The transferal - surviving it or riding it?
Rotwang transferring Hel into the Robot in Metropolis, 1927.
Other than for technology powered businesses and those enjoying a sugar-hit from lock-down revenues, many other businesses are facing low to no growth prospects and need to be reprogrammed or transferred, now.
Some can make operational tweaks, but many are operating in industries that were socially and technologically disrupted well before COVID-19, and a more meaningful change will now be required.
At the same time as Australia starts to reopen internally, JobKeeper trails away and the sugar-hit turns into a stomach cramp; owners need to decide whether their businesses are resilient enough to remain independent or whether they should be transferred into a more resilient machine.
The challenge now is how to grab market share and build margins in a dis-inflationary world that has experienced a global pandemic during a transition from Industry 3.0 to 4.0 and a populist trade war.
In the past, inflation was the growth engine.
In the 1980s and 1990s, revenue and margin growth was driven by inflation. Businesses would raise their prices, and those which could keep their costs under control made a motser.
As a cocky twenty something year old in the mid-90s, I remember going to IPO roadshows and analyst meetings and asking CEOs where they thought their projected (big) earnings growth was going to come from. Almost all would say that inflation would take care of growth. Hello – let’s just focus on output!
Those business leaders are now in their late 60s, 70s and 80s and those who are still involved in business have had to learn a few more tricks, like post-GFC and Industry 4.0 demand drivers – none of which have anything to do with non-existent inflation.
Then came internationalisation and the 2003 steel-making bulks infrastructure boom – yeehaw!
At that time, there was an incorrect view shared by many CEOs that their companies had a sustainable competitive advantage. Unfortunately, in many cases this was not the case as the super-profits earned during the boom times resulted from margins being driven by unprecedented minerals demand from China, and an under-supply of those minerals.
Then came the GFC and money started to eat itself after Bernanke pulled the lever on the Fed’s printer, and the dis-inflationary power of the cloud combined to erode price inflation.
Since then, iron ore in particular shifted into its supply phase and we are now seeing ‘replacement’ mines/tonnes fire up construction in the Pilbara again.
This may or may not continue and will be largely dependent on China funneling new stimulus into new infrastructure projects; how quickly, if at all Brazil can get its mines and economy back together; and the levels of energy and hard and soft (food) commodities demand coming from China, Japan, and South Korea.
And in turn, a lot of this will depend on the US/Sino trade, technology, and currency war and its spill-over into new tariffs and countries (e.g., it looks like we just got dragged into the trade war via beef and barley).
Growth will come from Industry 4.0.
That said, this Wednesday when the ABS reports on the March quarter, we will know whether we are in our first recession since 1990/91. A sobering memory for many of us who worked through those times.
Regardless of what you call it, inflation is gone for the time being, there is a high risk of decreasing growth and prices (which could lead to deflation) and other than for in the case of massive government intervention, the Industry 3.0 pie will shrink with some revenue lost and some of the balance transferred to Industry 4.0.
So, in the mad rush to transfer revenues to the new machine, how do Industry 3.0 players protect their businesses from getting chopped up?
How do Industry 4.0 players utilise this opportunity to grow and/or back-fill the missing pieces of their predominantly virtual models, for example?
Stay independent or become the soul of a new machine?
Some Australian industries such as healthcare, iron ore and gold mining, supermarkets and certain agricultural sectors are doing well, although it’s hard to work out how much of this is a lock-down driven sugar hit.
Many others are not.
COVID-19 has challenged many notions about living, moving and working and as a result many industries from new car dealers, health and fitness, hospitality, hotels, and landlord models through to small bricks & mortar retail, regional shopping centres and co-working locations, will need to rethink and change.
For some businesses in severely challenged industries that have lost their mojo, it will become a case of combine in some way with another business, or expire.
What’s your plan to reclaim margin, market share and meaning?
I routinely recommend the following depending on the likely strategic outcomes and the expected competitive responses from the relevant ecosystem.
Retain structure options
License, white label
Partner, JV, alliance, co-develop
Change structure options
Merge
Sell
Purchase
Mergers can be good to piece together parts of the same asset, business and/or supply chain, or to combine market share and jump several levels of a league table in one move, and/or for other reasons. Typically transacted as a paper for paper transaction, a merger is not appropriate in all circumstances.
Sometimes a sale makes sense, particularly if the owner is ready to retire. In that case, and assuming the business can deliver an edge to the acquirer and also assuming the sale price is likely to be higher than the net present value of future earnings under the ‘stay independent’ scenario, there’s a pretty simple choice to make.
Purchase? Yep, sometimes you can’t rely on the other party to play in a merger scenario because the ownership group simply wants out and will not roll the dice with paper consideration. Solution? Buy them. These days there are alternative channels for private companies to cash/debt fund acquisitions as long as there is a sound strategic and financial investment thesis to support it.
Regardless of where you sit, chances are that technology (directly, indirectly or via populist social media trends) has either altered the cost base of your industry or diverted a share of industry revenue to new players - like the software and hardware companies fueling Industry 4.0 and/or the new models catering for Millennial tastes.
Either way, if you are not a recipient you are losing margin, market share and meaning, and regrettably COVID-19 is acting as an amplifier.
There is a blinking neon light in Rotwang’s laboratory of challenged entities. It sits just above the transfer switch and says: “for new life, activate switch below”.
Mike.
NextLevelCorporate is a leading financial & strategic corporate advisory firm with a multi-decade track record that speaks for itself. Helping clients in all industries to transform their businesses in and out of Australia, is our passion.