Every country has a national champion, a mighty company that symbolises its prestige on the global stage. But increasingly, smaller and medium size enterprises play just as important a role in creating prosperity and defining Australia’s engagement with the world. The Diplomat Future Champions 100 List is a snapshot of emerging sectors pointing the way to Australia’s economic future.
Mining companies have long carried the torch for big Australian businesses. The national comparative advantage, minerals in the ground, goes back at least a century. But the story is very different for Australia’s smaller globalising companies. Almost two thirds of the firms and almost half of the revenue come from services industries. The next biggest sector is mining, which accounts for a fifth of the firms and 28 per cent of the revenue, followed by manufacturing, which accounts for a fifth of the firms and a fifth of the revenue.
That is not the only difference between Australia’s big and small globalising firms. The globalisation strategies of big Australian firms are diverse. Some “think global, act global”, others “think global, act local”. Some use regional plays, others niche plays. By contrast, Australia’s globalising small and medium enterprises (SMEs) are, mainly by dint of their size, almost exclusively employing niche strategies. Their challenge is to develop economies of scale rather than using the cross-border arbitrage that characterises the best of the large global companies. To this extent the business challenge tends to be somewhat simpler, albeit far from easy.
Information and communications technology is the most globalised industry for Australian SMEs. Companies from this sector comprise a third of all service industries, and a fifth of The Diplomat Future Champions 100. Because of the connecting power of the internet, Australian companies’ traditional disadvantage – geographical remoteness – is reduced. The industry is also knowledge-intensive, meaning the provision of resources and funding overseas can be limited. The majority of the companies in the sector are providing computer consulting, suggesting that it is an area in which Australia has a distinct advantage. Not perhaps on the scale of Silicon Valley or Bangalore, but significant nevertheless.
What is absent from the list is just as instructive. Service industries can be notoriously parochial. Still, areas where Australian firms might be expected to enjoy some competitive edge are underrepresented. The motor vehicle industry, for example, has enjoyed decades of government support, yet the investment is not leading to a global positioning.
There are only two motor vehicle services companies on the list, Capricorn Society (rank 88) and Supply Network (rank 89), both dealing in new parts. And their income from global sources is only on the margin (14 per cent and 16 per cent respectively). What’s more, there is only one motor vehicle manufacturer, Allomak (rank 66), on the list, and it only generates 17 per cent of its revenue offshore. The Australian industry support for the global car manufacturers has not been converted into global capabilities for Australian firms.
It has been very much about nationalist protection rather than positioning for globalisation. This is a policy failure. Some idea of the possibilities is evident in the performance of motorcycle manufacturer Vmoto (rank 35), which earns 90 per cent of its revenue offshore.
The mining sector is relatively equally balanced between offshore mining and exploration. In manufacturing, the emphasis is heavily on the medical, pharmaceutical and scientific equipment segments, which comprise almost half the total. The heavy industry support for the automobile sector is not reflected in any globalisation of Australian manufacturers in the sector.
The average revenue generated in the different sectors varies considerably. In the services sector, which tends to have lower fixed overheads, the average revenue is $20 million. In the more capital intensive mining industry, by contrast, the average revenue is $51 million. In manufacturing the average revenue is $35 million. On the face of it, the companies in the financial services and funds management segment should be fairly profitable – at least before the global credit squeeze gained pace. They are in a knowledge-intensive service industry, yet generate an average revenue of $31 million.
The strategies of the global SMEs tend to be matched to the specific characteristics of their individual markets. Their variety demonstrates a truism about business: there are not really any bad industries, just bad companies. Skateboard and surfwear group Globe International (rank 4), for example, operates in the clothing, textile and footwear industry, where Australia is supposed to be at a severe disadvantage because of competition from countries with cheap labour. Yet the company, which is partly backed by Solomon Lew, has the biggest revenue of any service-sector company on the list, and makes 71 per cent of its sales offshore. Not that conditions are easy: Globe International is barely profitable and recently announced a round of cost cutting, citing tougher economic conditions in the American market.
The ambiguity of globalisation, in which national character has to be balanced against global cross currents, is evident in the television production company Beyond International (rank 28). It derives 58 per cent of its revenue offshore. The company has repelled three takeover bids over the past year, only to see one of its rivals, FremantleMedia, emerge as a major shareholder. FremantleMedia is owned by the European company RTL Group, which is in turn 90 per cent owned by German media giant Bertelsmann.
The relative failure to build on Australia’s long history in agriculture is evident in the sector’s small representation on the list. An exception is the fruit and vegetables processor Webster (rank 45), which was recently the subject of a failed $150 million takeover bid by conglomerate Futuris. The company derives 60 per cent of its revenues offshore. Webster’s revenues actually fell over the past year, yet its profitability tripled to $6 million, reflecting the surge in soft commodity prices and the company’s diversification into salmon production. Gross profit margins rose from 7.5 per cent in 2006-07 to 18 per cent in 2007-08. While the emerging global slowdown is likely to have a negative impact on food prices, the impact will be offset by a weaker Australian dollar. Globalisation can mean managing changes that are outside a business’s control, but for Webster the cards are partially falling its way.
Some local companies have found innovative ways to globalise that have protected them from the ravages of the global credit squeeze. Take, for instance, Entertainment Media and Telecoms (EMT) (rank 58), which derives almost all of its revenue internationally. EMT shares have remained comparatively stable during the recent stock market carnage and the company was recently described by Foresight Securities as “a compelling risk/ return micro cap”. EMT focuses on mobile technology consulting and the development and sale of mobile products. It is a globally homogenous market, reflected in the fact that the company has markets in Malaysia and Sweden. Margins are high, with net profit after tax coming in at about 58 per cent of revenue. The company has a patent for a barcode identity verification system pending in 140 countries, and is looking to expand mostly into Asia, Brunei, the United Arab Emirates and the United States.
Lack of scale in the Australian market is often the spur for globalisation. An example is Adelaide-based Imagination Games (rank 17), which gets all its revenue offshore. The company began in television, producing corporate videos, television commercials, mini-series and TV programs. In the mid-1990s the founders decided to shift into the games industry. The strategy was to leverage local success in a game called Battle of the Sexes to get into the American market.
It was a success. Over 800 radio stations played the game on air, resulting in extensive store placement, significant turnover and then a sale to Toys ‘R’ Us. It eventually became the sixth-ranking game in the United States, all achieved with an asset base of a $4000 car and a one-bedroom office in Santa Monica. The company now makes almost all its revenue overseas. Imagination Games has diversified, developing and marketing interactive DVD games, running television, mobile and download divisions, and operating in the United States, Europe and Australia. It is looking to move into the Indian market, most likely via an acquisition. Retail giant Wal-Mart accounts for 20 per cent of the total revenue for the firm, giving Imagination Games distribution in around 85,000 stores.
Globalised Australian firms sometimes leave their country of origin. The business services company TZ (rank 62) is seeking to achieve better valuations by moving to the US stock market, but the global meltdown has interrupted its ambitions. A software and technology developer, TZ makes 93 per cent of its revenue internationally. It recently halted plans for a Nasdaq float, which would have entailed delisting from the Australian Securities Exchange. Valued at $96 million, TZ makes digital locks for shipping containers, personal computers and buses.
TZ’s desire to move to Nasdaq demonstrates the shortcomings of the capital markets in Australia, which heavily favour the big domestic players and are notoriously reluctant to invest in local innovation. TZ believes that not only will it get a “better multiple” in America, but also that there will be greater liquidity in its shares, and “exposure to worldwide market business segments”. This exhibits one of the central contradictions of globalisation. National economies need globally competitive enterprises to thrive, but once these businesses achieve a certain level of success, they tend to move beyond the nation where they started. TZ has six locations for its operations in the United States, one in Oxford, England, one in Lviv, Ukraine, and one in Hong Kong.
A curiosity on the list is AdultShop.com (rank 99), which gets 11 per cent of its revenue offshore. In 1999, it listed on the stock exchange as a mining company, Western Minerals. In the same year, Western Minerals bought the internet rights to the Barbarella name and trademark, divested its mining interests and renamed itself AdultShop. The company has mainly grown through acquisition. It is vertically integrated, with physical and internet retail operations, and mail order. It is the largest Australian wholesaler of adult products. Its globalisation has been only a marginal play, and mainly involves expansion into New Zealand. The company is currently operating in the red.
A hostile regulatory environment can be a spark to globalise. An example is uranium miner Paladin Energy (rank 3), which responded to local regulatory constraints by pursuing its operations in Namibia. The company is also building a $US185 million uranium mine in Malawi, its second in Africa. The move offshore has produced spectacular stock market returns, and Paladin joins Fortescue Metals as one of the best investments in Australia over the last five years. The company has two potential sites for uranium development in Western Australia, but its returns come mostly from its operations in Africa. The Northern Territory government recently granted a Paladin joint venture an exploration lease over the Pamela/Angela uranium project, suggesting that the local regulatory environment is becoming more benign.
Sino Gold (rank 40) is a company using Australian capital and expertise to operate in China, which accounts for all of its revenue. It is dual listed on the Australian and Hong Kong markets. China has recently overtaken South Africa to become the world’s biggest producer of gold. Sino Gold is using Australian expertise but Chinese physical and human resources. It has developed three mines in China, and has only 50 expatriates in a staff of 1500. The company has other potential operations and an alliance agreement for exploration across China. Its flagship operation, Jinfeng, is claimed to be China’s second-largest gold mine, with increasing production and an expected life of 15 to 20 years.
In The Diplomat Future Champions 100, the winners in the manufacturing sector are those companies in the pharmaceuticals, medical instruments and scientific instruments areas with high value-added production. An example is dental equipment maker SDI (rank 21), which generates 83 per cent of its revenues offshore. The margins are tight. The company recently reported a 2007-08 profit of only $1.5 million on revenue of $50 million, down from $4 million in the previous year. The reason cited was the strong Australian dollar, an adverse currency movement that has since been sharply reversed. SDI is attempting to move into a more mature phase of globalisation, relying less on organic growth through the gradual appointment of new distributors. Instead, it will look to align itself with multinational companies, a globalisation leap-frogging strategy that is used to increase reach. The company has operations in North America and Europe, but has moved to close its Japanese subsidiary.
Not all of the SMEs on the list are young companies growing into the global market. Some are being run by managers with extensive experience. One example is Ainsworth Games Technology (AG T) (rank 32), which derives 70 per cent of its revenue offshore and operates in 40 countries, employing more than 300 people. Selling poker machines is not for the faint hearted – founder Len Ainsworth reportedly was advised to put chicken wire on the windows and bought an automatic shotgun while he was learning the business. Ainsworth took his first gaming company, Aristocrat Leisure, overseas in 1960, into markets such as East Africa, Soviet Russia and China. He founded AG T in 1994, calling on his international experience and introducing a large-screen machine. Experience does not necessarily translate into profitability, however: AG T posted a $19 million loss for the last financial year, on sales of $50 million. Australia’s global SMEs operate in diverse industries, but their strategies tend to be similar: to sustain niche positions in markets much larger than Australia’s.
Managing the volatility of globalisation, especially currency movements and unexpected competition, is usually the greatest challenge. The most durable strategy, aligning with multinational companies that are able to manage their global markets, is a tactic that is rarely employed. Helping with that may be the most important role for policymakers.
The Diplomat commissioned IBISWorld to research Australian public SMEs with earnings between $15 million and $130 million to determine which had the highest offshore earnings. Offshore earnings is defined as all sales revenue derived from either export or offshore investments. It includes revenue generated in New Zealand. The list does not include property trusts and funds which fit the revenue criteria because they are predominantly operations that are subsidiaries of large corporations.