Welcome back to another edition of ranting about the perversities of the world of business, economics and finance.
Once again, I have been reading, listening and thinking, and I have realised that what I probably am is a voyeur; a peeping tom except what I perve on are businesses, corporate decisions and economics.
I know, it’s a bit sad, but I guess there are worse things I could admit to…
So, the thing that got me thinking was a statistic I included last time, that the share of Australia’s home loan market attributable to the Big Four banks had increased from 40% in 1990, to 80% today.
I don’t think I am alone in thinking that a market dominated by a few, large players isn’t one where healthy competition is going to be the norm; but that’s the message we are still being fed by policy makers, particularly in Australia: that competitive markets are a good and appropriate thing, while the competition watchdog allows the continued consolidation of industries.
The point has been made in the past here that when you think about economic policy Australia tends to follow the lead of the USA (at least in general terms). The tendency at the moment is to favour free market liberalism and allowing markets to self-regulate.
That’s right. Still. Even after the Global Financial Crisis we are still allowing markets to self-regulate.
Yes, APRA and ASIC are applying more pressure to the banks, and the banks are not getting the free rein they used to, but the banks still have BIG chairs at the table when it comes to determining the levels of that regulation.
Here is an interesting statistic. There are over 100 licensed lenders in Australia, but over 80% of that market is “owned” by only four of them.
Here is another. As consumers we have an expectation that debt will cost between 3.5% and 6%, but the cost of debt in Australia can actually run as high as 60% per annum for regulated debt and into the thousands of percent per annum for pay day loans.
It’s a bigger market than anyone realises, but it is absolutely dominated by four big players. And when you are in the sandpit those four big guys don’t play gently, or even fairly sometimes.
I don’t want to wax lyrical about the debt market, as this is actually only a sideline of this Update, but this has been in the Updates a bit recently and has also been in the media. The front page of The West Australian this week featured a story on our Prime Minister gently admonishing and warning consumers for their levels of borrowing and intentions to borrow more.
The message from the policy makers is: “Hey, everyone. Stop borrowing! Our household debt is 187% of GDP and that’s too high. Why are Australian households so damn greedy??”
But policies have encouraged the consolidation of the industry, the strengthening of the Big Fours’ positions and the lowering of debt costs.
Anyone with the most basic knowledge of economics, or how people make buying decisions, knows that as prices drop, buying increases, often way beyond needs.
And that’s what happened in Australia since the GFC.
The market has consolidated, and costs have fallen on the back of that larger revenue base. Prices dropped and people have bought more. That has pushed up asset prices everywhere, and has seen a sharp increase in household debt.
The sellers of debt, the banks, have made a killing and their balance sheets have swollen dramatically. Yes, the banks are being criticised for their lending and selling practices, but households are also being criticised for buying too much of a cheap product.
I guess I see the need to slap households on the wrist, just a little. Bingeing is never healthy, and we have binged.
But this Update isn’t about households; it’s about industries and their consolidation and domination by a few players in an environment where we are told competition is good; is healthy.
It’s not just the Australian banking sector that is now characterised by domination by a few “Too big to fail” giants. The US banking sector is the same, as is the European banking sector.
In fact, it’s not just the banking industry; it’s a whole range of critical industries that are now controlled by a few global giants.
Check out the movie Food, Inc. Here is a link to the trailer so you can have a quick look
The global food industry is an interesting example. There are food companies…and then there are food companies.
The largest manufacturers, or processors, of food on the planet are ENORMOUS, with the top 10 absolutely dominating the market, having revenue of between $38 Billion (Pepsico) $11 Billion (Mars Inc.).
Of course, given the combined size of the US and European markets these companies are probably quite familiar to most and include Kellogg, Coca-Cola and Nestle. And there is ferocious competition between them.
But the companies that supply them with their raw products such as grain, corn and bean derivatives? Or the manufacturers of pre-packed food stuffs? Those are different stories.
These industries are dominated by a few multinationals.
Pre-packaged foods stuffs are the domain of ConAgra and General Mills. Never heard of them? That’s not surprising, as they are American companies who exist in the background, but they are global, selling into Australia, Asia and Europe.
Meat products? Smithfield Foods controls pork production, while Tyson Foods is the world’s largest beef producer. Revenue of $80 Billion per annum between them.
And then the companies everyone loves to hate; the guys who produce the genetically modified grains and seeds that grow our corn, wheat, canola and beans.
Monsanto, DuPont, Syngenta who between them control 55% of total global seed sales, and in many cases hold patents for seeds they have genetically altered.
And in a further consolidation of the food industry, Bayer, a German chemical and pharmaceutical multinational, is merging with the biggest player in the seed market, Monsanto, with the deal worth $66 Billion USD.
This move will see the new, merged entity control only 25% of the total seeds sales globally, but 75% of the sales of chemicals used to spray seed crops.
What about pharmaceuticals? Our health is all that’s at stake here.
The industry is dominated by about 10 companies, all with annual revenues of over $20 Billion, all global, selling us everything from paracetamol to oncology medication to baby wipes.
We know about computer software, which is laughable in its concentration. Microsoft, Oracle and SAP control 98% of the global market, and despite Microsoft being hit with anti-trust violations in the US it continues to sit at number 1, with global revenues almost 3 times that of Oracle at number 2.
And our own sacred cow, resource companies? BHP Billiton and Rio Tinto at numbers 1 and 2 dwarf numbers 3, 4 and 5 with a combined market capitalisation that is twice that of numbers 3 to 5 combined.
So, what’s the point I am trying to make?
Is it that we are all slaves to the big corporations? Or that we are blind to the realities of global control?
No. I mean, you could be forgiven for thinking they were my points, but it’s a bit dark. A bit conspiracy theorist…
My point is, what’s the price of the convenience and luxury we now have? Not price in dollar terms, but what’s the price we pay in diversity.
In absolute AND relative terms our standard of living at the moment is outstanding. High per capita income, high standard of living, high levels of reported happiness and increasing or stable life expectancy.
And it doesn’t cost very much for us to buy all of life’s necessities as well as anything additional we desire.
And all of that convenience and luxury is provided for us at low and in some instances decreasing unit prices by an increasingly concentrated group of companies.
If we need life extending medication and it is covered by the Pharmaceutical Benefits Scheme we will be able to get that medication for a maximum price of under $30 per prescription.
If we don’t have enough money and need to borrow some, we don’t need to swallow our pride and visit our neighbour or parents, where we might have to pay interest of 20%. We can visit the bank, where it is professional, impersonal and fast, and can access debt with no fees at about 4% interest per annum.
Or, if we need 2 litres of milk we don’t need to keep our cow alive, milk it and then ration the milk. We visit the supermarket and buy 2 litres for between $2 and $3.
We take all that for granted.
There is a relatively well know modern experiment called The Toaster Project, where a young fella Tom Thwaites decided to test the worth of our modern conveniences and infrastructure: he decided to make a toaster from scratch, including sourcing iron ore, copper and other materials to make the hardware.
Tom bought a toaster for $4 (well, it was actually pounds) and tried to reverse engineer it.
Watch Tom’s TED Talk via the link attached.
He travelled thousands of miles, spent over a thousand pounds and a year of his life and still couldn’t build a toaster that worked.
This is a theory initially made famous by our boy Adam Smith who, in The Wealth of Nations, discussed the number of individual steps involved in making a pin (18 if anyone is interested) and the fact that one bloke on his own would struggle to make many pins each day.
But if you gave a bloke just one of those 18 steps to complete and he got really good at that step, and you did the same with the other 17 steps, then you could crank out a lot of pins per day.
So, here we are, about four and a half centuries later and we have split those pin making tasks up in pretty much every industry we know of and we have become, at least in an industrial sense, incredibly efficient and productive at making things or providing services.
In economics it’s called Economies of Scale, where the size of a company or enterprise grows to the size where it is doing exactly the above: making stuff or providing services at the lowest unit cost possible and then selling it for a reasonably low unit cost.
Now, what price do we pay for these low prices and convenience? And what price are we prepared to pay for it?
Well, we pay by way of a lack of diverse opinion.
Have you noticed that a lot of politicians and executives sound the same?
This is because there is considerable pressure on employees of these large entities and their bedfellows, elected officials, to behave in unethical or immoral ways simply to gain the approval of their superiors.
This is something I refer to as the habit of “managing upwards.”
We pay by way of a diminishing of the prominence of community and close relationships, which is replaced by the need to strive competitively for more.
This is the manner in which we all are locked within our large McMansions we don’t need and can’t keep clean, living alone and in fear that we are losing a game were the rules are unclear and the score is unknown.
The question becomes, where is the tipping point? When does the low price and convenience of our modern institutions become outweighed by the behavioural compromises we are both asked to make and see being made by others?
10 years ago a lot of these compromises were still largely invisible and hidden. Unless a large media outlet was informed, investigated and then reported, the wider population remained oblivious.
But digital technology and social media has changed that, and there is now far greater transparency around control and behaviour, meaning the wider population now knows or at least suspects what is happening.
The desire is for honesty, emotion and accountability, which are so often announced as “core values” of our large corporations, but are really a smoke screen to hide the true core values such as competition and greed.
So, the question that needs to be answered is “What price are we all prepared to pay for modern life?”