The year in KGB: CEO edition

Political turbulence at home and economic volatility abroad made for an uncertain business climate this year.  Many hoped the federal election would bring the business community some much-needed stability, but such relief was fleeting. Confidence across sectors was in short supply, and the high dollar remained a source of frustration. The blocked takeover of GrainCorp and the seemingly never-ending cheese war added some high drama to a year otherwise characterised by a cautious outlook.

In February, Commonwealth Bank's Ian Narev hoped for an improvement in business conditions once a government was either installed or re-elected, telling Robert Gottliebsen:

I think if we see Europe not produce any more bad news, China continue to do what China’s been doing and the US recovery continues strongly, I think on that basis what we will see is that post-election, assuming the election delivers a stable government on either side of the political spectrum, businesses will look around and say "okay now might just be the time, we’re feeling stable enough to invest a bit more for the long term".

Unfortunately his other prediction, that the highly experimental monetary stimulus out of the US was a driver of great international uncertainty has had greater sway. His concerns are as valid now as they were then.

At the moment we’ve got unprecedented level of activity by central banks overseas. To preserve stability in the current crisis they’ve injected enormous amounts of liquidity. They’ve kept interest rates extremely low for a long time. They’ve bought back public debt. It’s not clear to me or to any of us, I don’t think yet, how, four or five years down the track, this is going to really affect the real economy. What sorts of inflationary pressures are going to be there? You know, we’ve spent a lot of time as an industry, as a business community and so on, thinking very short term about what if Greece goes, what if there’s contagion to Spain and Italy? What there’s probably been less thinking about to date is four or five years down the track. How do these activities that we haven’t really seen or understood before play out in the long term? And again I’m not an alarmist on it at all. I just think we’ve got to be very prepared for different scenarios around that or that we spend a bunch of our time thinking about it.

The avuncular Mike Smith from ANZ had the benefit of a few more months of data to confirm suspicions the economy wasn’t looking terribly healthy. He predicted a May rate cut but didn’t think it would have much impact. He told the KGB:

For me, interest rates at the moment are at, effectively, an all-time low in Australia. Well, particularly in recent memory in the last 20, 30 years. Is it going to make a big difference to drop interest rates another half a per cent? I don’t think so. I think the issue right now is business confidence. If business confidence returns – and business confidence returns because of government stability, government consistency, government policy which is consistent – you will find I think a bounce in the economy. So I think business confidence is critical because that creates consumer confidence.

Interestingly, neither Narev or Smith predicted the massive housing uptick that would come from record low rates, but to be fair it wasn’t a question that was posed by the KGB either.

In July, Origin Energy’s Grant King advised Australians to buckle up for higher gas bills. He told the KGB that despite Australia not having a gas shortage, prices will double in the next five years.

I can assure you that the key point there is that we would be paying those [higher] prices for our gas today if we hadn’t seen that the right response occurred to those higher prices which, of course, people risked money, explored, particularly for CSG, and resources expanded dramatically in terms of the return available through gas price. So we do not have a supply problem. People will not run out of gas. It will not be a lack of gas in eastern Australia for anyone anywhere. But we will see prices move to the true value of that gas in the same way as we pay a national price for petrol or for iron ore or any other commodity that Australia produces.

He was also keen to emphasise that, for structural reasons, the key to lowering prices can be found in NSW’s LNG projects.

It is right to say that the establishment of LNG plants in the east coast of Queensland will pull gas towards them and that’s what will drive the movement towards export parity for gas. But at the end of the day, that gas is going to be produced in Queensland and imported to Queensland through pipelines, but there’s a natural constraint. Those pipelines can only deliver a certain amount of gas, and it’s therefore right to say that if supply can be increased south of that constraint, then if supply exceeds demand, you could see a downward pressure on price, south of that Moomba-Wallumbilla pipeline. Now, that’s only going to occur if we commit to developing the gas resources and understanding those gas resources and whether or not they can be economically produced.

Peter Coleman of Woodside took a different view of the domestic gas price in August, saying overseas export projects are keeping a lid on what we’re paying at home. But the US shale gas boom could dramatically reshape the market.

The US has an open market. One could argue that one of the reasons you’ve seen shale gas take off in the US is because there is no domestic obligation – although currently there’s only a domestic market, but the fact that people now have an expectation into the future that they’ll be able to export is a real positive for that market. I would suggest quite strongly that a number of the projects in Australia would not go ahead unless there was an export component to it. So, we are actually enjoying low domestic gas prices today because major export projects have been built and those domestic gas projects have hung off side. We often get this conversation the wrong way round. Domestic gas projects don’t drive development. Export projects drive development. Domestic gas projects are then complementary to the export projects.

The falling dollar will be boon for all exports, including gas, but it has a lot further to come if Australia is to become competitive, according to economist Ross Garnaut, who the KGB interviewed in November. He said that the Australian dollar needs to come all the way down to between 60 and 80 US cents and the sooner the Federal Reserve tapers quantitative easing, the better.

It’s great for us if the US and Japan and to a lesser extent Europe and the United Kingdom start the unwinding the monetary policy that pushes our dollar down. That takes the first step in the job for us. It still leaves us with all the problems of turning that into a real depreciation, but that’s the start. 

The bigger challenge is if that doesn’t happen soon. I don’t think it makes much sense for us to have interest rates a couple of percentage points higher than other developed countries when our growth is now, in fundamental terms, slower than other developed countries. In real output per worker or real output per adult Australian, we’re growing more slowly than Japan or the United States.

Myer chief Bernie Brookes was hopeful too of a lower Aussie dollar when he spoke to the KGB in March.

The advantage for us if the dollar did move that way would be: First, it stops people going overseas and coming back with bags full of stuff they buy overseas because of the strong Australian dollar. And second, it’s certainly going to help from a tourism point of view and there are going to be quite a few more tourists back into Australia. So, we’d actually applaud if the dollar was down to 75 cents.

He also explained the shift his company made from cost cutting to investing and value adding. He told KGB the retail giant would have sunk without a strategic rethink.

I think, like most businesses, we went through this period where cost cutting was the sole answer to what was a pretty tough retail environment. And I think we realised some 18 months ago that we were going to disappear if we continued to just cut costs all the time. So, we took a decision to invest $26 million or a million extra hours into service, and that’s really given us a step up. How we measure that is a number of things.

… overall it gives us, I guess you’d call it a score, and we’ve certainly moved from a very poor position to what I would say is good, but we’ve got a long way to go to be better and best.

Earlier this month Wesfarmers managing director and chairman of the B20, Richard Goyder, explained the need for greater global consistency in business regulation, specifically red tape.

For good reasons after the global financial crisis, regulations were put in place, particularly around banks, in order to stabilise the financial situation. The unintended consequences of some of those regulations have been to restrict the flow of capital because of capital adequacy ratios, because of the risk ratios that are associated with some places where that capital is to go. 

There’s a lot of work being done right now on what those unintended consequences are. I think a key thing that B20 can do is: business can go to governments and say these are the issues. Not necessarily the banks, but businesses can go to governments and say these are the issues that have come about through these regulations and we need them either modified or lifted to ensure that capital can flow, so that we can get infrastructure. There’s a chronic shortage of infrastructure globally at the moment, but we can get that infrastructure investment starting to happen.

Vodafone’s, and now NBN CEO Bill Morrow had a frank chat with the KGB about the telco’s spell of negative brand perception and substantial loss of customers, as well as “missing the ball” on Australia’s smartphone mania.

Vodafone of course was trying to do what they thought was right at the time. The market moved quite quickly here in Australia. I think we're the second highest smartphone penetrated market in the world now. I don’t think Vodafone saw that coming, as many others didn’t, and it just got ahead of them and it was an issue at about the time that they started to do the merger between Vodafone and '3' and so there were lots of things going on within the management team and, quite frankly, we missed the ball. That’s all changed.

Morrow also said he’s been keenly watching how Australia’s banks have been rebuilding their public image. Personalising service and bringing back call centres to Australia is part of their strategy, but that will cut further into profits during the brand rebuild.

I think the banks have done an interesting job here in Australia. I love reading about them because they had to go through a transformation. What I found fascinating coming into Australia, having worked in seven countries on four continents, is that consumers here in Australia don’t really regard the telco industry in any high level. I mean none of the three carriers are really doing well from a brand image perspective. I think the banks went through this period where there wasn’t a positive of a view on their industry and they’re turning that around. And in fact we’ve looked and studied a couple of the banks out here and some of the moves that they’ve made and I think they’re good practices and you’ll probably see some more of our actions that will follow some of them.

That focus on customer service was shared by Flight Centre’s founder and managing director, Graham Turner, whose business is being tackled by wholly online rivals like Webjet and Wotif. Turner still sees brick and mortar travel agencies as being central to the company’s future, saying he can’t see the online side ever growing beyond 10 to 15 per cent of the business.

With the blended model we would like it to be very much online/offline as much as possible, so that our bricks and mortar people, for example, if you do an online booking, you’ll be able to choose a consultant that can help you if there remains a problem such as airline groundings or the more cash sort of stuff.  I’m sure we must be getting ready for another terrorist attack somewhere, so that, you know, they will have a person who is dedicated and allocated to you to help you through your travel arrangements and I think a lot of people like that.

Bega may have bowed out of the tense takeover war with Australian and international dairy giants, but Bega Cheese chairman Barry Irvin told the KGB that the Australian dairy industry needs to consolidate and attain scale if we are to compete on a world stage with New Zealand.

I would say that overall you can’t find a very large difference between returns to a New Zealand dairy farmer and returns from an Australian dairy farmer. What you do find is that New Zealand focuses absolutely on dairy, from government right the way through, whether it’s through legislation or whether it’s through resources, research, or focus on actually how you improve productivity.

There’s no question that from the supply chain perspective it’s a very sophisticated, very focused model in New Zealand. Dairy is their mining, so they focus very strongly on it. And you could easily say that that hasn’t been the same in Australia and you can look back and say there’s a lot of rhetoric around food in Australia, but there actually isn’t a lot of government support for what occurs. I’m not talking about subsidy, I’m talking about the research, innovation and productivity, those sorts of things which were once part of the Australian landscape through things like the Department of Agriculture, etc.

And on the other major takeover story of the year, the KGB spoke to the now former GrainCorp CEO, Alison Watkins, in July when Archer Daniels Midland’s takeover proposal had yet to be blocked by Joe Hockey. Alan Kohler put it to her that the timing was off on the takeover, that it’s opposed by the Nationals as well as the farming community in general, and that during an election campaign is a less-than-ideal time to try it.

Well certainly there’s a lot of debate and I think that that’s all a healthy part of our process. We certainly knew that it would be something that’s very important and near and dear to the hearts of particularly rural and regional Australian constituents, so what’s playing through I think is really an important and healthy debate we’re supposed to be having, but we’re confident based on our advice that the approvals should proceed.