assuming the Trump tax package is approved. This week US bond yields started to rise as the market realised the enormity of what is being proposed. Forget the fake news — the US is set to boom under Trump and our boards, management and governments will need to discover quickly what is happening in the US. And I am optimistic that they will.

What can our government do? It would be good if we cut corporate taxes to match the US but it is politically impossible at this stage and in any case franking credits means the Australian savers pay most of the bill. So let’s start with capital investment.

Under the Republican proposal companies will be able to write off capital investment.

At the Melbourne Mining Club the BHP CEO praised the virtues of Donald Trump’s investment write-off policy.

If we want Australian companies to begin to invest and to make sure their operations adapt to the new industrial revolution we need to re-resurrect accelerated depreciation and make it much more generous than it previously was.

I know the ALP is thinking along these lines but they may not take office for another two years. Two years will be too late.

It is vital that the Coalition government starts the process.

PwC Australian tax leader Pete Calleja says: “If the proposed changes go through, the winners from Australia’s perspective may include Australian companies who are seeking to ensure both their intellectual property and manufacturing platform are based in the US for both US and foreign market supply.”

I would add that not only must we accelerate depreciation but we must immediately tax our intellectual property returns at the same rate as the US or we will lose most our science industry, including CSL. That’s a horrible prospect which both major parties need to understand.

Calleja warns: “The repatriation of US company funds is expected to be very significant. As investment capital becomes increasingly mobile, particularly in the boom industry areas of technology and health, a competitive local corporate tax regime is critical to ensure our economy remains a competitive location for investment.”

I would add that we might need special tax rates for new ventures and an adaptation of the US excise changes — maybe by introducing a mirror image of the US changes I detailed yesterday.

President Trump has changed the world. We must remove our head from the sand. It would be nice to stay as we are but we have no choice.

But what about the people who will be adversely affected? What do we need to do? And how do we pay for tax concessions?

That’s tomorrow, as I conclude the series.