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2013 Will Be Toughest Year Since GFC: How To Protect Your Business From The Storm


Michael Fingland

Executive Director

Australia is celebrating its 21st year without recession. Most recessions come in seven to ten year cycles, so a correction is well overdue.

And the next one could be bone rattling.

You can be in denial about this, or you can prepare.

Businesses need to take precautions now to minimise the impact of global and local conditions expected to hit our economy.

CHINA’s economy is slowing quickly, and even a 2% dip in growth from 8% to 6% will have a massive impact on Australia’s mining industry which will reverberate around the country.

2013 will be the toughest year since the GFC, with the potential for massive business dislocation beyond the mining industry if China comes off the boil.

While six months ago most economists and financial analysts were predicting at worst a soft landing for China, there is now more and more realisation that China could be in for a hard landing.

Australian businesses have not factored in this hard landing, and if it eventuates all bets are off – businesses need to be preparing now.

Already, with commodity prices (for iron ore and coal in particular) declining considerably, we are seeing mining projects in WA, SA and Queensland being delayed or cancelled – and we expect the ripple effect to travel well beyond the mining and resources sector.

The following factors are weighing against Australian businesses:

  1. China’s purchasing managers index has been in contraction mode for 7 months in a row which is continued evidence of the China slowdown.
  2. Europe is China’s biggest trading partner and is forecast to go deeper into recession over the next 2 quarters. This will further impact China and force up borrowing costs for Australian banks which will be passed on.
  3. US recovery appears to be stalling which will impact on China and Australia.
  4. The high Aussie dollar.
  5. Growing evidence that large national and international businesses are slowing or avoiding investment in Australia due to government policy uncertainty.
  6. The carbon tax hasn’t started impacting the economy yet.
  7. Australian households are still carrying record debt levels and the household savings rate is still rising which is significantly impacting the retail sector.
  8. Corporate insolvencies are still at record highs.

Why China slowdown will impact beyond mining
On the back of the resources boom, Federal and State governments have been able to increase spending on infrastructure and grants to ailing industries. With a drop in mining taxes/royalties, this falters and all industries will bear the brunt of cost-cutting.

Looking at businesses around Australia, I see a lot of unprepared people in denial.

Most business owners under 40 have not experienced a recession. The only thing that has saved us from a recession since the Global Financial Crisis is the mining boom.

The next downturn will be a lot uglier because of the weakened state of so many Australian households and industries (i.e. tourism, housing, retail, manufacturing).

How to protect your business
It’s important for leaders and managers to use the remainder of 2012 stress testing their businesses and putting potential solutions in place.

If you don’t work out in advance what you’d do in bad and worst case scenarios you’re behind the eight ball. If you’ve done stress testing, you’ve got action steps, whether 3 or 30, in the top drawer and if worse comes to worst, you’ll spring into action while your competitors are flailing.

  1. Reposition – develop your business’ unique point of difference and invest in R&D and innovation rather than price cut your way to market share. Scrutinise existing product range and cull unprofitable ones
  2. Diversify – Streamline the business, or add service lines to diversify customer base
  3. Pay down debt – Reduce gearing levels by sweating working capital, selling non-core or surplus assets.
  4. Consider selling non-core assets/divisions or surplus assets, and sale/leaseback options for property and other assets to strengthen your balance sheet
  5. Have a Plan B –“in our experience only 5-10% of management teams will be prepared with detailed action plans developed using the stress test process – and they will be in prime position to take serious market share off their competitors over the next 18 months.

Michael Fingland, Executive Director of national business transformation and turnaround firm Vantage Performance, was awarded Australasian Turnaround Professional of the Year 2011 by the Turnaround Management Association, for his work with fast growth and troubled companies.

 



Michael Fingland

Executive Director

My philosophy is that there is always a way to solve a crisis, as long as you’re engaged early enough.

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