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How CFOs can handle a slower growth economy

How CFOs can handle a slower growth economy

Tim Harcourt’s a smart guy. He’s the chief economist at Australia’s Austrade and has a very acute sense of export opportunity for Australian businesses both big and small. Recently, in an interview he used Donald Horne’s title The Lucky Country to underscore how, this time, we have made our luck by forging great linkages with Asia-Indo China; where Indonesia, India, China are all expecting 8-9 per cent growth rates for 2012.

He‘s probably right, but there is another dimension; many Australian businesses are facing a slower growth economy at home and a high exchange rate. Dramatic adjustments may be necessary and the CFO will be integral to the adjustments.

Consider that retailers are blaming the high Aussie dollar for the dry-up in sales; Qantas wants to build new relationships in the region but is shrinking its workforce and BlueScope Steel is, well, a bleeding mess. What is becoming clear from the recent reports from Qantas and BlueScope Steel is that the high exchange rate and a slowing growth rate are here to stay for the immediate future and that business models for businesses whose bottom line is significantly impacted by our currency may need tweaking.

CFOs would have their eye on unnecessary costs, unseen stock concentrations, inadequate currency hedging (particularly for export), and inadequate lines of (long terms) credit and supplier credit worthiness. In a lower growth economy many of these become attenuated.

What does Qantas and BlueScope Steel tell us?

In its August announcement that it is embarking on a push into Asia, Qantas signalled that it is reducing services into the UK because there are massive loss-making operations from Bangkok to London and from Hong Kong to London. Jobs are being shed; yet at the same time the restructure will also see two new airlines created in Asia and the acquisition of more than 100 new aircraft. Australia is a high cost country in which to do business when compared to Asian countries and Qantas is clearly using its expertise to create ventures in other countries where it can make money.

The number crunchers in Qantas know how difficult it is to run an international airline where fuel, costs and international demand are, quite simply, not in your control. They are therefore real and present risk factors and need to be ameliorated by reducing the cost base and leveraging assets such as brand and know how. As far as we know, Qantas is an active hedger in currency markets, but clearly cannot control the cost for in-bound travellers of a high exchange rate.

Meanwhile BlueScope Steel reported a net loss of $1.054 billion for the 2010/11 financial year and announced the company is going to retrench 1000 workers and get out of exporting steel. This is a momentous decision, not just for BlueScope, but for manufacturer exporters around the country. In BlueScope’s case, the executive team (and tens of thousands of shareholders and employees) have seen a massive erosion in value of the company. It was $12.06 a share on 20 June 2008, while at time of writing it was at 82.5 cents. In those halcyon days the Aussie dollar was buying between 76 and 98 US cents. As the price of the Aussie fell against the USD (from July 2008) the price of BlueScope – and the global markets – fell too.

But is it really about currency? And how much control can a company exert over the impact of a currency?

A submission by BlueScope Steel to the Department of Foreign Affairs and Trade reveals that perhaps it has less to do with the Aussie dollar and more to do with the change in global markets. In its big export markets of hot rolled steel to North America and coated and building product sales to North America, the company took losses in to the tune of $93.2 million and $21.3 million respectively. The two export segments that brought in a combined $1.36 billion in 2006/07 lost the company $111.8 million over 2009 and 2010. The currency was a lot lower on average during that period. It may well be that the company is selling products that are no longer competitive or that customers simply don’t want and that’s going to hurt the bottom line. And there’s little the CFO can do about that.

Look Inward

The ‘usual culprits’ that undergo scrutiny at times of economic slowdown and heightened uncertainty are before all CFOs. The culprits noted earlier - unseen stock concentrations, inadequate currency hedging, inadequate lines of (long terms) credit and supplier credit worthiness - are front of mind and will be given appropriate importance around boardroom tables. More significantly for the export facing businesses, however, is the question of what needs to be done to reflect the transformation of the financial world – those very issues which have so starkly affected the fiscal policies of Qantas and BlueScope Steel.

The benefits of ‘lean’ manufacturing will be familiar to most CFOs. The Manufacturing Advisory Service (MAS) in the UK, which is associated with the Department of Trade and Industry to provide support to UK manufacturing, has been running improvement projects across many hundreds of companies based on lean manufacturing techniques. The aim is to reap the advantages of lean production methods and processes. It found the following ‘average improvement’ figures for MAS projects (in summary):

  • Productivity +25 per cent
  • Scrap -26 per cent
  • Space -33 per cent
  • Delivery +26 per cent
  • Stock turns +33 per cent.

Lean is no silver bullet, but the numbers are stark in the current climate. It’s a whole new ball game. Don’t rely on an old game plan. Export manufacturing industries are being smashed.

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Tags CFO economy

More about Australian Trade Commission (Austrade)Department of Foreign Affairs and TradeDepartment of Trade and IndustryQantas

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