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Building Brand Australia


Building Brand Australia

Australia’s wish for a new government may be granted at the next election but its dream for a more competitive, more productive and more efficient country may remain just that – a dream.

I despair for Australia.  A Laissez-faire approach to the economy and to regulation held by the opposition – making people responsible for themselves and allowing companies and people to make their own choices – may work to help large companies (the Libs have previously had to deal with accusations of favouring big business) but left to their own devices, a ‘light touch’ produces legislated abuses of market power.  More on this another time.

But my despair comes from a philosophical position held by some in Canberra that may be too reliant on the idea of playing to our self-labelled “strengths”.

On the one hand, we are told by our politicians that we have to endure a structural deficit in our balance of payments current account – the value of our imports are always higher than the value of our exports.  This makes the speaker sound like they know what they are talking about.  Say ‘deficit’ and everyone agrees, throw in the word ‘structural’ and you can really sound like you know what you are talking about.  We are also told that our strengths are resources and agriculture.  If the next government is going to focus on our strengths, then that means focusing on low return on equity businesses that have no enduring competitive advantage because they are price takers rather than price makers.

The bloody reason the value of our imports is higher is because other countries are taking our raw materials (which nobody values very highly) and turning them into products we all want and do value highly.

Only when Australia starts to add value to raw materials and builds brands for which people are willing to pay a premium, can we be a price setter.  The best businesses are those that can charge a higher price for a product than the competition, even though the competition may produce essentially the same thing.  Think Tiffany diamonds.  Diamonds are the same all around the world, but Tiffany’s can charge more and people are willing to pay up.  They have a brand, they have a story, they have a reputation, there is desire.

This is a real and enduring ‘strength’.

Andrew Robb MP told me last week at a breakfast function that if, for example, as a country, we are good at ‘sport’, we should play to our strengths and focus on getting better at sport.  But without the incentives in place to encourage those who aren’t great at sport we will end up with an economy populated with a few jocks and little else.  Those that are good at science, IT, or have other skills are not given the incentives to even try if the focus is only on ‘sport’.  In Singapore for example there are attractive incentives to get people started in new endeavours.

This paragraph from Singapore’s Tax Portal tells the story of how they are encouraging new businesses to set up, to innovate and to create jobs.

“The tax exemption scheme for new start-up companies was introduced in Year of Assessment (YA) 2005 to support entrepreneurship and to help our local enterprises grow.

Under this scheme, a newly incorporated company that satisfies the qualifying conditions can claim for full tax exemption on the first $100,000 of normal chargeable income* (excluding Singapore franked dividends) for each of its first three consecutive YAs.

Starting from YA 2008, a further 50% exemption is given on the next $200,000 of the normal chargeable income* (excluding Singapore franked dividends) for each of the first three consecutive YAs.”

So a new business gets a tax holiday on the first $100,000 of profit for the first three years and the next $200,000 is taxed concessionally. That’s up to $900,000 of seriously low tax rates over three years and you pay zero tax on the first.

I enjoyed breaky with Mr Robb but I do think it is inadequate for a hopeful opposition to simply believe that encouraging resource investment and agriculture (our ‘strengths’) will do anything to change the long term narrative of our country.

Why?  Because digging up stuff out of the ground is not highly valued by the rest of the world and so they won’t pay much for it.  Our ‘structural’ deficit will remain.

If instead, we think about tax reform that produces incentives for value adding industries to start up and prosper, the value of our exports will rise and the structural deficit might just be a thing of the past.

I fear that the opposition currently have resigned our country to perpetual balance of payments deficits, which therefore make us dependent on foreign investment.  We are told that we as a nation are dependent on foreign investment because the capital account must offset the deficit in the current account.  The deficit on the current account can be fixed but we need courageous leaders willing to make long term changes rather than those focused on political marketing and self preservation.

If we don’t have to be dependent on foreign investment then we don’t have to sell off our farms and our mines and our infrastructure either.  Our government could also balance its own budget because it could preserve the cash flows from these assets.  But we need to start by getting real tax reform that incentives our smartest kids to stay in the country and develop value added products and services so the value of our exports is more than what someone will give us for our dirt.

The discussions about efficiency and productivity will then be in the right context rather than some abstract concepts cobbled together to make people think we have solutions.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. If we get little for the raw goods, and better value is added when they are manufactured into some product, could we not set up a factory overseas (cheaper labour) and call it our own? Think Apple, ideas, made cheaper overseas. Iron apples? – something to chew on!

  2. Raymond Luxuryyacht

    Isn’t the currency meant to be the stabiliser in the balance of payments. But there are two “structural” (if you will) counterveiling forces. The first is that we have large debts in forgeign-denominated currenices (and we have always run a surplus on the capital account since, ooh, 1788). So as a result of the dollar rising, it is easier to pay off our debts and we pay less interest. As a result, our balance of payments position improves. But, and there’s always a but in economics. A high dollar makes our value-adding (manufacturing and the like) more expensive. As a result, we take a hit on net exports (despite the fact that the terms of trade show us that the goods we sell the world are worth more than what we import, the terms of trade tells us nothing about volumes). So what does this mean for the balance of payments? Well a high dollar might be a good thing as it means we pay off our foreign-denomiated debt sooner and pay less interest. Tick. But the increase in the value of the currency to make this worthwhile is so high that it means that the economy gets hollowed out. Which effect is the preferred? Well, as the economist said, on the one hand…

  3. I know this thread is a bit old so might not be read. However i think it goes beyond just tax. I think what needs to change is a much bigger thinking australia. I read today that bething fee’s alledgedly set by the state govt in Sydney are increasing and are potentially getting to a point where cruise ships might take their business elsewhere.

    In the middle of this year i was lucky enough to be in Santorini with my wife. We saw about 5 cruise ships a day ferrying boatloads of people into the town where shops were packed. I was also commenting to my wife last weekend as we had lunch at circular quay that one thing that should be a priority is building another high quality cruise terminal. The current cruise ship docked made the area seem more exciting and it did seem busier than most other times i have been there.

    If my conversations mith merchants in Santorini was any guide, in Europe the cruise ships seem to be as busy as ever but it was people staying on the island in hotels which have dropped. By making it easier for more cruise ships to come to sydney it could have a huge effect on tourism but i think all governments are too quick to see a short term increase in money coming through rather than the big picture. The same goes for Rogers example about Deutche.

  4. @James, quite right to a point……until as @Roger points out it all wears rather thin. I think being forced to pay provisional taxation, along with becoming a pseudo tax collector by diligently accounting for and paying my GST quarterly has been of great service to the country, against a backdrop of ever increasing regulation, litigation and desperation. Let’s not even mention that those of us who actually take on a massive risk and the time to run a business do so while competing against a whole world of far more generous and efficient destinations, whilst relying on an onerously small population that appears to be much more interested in watching the footy or playing Xbox as opposed to rolling their sleeves up and working their way up into something special. Aside from that we are then faced with absurd labor/wage costs and conditions that render employing people so expensive that it’s completely unjustifiable in the current economic environment. For the record, I started my first business in 1996 and have been a proud employer and payer of superannuation ever since (yet another duty to my country @James). Sadly as discussed in my previous post this is no longer the case and absolutely will not be the case any time soon in Australia. Now the answer to the $64 Million question? Abu Dhabi and now Dubai. I straddle both cities on a daily basis, my wife has an outstanding job in Abu Dhabi, myself in Dubai. Best decision ever made and immediately at least three times financially better off in a tax free environment with a radically lower cost of living and five star wealth and amenities surrounding us on a daily basis. So you tell me…..what would you do?

  5. Interesting comments about Australia vs Singapore.

    I notice you mention about the tax incentives in Singapore for start up companies.

    A number of people I know are using Singapre companies to effectively pay aboutt 3percent tax on earnings of over 350k a year. And when they reached the time limit for the exemptions they merely create a new company and start over again effectively paying very little tax. Is this such a good thing when the rest of the country has to subsidise people like this?

    I have my own company in Australia and we made a profit of around 260k of which we paid income tax of around 90k. We also paid GST of 30k. I issued myself dividends and after taking into account the 30percent company tax paid I then need to pay another 15percent plus medicare levy for my own income. So you can see how much the Australian government is ripping off small businesses when it comes to taxation compared to Singapore. Of course many big companies in Australia organise their affairs so their revenue is soemhow flowing through low tax environment countries thus avoiding paying huge tax in Oz. The business tax environment in Australia is not globally competitve and is onerously expensive compared to many countries.

    I would like a meeting somewhere in the middle between Singapores overly generous to business environment and Australia’s overtaxed environment.

    • In reality I suspect there are a minority that engage in such activity as you describe but think about the invoicing with clients and suppliers and practically making that change. One imagines being dobbed in for such activity would be a real risk, preventing most from engaging in it.

      I concur with your remaining observations…

  6. Great article, again Roger hits the nail on the head about the lack of political courage in Australia and what it really means heading into the future.

    I’ve been saying this to anyone that would listen for at least five years now, often referencing Singapore as an example and making many f the same points outlined above but it was to no real avail and I was becoming increasingly frustrated with all of it.

    In the end, I decided to shut my three businesses down, let my staff go and de-register my Company, which all cost a small fortune to actually do in itself…..and leave Australia. The reason? Very simple: I don’t believe that the current PM or Leader of the Opposition has any idea about these issues, let alone the ability to do anything credible about it.

    There is no hope in dreaming about a future in Australia where; the cost of housing, utilities, wages and living is reasonable, the taxation system is simple, incentive based and semi fair, where Gov red tape is reduced, where business are encouraged to thrive, customer service is outstanding, and people actually have money to spend at their local shops………sadly none of this is going to occur anytime soon.

  7. Excellent article Roger! It sounds as though you are considering locating to Singapore. Are you in need someone to head up an office there to apply your investment philosophy to businesses in that region? That is where I am keen to invest my money, in A1 businesses servicing the asian emerging consumer markets.

    It is concerning that Australia’s political leaders are not even raising these most important issues, meanwhile Singapore and other Asian nations are beating us to position themselves to win big in the “asian century”. Every visit to Singapore reinforces this observation.

    In fact I will locate to singapore as soon as possible to operate my business in such a enterprise friendly country.

    • Hi Rob,

      My last three visits have convinced me that Australian has zero chance of becoming Asia’s financial hub. We lost that chance when the government snubbed Deutsche Bank’s offer to locate its Asian headquarters hear because they wanted some tax concessions.

  8. Roger,
    As with you, I despair with the behaviour of our political and business leaders. Until relatively recently, these persons have been anti-intellectual and myopic regarding the higher education of Australians required to add value to production and manufacturing. While the OECD and other countries were pouring billions of dollars into higher education, the Howard government was ripping hundreds of millions of dollars from higher education. Where once government grants accounted for over 80% of tertiary funding, this is now less than 40%, resulting in huge class sizes, increasingly poor salaries and morale. By contrast, teaching in Asia was a revelation to me, with massive spending in education by goverments on infrastructure, research facilities and highly qualified appointed overseas staff, and many keen appreciative students. Even more than 15 years ago I could see the future threat to Australia of the millions of highly educated graduates from Asian universities. By comparison, Australia appeared to be declining into a country content to dig holes in the ground while its brightest left to work elsewhere, where their talents were far better rewarded and respected. How much longer can the ‘lucky country’ depend on luck for its prosperity? Roger.


    I couldn’t agree more Roger with your views expressed here, I have long held the view that the true wealth of an economy is in what it can actually “produce”. For decades our thirst for imports and failure to produce have sent our current account deficit soaring. I do not understand why our leaders on BOTH sides of politics have never sought to address this problem in any meaningful way

    What happens when the rest of the world no longer wants or needs our dirt ? Or worse, when the wealth that we have been sending overseas for decades has finally come back and finished buying all our quarries and farmlands AND the few quality businesses we did actually have ? You cannot pick up a daily newspaper without reading of some new takeover offer for an Australian company or some Government announcing the sale of their Power Stations or other infrastructure. We have said goodbye to iconic brands like Arnott’s, Speedo, Vegemite, Foster’s and countless others. We can’t blame our small population either, Sweden has half ours yet they manage to export worldclass cars, trucks and telecommunications equipment worldwide

    We do have a few worldclass producers but we need many more, ARB, Blackmores, CSL and Cochlear for example, but reasons such as our high dollar and costs and lack of Government incentives and protection are sending these offshore and discouraging new producers from starting up or coming here. The Ford Falcon, the only truly Australian designed and built motor vehicle, is a world class car in many respects, their G6E Turbo is unmatched in dynamics or performance and features by any vehicle anywhere in the world that isn’t at least twice the price, but in a few years this vehicle will disappear into history, admittedly for more reasons than one but I include it as an example that we can design and build world class equipment here (albeit for a foreign owned company)

    The day is coming when we will be occupants of this country only, we are the next Fiji and those infamous words of Paul Keating from 1986 will come back to haunt us – Well, then you’re gone, you know, you’re a banana republic.

    • Indeed Stephen, And none other than Warren Buffett agrees with your sentiments. Here’s an excerpt of his Column for Fortune magazine. The last sentence is the worrying part and being experienced here now…

      Squanderville versus Thriftville (Warren Buffet)
      fortune | oct 2003 | Warren Buffet

      By Warren E. Buffett, FORTUNE

      I’m about to deliver a warning regarding the U.S. trade deficit and also suggest a remedy for the problem. But first I need to mention two reasons you might want to be skeptical about what I say. To begin, my forecasting record with respect to macroeconomics is far from inspiring. For example, over the past two decades I was excessively fearful of inflation. More to the point at hand, I started way back in 1987 to publicly worry about our mounting trade deficits — and, as you know, we’ve not only survived but also thrived. So on the trade front, score at least one “wolf” for me. Nevertheless, I am crying wolf again and this time backing it with Berkshire Hathaway’s money. Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in — and today holds — several currencies. I won’t give you particulars; in fact, it is largely irrelevant which currencies they are. What does matter is the underlying point: To hold other currencies is to believe that the dollar will decline.

      Both as an American and as an investor, I actually hope these commitments prove to be a mistake. Any profits Berkshire might make from currency trading would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar.

      But as head of Berkshire Hathaway, I am in charge of investing its money in ways that make sense. And my reason for finally putting my money where my mouth has been so long is that our trade deficit has greatly worsened, to the point that our country’s “net worth,” so to speak, is now being transferred abroad at an alarming rate.

      A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that’s how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

      Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

      The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there’s a quid pro quo — but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

      Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off — or simply service — the debt they’re piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

      Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.

      At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat — they have nothing left to trade — but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

  10. And also give some serious thought to the problem of income equality which is a major problem that is going to affect greedy rich capitalists. Read a book called ‘the spirit level’ and be prepared to be shocked. Especially so if you are an American, Australian or New Zealander!

  11. Kodak’s strength was in making films and it played to its strength…

    Great piece.

    But you got to wonder how many politicians have the conscience to right this wrong, and how many people in the general public possess the independent mind to see through this?

  12. Very good Roger, I want to try and find a way to share this article around as i think it needs to be read.

    Australia can punch well above its weight in areas other than sport, we only need to look at Cochlear (also rumours of a new project around a bionic eye which is showing good signs but now they are unsure if the government will continue funding, i hope they do).

    We do have quite a good brains trust in this country, however where is the incentive for these people to monetize their ideas in Australia where i think the overall feeling towards entrepreneurship is more sceptical than in other countries.

    We probably have many of our own Mark Zuckerbergs, Steve Jobs etc coming through our various universities as we speak who during their spare time are creating something that will become a great product. However, the problem they will run into is getting financing to start the project as well as the issues you speak about above so will be left to put their ideas in the filing cabinet marked “good idea but can’t get to work” or they will move overseas and take any benefit of it with it.

    I am a big believer that ideas and innovation are the true generators of economic growth but you do need the right incentives to allow this to happen.

    I think for this to happen, Australia as a whole needs to change its current mind set from the “she’ll be right” to one of leadership both in action and thoughts. However, when our retailers can’t even create an online shopping site that functions properly and our answers seem to be “well we have these valuable rocks in the ground in Queensland and WA” i can’t see it happening without some really big changes for this to happen.

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