Economics

Why Australian business avoids digital investment

Living in Australia and observing the rest of the world through the media, I’ve felt that while the rest of the world has been tightening its belt and trying to become more efficient, Aussies have been blissfully unaware they are going in the other direction.

Life styles and living conditions remain pleasant, wages have been going up, and there is little desire within business and government to really address productivity.

It’s also evident that while Australians are embracing technology at home, business is slow or indifferent about investing in digital change.

Put together, its clear that Australia needs some fundamental game changers to sort itself out and get to a point where business is happy to invest in technology to drive productivity

The Productivity Problem

I was unsurprised to see statistics released before Christmas by the US Bureau of Labor Statistics showing that Australia has indeed become a high cost, low productive country.

Of the 19 countries the US BLS studied between 2010 and 2011, Australia experienced:

• the greatest decline in manufacturing output per hour (-4%)
• the second greatest increase in local currency unit labour costs (+3.1%) behind Japan which had suffered a tsunami
• the most severe currency appreciation resulting in overall USD costs per unit of output increasing by 15.8%

Austerity measures in many other developed countries have forced through productivity improvements.

Australians by contrast have been living in a relatively comfortable economy with rising wages and a strengthening dollar that has bought them more. Why strive for productivity for no apparent need, especially when the sun seems to keep shining everyday?

The Digital Adoption Problem

Australian businesses are technology followers, not pioneers. This is somewhat at odds with its consumers who, despite some infrastructure constraints, are relatively quick adopters of new technology (Australia for example has one of the highest penetrations of smart mobile devices).

Conservative business leaders continuously defer to what is working well in the US or UK before they consider investment (and I think for the historical reasons mentioned below, it generally is just these two countries). We have no national technology champions that provide the inspiration to challenge this mindset.

Australia is also has no digital economic cluster to speak of. While few countries can match Silicon Valley, the UK at least has Cambridge and Old Street, China has Zhonngguancun in Beijing, and Israel has Silicon Wadi around Tel Aviv. Such clusters not only foster innovation, they are also a visual demonstration to other businesses that technology can be harnessed.

Cultural Obstacles

I’ve been reading assessments of Australian culture by far smarter people than me and it strikes me that long held cultural beliefs are behind the low appetite to back new technology and address productivity

• ‘A fair go for all Australians’ means that legislation, tariffs and quotas are preferable to tackling productivity and that governments won’t back winning technologies or businesses because that means others will lose
• A strange faith in government means that businesses wait for government to lead before investment is made
• The historically dependence on Britain then America seems to linger on in that business is always deferring to what has become established practice in the US or UK rather than be pioneers
• The feeling that work should involve ‘hard yakka’ means that getting the job done in tough conditions matters more than working smartly or more efficiently

Structural Obstacles

Australian industrial and commercial structures also provide few incentives for technology led productivity.

• Corporate protectionism and duopolies in most sectors mean that protecting today’s revenue is more important than creating tomorrow’s competitive advantage through productivity. Productivity is therefore addressed in a reactive way, rather than a proactive way
• The relative scale of the Australian market (22 million population versus 312 million in the US) means that high fixed cost investments in technology have a smaller customer base over which to spread recoup the costs
• Banks are highly conservative and there are no significant pools of venture capital. Technology led productivity is therefore often viewed as a higher risk investment than say, property or other physical assets

Weak Leadership

The controversial words of Donald Horne from the 1960s book ‘The Lucky Country’ unfortunately still have meaning.

“Australia is a lucky country mainly run by second rate people who share its luck”.

The sad reality is that many of Australia’s business and political leaders have limited vision, low ambition and low appetite for risk compared to counterparts other countries. Julia Gillard (prime minister) and Tony Abbot (opposition leader) seem to only trade in mediocrity and few of the Australian C-suite managers I’ve met seem inspirational.

Low quality political leadership is reinforced through the short 3 year election cycle that provides no opportunity for governments to make the hard choices that will be unpopular in the short term but benefit productivity in the long term.

The general level of digital ambition among Australian businesses remains relatively low in the apparent absence of inspirational digital business leaders and limited awareness of Australian companies with proven digital track records.

Embrace change or be a victim to it

Technology, digital communications and a strong currency have combined in the last three years to break down Australia’s geographical isolation and expose its businesses to the genuine global competition

• Retailers, for so long operating in a protected bubble, are now competing with global online stores that offer a wider range, lower prices and a superior customer experience
• Manufacturing businesses have struggled to compete on price

I think Services are likely to be the next sector exposed to technology led competition as lower cost international providers crack the challenge of delivering a high quality service from overseas.

Embracing change means tackling productivity before being are forced to and adopting the attitude to technology investment that international competitors have.

Digital Game Changers For Australia

Australia has potentially more to gain from technology and communications led productivity than most countries. Its high labour cost and dispersed population mean that the impact from more efficient processes and reduced physical transportation should be greater.

But as a nation we need some game changers to break through embedded structures and cultural obstacles.

Here are the game changers I would like to see

1. Visionary leaders please step up!

• Ignite the natural resourcefulness and ‘have-a-go’ spirit of Australians
• Create digital business pin-ups
• Work to break down traditional investment attitudes
• Encourage consumers to challenge suppliers as to why Australians pay more for the same product than Americans

2. Deliver the infrastructure

• The NBN (national broadband network) in metro and bush areas will go a long way to eliminating the tyranny of distance and enabling digital investment
• Update legislation to reflect today’s cross border digital economy

3. Develop Silicon Creek, an Australian digital cluster

• Focus investment on a suburb that already exhibits the most potential, ideally with several existing technology businesses that will act as anchors
• Don’t worry about giving all states and all businesses ‘a fair go’
• Promote links with technology universities
• Ensure financial and legal institutions support it with leading specialists

Australian cultural references

“The End of Certainty”, Paul Kelly, 1994

“The Lucky Country”, Donald Horne, 1965

Tagged Australia, Digital Change, Digital Disruption, economic cluster, Productivity, Technology