Year of Living Dangerously

 
 

On the face of it, the offshore earnings of Australia’s most globalised companies are powering along. They have increased by 15.3 per cent to $218.9 billion in a year when the international environment has become progressively more volatile. But for many of these companies the true tests of globalisation are only just starting. Already, some of the companies that have grown offshore too quickly have struggled to survive, such as ABC Learning and Centro Properties.

The challenges will be many. There is a general rise in the cost of capital, tightening liquidity, a stronger Australian dollar (at least against the greenback), the possibility of a shift towards protectionism in America, and the likelihood of weaker economic growth across the world economy. If Australian companies continue to increase their offshore revenues over the coming year, it may prove to be a watershed for non-mining Australian industry. Continued growth would be an indication that, in sectors other than mining, companies are becoming well integrated into the global production matrix.

Another challenge will be avoiding acquisition. About a fifth of the companies have disappeared from last year’s list and some on this year’s look rocky. However, Australian firms may prove comparatively hard to digest. The strength of the Australian dollar increases the price of Australian assets, at least against the greenback and yuan. And the tightness of the debt markets makes debt funded acquisitions at once harder to attempt and riskier.

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Perhaps the greatest obstacles to Australia’s global firms will come from the global credit crunch. This began with the subprime mortgage problems in America in mid-2007, setting off a chain of consequences that are now threatening the world’s financial system.

The challenge will be to avoid the fate of ABC Learning Centres (rank 46), the world’s biggest private child care provider. ABC expanded too fast into the US and had to sell assets when it was punished for a poor profit announcement, mainly by hedge funds. The fact that the same half year result included increased revenue did not mollify investors. The tolerance for high levels of debt in the jittery stock market is lower than it has been for decades.

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