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.
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.
Finance takes the cake
This year’s Diplomat Global 100 is dominated by a rising tide of property and infrastructure funds and trusts. No fewer than five such companies have debuted, as well as several more diversified asset vehicles, helping boost the foreign revenues of the financial services sector a dizzying 38 per cent. However, the recent fate of companies such as Centro Properties Group (rank 86) and Allco Finance Group (rank 69) have opened cracks in the asset vehicle business model. Exposed are the investment banks Macquarie Bank (rank 9) and Babcock & Brown (rank 20). Although they are “cashed up”, conditions have turned against their way of doing business.
Debt is becoming more expensive and difficult to obtain, and asset prices (including equity valuations) are more likely to fall than rise. Complex arrangements that investment banks use to share in capital gains with investors (without the concomitant risk) are starting to lose their efficacy. “Quality assets”, such as toll roads or airports, may provide predictable cash flows, but they tend to be difficult to make more profitable operationally. If investment banks have to start making their money from managing operations better, rather than through financial engineering, the task is likely to prove difficult. The suspicion is that the model is broken.
Elsewhere in the finance sector, Australia’s big banks continue to nibble at being global, with only National Australia Bank (rank 5) having more than a tenth of its revenues offshore. The NAB’s foreign revenues for the year were flat. The ANZ Banking Group (rank 24) may be the big mover, or at least the most ambitious in its intent. The bank only creates 7 per cent of its revenues offshore, but chief executive Michael Smith is certainly eyeing off the region. Despite what he acknowledges as hostile conditions in the global financial markets, including a possible tightening of lending, he describes his firm as “the world’s only genuine Asia Pacific Bank”, adding that his intention is to make ANZ a super regional bank over the next five years. ANZ posted a respectable 19.8 per cent increase in foreign revenues. However, it was outdone by the Commonwealth Bank’s (rank 21) quiet achievements in its own Asian acquisitions. In Indonesia, an 83 per cent stake in Bank Arta Niaga Kencana, as well as additional branches in PT Bank Commonwealth, and further investment in China’s Hangzhou City, saw CBA grow its foreign revenues 32 per cent and overtake the ANZ. Westpac (rank 51) also made small moves into the region with new branches in Shanghai and Mumbai, and a soon to be launched trade platform. Still, Westpac remains the most terrestrial of the big four and its foreign revenues on the year sank 15 per cent.
The global strategies of companies in the finance sector are becoming more diverse. QBE Insurance (rank 3) continues to establish itself as a global specialist in insurance operations. National Australia Bank has a multi-domestic strategy; its most recent play has been the $900 million acquisition of the Great Western Bank in Sioux Falls, South Dakota. NAB now has assets that are managed separately rather than globally integrated: Clydesdale Bank, Yorkshire Bank in the United Kingdom, the Bank of New Zealand and Great Western.
Insurance Australia Group’s aggressive ambitions in China resulted in its debut in this year’s list at rank 40. But with only mixed success overall, the company is under pressure to improve the performance of its domestic operations.
Outside the finance sector, globalisation is following a more conventional course. As the cliché goes, the liquidity crisis is hitting Wall Street, not Main Street, and this is reflected in the prospects for Australian firms not in the finance sector. The mining sector, where Australia has long possessed world leading skills and management expertise, remains the greatest area of strength. Just two companies, BHP Billiton (rank 1) and Rio Tinto (rank 2) produce about a third of The Diplomat Global 100 revenues. Of the 15 mining companies on the list, none generates less than half its revenue globally and, on average, the 15 receive four-fifths of their sales from overseas.
The services sector posted respectable growth of 13 per cent and a number of Australian service oligopolies continued to diversify their revenue base with small overseas plays. Telstra (rank 32) receives about 6 per cent of its revenue overseas, mainly in North Asia, but it is showing little sign of moving aggressively beyond its domestic market. Toll Holdings (rank 58), virtually a transport monopoly, grew its foreign revenues to a similar percentage but jumped 18 places on the list coming off a low base. Its purchase of pan-Asian SembCorp Logistics drove growth along with the contract to operate Asia’s premier oil and gas supply base in Singapore. Qantas (rank 12) also creates about 24 per cent of revenues overseas, but it remains very much a domestically focused national carrier.
In the manufacturing sector, Amcor (rank 6) and PaperlinX (rank 7) are genuine global players, but continue to struggle with the strong Australian dollar, which is depressing their Australian dollar earnings. BlueScope Steel (rank 10) has signalled its intention to reduce its Asian focus in preference for North America, a surprising play given the strong growth prospects in North Asia and a solid year of 8 per cent foreign revenue growth.
Perhaps most interesting of the services oligopolies is Foster’s, which is seeking to create a complex global supply chain predicated on a dual value chain for beer and wine. Foster’s is in effect running a domestically-focused strategy with beer, building on its dominant market share, and only making marginal plays in overseas markets (it withdrew, along with its main competitor Lion Nathan, from China). Foster’s may have a globally recognised brand, but the firm gets limited commercial advantage from it as a result of an international licensing deal struck with the brewer Scottish & Newcastle in the mid-1990s. By contrast, the wine strategy, although contentious with investors, probably has more growth prospects and is more global in scope with its geographically dispersed sourcing. Foster’s generates about two-thirds of its revenues in Australia and Asia, a quarter in the Americas and a tenth in Europe and the Middle East. Its growth rate in the latter, however, was 19 per cent in 2007, compared with only 2 per cent in the Americas and 4 per cent in Australia and Asia.
Niche Plays Rule
The strongest strategies outside the mining and finance sectors tend to come from niche players. The stand out performer was resource and energy services provider Worley Parsons (rank 19) with 41 per cent foreign revenue growth. Further demonstrating that the mining boom is having positive knock-on effects in associated industries was the impressive debut of mining services company Ausenco at rank 64. And the global infrastructure boom introduces engineering services firm SMEC (rank 99) to the list for the first time.
Biotech specialists CSL (rank 16) and Cochlear (rank 55) continue to thrive from their global niches. CSL posted foreign revenue growth of 24 per cent, while Cochlear managed 14 per cent and a return on equity of over 30 per cent. Another new entrant to the list is Transfield Services (rank 57), whose international revenue is likely to grow after it made its first move into the US market last year by buying management services company US Maintenance for $372 million, whose clients include Wal-Mart.
There are many other firms that have established robust global niches including finance software company Computershare (rank 31) and surfwear manufacturer Billabong (rank 41), the world’s biggest surfwear maker with a presence in 100 countries. Billabong is even looking at possibilities in Dubai, where surf is unlikely, other than of the artificial variety.
Other favourite niche players maintained their positions. Brambles’ (rank 8) “think global, strategise regionally and act local” approach is entrenching its global dominance in logistics services, including pallets. The company is recording a soaring return on equity of over 90 per cent, according to IBIS.
Leighton Holdings, which specialises in construction contracts, gets only 14 per cent of its revenue from offshore, and had flat growth for the year, despite its longstanding strong presence in Asia. But this is likely to change, especially with the firm’s growing activities in the Middle East, where construction activity is at fever pitch.
If niche plays are the most successful of all the globalising strategies, then it is no surprise that The Diplomat Global 100 is proving that niche companies are also the most attractive to foreign predators. Of the eight companies acquired by foreign competitors in the last year, all have been service or manufacturing specialists. The loss of Rinker, Pacifica, and Vision Systems dealt a blow to manufacturing’s share of national foreign revenue, which fell 3 per cent. Another five service sector specialists also fell to foreign takeover with Adsteam Marine, Macquarie Prologis, Mayne Pharma, Mincom and Multiplex picked off. These service sector losses were offset by the growth in other niche players, the surge in property and infrastructure funds and trusts, and the growth in mining related services.
Perhaps the most peculiar absence in The Diplomat Global 100 is that of agribusiness. Despite surging soft commodity prices, agribusiness revenues dived 20 per cent to a meagre $4.4 billion. Nufarm (rank 38) and AWB (rank 25) offer some hope, posting 24 per cent and 28 per cent growth in foreign revenue respectively. And the debut of ABB Grain at number 65 is another positive. But Nufarm may also be seen as symbolic of the travails in the sector. Despite a collapsed private equity bid in December, it remains surrounded by foreign suitors and is likely to fall. A longstanding failure to globalise Australian agribusiness has left the sector vulnerable to a recent foreign buy-out frenzy just as fundamentals reach new highs. Clearly, Australian companies no longer ride the sheep’s back to global prosperity.
Australian globalisation is at a cross-roads. If companies come through the global shakeout with solid balance sheets, opportunities to expand via acquisition will be plentiful. With the resource boom likely to keep the dollar strong, those assets will be even cheaper.
But if the loss of niche players and agribusiness companies continues, an incipient thinning of diversity in Australia’s globalised companies will gather pace. The potential retracement and even destruction within property and infrastructure trusts is already set to exacerbate this trend. In that event, the powerful growth of mining may tip Australian globalisation towards a fundamental imbalance.
The Diplomat Analytic Unit