Buried in the BHP investor documents is a remarkable development: chief executive Andrew Mackenzie has started to make the Big Australian much more productive. And he needs to.
Mackenzie says that he achieved a $US2.9 billion set of productivity gains in the latest year, with more to come. As PricewaterhouseCoopers has revealed, Australian miners are among the most inefficient in the world and BHP, as our largest miner, must be close to the top of the list (Some hard truths for our biggest miners, August 15).
BHP is learning how to use its plant more efficiently and achieved an average increase in utilisation of 10 per cent, but aspires to do a lot more. The company still appears to be concentrating too much on comparisons with its own operations instead of benchmarking itself with the world’s best. But that will come, and this is how BHP can increase returns in a mining industry that looks like getting tougher.
But of course BHP is not alone in examining its productivity -- that is happening across most Australian and global companies. Because many of our companies (like BHP) lag the world, we have big gains ahead. This was one of two changes that were laid bare at the ADC’s leadership retreat at Hayman.
Essentially, companies from banks to retailers to transport groups to miners and everything in between are undertaking processes to lower their cost base using new technologies and systems. The labour reductions will be massive and some companies at Hayman were clearly worried that because everyone is cutting labour, the benefits to those selling on the local market will be eroded because the job losses and job insecurity created will affect consumer demand.
I don’t think the Canberra boffins fully understand the implications to employment of what is taking place in companies from BHP and Commonwealth Bank at the top end right down to much smaller enterprises. Alan Kohler yesterday looked at the grim reality (What are human beings going to do?, August 19).
The second change takes the cost-reduction programs a stage further and adapts the business model to the digital age. This change is not nearly as widespread and there is great variation between companies. At Hayman there were discussions about this at a few companies but this covered only a fraction of those on the lists.
There are companies that ‘get it’ and those that do not understand and cannot adapt.
A substantial part of Australian banking revenue is threatened by the ability of new entrants to use the new technologies to cherry-pick profitable parts of the banking and wealth industries. The Hayman message was that the bank best equipped and motivated to counter this is Commonwealth Bank.
The current chief executive Ian Narev is benefiting from the technology investments of his predecessors. The CBA is now able to use digital platforms to make it simple and easy for a person undertake almost every type of banking and wealth transaction and there is less incentive to be tempted by new entrants or rivals. Other banks do not have the technology base to do this and are more vulnerable.
In retailing, the winners will be those that maximise the use of their customer bases through mobile phone marketing and other technologies. Both Woolworths and Coles are looking to embrace these techniques. The example everyone uses as what not to do is Harvey Norman, which does not have clear customer base records and is up against an online retailer, Kogan, which is undercutting it.
Miners do have much less need to completely change their business model but they have enormous scope to lift returns with greater productivity.