How to increase the exports of value added processed foods from Australia.
To increase the exports of value added processed foods from Australia we must have a national coordinated plan.
Any plan will have to be commissioned by our federal government on a bipartisan agreement that remains in place for the long term. It will require the cooperation of all states and territories; it will require the involvement of the existing food production industries and the agricultural sector. It will require cooperation from Treasury who have the power to adjust taxation legislation. It will require the involvement of the finance sector both banking and superannuation. For any plan to increase value added processed food products from Australia work it will have to address the critical issue of return on investment.
For value added food processing in Australia to be sustainable it has to be profitable and generate at least a 20% return on investment. The current returns on investment are reduced to around 6.0% as a result of internal taxes, imposed by Local, State and Federal, Australian Governments. A return of 6.0% is not high enough to attract investment to an industry where risks fluctuate.
The food industry as it stands today produces about $100 billion per year. We export about $34 billion of food and import about $31 billion of food. About 60% of this food is sold through the supermarkets, the remainder through foodservice takeaways and independents.
The industry represents 32%of the Australian manufacturing sector (The Job Makers)and directly employs 273,000 people.
The current new capital investment into the industry per year is $2.9 billion. Considering it requires an initial investment of $200,000 in processing equipment in order to manufactures a million dollars’ worth of processed food a year and the plant and machinery require replacement within a maximum of ten years to remain competitive and to counter wear and tear, keep up with technology and comply with hygiene standards.
Export sales have increased by about $4 billion per year, new capital for increased sales = $0.8 billon. Estimated replacement capital =$2.1 Billion
The value added food processing sector (The Job Creators)
When viewing the food industry we need to break it down into its various components to understand how this market functions and where Australia can capitalise.
We can break the sources of food into two categories:
Locally produced food, Plant sourced, animal sourced.
Locally produced food.
Raw Food Exports.
What happens to the food? A large proportion of Australia’s food is exported. The greater portion of these exports involves a minimum degree of processing. In fact we export live cattle and sheep. We export wheat and raw grain; we even allow our surrounding ocean to be harvested by overseas floating fish factories that have zero Australian industry input.
When we export a live animal we miss out on the abattoir. An abattoir is a factory that employs people involved in processing meat, it also requires an input by Australian industry to build, maintain, administer and service the factory.
Live animal exports require a port now foreign owned and a ship also foreign owned. The only component of live animal export is the land that the animal grows on and a few farm hands and a small amount of equipment.
After the animal has experienced its once in a life time cruse it will be welcomed to an overseas abattoir where it will be transformed into a first stage value added processed food product, some of which will be imported into Australia for processing, some of which will be exported to other countries for processing and consumption and some will be consumed by the country that hosts the abattoir.
Bulk grain export it is a little more sophisticated as the farmer has to separate the wheat from the chaff, using an imported machine, the wheat is then transported to the grain silo in a foreign made truck. The wheat silo was built in Australia, if we are lucky there may even be a railway line that functions and a freight train, foreign built to transport the wheat to the foreign owned port where it will be loaded onto a foreign built and owned ship. The wheat will then be transported to another country where it will be turned into flour and transformed into value added processed foods some of which ends up being imported into Australia.
When it comes to the harvesting of our neighbouring seas by overseas floating fish factories the situation gets even better. The harvesting depletes our local fish stocks which in turn creates an environment that makes our local fishing industries nonviable. The harvested fish on the foreign owned fish factory is off loaded in a foreign country where it is further processed and mixed with other fish from all around the world. Some of this product is then shipped back to us and ends up either in the supermarket or on the plate in a restaurant or a fish and chip shop. The poor consumer has no idea as to where the fish has come from. Heard of Fukushima!
When this food arrives in Australia there is limited access to the supply chain therefore it ends up in the hands of the large supermarket chains the large foreign owned food processors and the large frozen food distributors.
We the people who use this food as fuel for our families live on are told that it is a good thing because it is cheaper, more economical, if we did it any other way you could not afford to buy the food. Now think about this. The food has traveled half way around the world, it has been processed in a place where we have no control on hygiene standards it is then shipped back to us and does it then go through a rigorous inspection procedure to ensure it conforms to Australian Food Safety Standards? Does anyone think about the fuel that has been consumed and pumped into the atmosphere because of this “cheaper process?”
Now ask yourself how you gain. You are told the food is cheaper, but is it more environmentally friendly, is it healthier, does it now contain dangerous contaminants, how did it benefit the local community by providing them with a long term stable job?
Ask yourself who gained and who lost. Yes you bought a bit of food that you are told is cheaper, only because all of the industries in your country either closed down or if they were foreign owned shipped their plant and machinery to overseas countries where labour and taxes are lower. But on the way through the foreign owned transnational put your local producers out of business and kept a large portion of its so called savings, there by increasing its Return on Investment.
The money generated by taxes on these forms of food export by Australian Governments on the “activity” is very low when compared to sales. Due to low inputs of local labour and other highly taxed inputs such as fuel or taxes generated on the activity of service providers the overall rate is about 5% unless of course if the producing entity makes a profit that is taxable in Australia after all is said and done. But I am talking about the tax to government generated through the “activity” not the tax on the profit of the activity. In other words for every one million dollars of these raw food products the government would be lucky to receive $50,000.
First Stage processed food exports.
The remainder of the food produced in Australia undergoes some type of processing. These raw foods are either prepared for retail sale, processed into a bulk form for further processing or for export. We process some of our fruit and vegetables for retail sale; the rest is processed for export or for downstream manufacturing. We process our grains into flour, or into raw cereals such as rolled oats, we process our livestock, we process the seafood we harvest from the ocean.
The majority of this processing is in bulk, the wheat is processed in flour mills, and the dairy produce is either sold as retail milk or is processed in large factories of which a large proportion is sold in bulk for export where it is further processed in the importing country.
The money generated by taxes on these forms of food export by Australian Governments on the “activity” is greater than raw unprocessed food compared to sales. Due to higher inputs of local labour and other highly taxed inputs such as fuel or taxes generated on the activity of service providers the overall rate is about 15%. This is still a much lower rate of taxation than what occurs with the high value added sector of the food processing industry which requires a far higher proportion of labour as the small size of the local market fails to warrant the stupendous amounts of automated capital when compared to similar processing plants in nations with much larger populations. For example a food processing factory operating in South East Asia apart from having a far lower taxation rate on activity also has access to a market of 2 billion people compared to the 25 million people living in Australia that is split over six states and is often inaccessible for local producers due to the lack of low cost rail transport and the high cost of road freight.
Note these industries contribute three times more to the local tax revenue collected by governments than the export of raw materials. These industries also provide a corner stone for research and development and support smaller downstream industries in the manufacture and servicing of machinery, packaging, design, and other significant technological development. For every one million dollars of these First Stage processed food exports the government would be lucky to receive $150,000.
Second and final stage value added processed food exports.(The Job Makers)
Australia has lost a large sector of this industry sector over the past thirty years. The foreign owned larger corporations have packed up stumps and moved to greener pastures, or have been sold off to other foreign owned companies ,for example, Nabisco, Heinz, Kraft foods, Cadbury Schweppes, Peters Ice Cream, just to name a few.
The new owners are happy to harvest the technology and the machinery but are loather to invest in new plant and product development due to market size and the cost of production a large proponent of which is the high tax by the three tiered government structure on activity.
The money generated by taxes on value added processed food sector by Australian Governments on the “activity” is greater than first stage food processing compared to sales. Due to higher inputs of local labour and other highly taxed inputs such as fuel or taxes generated on the activity of service providers the overall rate can be in the region of 30% depending upon the degree of sophistication and automation in the production cycle. For every one million dollars of these Second and final Stage processed food exports the government would receive $300,000 which is six times the rate of an exported raw product.
Unfortunately this economic miracle never comes to fruition because the value added food processor that exports goes bankrupt or becomes noncompetitive as it supports the Australian taxation system and because the return on investment is low for the risk they fail to attract the much needed debt free investment required to grow the businesses.
Despite the fact that we have the raw food, we have the people, the technology and a market ready to buy as food producers we are better off to manufacture off shore and bring the raw materials in from Australia.
Now if the Australian governments were to give the value added food processors, the Job Makers, a tax break of half of the money they currently generate for the three tiers of Australian Government at 15% of export sales the return on investment would become competitive for value added export sales from 6% to 21% the risks would diminish, the food producers could attract investment instead of becoming to indebted to the banking sector that often leads to instability collapse or a sale to a foreign owned entity who capitalizes on all of the previous hard work of the locally owned business and then controls its destiny, which can mean taking the facility to another country with the resulting loss of jobs, technology and future opportunity not to mention loss of revenue of the local food producers.
Australia’s food and grocery manufacturing sector (The Job Makers) is both broad and responsive, vulnerable and resilient. Its future relies on business confidence built from solid economic conditions and a political environment that provides stability. This is the Australian Food and Grocery Council’s (AFGC) eleventh annual industry snapshot report, State of the Industry 2019. Highly respected for its in-depth analysis of the sector’s key performance indicators, the report demonstrates and reinforces the value and contribution of the $122.1 billion* Australian food and grocery manufacturing sector. This report provides key data to highlight the sector’s performance and inform the development of policies that are needed to ensure the sector has a strong future in Australia. Jobs are central to the success of the Australian economy and the food the grocery manufacturing sector is Australia’s largest manufacturing sector, representing 32 per cent of all manufacturing jobs. The sector is also one of the biggest employers in the country, providing more than 273,300 jobs, of which 39.3 per cent – just over 107,000 – are in regional and rural communities. The sector is at the heart of regional Australia. Communities rely on it through direct employment and the trickle-down effect this has in boosting and sustaining local economies. And this filters right along the supply chain through the sector’s sourcing of not only agricultural inputs but also other goods and services used in food and grocery production. A better understanding of the sector and its benefits must be fostered to help ensure it can continue to prosper in the regions. The sector is represented right across Australia, with New South Wales, Victoria and Queensland hosting major hubs for food and grocery manufacturing. Together they constitute 85.3 per cent of sector turnover and 79.9 per cent of sector employment. While the sector has a strong presence, it is not growing to the extent it should. This is the result of significant challenges on the domestic front, both in terms of input cost pressures and a deflationary retail market, which are putting pressure on profit margins and impacting willingness to invest. While capital investment was $3 billion in 2017-18, this was a negative 3.5 per cent compound annual growth rate (CAGR) over the previous five years.
The lack of investment is particularly concerning, given the need for innovation, increased automation and modernisation in order for the sector to stay competitive and remain strong in Australia. To this end, the AFGC continues to advocate for mechanisms to provide companies with the confidence to invest. While domestic growth has been small, major jumps have been made in export trade, with a 7.6 per cent year-on-year increase to $34.4 billion. This has been spurred on by increased access through free trade agreements, a favourable exchange rate and the great reputation of Australia’s food and grocery products. China is now Australia’s key export market and in 2017–18 exports increased by 45.3 per cent YOY and 36.2 per cent three-year CAGR to a value of $7.1 billion. For this trend to continue, Australia needs trade and investment policies conducive to improving the competitiveness of Australian food and grocery manufacturers. Such measures will help ensure a growing export market and from that new jobs and investment domestically. To this end, the AFGC has welcomed the Federal Government’s export deregulation agenda and its beneficial impact on reducing the red tape and costs associated with exporting. Beyond 2017–18, the sector will work to strengthen trade, improve sustainability and create a fair playing field for Australian food and grocery manufacturers. Central to this are retail-supplier relationships that incentivise innovation and risk. This would benefit all Australians. The future of Australian food and grocery manufacturing can be bright. This is a diverse sector that sustains Australia, providing jobs and economic benefits. Australians are proud of our products and want to see the sector thrive. But pressures on the sector are real and can hamper growth and provide uncertainty. The right policy settings must be in place for growth. And advocating for positive change is at the heart of the AFGC’s mission.
Tanya Barden CEO, AFGC
The lobby groups that exist for Australian value added manufacturing, have been ignored by our governments and the importance in terms of the well being of manufacturing, (The Job Makers) within Australia has certainly become irrelevant as part of the political agenda. Despite the simple fact that its demise is the disease that currently affects us all in relation to trade deficits, balance of payment problems, Government deficits, the sell off of our national heritage, the erosion of our education, health, community infrastructure and dependence on overseas suppliers even for the most essential items such as face masks to protect us from Covid-19. Our governments are all to keen to treat the symptoms by cutting expenditure rather than realising that the country is currently suffering from a terminal disease that needs a complete economic overhaul.
If you have time I would appreciate it if you could spend a moment reading about my experience and why I see the urgent need to look at methods of re engineering our economy in order to allow the manufacturing sector to grow and prosper. More particularly the small to medium manufacturers (The Job Makers) like myself who are Australian owned and do not have the funds to pack up and move off shore.
I spent six years of my life attempting and partially succeeding in establishing a business in Australia that manufactures and exports cakes (Processed food that is value added to Japan.)
In 1989 I was approached by a Japanese Trading house Mitsubishi (One of the world’s largest trading companies) to manufacture a baked cheesecake for Japan’s largest family restaurant chain (Skylark) I thought the exercise would be a simple one and that the infrastructure within Australia would be supportive of my company’s efforts and would facilitate this activity. This assumption was based upon the general thrust of political rhetoric that is continually fed to us by the media from a massive bureaucratic base somewhere in Australia. The message is loud and clear. Go forth Australian Industry and sell to the rest of the world.
I had heard of government support programs and I had read about how our financial institutions were willing to assist in exporting and I had come in contact with any number of consultants that were prepared to assist in this project for a fee.
This experience allows me to comment from the perspective of a small Australian owned manufacturer about:-
- The difficulty of creating a successful business that manufactures value added processed food and exports it from Australia. More particularly the financial constraints that are currently placed upon manufacturers within Australia, particularly small to medium sized manufacturers that are privately owned, by the taxation system and by the financial institutions that profit from financing them.
- The ingrained structural and cultural problems originating from its colonial roots that prevent this nation, the richest in the world from being able to succeed as a world class manufacturing base.
- A simple solution for overcoming our current trading problems that is practical to implement and will provide benefits for every sector of the Australian community.
- The current economic structure in Australia. Australia is a young country with a small population by world standards. Australia has an economy that is based upon the production of commodity items for its generation of wealth. This structure was initiated by the British in the 1780`s so as they could reduce the cost of keeping prisoners in their jails.
- Australia became a country that could provide cheap commodities to the empire’s manufacturers from which wealth could be created. The wealth was and is produced by the activities of commodity production.
- The economic model upon which Australia was founded was not set up to transform these commodities into value added manufactured items. This was all done close to the markets where the products were sold. Our constitution our tax system and our way of thinking is structured around this basic premise. With the advancement in technology and a radical change in the dynamics of world economies we are now in a position whereby we have to manufacture goods within Australia in order to maintain the standards of wealth we have been accustomed to.
- We can produce these goods in Australia but due to the internal structure of our economy we cannot sell these goods and make a profit on overseas markets.
The reasons for this are: –
- Our population is very small by world standards and our manufacturers, those that are left, only cater for a very small local market.
- There are large distances between the population centers, further reducing the market size. For small to medium sized manufacturers that have to be regionally focused this equates to a maximum market size of three to four million people.
- Our manufacturing industries are young by world standards and the Australian owned companies, those that have not been sold or decimated by Government economic mismanagement, due to their size are quite often financed by the resources of the owners and do not have access to the Stock Exchange.
- We compete with manufacturers from all over the world. There are manufacturers in the U. S.A. Population 320 million, Japan population 120 Million, Europe 240 million, and now the growing economies of South East Asia. Many of these companies have long histories 100 to 200 years and have: Accumulated large financial reserves, they are supported by the governments of their native countries who see them as an integral part of the society.
- These governments understand that without a manufacturing base, very little wealth can be generated and therefore government is unable to provide for the needs of the community.
- These manufacturers can develop their local markets that are much larger than ours and far more accessible before the need to tackle export markets. Australia is an island; its population centres are isolated by huge distances. This creates immense difficulties for manufacturers because we cannot get the high volumes that permit us to become world competitive without entering these overseas markets.
- A further impediment that is unique to Australian owned manufacturing is that in nearly every instance it must compete with a larger foreign owned Corporation that is based in Australia, or it has to supply one of these foreign owned companies who are dominant in the retail food sector. In other words many of the decisions relating to purchasing of Australian produced goods that are still in Australian hands are governed by overseas interests.
- Our government in its wisdom decided to reduce tariffs which have eroded our ability as manufacturers to develop our local businesses. Somebody forgot to calculate the cost of development when designing the economic equation for Australia.
- We have a manufacturing base that is in its infancy, that only has a small market base that, has to employ one of the most expensive labour forces in the world, that can only supply very small local markets prior to exporting, that is exposed to competition from overseas manufacturers, that supply large local markets and have already developed the manufacturing capacity to supply their own markets plus overseas markets.
- We have a taxation system that supports the development of housing stock by allowing investors to claim interest on borrowed money for rental housing as a tax deduction. Effectively directing money into an activity that drags imports into Australia, does not create any long term sustainable jobs and ties up much needed money that should be used to buy up to date machinery for our manufacturing sector.
- We have a compulsory superannuation scheme that generates a 15% earn for the government. All compulsory superannuation payments are taxed at 15% on the way in. Currently that money is invested on the share market, in property trusts and some of it is invested overseas, possibly in overseas manufacturing activities in countries where there is greater government support, manufacturing which intern offers the funds a greater return than that which is available within Australia.
- None of this money is made available to small to medium sized Australian Manufacturers (The Job Creators) that are privately owned and yet our activities contribute vast sums of money to these funds.
- We have a wages system that penalises manufacturers that are succeeding. The penalty rates of time and a half and double time benefit the tax collectors and nobody else. Talk to any worker and they will tell you the same thing, the tax rate on overtime is too high and it’s not worthwhile doing. Talk to any manufacturer and they will tell you overtime makes manufacturing extra product non profitable.
- When you manufacture in Australia and the company produces for a small market there is a high labour input into the manufactured item because as manufacturers catering for a small market our companies cannot invest in large-scale plant immediately. So to increase output we have to work our existing experienced staff longer hours, especially when you cater for initial Export orders. The only beneficiary of this exercise is the coffers of the Federal and State governments.
- Our grants schemes. The export market development grant is a classic case. This grant allows an exporter a rebate of 50% of expenses that have incurred on overseas marketing of its products over and above $30,000 per year up to $560,000 per year for a period of years. The first problem with this grant is that small to medium sized Australian manufacturers (The Job Creators) find it very difficult to spend $30,000 on overseas marketing especially when they begin to export. Most of the expenses in developing Export markets for small companies involve costs associated with capital, infrastructure, staff training, increasing working capital, and product development (Modification of product to suit the overseas clients’ needs). None of these expenses are catered for in the Export Market Development Scheme.
- A further irony of this scheme is that it is almost revenue neutral from the government’s side. Say a company spends its total allocation on overseas Marketing of $550,000. Say 80% of its marketing costs are spent in Australia. The company will therefore spend $440,000 in Australia. The mere fact that the company spends this money in Australia primarily on labour, will generate about 35% of $440,000 for the government in the form of internal Taxation. This is an amount of $154,000. The company will then be eligible for a rebate of $260,000. This rebate is classified as earnings and is taxable at the company rate of 30%. So if the company is trading profitably it will pay tax back to the government of 30% $260K = $78K
The real level of government support therefore from E.M.D.G is:- $260,000 – ($78,000 + 154,000) = $28,000 This is for a company that has spent a total $550,000 on overseas Marketing.
Unfortunately all of the above are real facts and if you have been a person that has run a small manufacturing company, a job creators, that does export from Australia and experienced first-hand these inadequacies within our economic frame work you would wonder as I do about ways and means to change the frame work so as our manufacturers could be successful without having to die of stress related diseases or go bankrupt as many have, before attaining their goals.
Australia`s Growing debt crisis.
Australia`s external debt A looming disaster
I am writing to you in order to relay my concerns on the current serious dilemma facing Australia as a nation. Way back in 1982 Australia had a total foreign debt of only $18 Billion dollars, by 1996 this figure had risen to $200 billion and is now approximately $2000 billion with the advent of CoVid-19 stimulus packages? This means we are borrowing about $160 billion per year from the rest of the world; approximately $6,400 for every person, man woman and children who live here. The average per capita income over the whole of the world is $2,920 per year. When we consider that of a population of $25 million only $10 million of us earn an income this annual debt per wage earner rises by $6400×2.5= $16,000 per year or 5.5 times the average global per capita income. Clearly this rate of borrowing is unsustainable and will come to an end.
We are increasing our debt by a rate of 13 billion dollars a month approx. or $160 billion per year. Unfortunately we are a nation of only 25 million people of which only 10 million people are in full time employment. Of these 5 million people actually work in the manufacturing, mining, export services, farming and tourism industries (What I call productive industries). These industries along with some others provide our nation with either exports or products that are called import re-placers.
Currently each of those 5 million people must generate at least $160 billion of extra sales per year for the country to balance its trading account with the rest of the world. This assumes an item requires 30 % labour, 30 % material cost and 30% overhead and 10% profit. When the overhead and the materials are further analysed; provided the materials and overhead are supplied from within Australia the total labour content increases to about 50%. This would mean that we would have to generate an additional amount of labour of $80 billion or if we assume that the 5 million people who are working are currently earning $100,000 dollars per year which includes employers on costs including work care payroll tax and superannuation we would have to earn an additional sum of $80 billion divided by 5 million workers which amounts to $16,000 per worker or 800,000 extra jobs at $100,000 per person.
Unfortunately this scenario is flawed because to be world competitive we cannot produce this extra $160 billion worth of sales without the injection of a large amount of capital approximately $70 billion. A greater proportion of this money is needed to purchase machinery that will permit us to manufacture at competitive rates with the rest of the world.
Capital Calculation: This is calculated using the following assumptions. To generate $1 million worth of sales in this sector requires an input of capital to cover stock, debtors and plant of about $400,000. Increased Stock $100,000, new plant $200,000 and increase of the debtor’s ledger $100,000.
To reduce the dependency on debt we have to:
- Increase sales of our commodity exports.
- reduce our imports
- Value add to the commodities we produce for local consumption or export.
This will require increasing farm output, mining output, and manufacturing output.
To achieve this end will require the investment of $70 billion and to attract that investment we require a plan which will allow that investment base to earn 20% per year for it to be competitive and to factor in the risk.
A proportion of this financial hole can be filled through increasing output in the value added food sector.
We currently export $34 billion in food produce a large proportion can be redirected for import replacement or it can be further processed to increase the value of our food exports.
Let us look at a model where we halve our food imports to $15 billion per year and increase our food exports from $34 billion to $50 billion by value adding food processing.
This would require us to increase our food processing capacity by $36 billion per year assuming we would have a 20% raw food input. To achieve this result will require an initial capital investment of approximately $15 billion. To attract this capital will require a return on investment of 20% or a return of $3 billion from the $36 billion of food produced. Currently the increased production of this food would create approximately $10.8 billion in extra taxes generated from the activity and a profit of $0.9 billion for the investors, a gain of $10.8 billion for government and a shortfall of $2.1 billion to attract the investment.
The number of jobs created assuming a 20% labour cost total wages of $7.2 billion at $80,000 per year would be 90,000 jobs a saving of at least $1.8 billion on social welfare payments at $20,000 per person per year.
Hence it would make a great deal of sense for the government to revaluate its tax take on the activity and also on the initial capital investment expenditure. For very little shift in its tax take on the activity it is possible to balance the return on investment equation.
Let us have a look at the initial capital investment.
Let us assume that the tax generated through the expenditure of this capital is about $20% and the governments are prepared to forgo those taxes then the initial investment is reduced by 20% or an amount of $3 billion there by reducing the initial investment to $12 billion. To generate a return on investment of 20% from $12 billion = $2.4 billion.
Currently the increased production of this food would create approximately $10.8 billion in taxes generated from the activity and a profit of $0.9 billion for the investors, a gain of $10.8 billion for government and a shortfall of $1.5 billion to attract the investment.
If the three governments are prepared to forego their tax take during the initial set up and then are prepared to reduce their tax take on the new activity you can see it is very easy to obtain a healthy return on investment.
Another way to achieve this type of modelling and to attract this investment is from the compulsory superannuation funds as the government currently collects a 15% tax input on money flowing into these funds. If the government were to forego those taxes for Australian based value added projects that were free of tax on initial capital and had a reduced taxation rate on the activity you see would these much needed capital flows into Australian owned enterprises which would be able to soak up the current looming unemployment crisis.
The Problem with increasing farm output.
The problem with increasing farm output is that to grow more you must either make the land more productive or you must have more farming land also you must sell the produce and when there is more commodity available the price goes down. Furthermore our total food exports from Australia are approximately $100 billion per year. This is made up of $66 billion in raw food and $34 billion in processed food. To significantly change our balance of trade position through the increase of farm output we need to treble our output, this is impossible. Currently our farming land is becoming less productive and we cannot increase its size due to massive environmental problems.
Return on investment in Manufacturing must equal twenty percent or more, not six percent!
Our environment is not only unique and saved from the abuses of man it is also clean, by world standards and anything grown here can be sold to the world with that in mind. People worldwide are becoming more and more aware of the environmental disasters that have befallen their food chain, the ones with wealth will pay more and more for clean healthy food as these environmental problems continue.
Previous governments over the past thirty years have always touted an increase in our food exports but have failed to create a sustainable economic plan. Any plan must incorporate a method of ensuring there is sufficient return on investment so as to attract the funds that will build the factories that produce the products.
Currently we produce about 100 billion dollars’ worth of export food sales per year. Of this 34 billion is processed food which is exported.
Processed food covers a broad range of foods and incorporate: First stage food processing, primarily bulk products for industry such as 25kg bags of flour and sugar, 25kg blocks of cheese. These products are packed in containers and are sold at comparatively low prices per kg. Also second stage high value added food products that are sold to the end user either within the food-service or retail markets. These products can be sea freighted by container where the demand exists or by air freight and are sold at about five times more per kg than the first stage food products.
The idea of governments has been to convert the first stage processed foods into the second stage value added processed foods and sell them for export. Hence increasing the value Australia obtains for its produce by a factor of five. The aim is to increase the revenue earned via this value added processing by many billions of dollars. As previously discussed, it is possible to increase the output of the high value added food processing sector by import replacement combined with increased exports of selective high value added food products by an amount of $36 billion per year.
The investment required to produce this food is $36 billion x 40% = $15 billion. To attract this amount of money means Australian industry must compete for it on world markets, and prove to the investors it returns them competitive profits. These investors are currently looking for returns in the order of 20 % per year or $3 billion per year after tax.
Currently the average profit on sales for the high value added processed food industry is about 8% on total sales. If we were to make 8% on sales of $36 billion per year we would make a profit of $2.88 billion which would incur tax at 30%, this generates a net profit to investors of $2.016 billion per year.
Furthermore the set up costs involving development of new products, restructuring existing products for new export markets R and D, restructuring of the work place, changing the attitude of the company to enable it to be export focused have not been included but you can safely say for every product developed there will be a huge initial investment particularly when dealing with new products in cultures that are different from our own.
In the first years of this development cycle it is safe to assume these costs will be at least 10% of sales.
If we assumed an ideal situation, the capital being available, within a year Australia could generate $36 billion worth of sales. The industry would need to generate a further income of $3.6 billion so as to cover developmental costs.
To satisfy the requirements of the investors we need to generate: –
A return of 20 % on an investment of $15 billion = $3.0 billion after tax.
Company profit = $3 billion/0.70 = $4.3 billion
Development costs = $3.6 billion
Total = $7.9 billion
Calculated percentage return on sales in the processed food industry to attract investment to generate $36 billion worth of additional export sales equals
$7.9 billion divided by 36 x 100 = 21.7%.
This means the process food industry must make a profit of 21.7 % return on sales if it is to become competitive in attracting the investment funds required for it to generate $36 billion worth of export sales in processed food for Australia.
Currently the industry only generates an 8% profit on sales. This will not generate a higher enough return to compete in world capital markets. This means that one of the major premises of our government planners in solving our balance of trade problems is fundamentally flawed because it will never be able to attract the investment to generate the additional volume of sales required to help solve this nation’s problems.
When exporting we cannot set our price as we would like it to be. We must compete against other countries and we must also overcome tariffs of 30%, severe quality restrictions and countries with heavily subsidized industries. To generate interest in Japan for our products, they must overcome all these hurdles and also be 20 % cheaper than the local product before one can generate buyer interest. The reason is because it is more complicated to buy some processed foods from overseas than locally produced products and there must be a significant price advantage for the buyer in the importing nation.
Unfortunately this also causes many problems for Australian products, as they are too expensive to compete overseas and therefore even though we have the manufacturing capability we cannot sell them because they make a loss for the companies producing them.
So to sell new products for export some Australian companies are selling at meager profit margins down to as low as 0%
This means no investment for the Australian processed food industry unless by foreign buyouts at ridiculously low prices.
HOW TO SOLVE THE PROBLEM?
- The government must start to rebate value added manufactured product as a percentage of export sales. In other words the government must cut its tax margin on sales into new markets in order to allow Australian manufacturers (The Job Creators), the profits that will enable them to sustain their growth for export. The government could direct the superannuation funds into Australian manufacturing for export and import replacement by reducing its 15% tax rate on monies that was invested into Australian owned companies that are new and emerging Australian exporters.
- The government must reduce the incentives within Australia for speculative property development that currently is of little assistance to Australian Exporters of manufactured goods. This would make life a little bit tougher for the banks. They would then have to learn how to lend to manufacturers (The Job Creators) and would be forced into developing technology to better understand the financing requirements of these companies.
- The government could do a deal with its work force to reduce the penalty Rates and at the same time offer a tax incentive, particularly to younger People who are trying to buy a house or are trying to pay off their housing Loans. Say an amount of a maximum of $20,000 per annum that is paid off the Principal of a home loan, or is saved in a housing fund and must be used for purchasing a house or the tax benefit is forfeited. This would increase savings and make more money available for investment into manufacturing. By increasing savings we would also keep downward pressure on interest rates and reduce the value of the Australian dollar thereby making our exports more competitive.
Rebate Value Added manufactured exports from Australia.
Currently to produce $36 billion of value added processed food assume 27% labour 35% overhead and 30 % material with a profit 8 % one would then spend the following.
The tax revenue to the three tiers of Australian Government.
Labour: We have estimated the tax take by government of the cost of labour at 40% because the wages are taxed at about 25%. The net wage the worker is paid is then taxed as it is spent. In the form of GST, Fuel Excise council rates and embedded taxes on purchases.
Materials: We have estimated the embedded tax take on materials at 25% which incorporates the tax on all of the inputs by government to create the materials for processing.
Overhead: We have estimated the embedded tax take on overhead at 35% which incorporates the tax on all of the inputs by government to create the overhead a value added food processor pays.
Profit: The company tax rate on profit in Australia for SME`S is 27.5%
Calculation of tax generated on $36 billion worth of value added processed food.
Input Cost Taxation rate. Revenue
Labour $9.7 billion 40% $3.9 billion
Material $10.8 billion 25% $2.7 billion
Overhead $12.60 billion 35% $4.4 billion
Profit $2.9 billion 35% $1.02 billion
Total tax generated by increasing export sales of processed foods $12.0 billion per year. Tax generated on material inputs if exported = $9.7×15% = $1.46 billion
Net gain to government in taxes= $12 billion – $1.46 billion = $10.54 billion.
We stated that currently the industry generated a profit of 8% on sales, therefore generating a before tax profit $2.9 billion we have also calculated that it needs to generate a profit of $7.9 billion during the development cycle in order to attract the required investment (which could last five years at least and possibly 10). The gap is therefore $7.9 – $2.9 billion or $5.0 billion per year.
This additional economic activity will generate increased revenue of $10.54 billion for the government. It will create 90,000 long term sustainable jobs and save the government $1.8 billion a year in welfare payments. The reason it does not happen is because the investor’s return is to low and the government’s return is too high.
If the government were to return $5 billion of its $10.54 billion to the investors then we would see the investment arrive and our processed food industry and our agricultural industries would well and truly become the economic engine for this country to grow in the future.
This figure based on sales of $36 billion means the government would need to rebate exporting food processors at an average rate 12.5 cents in the dollar.
Unfortunately there are varying degrees of processed foods and it would be necessary to break these up into different categories with a higher incentive directed towards the industries that could generate higher returns to the government.
Analysis of the first stage bulk food processing business.
Historically Australia has been a producer of commodities. To get the raw materials to export market has required some form of processing. This involves a high capital input and a minimum of labour. We have successfully developed large flour mills so as to process our wheat into flour, we refine sugar, and we process our dairy produce into large 20 kg blocks of cheese.
One finds that as the less sophisticated products require less labour and more capital. For example a flour mill is almost a big machine that grinds wheat into flour, the cost of labour as a ratio of sales is far lower than for a sophisticated value added food product that enters the export food service or retail markets.
These large companies are viable in Australia and contribute a lower proportion of tax as a percentage of turnover than the higher value added food processors see example calculation.
$1 Million worth of flour sales may only generate a 17.2% of tax on sales when compared to a value added food processing activity at 30% on sales.
Item %Cost $Cost Tax generated $
Labour 15% 150,000 60,000
Overhead 15% 150,000 52,500
Material(wheat) 60% 600,000 30,000 at 5%
Profit 10% 100,000 35,000
Total tax $172,500 or 17.25% of sales
$1 million of flour produces $4 million worth of bread it will contribute 33 cents in the dollar in tax. I E $1.32 million to the government coffers.
We have excess wheat, sugar, dairy and meat we also excess labour: it is in our interests as a nation to increase our exports of high value added food items. It can over time generate substantial government income. It can make a significant dent to our national debt and it will help secure long term secure employment for the people who live in Australia.
Why is the high value added food processed industry (The Job Creators) and other high value added industries (Manufacturing) being taxed at a far higher rate on their sales than their commodity producing counterparts.
There are fundamental historical reasons but they do not matter because the figures say it all and all we need is for our government to realise that therein lies a package that will satisfy Australian and overseas investors, environmentalists the labour movement, our prospective customers and the establishment.
All it requires is the impetus and we as a nation can change the face of this continent and its future direction, one simple act of parliament.
The inequity within the taxation system is structural and has been formed from our colonial history. The model of Australia was built by the East India Company, its purpose is to exploit the land and achieve a maximum return to the overseas investor.
There was a stage in Australia where we realised the importance of creating a manufacturing base (The Job Makers) but the baby was thrown out with the bath water when the free traders entered the room. The tariffs were removed; mind you those tariffs not only increased the price of foreign goods which allowed Australian governments to continue to tax the manufacturers at a different rate to the commodity producers but also fed those same governments with revenue. When the tariffs were removed the revenue to governments disappeared, but the same taxation regime continued, making it impossible for our manufacturers to stay in business.
Australia reverted back to its old ways of exploitation. The old factories that gave people a long term job are now being turned into skyscrapers built upon a financial Ponzi that feeds the banking cohort. Those buildings are now made from 60% imported goods.
If we are such a clever nation we can analyse the percentage tax contribution to sales of every product that we manufacture. Our governments can rearrange the taxation system so as the value added component of all industry including the food processing industry is not restricted, simply because it has a higher labour and activity component because it has not as yet had the chance to enter large overseas markets and obtain the capital required to automate its processes.
Rebate value added food processors (The Job Creators) on their export sales.
I have just committed an act of heresy in the land of free trade. We are not allowed to discuss an export rebate because the lawyers have defined that as a subsidy and those subsidies contradict the rules of free trade. The rules that favour large corporate structures over small locally owned businesses that provide the glue that holds our communities together. These entities provide the jobs, create innovation, allow technologies to develop and grow within our communities but to make the system fair would somehow contravene those rules. These are rules that have been made by people who have never worked, run or lived in a local community and have never got their hands dirty at the coal face. These rules favour the pirates who exploit communities and do not consider the development and wellbeing of the family unit in our societies as something that requires consideration, they are not community collaborators.
The solution is very simple. All our governments need to do is categorise our food exports into Raw, First stage bulk processing and High Value added processed food which create jobs. Our governments have the ability to analyse and measure the tax is currently being generated from these activities. That is 5% on raw foods, 17.5% on first stage bulk processing and 33% on High value added food processing.
It is very simple to calculate the value of produce a manufacturer exports and to rebate 50% of that amount to the manufacturer (The Job Creator) during the first five years of a products life cycle. It is also very simple to extend that period if required.
That rebate would alter the return on investment to the high value food processor significantly while at the same time generate additional revenue to government resulting from the successful and sustainable viability of the manufacturing activity.
The government structures are already in place to administer such a scheme. The investment is available through the superannuation funds combined with overseas interests and the public.
This money must be rebated on proven export performance and as a percentage of export sales. It would then be part of the profit of companies; a requirement of the rebate would be that it would have to be reinvested into the company either to reduce debt or to continue the growth cycle.
The returns and the balance sheets of these companies would greatly improve, making them stronger, thereby allowing them to attract further equity investment and finance. This would allow them to invest in the sophisticated machinery that will ensure they are world competitive and permit us to compete on world markets. Eventually this would lead to an increase in the value of the company and a return to the investors.
With the growth in these job making industries Australian agriculture will need to improve productivity to increase output.
Currently we produce about $36 billion of food a year that leaves Australia every year and is processed into $150 billion overseas.
The $36 billion of increased value added food processing would therefore require an input from the agricultural sector of $12 billion of raw food.
This increase in demand by the Australian processed food industry (The Job Creators) would benefit farmers as it would tend to put upward pressure on exported Australian commodity food items that would now be sold as processed food with the image of clean and healthy.
This area of food production would tend to lend itself to an increase in the emphasis of quality, an increase in the diversity of species of food grown and farmed in Australia and massive developments in the Agri technologies which are a long term and essential part of mankind’s ability to survive in the future and will lead to a better planet.
Why we do not have a coherent and workable plan to develop manufacturing (The Job Creators) in Australia why have our successive federal governments not planned such a move? Why are we not screaming for it, why are we instead wasting our energies on trivia, rather than focusing on the main issue which is to develop our nation into a self-sufficient and sustained economy that is not dependent on increased exposure to foreign debt in order to try and maintain its current standard of living.
We have so much to look forward to, to go out and work for such opportunity and yet we seem to have spent all our energies bickering and arguing about the most trivial matters.
We are most of us in some way either refugees, outcasts, displaced people or those who are indigenous surviving a terrible genocide.
We have become embroiled in petty skirmishes between ourselves; instead of realizing we have to work together, to benefit us all. We have lost our direction.
We have become a nation of apathetic slobs.
Consider the following Ancient Japanese proverb. When you are climbing the mountain it is impossible to see the whole of the mountain.
In other words when climbing the mountain one becomes so involved in the climbing process that one forgets the mountain and one can get lost.
Why has it happened in Australia?
It`s convict origins created unique structures, not seen in other western economies. The purpose we were told was to make jails self-sufficient; the reality is a very different, Australia was created so as to provide the empire with a strategic military base and to provide a source of raw materials for its every hungry manufacturing sector. The internal economics were of the nation were of no concern. Labour was provided at no cost. The employer had to ensure labour worked. Labour could be replaced with more labour. Life was cheap; people died and were subjected to terrible cruelty. The sole objectives were to make jails self-sufficient and to provide a reliable source of low cost commodity items to the mother country. Australia became a commodities supplier to Britain. (Britain exported grain from Ireland during the potato famine whilst a million Irish peasants starved to death)
Britain was responsible for the Australian constitution and for the economic structures that would enable it to get access to cheap commodity items. In return Britain provided a trading structure, and a judicial structure which bought about a feeling of comfort for the establishment and a defense pact. Britain also demanded loyalty and support during its wars and was negligent in its defense of Australia during world war two.
We were rescued by the Americans who in turn colonised us. We are currently competing with our Asian neighbours and have been assimilated into their economies during the past thirty years. The ties with Britain and the U S A are no longer as strong and the relationship between our supply of commodity items in return for defense and economic support is declining. This means we have to stand on our own two feet.
Unfortunately we still have a constitution and an economic structure that has not changed rapidly enough. It is adversarial in nature has eight separate jurisdictions based upon a medieval system, run by an unaccountable ruling elite. This is evident due to the spiraling foreign debt, the decline in living standards, the slowdown in wages growth, the decline in the value of the dollar, the increase in unemployment, restrictions on welfare and more. This is what we squabble about. No better than observing a pack of seagulls fighting over bread scraps.
Our economy is still based on supplying commodities to our mother nation whether it is Britain, U S A. Now China and Japan but Japan and China are free marketers, they buy at the best price and not for strategic reasons or for reasons of heritage and we have to compete.
Unfortunately because we were preferred supplier and supported by our mates we got used to a high wages structure. We are also very sentimental, as most people are about our heritage, which is predominantly from overseas. We have become an easy target for imported goods.
We have been conditioned as a society to buy imported items. Most countries have populations that are not conditioned this way and in some cases perceive imported items as a threat and label them as inferior. As a result of this conditioning we have been conditioned into buying a lot of imported consumables. These have flooded into this country through the reduction in our tariff barriers. As a result of our small population and our isolation from the rest of the world we are also more prone to crave these items and therefore are prone to purchasing them especially when they are much cheaper than the locally produced goods.
If we do not maintain our wages structure our internal economy will collapse and currently it is supported by overseas borrowings and sell offs.
Another serious problem we face is that with the internationalization of Australia we are seeing a growth in imported processed foods. These items are competing directly with the Australian market. Say soy sauce is very cheap. More people use soy sauce. This means demand for tomato sauce may go down. A tomato sauce manufacturer tries to produce Soy sauce that comes into Australia from China where labour is very cheap and the product is heavily subsidised by the Chinese government. Australian Sauce Company cannot make this soy sauce and make up lost sales on tomato sauce unless it goes and invests in China. This becomes the inevitable which is what has happened. The other option is it tries to sell high quality sauce overseas this may not work the company fails. Hence we import tomato sauce and we import soy sauce and we have a smaller number of tomato farmers.
Australia only has a one levered economy! The interest rate lever.
This lever has broken our nation. As world demand for commodities increase the value of the Australian dollar increases because there is greater demand for Australian dollars. The last rise in commodity prices saw a boom in the mining sector but that boom decimated the manufacturing sector and led to the exodus of the motor car manufacturing industry. This all occurred whilst the Reserve Bank of Australia waved the interest rate lever at the behest of the banks.
Interest rates go up, The market buys our dollar because interest rate is high.
Dollar goes up because it is in demand because it pays a high interest rate. The interest rates have always been comparatively higher in Australia than in most parts of the world.
Imports become cheaper because Australian dollar is high, Australian exports are dearer so demand for Australian exports slows. This means Australian exporters are weaker and overseas exporters are stronger ensuring that Australian exporters will find it even harder to survive.
For manufacturing of high value added food processed products (The Job Creators) to be sustainable, both currency and interest rates need to be stable or it becomes an imperative that our government is prepared to intervene to cushion the economic blows to these businesses in the long term interests of the nation instead of the short term ideology of economic rationalists.
WHY IS THIS HAPPENING? I DO NOT KNOW.
There is a fundamental difference between Western society and Asian society at least in Japan.
The ethos within these Asian cultures is that the Society has an obligation because you exist to provide the individual with a purpose in life.
The individual on the other hand recognises society’s obligation and accepts his existence as a useful member of society.
In our society we appear to have developed an ethos whereby we only provide a purpose for individuals if they can make the grade.
The individual is taught to get as much as they can possibly grab.
The relationship between society and the individual is not bound in a social contract.
Asian economies recognise that Manufacturing (The Job Creator) is the engine of any economy in today’s technological and traded goods world and this engine provides them with wealth that in turn can be utilised to increase standards of living. They structure their economies on the following basic principal.
“We must ensure we have the economic conditions set within our society to enable the manufacturing sector (The Job Creators) to profit and grow. This involves subsidies tax benefits and other sophisticated economic manipulations, it ensures that these manufacturing entities which are the engine of the economy are sustainable.”
In our culture we have a set of rules and we say to the manufactures, you must obey all these rules and if you can make a profit then you can stay here and prosper if you can’t go away. We know we need you but we are not obliged to change our rules for your profit and we see no need to contribute to the growth of the engine.
The reason we behave this way is structural and formed from our colonial history of exploitation rather that developing our nations assets for the people who live here.
Unless there is a fundamental shift in the way our society perceives its manufacturing base and we as a nation begin to cooperate with ourselves to make the manufacturing sector (The Job Maker) economically viable, which means profitable, by providing it with world competitive returns on capital we will sink further and further into the economic mire.
This means government must realise it has to share its revenue with the industry. Government has a responsibility to Australia to do what is best for Australia.
Government is the facilitator, government is the only instrument that can change the economic framework so as the manufacturing sector in Australia can grow and prosper. It is not acting the best interests of The Australian People by continuing to restrict the conditions for the growth of the most important contributor to our nation’s wealth. Government can no longer afford to isolate itself from the development of manufacturing (The Job Makers) as it is by its ingrained structure and the past development of this nation the major contributor to costs and therefore the entity that is restricting and in many instances destroying this fundamental component of wealth creation in today’s Australia.
I dedicated seven years of my life to developing a business that exported cakes into Japan. It is as a result of this experience and being subjected to the ingrained myopic minds of the establishment that rules Australia’s most powerful institutions that I write my ideas in the hope that in some small way my thoughts can contribute significantly to a redevelopment of thinking within this country so as we can start to grow up and all work together for our common good.
Thoughts for the up and coming delayed budget.
Will the budget address the major issue facing it, the issue of how Australia will come to terms with the fact that we are currently borrowing $160 billion a year from the rest of the world?
To overcome this issue we must sell more in dollar value to the world and buy less.
This means we have to make more things in Australia and we must purchase those items instead of purchasing items from overseas. We must also make things in Australia and sell those things to the rest of the world.
The only way we can do that is firstly have a local market for our produce and secondly be able to get to a stage whereby we are producing so efficiently for our local market that we are able to go overseas and compete.
There are currently a number of serious impediments within Australia that make the above scenario impossible for Australian manufacturers to achieve. This is a major problem for Australia; the government who has control of the taxation system and makes the laws relating to taxation must become directly involved in the manufacturing (The Job Creating) sector.
The Australian government has created a taxation system that is biased against small Australian owned value added manufacturing companies.
If you look at the method of government revenue raising activity in Australia it mainly revolves around taxing labour. These small companies are heavily reliant on labour to produce their goods. Due to the small Australian market they cannot justify the high capital cost of automation and often have a component of 40% of labour involved in their total input cost.
The government raises about 40% from this input cost in the form of its own tax system. Group tax, payroll tax, superannuation, work care insurance and sales tax. There are other indirect taxes imposed on this labour cost.
For a small manufacturer to begin exporting it must initially employ labour to meet its increased production demands. Immediately it does this government receives a boost in revenue.
A company during the initial phase of gearing up for the export of manufactured items from Australia will have to spend money on.
- Improved quality programs.
- Redesign of products in order to cater for the export market.
- Upgrading of its management systems.
- Staff training in order to achieve the new standards set by the demands of overseas markets.
- Redesign of its manufacturing process.
- Overseas marketing.
- Investment in new plant in order to produce for the export market.
- Investment in working capital to allow for increased stock holding and an
- Increased debtors ledger.
The Australian government taxes all of this investment.
A small company one that spends less than $30,000 over two years on export marketing you will not receive one cent in support from the government support programmes.
Large high capital investment companies apart from certain exceptions, clothing and car manufacturers, often are involved in activities within Australia that do not add a great deal to the products that they process, for example a flourmill, a mine, a large milk or cheese processing plant does not add a great deal of value to the product it develops. Furthermore these activities due to the nature of the equipment involved have very little need for labour and once they are operational, and traditionally within Australia they are operational due to our historic dependence on mining and farming, contribute very little in the form of revenue as a percentage of their turnover to government revenue raising activities. Many of these companies are foreign owned and have obligations to supply bulk processed goods to their subsidiaries in other countries that we are directly competing against for the market share of value added products.
These countries have large populations and advanced economies unlike that of Australia: and have already invested in capital in order to provide value added manufactured items to their own large local markets. Furthermore these countries governments heavily subsidise the export of value added items in the form of tax rebates and other subsidies.
These companies dominate the committees that advise our government on policy, particularly within the processed food industry.
If you analyse the two types of companies you see a major difference in the amount raised by government in the two cases.
A large processed food plant may have a total input of labour including management of only 10 % of turnover. The government will only raise 4 to 5% from taxing this labour input.
In the case of a chocolate maker or a cheesecake maker like myself, this percentage increases to 40% the government will raise 16 % from the labour component.
I ask you where the level playing field is?
The scenario gets worse as you begin to analyse the other inputs of both activities.
The large food processor is obtaining produce directly from the land and as yet has not passed into the hands of the infrastructure of the nation to be taxed.
Yes it has been grown and there is a tax component. Both large bulk processor and the small value added food processor have this input because the small processor purchases off the bulk processor and there by pays for this cost.
As soon as the small company places an order it encounters the government revenue raiser. The phone is taxed, the person receiving the order is taxed, the transporter pays tax on the fuel, the box maker pays tax for its staff, By the time goods are received by the small processor the government has received at least 10 % of the value on the purchases.
The bankers and the hangers on the accountants the lawyer and the consultants are lining their pockets because the company due to its slim returns its under capitalisation and economic fragility becomes prey to these entities. Further reducing its chances to become successful at the primary objective which I remind you it to make things in Australia and sell them overseas at a profit. Our tax system does not allow our manufacturers to make a profit.
Because of this these small companies will try to export but in the end they will become too heavily burden with debt and cannot grow in order to resolve the balance of payments problem Instead irony of ironies, the bankers the lawyers and the accountants will close them down and feast on their rotting carcasses.
No wonder nobody wants to value add in Australia no wonder we have a growing debt that appears unsolvable.
The elected politicians of Australia are responsible to the Australian people for there long term future and it is up to those democratically elected people to create laws that will bring the best opportunities to this country and its inhabitants. By allowing the current tax system and the current way small manufacturers of value added products are biased against is not in the interests of any person living in this nation in the long term.
The story of The Cheesecake Factory.
In mid-1989 I received a phone call from a gentleman called Earn Healy, I had known Earn for about four years and as he worked for a large cheese processing company that supplied us with our cream cheese and also sent large quantities into Japan I would on occasions in a tong in cheek fashion mention to him that I would like to sell cheesecake to Japan and would he inform his contacts of this fact.
Well Earn rang me and he said would you like to sell cheesecakes to the Japanese, I of course said I would and he told me he would be in Melbourne in a couple of days and if I wished he would arrange a meeting with his contact.
A couple of days later dressed in a suit and tie Earn and myself were standing in a lift going to the 45th floor of Collins towers to meet with Mr. Matsue from Mitsubishi Trading. The same building in which Malcom Fraser had his office.
We entered the reception area and I was overwhelmed by the view, it stretched out at 180 degrees across the bay encompassing Geelong to the west and the Dandenong’s to the East, I was watching the weather and clouds changing before my eyes, In the reception area was one of those floor to ceiling windows that you could stand at and think that you were falling off the side of the earth. I looked directly downward and across the road on the adjoining block a large hole was being dug the beginning of another multi story building.
Mr. Matsue greeted us in the reception area with a stiffness and formality that only a Japanese person could perform and we were off to lunch.
Having never eaten Japanese or raw fish I was a little lost at lunch.
Matsue San ordered the meal my only proviso was no snake please.
I discovered from this meeting that it was acceptable to slurp your Miso soup, and if you didn’t slurp it and make a noise perhaps you weren’t` enjoying it.
The purpose of the meeting was to discuss the possibility of making a cheesecake in Australia and shipping it to Japan in a frozen form. The customer inquiring about this product was Japan`s largest restaurant chain Skylark who ran over a thousand restaurants in Japan. They had made an internal decision to source more produce from overseas and had chosen baked cheesecakes as one of the products they required, Mitsubishi Trading as their agent on a worldwide basis had been requested to find a manufacturer who could assist in this project. The proposed consumption of cheesecake was initially estimated at 10.000 units per month, or 120,000 serves, one container, worth about $75,000 Au at that time.
We would be paid cash at the wharf in Australia.
During this meeting I was presented with a specification of the required cheesecake with dimensions and a list of ingredients and asked to quote a price on a whole baked cheesecake.
Earn and myself left the restaurant and I told Mr. Matsue I would get back to him shortly.
I thought all my Christmas`s had come at once.
A customer that would double the size of my business, who would pay cash on delivery for a product, all I had to do was make long production. It was a baked cheesecake, not such a problem we had made thousands of fresh ones so a baked one would only mean cooking it. Boy was I optimistic, or maybe totally naive, they say ignorance is bliss.
POLITICS, CONNECTION SGM TO MITSUBISHI TATURA TO MITSUBISHI, CHEESECAKE MAKER IN JAPAN.
My first tasks were to source the materials on the ingredient list in Australia.
This in itself was not to large a problem. The materials had to be accompanied with a technical specification sheet stating the contents of all materials used. We also had to ensure that we sourced our raw materials from suppliers that had export-approved premises.
We discovered during this process that there are ridged laws governing the export of most food produce from Australia. We also discovered that cheesecake and ice cream were classified as non-prescribed goods and fell outside of these laws. An extremely lucky break for ourselves, that I was able to inform Mr. Matsue of in the early stages of the project.
Once we had obtained all of the materials as per our specification and as per approval for usage in Japan we were then able to make a cheesecake, estimate a price and send a sample to Japan.
We sent a series of six different samples to Japan during the next six months.
Each time we would send a cheesecake we would receive a reply and there would be a detailed evaluation of the product with requests to do minor adjustments to the product. These involved changing the colour, changing the lemon juice content, changing the sugar content, investigating baking temperatures in order to avoid cracking of the surface. We would baked at least 1000 experimental cheesecakes and sent the perfect ones, at least 20 to Japan.
What we would do at this stage was to make fifty cheesecakes in a mix, this was the smallest number our mixers would handle and was the smallest viable commercial production run, we would only take the very very best ones and send them to Japan. In other words during this stage of producing 1000 cheesecakes we were only able to make about 40 that were of sample quality the rest were not up to it.
We were then informed that the Japanese restaurant chain Skylark would like us to investigate the possibility of cutting these cakes into slices of 12 and packaging them in boxes the same as they already had in Japan.
In Australia we sell cakes as a whole and in all my ten years of cake making I had never seen a pre-cut cake in Australia.
At this stage things began to get a lot more complicated.
The packaging had to change, we had to work out how to cut the cakes, we had to work out how to separate the cakes, so as they would not stick together during transportation.
Again we quoted a price and we sent more samples, this time of pre-cut and wrapped cake. It was at this point in time that I began to realise that things regarding export were not as right as they could be, I began to have problems in regards to the way our samples were handled on our own Airline Qantas, on more than one occasion, samples that we had spent days preparing arrived in Tokyo in very poor condition.
Eventually we devised a method that allowed us to get samples to Japan without being damaged, which involved taking the samples to the plane at 5.00 AM on Monday morning were there was a direct flight Melbourne Tokyo. These samples were packed in dry ice in a Styrofoam container. The following day Tuesday in Japan we would check and make sure that the samples were picked up and delivered directly to Mitsubishi Tokyo. Why in god’s name didn’t Qantas provide a special free of charge service to personally look after and care for those food samples I have no idea, especially when you consider the quality of value added food samples arriving from Australia will either make or break the sale and are a major factor to the future wellbeing of this country.
The damaged samples added at least six months to the length of the total development cycle and would have at certain points led to either ourselves or our potential customer considering giving up
We worked out a way to cut the cakes, by pushing them through a matrix of piano wire, the idea contributed by my brother in law a food technologist, it absolutely amazed the Japanese, We worked out how to separate the slices of cake and we devised a method of packing the cakes. Remember nobody from our business had ever gone to Japan; we only employed eight people and could not afford to go.
During this early stage of development I bought out my business partner for the sum of $175,000, which was fully financed on a personal loan from the Commonwealth Bank of Australia, The going rate at that time for money was about 14%. The total debts carried by the company at this stage after the buyout of the partner were in the order of $460,000.
I bought my partner out on the 6th of April 1989, the birth date of my third daughter. Interest rates were running at 14% by the end of the year they had climbed to 20% and we paid every single god dam cent to those rotten bloodsucking parasites that must have whooped for joy as they fed off the blood of the common man.
This was the recession we had to have the first or second or third or whatever of some inane comment made buy an uneducated individual who by some terrible mishap got to control our country and due to his shallowness and lack of life experience could not see the damage he allowed to occur to the ordinary business people that could have built Australia. Instead he allowed them to go to their graves and because he was a great orator he got away with it along with many many others.
In June of 1989 Mr Matsue rang me, by this stage we had met on quite a few occasions and he had started to become quite involved in the development of the cheesecakes, it had been a year since our first meeting, they were now pouring the foundations in the building below Collins towers as you looked down to the ground across the road and we had seen a spring a summer and an autumn pass. The phone call was to inform that the buyer from Skylark restaurant chain was coming to Australia to visit our factory and to discuss the continued development of the cheesecake business.
With the increase in interest rates a slowing down of our local economy resulting from the interest rate rise and the continued development costs on this Japanese project, that had amounted to about $20,000 at this stage things were beginning to be a little bit tight on the financial side for the business.
With the prospect of a very important buyer in the food industry turning up on my doorstep I was concerned to present a good image not only of my company but also of Australia, I was also aware by this stage that this type of value added food business was unique and would be an important step not only for my company but for Australian processed food aimed at the enormous Japanese restaurant market.
I realised I needed help and I needed it in the form of government financial support so I went to Austrade.
I can clearly remember that day, I can clearly remember my conversation, my youthful enthusiasm my informing the Austrade man about the fact that we had been working for a year on developing a cheesecake with Japan`s largest family restaurant chain through one of the world’s largest trading houses, and that finally the buyer was coming to Australia, this was ceasing to be totally speculative and was there anything he could do to help.
It was 12.00 noon when I began the appointment at 12.30 I noticed this gentleman had become edgy and started to look at his watch. We were discussing assistance from Austrade, the federal government’s arm of trade, the organisation that goes out and bats for all Australians. We were discussing if they could help my company to succeed, we had eliminated every possible avenue within 15 minutes and we were discussing The Export Market Development Grants Scheme.
We discussed the issue of samples, I informed him that to make a sample for the Japanese would require us to make 50 cakes and from that we would send one or two, my question to him was, Under E.M.D.G. could we claim for the cost of making the fifty samples, or would we only be allowed to claim for the two that we sent. Well this question involved some research, he had to go and consult with his superior, Answer you guessed only the cost of the two samples you sent. Furthermore, you would at that stage have to incur at least $5,000 in a year prior to claiming. I asked him why this was so and he told me too many people were rorting the system. It was too difficult to administer so they had bought in a $5,000 limit and anyway if you couldn’t spend $5,000 on overseas marketing you were too small to succeed and therefore you weren’t worthwhile worrying about. Again he looked at his watch it was now 1.00pm and obviously I had made him late for lunch.
I didn’t bother about Austrade for another Two and a half years.
Well it was obvious I wasn’t going to get any help there especially for what I needed which was for product development and for internal work within our company so I persevered utilising the merge resources that we had available.
I did have contacts within the Small Business Development Corporation and after the unenthused response by Austrade I approached these people with my problem. Clearly stating to them that I had a potential customer that was Japan’s largest restaurant chain of over 1000 restaurants and that they were keen to order our product. I explained that I needed financial assistance and that it was not only a great opportunity for me, our company and the Australian food processing industry as a whole. If we were successful it would give Australia exposure in the food service market in Japan that was a very large market and traditionally only bought commodities from Australia. That is the more value added food processors entering this enormous market the better off we would all be because Japanese buyers would visit Australia more frequently and become more and more familiar with the processed value added items that we had to sell. This is why I am still perplexed by the response Austrade gave me at the time!
I was very fortunate to meet a certain Kevin Knowles who worked in the Department of Business and Planning. By this stage the government had abandoned its programme of lending money to developing companies as a result of the disaster of the V.E D C. Victorian Economic Development Committee, and had developed a strategy of straight out grants. We were one of only two companies to receive such a grant. We requested approximately $200.000 and eventually received $90,000.
I may add the other company that received a grant was central Victorian Frozen Foods a wholly owned Japanese venture that finally collapsed due to having no local market and being totally dependent on exports for its survival. At the time the federal government gave Kodak $50,000,0000 to stay in Australia. Kodak is not an Australian company.
I am very grateful for that grant and without it and the support we received from Business Victoria we could never have gone as far as we did. It allowed us to develop our product but it was very time consuming in applying and the decision making process was arduous to the point that the grant was approved two months after we had shipped our first container which meant the first grant funds arrived after the horse had bolted so too speak.
My first problem/challenge was to make the business look its real size and to clean the premises to Japanese standards.
We invested about $4,000 in a
massive clean-up and repainted the inside of our two small factories.
The outside of one of our factories was currently sign written as a health food shop and we changed the sign writing to say in large letters Charada cakes at a cost of $1500.
My major concern at the time was that our company due to its size would be considered too small by our potential customer to achieve their requirements and theirfore after visiting us we would be denied the opportunity due to our size.
During the week prior to the visit we spent many hours trying to get the baking technique right for the baked cheesecakes for Japan. We had problems particularly with getting the colour of the cakes consistent and also preventing the cakes from cracking. We were able to make about two perfect cakes for every 50 cakes that we baked. We had about three hundred baked cheesecakes of which only about ten were suitable to show the buyer. We hid the other 290 failures.
When the Skylark buyer came to our factory his product development manager and Mr. Tekano accompanied him from Mitsubishi Tokyo along with Mr. Matsue from Mitsubishi in Melbourne. Because our factory was very small and our tearoom was only 6 ft x 7 ft it was rather a comical affair trying to fit all five chairs and us into the room for discussions. Whenever possible we tried to have meetings away from our factory. I was later to learn after going to Tokyo that those fears were completely unfounded as I when visiting companies in Japan I experienced the same cramped conditions as our own factory in Australia.
We had a preliminary discussion on the first day of the visit regarding certain changes to specifications, which bought up issues of colour, and also the cheesecake had to be flat on the top.
That night and the following morning we again baked cheesecakes, in fact we baked cheesecakes for 16 hrs a day for every day they were in Melbourne, also during that time we had to modify our plastic dividers to the buyer’s request. He was very concerned that the points of the cakes would be damaged during transportation and he would not agree to an order unless we addressed this problem.
We cut pieces of plastic in various forms and shapes and sizes until he finally agreed upon a shape that would be suitable.
The S G M buyer left for Japan on the Friday after a very long week for us.
We were asked to attend to some small details in relation to the internal maintenance of our premises and to place a hat wearing procedure in place and a personal hygiene program for staff in place.
Upon returning to Japan we received a request from Japan to ship one carton of baked cheesecake buy ship to Japan.
When asked why this was necessary we were informed that the buyer would like to test the packaging by sea so as to insure that the cheesecake did not get damaged during transportation from Melbourne to Japan.
It is impossible to send one carton of cheesecake frozen from Melbourne to Japan by ship on a commercial basis.
For starters nobody consolidates small frozen shipments of food product from Melbourne to Japan that are compatible with cheesecake. Cheesecake cannot go with fish or with meat so the only option is ice cream as butter is transported at a higher temperature than frozen cheesecake. People transporting ice cream into Japan do not want any other products shipped with their product as it might lead to complications with Japanese customs and nobody needs that in their lives so a simple request became a real challenge. Fortunately Mitsubishi owned a shipping line called N Y K that ships from Melbourne and we were able to get in touch with the captain of a container ship that was going to Japan. I personally delivered the carton of cheesecakes to the ship and was introduced to the Japanese captain.
Being an engineer it was a fascinating experience to go aboard a container ship but to be given a tour of the ship by the captain was an experience. I am still amazed at the size of the engine pistons and the engine that stood three decks high, the computer systems that monitor the refrigerated and frozen containers to insure that they are running at all times and the maintenance crew that will change a refrigeration unit over immediately if a breakdown should occur. The size of the vessel whilst standing on the bridge, the captain explained that Melbourne was a difficult port and to turn the ship into dock at one point he has only about 2 ft. clear at the bow and the stern of the wharfs at either end on a vessel that looks to be about 100 meters in length.
We put the cheesecakes into the kitchen where there was a small walk in freezer for the crew’s provisions, and it found its way safely to Japan. It took about four weeks before we heard a reply.
It was now September 1990 well over a year since our first meeting at Mitsubishi. I received an order for one full container of sliced baked cheesecake from Skylark.
We had estimated the price on a product we had never made, we had a hypothetical production system that we had never tried out and we had no oven to cook the product in.
One evening I was in a pizza restaurant delivering some cheesecakes and by this stage we had carried out quite a few tests on various types of oven without any success. I was talking with the owner and he informed me that I could purchase a second hand electric pizza oven for a reasonable cost. I made some inquiries and looked at the oven that was for sale about $6,000.
The idea was that buy passing the cakes through a tunnel oven it would be simple to get them all to bake at the same consistency and colour.
I was put in contact with a true gentleman Ken Skoullos who had a working tunnel oven in his small factory which he allowed me to do some experiments with. After some extremely rough experimenting I decided to go ahead with the purchase the electric oven.
In December of 1990 we were set up and ready to begin production for Japan.
The oven was installed, we had bought 1000 baking tins, we had experimented on numerous cakes by cutting them through a matrix of piano wires, we had designed special packaging for the cakes in order to transport them by sea without damaging them and we were ready to give it a go.
We baked the cheesecakes during the daytime and then began to cut them using our primitive system on an afternoon shift. We had a team of twelve people working around the clock for a period of seven weeks to complete the order and we thought we had produced the best cakes in the world.
Each cake had been sliced into twelve pieces, each cake had been [placed into a box of six, and then into cartons of 20. These cartons were frozen then transported to a cold store because our premises were far too small to store a full container of product.
We were meticulously clean and washed everything all of the time to prevent microbiological contamination. We checked all of the incoming materials, we wore hats and gloves and I worked an average of sixteen hours per day for five days a week and most weekends.
The container of cakes was shipped we received a cheque for about $75,000 and I took a well-deserved break with my family for a holiday to Western Samoa.
As we got off the plane in Auckland we were informed a cyclone had hit Samoa and we would have stayed overnight in Auckland. It was the final night of the Commonwealth games, being a family with two very small children Air New Zealand had spent a great deal of time trying to find accommodation close to the airport for us. They took us to one side and told us of a hotel that they had arranged for us to stay at that was only 10 minutes from the airport it was 12 at night. The rest of the plane had to travel two hours by bus to another town to get accommodation. There is a message there about customer service that I do not think has yet been discovered in Australia.
After three days we arrived in Samoa. The place was destroyed not buy a cyclone but by the worst hurricane in the region for quite some time the place had been declared a national disaster area, there were impending food shortages,
There were problems with water supply and not a place to be with a four year old and a 12-month-old baby for a holiday. We escaped the next day back to Auckland. Air New Zealand once aware of the situation in Samoa gave us the choice of going to The Cook Islands or to Fiji. We left for The Cook Islands the following day.
We rested for a few days then decided to visit an outer Island called Atutaki. Atutaki is famous for the filming of blue lagoon; it was also a stopover point during WW11 for the allies and has two large runways. It was also the place where seaplanes stopped in the middle of the Pacific in the 30s, a true island paradise. We stayed at the Cook Island government run motel a basic establishment with a restaurant and bar that fronts the beach and when the sun sets in the Western sky you can sit and eat your evening meal whist watching it disappear below the horizon in a brilliant storm of colour as its rays reflect off the sea and sky in a brilliant display of colour.
The only contact with the outside world is the bi weekly flights and a radiophone that is unreliable to say the best about it.
Like a fool I phoned work. I asked how things were going and of course I was anxious to know if the container had got to Japan and had there been any problems. Well I was immediately informed that there were and that Japanese customs had found a substance called sunset Yellow in the cheesecake and it was non allowable in Japan. In other words I was going to experience as many other exports of food products to Japan that awful feeling of failure and a container of cakes worth $75,000 going to the bottom of the harbour.
I was able to contact my brother in law in Melbourne who was left the rotten task of trying to sort out the mess. God bless him, although he must not of been at all impressed. I had done all I could I was stuck until the next plane arrived. I went to the bar and drank six rusty nails, doubles and watched the sun set.
The following morning we were informed that a hurricane was going to hit the island that afternoon and it did. There was nothing I could do for another week as the phone lines were down so I forgot about cheesecakes and Japan and enjoyed the hospitality of Atutaki. So there is something good about hurricanes after all, but I fear it was to set the stage of my life for the following five years.
We arrived in Rarotonga and immediately upon getting off the plane I was handed a fax. It clearly stated, No problem with cheesecakes cleared by Japanese customs, Sunset yellow was found in cheese part of the cheesecake not sponge part. Sunset yellow allowable in cheese but not in cake therefore this time Japanese customs will allow product in. I still think it was the influence of Mitsubishi and Skylark more so than the regulations that allowed the product through and the determination of the people working from the Japanese side.
The second sentence of the fax stated, government has approved grant of $92,000 I was elated.
Our first container of baked cheesecake had entered Japan. Unfortunately the product was found to be not acceptable and was unusable for the restaurant chain. We received information that the points on the cheesecakes were broken and therefore could not be served in the restaurants and to send more samples. There was no request for a refund, Mitsubishi Trading took the $75,000 loss.
We prepared more samples utilising thinner cutting wires and the same plastic separators and sent three more sets of samples over the following three months all of which were rejected.
In a moment of frustration when preparing my next batch of samples I had cut some strips of clear cellophane and reluctantly carefully wrapped each slice of cheesecake and placed them into the sample box. In Japan every slice of cake is wrapped around the cut faces with a strip of cellophane so as to prevent the cur edges from drying out.
I had always been reticent to do this as I had no idea as to how this wrapping procedure could be economically achieved in a mass production process.
Within a week of sending these samples I received a fax, (we had no internet a fax machine and a dot matrix printer were state of the art technology which we had been able to obtain through a leasing agreement for the grand sum of $5000.)
The fax stated the Japanese were very happy with the samples and please continues with the project.
I had a meeting with Mr Matsue from Mitsubishi. He was happy, but in an embraced way I explained to him that I had no idea as to how I was going to achieve this wrapping process. His answer was revealing. We have a machine that cuts, separates and wraps cakes. My answer was please can I have more information. He replied, I will get you a video of how the machine works. Within a week I was viewing a production line that cut, separated and wrapped cakes. I asked him how much$$. The answer came back $100,000.
All of the time the discussions had continued with the Victorian Government over the terms and conditions of the grant for $90,000 and now we had something tangible to use it for.A visit to Japan was arranged and I arrived in Tokyo on the 2nd of September 1990. I was a man visiting the moon. Even the body language was different and I only spoke two words of Japanese, hello and goodbye.
I was cared for by Mr Takano who picked me up every morning from my hotel and helped me to select the appropriate gift for today`s meetings. I had bought with me a good selection of Australian Red wine that I had discovered at the Le Mond Hotel in Brunswick that had been stored in the cellar for quite a number of years.
We visited a small factory where there was a cake cutting and wrapping machine, I had bought samples from Australia to test cut and wrap. The experiment was successful; as they say seeing is believing.
The following day we visited a Skylark restaurant for lunch and there was a Japanese gentleman sitting close by who had just ordered a baked cheesecake. It arrived ungarnished and wrapped in cellophane on a plate. The Japanese man closely examined every micrometer of that cake and then very gently un-wrapped the cellophane. The penny dropped, the unwrapping of the cake was ceremonial and ingrained into the culture. The cake had to be aesthetically perfect, a work of art, it then had to be presented in a way so as the ceremony of unwrapping could be performed prior to savouring this luxury. The taste, the texture it serving temperature were the final chapter in the food eating experience in Japan.
In Australia we eat. In Japan they look then they reveal the food then they experience the food.
The following day we visited the Fujishima head offices in Tokyo so as to negotiate the purchase of the machines. I had presumed this would be a rather simple process of negotiation around price. It was not, the men from Fujishima did not want to send a machine to a far off country and then have to deal with any maintenance or servicing issues and required reassurance that we were capable of running, maintaining and repairing their machines; In hindsight extremely sensible. Fortunately I was familiar with the technology used in controlling these machines and was able to reassure them that there was the technical capacity within Australia to sort out any issues.
The machines arrived in October 1990, which had given us time to rebuild our primitive tunnel oven that was lengthened, equipped with baffles to distribute the top heat more evenly and a controlled with solid state relays and a very expensive PID electronic digital temperature controller.
We were able to fund all of this development apart from the purchase of the cake cutting and wrapping line which was paid for by the Victorian Government grant, through the profits we were generating from our local market.
There was an additional cost of $15,000 made up of a $10,000 currency fluctuation loss when purchasing the equipment due to a sudden devaluation of the Australian dollar and an excessive freight bill caused by an oversized crate that was used to bring the cutting machine into Australia by airfreight.
We were ready to go. The grant from the Victorian Government had locked the Japanese into a purchase order for six containers. The Japanese buyer from Skylark was due to arrive in Australia so as to check the quality of the product at the commencement of production, but as a result of the first war in Iraq in 1990 all Japanese business visits were cancelled due to the terrorist threat. At this point in time I felt relieved and we proceeded to manufacture two containers of cheesecake which we shipped to Japan and were paid for by Mitsubishi at a price of $90,000 each. Mitsubishi had now outlaid $255,000 on product alone, we had outlaid $100,000 on product and machinery development and the Victorian Government had invested $90,000 for the cutting and wrapping machinery.
In March of 1991 we were visited by Skylarks` head buyer accompanied by representatives from Mitsubishi. We were half way through our third container at the time of their visit. We showed them the production line in operation and everything was going smoothly. The telephone in our micro office rang; it was a call from Japan for the head buyer.
I could tell by the tone it was not good but I had no idea how bad it actually was, when the call finished the buyer said stop production immediately. I asked him why and he said they had found twenty incidents of mold on the edges of the cakes after selling 20,000 slices in Japan. I felt relieved because I knew it was not mold but only a faint grey blemish I had noticed on the side of the cakes, something that was not an issue in Australia, but in Japan another market dealing with their largest restaurant chain it certainly was. Even after showing the buyer the source of the stain he remained firm and we stopped production.
I admit I ran away for an hour but then returned to meet the music. We were all cramped into our six foot by 10 foot tea room, my friend Dario who had remained told me I had to sit down and listen to my customers. The following sixty minutes changed my life and way of thinking for ever. My Anglo Saxon male driven persona was stripped from me and I was transformed into a person who realised that collaboration and cooperation are the key to success.
At one point during this meeting unwittingly I became emotional and explained to my Japanese friends who like myself are all people that I was going to have to go home tonight after trying so hard to succeed to their requests and inform my family that we were facing bankruptcy.
A suggestion came forth from the Skylark buyer, they had a quality control expert in Japan and if I was prepared to agree they could send him to Australia to help us sort out our quality issues so as to satisfy the unique requirements of the Japanese market. I said well he will have to get here within two weeks because we are running out of time.
Within two weeks a Japanese man arrived at our factory, in the mean time I had had our aluminium tins re-coated with Teflon thinking this would solve the problem as the original aluminium baking tins had lost their silicon coating and as a result of corrosion were leaving a slight grey stain on the edge of the cakes.
We set up for production and I presumed everything would progress as planned by my Japanese advisor was armed with a very powerful bench top microscope. Within an hour he had found a serious problem, microscopic black dots, on the edge of the cake, they were coming from the Teflon and did not disappear even after wiping and washing them. The baking tins had to be made from stainless steel as in Japan.
This led to another problem, the original baking tine were made from aluminium as they were spun on a metal spinning lathe and at the time it was impossible to spin stainless steel because it work hardens during the spinning process and will not form into the required shape, also they are significantly more expensive and we required 1000 of them.
Fortunately I was able to find a metal spinner in Melbourne who had recently purchased the latest NCN metal spinning lathes that due to their fast action could spin stainless steel before it had time to work harden. I phoned the factory owner on the Wednesday and told him I needed stainless steel baking tins, he gave me a quote immediately of $13.00 each. I had no money so I phoned my Japanese friend from Mitsubishi who said they would pay for the tins and would lease them to our company for no charge. I was able to get back to the metal spinner that afternoon and tell him he would be paid by Mitsubishi Cash on Delivery. I then drove to Dandenong with a sample tin so as he could make a die and start making the tins.
My Japanese advisor accompanied me to Dandenong and we watched as the tins being made, he was impressed by the speed at which things could be achieved in Australia as such an exercise in Japan would have taken months. The baking tins arrived on the Tuesday and we restarted production that night. Mr Yoshi fare welled us with his guide Toshi Tachibana on the weekend and left us with a quality control manual for production of Japanese baked cheesecake that would last us for the next five years and $5 million dollars’ worth of value added food production for Australia.
Mitsubishi paid for Mr Yoshis visit and accommodation in the Grand Windsor Hotel and for his guide, they also paid for 1000 stainless steel tins at $13,000 each. We were left with half a container of sliced baked cheesecake about 10,000 packets or 60,000 slices that we ended up selling at $2.00 a box at the next Royal Melbourne Show.
It was now the end of June 1991. We immediately set to work producing our next container. We were desperately short of funds as we had half a container of cheesecake unsuitable for sale to Japan in frozen storage and we had been delayed in production by three weeks.
I approached Mr Matsue at Mitsubishi and he kindly agreed to pay us by the week based upon the product we had completed for export as our borrowings from the bank had reached their limit and the Australian economy was under a great deal of stress as it was going through the recession we had to have.
This arrangement with Mitsubishi lasted for the next two containers and we were then able to arrange a temporary overdraft with our friendly local Commonwealth Bank manager to extend our $50,000 overdraft to $75,000 until we received payment of $80,000 for a completed container.
We carried on until Christmas and began work on the next container in early 1992. Realising we would require a top up of funding to complete this container for a period of two weeks again I notified the bank. Unfortunately due to the tightening of the economy and devaluation in real estate values the lending procedures within the bank had changed. The old bank manager from the Carlton branch had disappeared and all requests for additional finance now went through head office. Instead of the usual yes that will be OK, there was a delay of six weeks and then a letter came stating the bank could provide more finance of $10,000 for the fourteen days that we required it on the proviso that they were provided with more security in the form of property.
Unfortunately this was the straw that broke the camels` back after all this was the Commonwealth Bank of Australia. My contacts within the Australian Dairy Corporation forwarded me a list of all of their media contacts and I had just leased a computer with a dot matrix printer and a fax machine. I wrote a letter to the media contacts about our trials and tribulations.
A photographer from the Age appeared on our door step on Friday afternoon after I had spoken with a gentleman by the name of Ken Davidson. I recall him standing on the production benches whilst I peered through a hole surrounded by cheesecake, I was smiling and he asked me to look serious, I had to think of something that upset me so I thought about the building of all of the skyscrapers in the city and related in my mind back to the pyramids built in Egypt and the resulting desertification of that land.
The following morning I recall going to the newsagent and there it was on the front page of Saturdays Age not on the bit that lies unseen but right there staring right at you when you by the paper
The head of the Commonwealth Bank felt they had been treated unfairly; it even affected their share price for a short time. In other words I later discovered they were very upset.
There was never any request from the Commonwealth Bank to sit down and discuss the issues which I found somewhat surprising considering the bank was at that time 85% owned by the Australian Government and as a small company who were the first company in Australia to export a value added food product which was served into the largest Japanese family restaurant chain without any intervention apart from placing the product on a plate, I had hopped we were all had the same objective and were working together as a team.
To understand the level of stress the denial of that $10,000 of finance for two weeks created one has to know the day to day issues it generated. As a result of the continual need to receive raw materials we had to pay for and the assumption that the bank would agree to provide the finance I naively posted a large sum of money into the mail. As the loan had not been approved I would receive a daily call from the bank informing me of how many cheques had landed on the account and was then forced to beg my existing customers to pay me ahead of time in order to satisfy this bank whilst ensuring that the production of the next 100,000 slices of cheesecake were being made perfectly in the factory.
We carried on regardless producing a container of Sliced Baked Cheesecake every six weeks during 1992 working our factory on 24 hour shifts to meet the production requirements. We baked the cakes at night and sliced and packaged them during the day whilst at the same time keeping our local market supplied. Fortunately in Brunswick we had access to a large commercial cool store, now a residential complex where we could store a container load of cakes.
When the cakes were loaded into the container I would go and watch every box being loaded to ensure they were packed in the correct configuration and the cartons were gently placed in the correct orientation as the people packing the containers were trained in packing meat.
We also had to specify a particular type of container as shipping containers vary in width and length and if we did not have the correct container we could not fit the designated number of cartons into the container. The number of cartons in a container was critical for our cash flow as each carton was worth $120 so if twenty cartons were not shipped the cheque from Mitsubishi would have been reduced by $2400 per shipment.
During 1992 I became aware of The Australian Export Awards. It was only by chance that I stumbled upon this event, but I had applied for the Victorian Small business of the year awards, only because they were offering a mobile office as the prize. We did make it to finalist.
Since all of the work had been done in this submission I thought it would be worthwhile submitting for the export awards, since after all we were selling product into Japan and had already received a Victorian Governor award the previous year.
Low and behold we got a bite. We were visited by the Austrade team from Canberra and not soon after were nominated as a finalist in these awards. We even arranged an event for the presentation of the finalist certificate at my friend’s Thai restaurant in Carlton.
A couple of weeks later we were invited to Canberra to attend the function of the export awards. I even hired a dinner suit. At this stage the winners were not announced. I bought a big tray of sliced backed cheesecake to Canberra for morning tea at Parliament house.
That evening we were ushered into the Grand Hall in Parliament house and were allocated to a seat around large round tables. There was a lot of press and some important speeches, including one by the Prime Minister Paul Keating and then the announcements of the winners.
As I waited for the announcement of the winner of the New Export of the year award on the big screen, and there it was The Winner The Cheesecake Factory. I had never won anything in my life; I floated to the stage to receive the award.
I was the humble one, the other winners were a great deal longer in the game, and it was a privilege to be in the company of such people.
After all of those years of building a business in Australia we had been acknowledged for something the large foreign owned multinationals had not been able to achieve. That is to get a fully processed food item to land on the plate in a Japanese restaurant. We had proved that it was possible to achieve the impossible, but this achievement would not have occurred without the involvement of many participants, our hard working and dedicated staff, members from the Victorian Government, our professional advisors, my brother in law and the people who worked for Skylark and Mitsubishi. Truly it was a team effort. A pity that Austrade and the Commonwealth bank were not on board.
That night after the awards at the post drinks celebrations I recall being asked by a member from Austrade if we had received any support and I informed him not as yet because we were too small. He immediately said they could help me find some money. In hindsight that is where the problems began.
The solution came in the form of what was known as an Innovative agricultural marketing grant. It involved a deal whereby for a dollar for dollar contribution by the exporter the government could provide a grant that would assist in contributing 50% of any costs attributed to the development of our export market both in the form of marketing and any product development including a subsidy for any improvement to plant. The grant was to be repaid by a 105 royalty on any exports and various conditions. One of which was that we relocated to larger premises and also participate in an international trade fair held once a year in Tokyo, called Foodex. The total value of the grant was $900,000 over a number of years.
We had found an old meat works in Fitzroy with a large freezer and two large cool rooms 11,000 sq ft in area which would be suitable for our requirements. We bit the bullet and moved. The move cost us the $100,000 in cash reserves that we had built up but also required an extra $50,000 to complete the move. Again we approached the Commonwealth Bank who was reluctant to participate and were only coerced after receiving a letter from the federal treasury to provide an increase to our overdraft of the $50,000 for a period of six months. We were able to repay $25,000 within this time period but found it impossible to come up with the other $25,000 as the company was expanding at a very rapid rate due to the interest generated through winning the export award.
We had picked up business from Myer Grace Brothers, nationally and also Ansett airlines plus numerous other large customers, including the Sizzlers restaurant chain.
The sales of the company rose from $1.5 million per year to $2.4 million in one year. Along with an expansion in sales comes an expansion in costs as one has to build a management structure along with all of the other requirements of transition from a very small business to a medium sized company. We were now employing 34 people and had sales of $50,000 per week.
During 1993 I along with the other export winners were invited on a grand tour of Australia to spread the export message, even though I could not afford the time, how could I refuse such an opportunity and off I went, I even got to fly business class care of the government!
From 1993 to mid-1995 the company continued to grow and stabilise. We exhibited at Foodex in Japan in 1993 and 1994.
Foodex is one of the largest food exhibitions in the world and covers the area of at least the whole of the Melbourne Cricket Ground. A walk around this exhibition is a very revealing exercise. Each transnational company only exhibits on its national countries stand which means the likes of Sara Lee, Cadbury Schweppes, McCain Foods, Mars, Heinz, Nestle are not found on the Australian stand and are found on their mother nations stand. It becomes apparent that there is a very close relationship between each of these companies and their mother nation and if a significant buyer arrives at an exhibition with large potential orders, these companies have direct access to their government representatives and price becomes more flexible. This does not happen when you are a very small value added Australian Company representing on the Australian stand at Foodex.
We were able to generate some very serious interest from some very large companies within Japan for our products but our price as I previously stated was about 10% to high. The tyranny of distance, our own small market and overcoming that quantum leap were right before our eyes but because our bankers are only focused on the local easy housing market and do not communicate with the Commonwealth Government on the financial hurdles Industry faces we as a nation have failed to develop a comprehensive industry policy.
It became apparent that after overcoming the 30% import tariff shelling out 30% of our sales income in tax on activity in Australia for us to infiltrate the market our prices needed to reduce by about 10%. There were two ways to achieve this outcome. Purchase a fully automated production line at a cost of $5 Million dollars which would have given us capacity to produce 30,000 slices of cake per day, but to achieve this investment would require an outside investor and because the financial model is not set up for value added export within Australia we were unable to come up with the required figures. If the Australian Government were prepared to forego the tax generated from the activity by only 50% for the first five years the figures correct themselves. In the first instance it allows the exporter greater flexibility so as to obtain access to the volume markets, once into those markets it is possible to obtain the investment in plant to produce for those markets at a competitive cost. Unfortunately the ball and chain around every Australia Value added food exporter are the financial figures not the capacity or the will to achieve.
As a result of a front page article appearing in Saturdays Age in 1992 regarding the inadequacies of the Commonwealth Bank we were continually bullied by their Chief General Manager for Victoria Mr. A Long.
This harassment continued until 1995 and although we had always paid the bank their dues they threw us out. I had the misfortune to meet Mr. Long in his offices in 1994 as a result of Mr. Kennett arranging a meeting. At that meeting Mr. Long told me he used to play Rugby and Quote. “Mr. Hannigan we finally meet. I used to play rugby as a half back flanker and you know what I would do to you on the rugby field.”
At the time we notified the Federal government through the Minister for Trade, and also treasury. Neither department would help. My opinion was that it would sour the taste of the oysters and red wine at the next lunch.
A simple phone call to Long by the minister saying back off would have prevented us from wasting $50,000 in refinancing costs and at least three months of my own work chasing another source of finance. This simple action would have most likely saved the business and we would still be exporting to Japan.
As a result of the banks actions and better government support systems within New Zealand we finally lost our Japanese customer, the largest restaurant chain in Japan with over 1000 restaurants went to Goodman fielder in New Zealand.
At the end of 1996 after losing half of our business we were forced to call in the administrators and down scaled to a much smaller premises in Smith Street Collingwood. A year later I received a phone call from a Japanese agent inquiring as to whether or not we would like to make cheesecake for Japan. I assume Goodman Fielder had failed and the Japanese were looking to turn back time, but it was too late.
Sitting waiting, waiting, for the final judgment will it be life will it be death. Who are the decision makers, who are they. A person, who has never seen the other side, never experienced the struggle a man looking at a page of figures. Is this how Australia treats its defeated fighters, when they come home and are worn out defeated tired and sick let us just kill them off get rid of their presence they are the guilty party. The inadequacies in our financial system are irrelevant to the decision maker, the preservation of the establishment, the fact that it did succeed and could in the future succeed is not considered. Punish kill find the person guilty, punish all those who tried to succeed for themselves and for their nation, punish, punish, punish, still the penal code remains, still we are a jail. The warder holds the power and will eventually destroy us all, god help me in my hour of need. He did not build it
Comatose, nerves frozen, the chill of fear rising in my gut up my spine that dreaded knowing the sentence will be death, the sentence will be death, death for employing people, death for trying, death for treading where not many others have gone and returned. The pointlessness of it all the extinction of another piece of Australian technology because it is insignificant it goes unnoticed like the cracks forming in a derelict castle, slowly eroding itself until eventually the walls fall down and its purpose as a defending structure are useless. The enemy invades and murders all the peasants in the field. The ruler does a deal with the occupying forces in order that his genes can survive. The efforts of the strongest go wasted by the excesses of the weak, a nation falling apart held together by its proud past led by people unaware of its fate. May god help our nation in its hour of need?
Remember when you kill me that I have touched the sky, that I have floated on the wind and heard its spiritual song. I have lived my life to its fullest; I have never shirked my responsibility and have always strove to win. You who pass sentence can never take this from my soul. You can never defeat my inner strength because you have never touched the sky or danced with the wind. Your spirit is weak you hold fear in your heart. You venture from the warmth of your home each day and fear rises up within you, you always want to stay there and you will never touch the sky will never know your soul.
If you do kill me I will seek vengeance I will return and I will make sure that your miserable being is left as a paste upon the ground to be washed away by the rivers of rain and consumed by the oceans of time. I do not hate you for I do not know you but I despise you and all who are of your kind. For you love the way your world is today, you see nothing wrong with the world around you, mediocrity is your measure of excellence, and waste is taken for granted, suffering is a part of life to be accepted. You despise any change that would make the world a better place to live in unless there is no gamble, unfortunately fool you cannot have change without risk and some of us are bound to fail. Others can follow our mistakes and our footprints and they can seek a different path in order they can succeed. But without the risk takers that go forward blindly seeking success there are no paths to follow there is no direction at all and failure is inevitable. Ask yourself why I did what I did ask yourself this one question. Why?
Did this company try to do this? Well it succeeded in achieving its goal it exported $4,000,000 worth of product to Japan over five years. It created 26 full time jobs and generated $1.2 million in revenue for the Australian Governments who put back in about $250,000. If they had been a bit more generous and let this child grow there would have been another $900,000 there towards the end. The financial stress would not have existed and the business would have remained in Australia.
Where it failed was in its ability to attract investment due to lack of profitability as a result of the antiquated tax system that is stifling this nation and the simple fact that because our nation is so isolated from world trade that the major governing institutions which have the power to change, our financial structures are infected by parochialism and are unaware of the greater needs of our nation and companies that desire to succeed.
Now you can kill me for I have said my peace and if you do every word every thought every action was an exercise in futility perfumed to a nation of fools.
It has been a terrible loss for my staff and all of the supporting people and suppliers who helped us succeed.