opinion/analysis by Renai LeMay
6 February 2014
The Federal Government’s decision to reject a $25 million plea for financial assistance for SPC Ardmona’s troubled fruit processing plant in Shepparton should be seen in the context of the long-term and very necessary war to lessen the reliance of Australia’s economy on legacy industries and to push it towards the next-generation of knowledge-based smart businesses.
Like many Australian technologists, I’ve watched, aghast, over the past several weeks as the nation’s political and business elite engaged in an intensely fought debate over an area of the economy which most Australians rarely think about, if they think about it at all: Fruit canning.
If you have at least a moderate pulse beating through your veins and you have any access to the media, you could have hardly missed the fact that a rather large commotion has arisen over the Abbott Government’s decision to reject a $25 million assistance request from Coca-Cola Amatil-owned Victorian fruit manufacturer SPC Ardmona for its processing plant in Shepparton.
There are many angles to this story. There is the fact that if the plant shuts down, some 700 jobs will certainly be lost immediately, and likely thousands more from the flow on effect to the entire region, including local farms. There is the fact that the Coalition’s stance on the issue is somewhat hypocritical, given the $16 million the Cadbury factory in Hobart is getting to promote tourism to its facility. There is the associated hypocrisy of a massive, profitable Australian company like Coca-Cola Amatil (itself a third owned by global conglomerate Coca-Cola) seeking a government handout which will support those profits.
And, of course, there is the political angle: Local Liberal MP Sharman Stone’s claim that Abbott has “lied” about the employment circumstances of the plant’s workers is getting plenty of airtime.
But what appears to have been completely missed in all this sound and fury (as usual, signifying very little) is the fact that Australia needs to have a much larger debate about the future composition of the economy as a total sum; a debate that extends far beyond the boundaries of a tiny fruit processing plant in Victoria and spreads across the next quarter century of sustainable economic growth across trillions of dollars and millions of jobs. A debate that wiser heads have been trying to have for years.
A debate that, if we truly had it, would likely lead to the inevitable conclusion that the Federal Government shouldn’t be propping up traditional industries such as food processing, which grow very slowly, if at all, but stimulating the rapidly growing technology and digital content industries, which have remained virtually stillborn in Australia due to a lack of anything near the same support which SPC Ardmona had virtually taken for granted.
Like it or not, one component of the Federal Government’s responsibility for stewarding Australia is to actively manage the country’s economy.
A critical and extremely complicated aspect of this task is deciding which areas of the economy need assistance. Although it’s attractive from an ideological perspective, the classic liberalist idea of providing no assistance to any area of the economy (and letting businesses fend for themselves) is unrealistic in today’s global environment.
The reality is that every other country — from megaliths such as the United States and China to the tiniest third-world nations — all subsidise critical industries in some way, whether it’s through direct assistance in the form that SPC Ardmona is seeking, low interest loans, tax relief, or export and import controls and taxes. If Australia does not engage in this game, then many of our industries will not be able to compete on an even footing with those of other countries. It’s a bad deal at times, but often it’s the only deal on the table.
The role of the Federal Government, and to a certain extent, State Governments, is to pick and choose which industries to support and which to leave to fend for themselves, and to what extent.
If you could take a macro view of the situation, this usually boils down to trying to keep Australia’s existing strong industries (chiefly resources, agriculture and services) more or less on an even keel of reliable growth (without beggaring the Government’s coffers to do so) while stimulating other industries to grow up alongside them and provide additional planks to the national economic strategy.
Viewed in a certain light, this process has been proceeding more or less to plan over the past century. Although some industries which were once dominant have fallen away (manufacturing, which once took up 30 percent of Australia’s gross domestic product, has shrunk to around 10 percent), others have been stimulated and have taken their place. The resources industry has grown hugely, with states such as Western Australia and Queensland supporting such growth to the hilt. Agriculture continues to be an old reliable for the nation, and other industries such as tourism, finance and services in general have grown substantially.
As a sum total, our economy is still strong because of these reasons; certainly we’re in much better shape than most European economies, and we’ve weathered the United States’ recent financial traumas almost completely intact.
However, it’s also important to note that Australia has almost completely missed out on other substantial growth drivers which other economies have invested heavily in, with the two largest examples clearly being the media and technology industries. To make the case that these industries are much more worthy of government support than the food processing scene is, I’ll take you through a few basic top-level figures about them.
The Motion Picture Association of America maintains a list of the largest countries by film consumption in terms of box office figures. Australia was 10th on that list in 2012, spending US$1.2 billion at the cinema. That figure, despite our significantly lower population, was still proportionally high when you consider that Canada and the United States combined (the biggest spender) only spent US$10.8 billion. Despite only having a population of 22.7 million compared with China’s 1.35 billion, Australia spent about a third as much on watching films as China in that period.
And yet when you look at UNESCO’s list of countries which produce films, Australia isn’t even in the top 20. India tops the list with 1,170 films produced on average per year, while the United States produces around 550 and Japan above 400.
As a country, India has invested heavily in and supported its Bollywood scene. Japan has invested heavily in and supported its anime and live action scene. And the US has invested heavily in and supported Hollywood and its cable TV networks. All of these industries produce content which is heavily consumed both in their home country as well as exported overseas.
In stark contrast, Australia has almost completely ignored the content production industry; as a consequence, we tend to import most of our content from overseas; when we’re not watching sport, that is. The Government provides only very small amounts of subsidies to Australia’s film and TV production industry; chiefly through supporting the ABC and SBS, as well as small investments in major film projects and mandating a certain level of Australian content produced by the TV networks.
The exact same situation is true of the associated video game technology sector, which shares many of the fundamental dynamics of the film and TV production industries.
Australians consume video games in record numbers. In February 2013, the Interactive Games & Entertainment Association announced that the local interactive entertainment industry recorded a record $1.16 billion in traditional retail sales in 2012. And that wasn’t even including the burgeoning digital channels.
Local technology analyst firm Telsyte expected at that stage that Australians would spend over $730 million on digital games subscriptions, virtual goods and mobile games in 2013 – an increase of 18% from the estimated $620 million generated in 2012. “The growth in digital gaming is driven by mobile app gaming on smartphones and tablets, which is offsetting the decline in physical purchases and even pushing the overall games market into growth” says Sam Yip, Senior Research Manager for Telsyte.
PriceWaterhouseCoopers’ Australian Entertainment and Media Outlook 2012 – 2016 forecasted that the local interactive games sector would grow by a compounded annual growth rate of 7.4 per cent over the succeeding 4 years. Furthermore, the interactive games sector was expected to demonstrate the biggest growth area in consumer spending with the exception of the Internet, out-stripping the forecasted growth of Music, Film and Subscription Television.
So game development should be big business, right? No. Not really in Australia. Our national video game industry has received even less support than the poorly developed film industry, according to this insightful article by Sebastian Darchen, lecturer in planning at the University of Queensland. Most local game development firms have shut down over the past half-decade.
And again the same issues surrounding the lack of Government support arise. Darchen cites the fact that the Quebec Government in Canada subsisides 37.5 percent of video game studios’ payrolls as a stark example of how far other jurisdictions are willing to go to support the industry. And the results have been similarly stark; Ubisoft’s popular Assassin’s Creed series — one of the most lucrative franchises in existence — is partially developed in Quebec, and Quebec is actively taking video game development jobs away from the United States.
Now, there’s an argument to be made that cases such as the SPC Ardmona issue are immediate and need to be dealt with right now. Developing industries such as content and technology requires a long-term time frame. And to a certain extent, this is a valid argument. However, if we don’t make these kinds of investments now, those long-term changes will never happen. The video game example in Quebec is a good example of how things can pay off in the long term. Reuters reported in 2011:
“Last year, Quebec spent $100 million on the program, up from $83 million in 2009 and significantly more than some U.S. states with similar programs such as Texas and Louisiana. The province first set aside money for video games in 1996 after starting a program to jumpstart the film industry a year earlier. According to Jolicoeur, the aim was to move Quebec from a manufacturing economy to a “new economy” by creating artistic jobs for young people.
Fifteen years later, the bet appears to have paid off. “The incentives the government provided helped plant the seed, and now it’s big and everyone is hiring,” said Yanick Roy, studio director of Bioware, an Electronic Arts outfit.”
The other great example is the technology sector.
It’s true that countries such as the United States, Japan, Israel and Germany, which have strong and thriving technology sectors — each counts some of the world’s most valuable technology giants among their national company roster — each have certain inherent structural advantages that have stimulated the development of a strong technology sector. Typically, these structural advantages tend to consist of a strong military, strong local telecommunications infrastructure and a larger financial sector which is less risk averse and thus open to funding the kind of high-risk bets which early stage technology companies to represent.
However, it’s also true that each has provided a welcoming environment for their cadre of technology companies. In Germany, enterprise IT giant SAP is a household name and national icon. Japan has Nintendo, Sony, NEC, Fujitsu. The United States has Apple, IBM,, Google, Microsoft, Oracle. Israel’s companies are less well-known but still legion. Some of the better known ones are RAD Data and Check Point. All of these companies are in constant and frequent discussions with the governments of their respective countries about how their industry can be better supported.
Australia has developed its own cadre of rapidly growing tech companies over the past several years (companies such as Atlassian, Freelancer, Technology One, MYOB and more), but they’re not well-known, and they certainly receive almost no support or even interest from our Federal Government. In fact, they continually have to fight the Government to get basic rights.
Witness Atlassian’s decision late last year to shift its formal company headquarters to the UK instead of keeping it in Australia. In countries such as the US, Germany or Japan, such a move by a large tech company would be unheard of. In Australia, the issue passed by almost without a blip.
“I think the local tax laws are a struggle, and I think equity-raising laws are a struggle, too. I’d like to see more of the policy changes to make the startup scene better,” Atlassian co-founder Scott Farquhar said in an interview with ZDNet in February last year. Most people, including myself, would recommend to startups to incorporate their companies overseas. I think the government can do a lot more with startups, and I’ll keep pounding on that until we see some meaningful traction.”
Last month, Communications Minister Malcolm Turnbull played down the issue as being “rather exaggerated”, as it was “more of a corporate move” that did not involve moving Atlassian’s staff or their business to the UK. However, the truth is that Atlassian wouldn’t have considered shifting its headquarters on paper to the UK in the first place if there wasn’t some issue with respect to the way Australia treats technology companies.
Another example is the way that the Federal Government has provided an extremely hostile environment for the local IT startup ecosystem.
There are ongoing concerns — which have been an issue for at least half a decade — over the ability of Australian IT startups to easily allocate equity to their staff without those staff being slugged with an immediate tax liability on capital which may not turn out to be worth anything. The last set of key changes made to taxation law in the area took place back in 2009, when Labor sought to rein in the ability of some employees to achieve better rates of taxation by placing some of their remuneration in company stock.
In an interview with Business Review Weekly as early as July 2013, then-Shadow Treasurer Joe Hockey described Labor’s approach to the issue as “a massive handbrake on start-ups in Australia” and “an obvious area for change”. “So many start-ups have remunerated their senior employees with share options and the Australian Tax Office is now hitting them with a tax liability for what they may receive, rather than actually what they have received,” the Liberal MP added at the time. Communications Minister Malcolm Turnbull — currently in the US meeting with technology companies and policy makers — has also publicly noted that he supports a review of the scheme.
The issue appears to represent a clear case where the Federal Government has overreached in trying to keep executives at major companies accountable.
On the flip side, the Federal Government also appears to tacitly support international technology giants when they operate in Australia. Massive US companies such as Apple and Google, for instance, pay only minimum corporate tax on the billions in revenues which they are siphoning out of Australia, while locally registered companies providing very similar products and services are taxed at a massively different rate. The recent establishment by Australian online retailer Kogan of a Hong Kong subsidiary, which formally deals with many of the company’s Australian customers, is an obvious attempt to mimic the practices of the international tech giants in escaping Australian tax structures.
The sums involved in all of these examples, dwarf the amount of money being discussed with respect to cases such as the SPC Armona example, and consequently should be much more important.
The Coca-Cola Amatil subsidiary is only looking for around $50 million in total subsidies — half each from the Victorian and Federal Governments. In comparison, the amount of tax likely to be paid by companies such as Google and Apple, if they were being taxed differently, would likely range into the hundreds of millions of dollars, each. Tens of thousands of Australians are involved in Australia’s IT startup industry and would likely benefit substantially from a better startup equity regime. And, as the billion dollar listing of Freelancer last year showed, taking these technology companies public on Australian shores, as opposed to overseas, would create a huge impact.
Then too, the amount of employees involved in similar IT industry job loss situations as may happen at SPC Ardmona typically exceeds that case. It’s not uncommon at all for the Australian divisions of companies such as IBM and HP to go through restructuring rounds to lay off several thousand staff at a go; likewise at Telstra and Optus. Yet none of these examples raise even the slightest controversy on a national level; likely because the tech sector is very lightly unionised and does not enjoy a strong political connection with the Australian Labor Party.
We’re never going to see an end to government support of certain industries in Australia. As economics commentator Peter Martin wrote for the Sydney Morning Herald today, the amounts the Federal Government is funnelling towards industry range into the billions. However, what we need to be pushing for is a re-focusing of the discussion; removing subsidies from low-growth industries and shifting them into high-growth areas that would smarten the overall economy.
In areas such as technology and content production, this can be done in an extremely easy way to start with. Foreign multinationals operating in Australia need to be taxed correctly. Local firms need to receive tax incentives, and support to set up shop in rural areas. Employee share schemes need to be re-jigged to be competitive globally, and the Government also needs to provide tax relief on venture capitalists and angel investors who fuel growth in these sectors. Lastly, and perhaps most important, we need both sides of politics to agree on a sustainable plan to deal with the upgrade of our national broadband infrastructure.
The technology and content industries, along with other sectors such as education, are rapidly growing sectors which have the potential to employ hundreds of thousands more Australians in much more satisfying and highly paid work than would be possible when you work for a fruit processing plant in rural Victoria. The rapid development of broadband infrastructure means that much of this work can be conducted remotely in similar locations, and it’s hard to imagine that any government investment in these sectors wouldn’t be repaid substantially. If there is one thing the tech and content sectors are good at, it’s making money. They’re far better at it than the food processing industry.
The fact that, as a country, we’re not having debates about how to better grow these industries shows our national immaturity and lack of understanding of their potential. The fact that we’re hotly discussing the fate of a rural fruit processing factory instead turns the whole situation into a farce. Nobody ever got rich overnight from canning peaches. But success stories like that of Freelancer or Atlassian are all too common in high-tech and should be supported and exploited on a national level.