Lock down

Survival this year will depend on seeing beyond the crisis mentality. Every smart plan for 2008 must have a fall-back option.

Smart companies are going to prepare a two-track plan for their business for the rest of this year – a short-term plan for the rest of this financial year and a lock-down plan for the next financial year.

We have just seen gold go through $US1000, and it is likely to go further in the next month if George Bush is able to agree with Israel this week to reinstate Iran as the “evil empire” and McCain and his Dad’s Army team campaign for military expansion in the Middle East. 

We have seen the two Andrews story (see below) show both sides of the global realignment away from the Coalition of the Willing warrior economies to the emergence of the BRIC (Brazil, Russia, China and India) economies.

Andrew Scott at Centro is struggling to stay afloat past 15 February as the financial institutions go into free-fall beyond the US sub-prime and related collapse in retail property values, at the same time as Andrew Forrest shows that vision and longer term thinking about mining resources has made him one of Australia’s richest men.

While the media will be filled with the US soap opera until that race stops in November, the incoming Rudd/Swan/Tanner team will be hunting down any part of the outgoing administration’s forward estimates to find savings in excess of $15 billion in a desperate attempt to convince the RBA that we can continue to fly below the no-go line of 3% inflation.

The reality is that all central banks are going to pump funds into the American market in this presidential election year as hundreds of financial institutions change CEO – and scramble for survival as the credit crunch becomes a liquidity drought for many small and medium enterprises that face the same problems as Centro and Countrywide; a total inability to roll over their lines of credit.

This year has all the prospects of a disaster for companies that have invested their hopes on an expanding US and European economy. As a result, the rest of this financial year will represent a crisis of confidence for the lenders and corporate treasurers who have large numbers of staff living on high-risk prospects that require consistent household expenditures.

Consumer confidence levels from the Roy Morgan Values Segments survey show that there is a canyon-like gap between the affluential NEOs (new economic order) who believe that their bonus and returns from a few years of record growth will continue, and the lower income household sector and middle class who are already finding that real costs are going through the roof.

The efforts of Tanner and Gillard to keep a lid on wages and salaries will come under massive pressure from a trade union movement that is beginning to see that its members are the real losers from the last few years while those who were on guaranteed incomes, AWAs and corporate executive payrolls have had the extra cash to buy new cars and take trips overseas.

In the next financial year opportunities emerge for any small business that can disaggregate the value chains of larger industries through the use of new technologies, software solutions and service contracts that enable downsizing and outsourcing of fixed staff costs.

There will be a shift to longer term strategies that have a return on investment below 12% but a consistently higher return on capital as price-earnings ratios get better with declining interest in equities and greater interest in bonds. Companies that can expand their trade contacts overseas and reduce their terms of trade will expand offshore rather than look to the domestic market for significant expansion.

The good news is there, however, for Australian companies that are making the most of our contacts in China and India (despite the best efforts of the cricket establishment) to extend long-term investments in service industries, technology transfers and in particular education and health-related services. As these countries dramatically increase their middle class they will look to mobile and committed staff to develop the range and quality of their domestic capabilities.

Those who can see beyond the crisis mentality have the best prospects of planning for a brighter future in 2009.

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