Looking East not West

By Martin Conboy, President – Australian BPO Association

August was unquestionably one of the weirdest months on record. The volatility in the share markets was extreme, with wild fluctuations – almost as bad as the worst of the GFC months. The dissimilarity was back then we didn’t know what we were in for or when it would stop. We really held our breath for what was a white-knuckle ride. It was frightening. However having lived through that period we have become accustomed to market volatility.

Why is it so? Slow US growth, coupled with a supply demand mismatch in their labour market and a very weak housing market, the introduction of a new Australian carbon tax, mining tax, flood tax, high interest rate settings, a very high A$, a very weak retail market and manufacturing sector and the all singing all dancing 800 pound gorilla in the room – Euro sovereign debt issues.

Australian banks borrow overseas to fund their balance sheets. If there is a credit squeeze the banks have to pay more to borrow which will find its way into business borrowings and mortgage rates. In the post GFC world our banks are paying up to 1% more to borrow offshore. That spread will increase should there be another liquidity event, (Double dip recession) leading to higher interest rates and ultimately lower economic growth.

The introduction of three new taxes, as well as the Australian government’s efforts to balance the budget by 2013 is weighing heavily on the market. Major businesses are calling for an immediate interest rate cuts to stave off a broad economic slowdown and to take pressure off the high Australian dollar, which is killing our retail and manufacturing sectors.

Anyone of the previous challenges would be serious in isolation, but put them all together and you’re applying the brakes to a locomotive whose front carriages (WA) are pulling the back carriages (eastern states) however the sluggish nature of the back markers is slowing the overall speed of the train down.
That’s not to say the market cannot deal with these challenges and rise– but we are not about to enter a raging bull market any time soon.

So that’s the economic background and the question is what’s the impact on the outsourcing sector?

The prevailing view is that our banking sector is sound, we are more or less decoupled for the US and European markets and have limited exposure if any to Greek bonds and we are much more closely aligned to the Asian markets and specifically China.

I was reading in Dr. Phil Hadcroft’s ‘Big Red Book of Outsourcing’ a directory and road map into China that, at the start of 2011, the People’s Republic of China was home to 1.34 billion people, of 56 different ethnic nationalities, situated within 22 provinces, five autonomous regions, four directly administered municipalities and two special administrative regions (Hong Kong and Macau). China has 656 cities of which 93 hold populations exceeding 5 million inhabitants.

1,609 economic development zones and high-tech parks have been established across China to support the nation’s social, industrial and economic transformation programme. Each park, each city and every province is assertively engaged in attracting talent, encouraging foreign and domestic investment, driving innovation and promoting economic growth.

China is programmatically replacing the heavy manufacturing industries in eastern China with commercially sustainable hi-tech businesses. Some of these are in the manufacturing of pharmaceuticals, electronics, new-age materials and high-tech products. Much of it will be in the information economy of ITO, BPO and KPO, including extensive research and development and concentration on new communications technology and next generation IT.

So the sleeping bear of China is not just about Australia’s resources sector, the BPO entrepreneurs who get Dr. Hadcrofts book will set themselves a course to economic opportunity. (See China story below)