Australias Offshore Investment Revolution

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Australias Offshore Investment Revolution AGSM
November 07 2003 John Edwards Chief Economist,
Australia and New Zealand
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Integrating Australia into the global economy

• Floating exchange rate, suspending capital
  controls 1983
• Financial deregulation 1984
• Tariff cuts 1988, 1991
• 747, cheap computing, cheap telecoms, the
  internet
• Global reduction in trade barriers from 1950
• Global reduction in capital flow barriers from
  1969
• Integration of other regional economies into the
  global economy

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Australias twelve year expansion
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Average annual labour productivity growth
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AUD real effective exchange rate
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Australian real unit labour costs
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Exports to GDP
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Changing industry shares 1983-2002
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2001/02 ABS 5325 Stock of US FDI in Australia
57.6b Stock of Australian FDI in the US
73.7b
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Where Australian firms invest abroad
US 47.8 EU
22.2 (UK around 2/3) Japan
0.2 Non Japan Asia 7.4 Other
22.4
Asia underrepresented, especially compared to
exports False analogy? Barriers to investment?
Relatively small Australian manufacturing
industry? Simple ignorance? A new generation?
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Which industries?1999-00
Manufacturing 65 (up from 51 in
1991/2) Mining 5 (down from
8) Finance, ins. 22 (down from
25) Other 8 (down from
16)
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Why companies invest offshore Productivity
Commission Survey 2001

• Getting closer to offshore market
• Lower labour costs for manufacturing
• Proximity to shareholders, deeper capital
  markets
• Tax regimes
• Wider spread of production and market risks
• For services firms, a simple extension of
  Australian product e.g. education, architectural
  services, law services - especially in Asia

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Characteristics of companies investing offshore

• Globalisation is about the increased opportunity
  for differentiation and specialisation opened by
  a bigger market
• In the last decade or so the typical successful
  firm has intellectual property and/or local
  success and/or local dominance in a very specific
  industry segment, which can be replicated
  offshore.
• Offshore investment thus reflects specialisation
  - not size
• Neither absolute size or big capital base
  essential

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Implications
Globalisation encourages mid sized specialists
against national behemoths
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Why firms succeed
CSR CSL Amcor
BHP Steel James Hardie
Brambles Boral Westfield News QBE MBL Leighton Fo
sters Resmed
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Why firms succeed

• Take to offshore business unique skills,
  excellence or IP developed in Australian market
  (MBL on infrastructure, tax driven leasing,
  Resmed and CSL, Boral, CSR and James Hardie,
  Westfield, Leighton, Brambles)
• Carefully nurture offshore business, often using
  local executives
• Clearly understand the risks
• Confine offshore expansion to single product or
  single market in which the firm believes it has
  some offshore advantage - even where it has other
  products in the Australian market

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Why firms lose
BHP Telstra Brambles
Lend Lease Fosters
AMP Amcor NAB Coca Cola
Amatil News
BRW in five years to 2003, 20 Australian
companies lost 40b in offshore write downs and
losses



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Why firms lose

• Global media, dotcom and telecoms downturn
  (News, Telstra)
• Not understanding US market (NAB, Lend Lease)
• Wrong resource, wrong time (BHP)
• Not understanding product risk and market (AMP)
  
• Not understanding local market esp distribution
  (Fosters)

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Why firms lose

• Lack of information, experience, understanding
  amplifies the problems, but most lose offshore
  for reasons they could lose onshore
• Australian companies also lose money in the
  Australian market, and foreign companies lose
  money in the Australian market
• Same companies may be on both losers and winners
  list

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Issues with Australian offshore investment

• Are jobs been sent offshore?
• Australia has added 2 million jobs in the
  past decade, half full time and half part time
• Manufacturing employment has increased by
  only a few thousand
• But manufacturing output is up 35 over
  the decade
• And manufacturing exports have more than
  doubled to nearly 30bn

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Are we creating a branch office economy?

• James Hardie, BHP/Billiton, Brambles cases where
  offshore expansion sees some or all HQ functions
  moved offshore
• Others more complex arrangements e.g. Westfield,
  CSR, Resmed
• Influenced by where most of the business is
• Australia has strong competitive advantages of
  cheap treasury, accounting and law professionals
  and an attractive lifestyle
• In PC study only small minority reported plans to
  move HQ offshore
• UNCTAD report suggests Australia gained more
  regional and global HQs in last year than any
  country surveyed except US and UK.
• ,

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The future

• Offshore investment trend will likely deepen and
  extend as offshore barriers fall, business
  executives become more accustomed to global
  business, and Australia evolves towards more RD,
  IP, marketing and ideas driven economy
• China and Asia will become more important
• Resmed, Westfield, Boral models though e.g.
  motor vehicle parts will also see offshore move
• Within a decade or so Australian FDI abroad will
  at least equal FDI in Australia
• Business executives will be more exposed to this
  than media, politicians. National v global
  perspectives
• This new and powerful connector to the global
  economy will continue to change Australia in ways
  only slowly recognised by media and politics

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