As we head into Melbourne Cup week when we all hope to be picking winners – traditionally the end of the year and the beginning of the festive season – I thought it would be worth reflecting on the businesses that could have been if governments had decided to pick winners and back certain industries. Our politicians are quite adamant that they do not engage in this practice.
The evidence states otherwise.
It appears as though the coalition has picked the resources industry as a winner – I assume because that’s where their bread is buttered. Billions of dollars of subsidies have been granted to that industry. They even fought an election on the issue of removing a carbon tax.
Labor also has picked its winners. The auto manufacturing sector (indeed all manufacturing) – again because that’s where unions were traditionally strong and unions write the biggest cheque for the Labor party. Billions were poured into subsidies and the end result has been that – due to our labour costs – manufacturing has been moved to cheaper unit cost countries that are closer to the relevant markets.
Given the current regulatory environment where our banks are being made safer (read that as restricting lending to an ever narrower range of clients), it is difficult to see where emerging companies will get their funding and capital from.
Where are our Apples and Teslas?
I’m glad you asked. In May this year the LA Times ran an article about how Tesla is funded. The article states that USD 4.9B in government subsidies have gone into this company alone. Sure, there is private funding as well but that level of disclosure is not available as yet.
Let’s focus on the US government subsidies compared to what our governments have done. The US government has encouraged investment in emerging technologies whilst our government has encouraged investment in dying ones.
If you look at Tesla and what it’s done – transformed the automotive industry in a few short years by releasing new all electric models that have outstanding performance and a range of up to 500kms. Remember there is no internal combustion engine in these vehicles.
Further, they have developed battery technology and branched out to providing batteries linked to solar panels to enable homes to be self-sufficient.
So, next time you wonder why the US is home to such outstanding companies, ask yourselves how they got started.
We need governments and financial markets (particularly the capital markets) to support these industries.
Our one recent example, Atlassian, had to list in the US. Reason: the maturity of the US capital markets. Read about it here.
Conversely, one of our most successful companies has been CSL. Its previous name was Commonwealth Serum Laboratories. It was 100% government owned and subsequently listed. So clearly, we used to pick winners (CSL was founded as a government entity in 1916).
I have been involved in the financial sector since 1985. The things that have irked me consistently in that time are as follows:
- an absence of a stable capital market that looks beyond 3 years.
- Governments that are too frightened to back emerging industries (so the likes of Atlassian list in the US).
- The shattered looks on business owners faces when they come to see us after being rejected for funding by almost all traditional funding methods (banks).
The solution? The infrastructure is already in place and the current government is making noises about crowd funding. That’s not the complete answer.
Stable capital markets mean a stable bond market for unrated entities and a stable equity market (small caps). The small caps equity market is in existence but the unrated bond market is very small and appetite is in a narrow band of investors.
What they really need is a Government with the guts to start picking winners again – like they used to a century ago.
Fail to do this and we’ll never have our own Apple or Tesla.