Friday, January 18. 2008The Recession "We Had To Have?"John Linton I just skimmed the financial press this morning as it seemed to be full of gloom and doom and I can do without that on a Friday morning. From what I could see the bad news was evenly split between the views that the latest Merrill Lynch sub-prime write down was a further indication that the US economy is actually in recession and that the 9th consecutive day of falls on the ASX is a clear sign that the Australian economy will quickly follow as Australian companies and exporters lose orders from the US and China and, almost certainly, Japan. There's a possibility that won't happen but it seems more likely than not and therefore any planning has to take in to consideration what a 'significant slow down' in the Australian economy may bring to such a minor part of the economy such as data communications. My memories of how last two 'significant slowdowns' affected companies involved in supplying data communications services are that residential customers stopped being able to pay their monthly bills and business customers began to go out of business owing months of back service payments. Applications for new services slowed substantially and suppliers started calling multiple times a week seeking assurances that their invoices would be paid BEFORE the due dates. It was all very, very unpleasant. There is clearly nothing the current Australian 'government' could do about ameliorating any of the affects of a 'business slow down' - they will spend the next 12 months blaming the previous government for any problems that arise and then say that "global trends are beyond our control". No assistance from those people under any scenario. So a prudent management of a small company that operates at a little over break even will need to look after itself and therefore its own customers entirely via its own planning and initiatives. The CFOs of the majority of company's will hold sway in these times and the most common actions they will almost certainly take would normally include: 1) Freezing hiring (pursuing 'down sizing') 2) Not replacing employees who resign 3) Freezing all new capital expenditure 4) Attempt to lock in all interest rates on current borrowings 5) Increasing pricing 6) Decreasing credit terms 7) Cutting off supply to 'at risk' customers - accepting no new 'marginal' customers ...all of these actions, collectively, guarantee that any likely 'financial slow down' will be more severe and last longer than if they allowed their businesses to continue as 'normal'. I tend to agree with those people expressing the opinion that Australia's situation is going to be more difficult in some ways than it is in the US. According to the same financial press over the last few days Australia now has record employment with the result that 'skilled' personnel are very hard to find and becoming more and more expensive resulting in upward pressure on inflation that, using conventional 'wisdom', would normally mean that the RBA would put up interest rates early in February which in turn would inevitably make recession in Australia even more likely. I also read the current Federal Treasurer's statements that the 'resources' boom that was entirely responsible for the last government's 11 boom years has ended due to the effect the US slowdown has had on China's economy and things will get even tougher (due to the actions/inactions of the previous government). So....what to do.....and is the sky really falling? One sensible thing to do, beloved of tough CFOs, is to put up prices enough to suggest to those customers most sensitive to price in their selection of a data service (and therefore most vulnerable to a change in economic circumstances) that it's time to look elsewhere and move to another provider before any 'business slow down' can affect their ability to make their committed payments. I'm not sure that Exetel has a CFO that tough but I wouldn't mind betting that some other data communications companies do (those that actually have a CFO tougher than their CEO that is). Trackbacks
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Doesn't Exetel bill ahead a month anyway?
I'm guessing over half (if not way more) of your customers are out of a contract period anyway... So suspending a service for non-payment of the NEXT month's supply shouldn't hurt you.... And if a payment doesn't eventuate you disconnect them. Raising prices now would just merely lose you customers that would probably keep paying otherwise and most of them already out of contract. No? Comments (2)
If Exetel 'suspends' a service we don't 'suspend' the liability to the carrier to pay for it so if the customer didn't eventually pay we would still have paid for the month (which we also pay, pretty much, in advance for).
If the defaulting customer is still in contract then we're also liable for the carrier's early termination charge. Currently we have very, very few instances of non-payment and over 70% of those very, very few are subsequently retrieved by a debt collector. My memory of the last 'business slow down' is that payment defaults by residential customers rose from virtually zero to around 8% and payment defaults by business customers rose from zero to around 5%. If that scenario were to be repeated then Exetel would cease being in business inside 4 months. Not a pleasant thought. Would raising prices in the near future obviate that theoretical situation? No one knows - least of all me. It's a decision that many managements around Australia (and presumably the rest of the world) would be considering either right now or in the not too distant future. In Exetel's case the CEO is as equally strong (in such decision scenarios)as the CFO so it's impossible to predict. Comments (5)
Have you ever thought of billing two months in advance then.... or making ppl pay a deposit of the early termination fee that's refunded once out of contract?
Comments (2)
We would not do that because we believe it's financially dangerous to charge for future services that haven't yet been delivered or paid for by Exetel - we are a very conservative company when it comes to financial considerations (no borrowing, no leasing, no overdraft etc).
There is some justification for billing further in advance for people who default on monthly payments but, at least to date, we have not done that - pretty much for the same reasons. It's a good thought though. Comments (5)
As transport and resource costs increase, wouldn't more people use the internet as a substitute to fulfill their business and personal needs? I agree with your main points, but its not all doom and gloom for a telecommunications company. Although, what proportion of Exetel's operating expenses are related to electricity?
I think that globally, we're seeing the limits to growth - and that the 'subprime crisis' is just a manifestation of that. Comment (1)
It's never all doom and gloom in any financial scenario - there's always 'winners'.
Small companies, despite their agility, find it harder to cope because of very limited financial resources. Comments (5)
I have seen it reported that the level of executive flying activity has actually increased as a result of the use of better and cheaper communication costs.
It sounds counter-intuitive, but the airlines are enjoying it! Comment (1)
Thereis no slowdown at this time - the economy is still racing along and full employmet is ensuring spending is still booming (record Christmas retail sales/one million auto sales in 2007).
The cahnges, should they eventuate will not be evident for some months withthe interest rate review in Feruary by the RBA being some sort of 'watershed', Comments (5)
Regardless of political agenda, I think that you're definitely correct about how things are going to go.
That said, I suspect that it may be an opportunity for Exetel to push their Naked DSL product to cut down on line rental and their plans in general to those looking for a better deal. Surely some outcome of this type may occur. Comment (1)
A couple of things that I think you should keep in mind when making your considerations...
1) I believe that Australia's record employment rates have less to do with the former Government's economic management, and more to do with the fact that the Baby Boomer generation is fast reaching retirement age. I think that the further along we go, the fewer total number of workers there will be available to the Australian workforce, regardless of any 'significant slow down' in the economy. (*My memories of how last two 'significant slowdowns' affected companies involved in supplying data communications services are that residential customers stopped being able to pay their monthly bills and business customers began to go out of business owing months of back service payments.*) 2) Times are changing. Even back in those previous times, there were some things that consumers did not give up and somehow found the money for, two of those being the TV and the car. Today, a computer and an internet connection is becoming one of those "must haves" that people will cling to while other things are let go. Exetel can take advantage of those other ISPs who might take the knee-jerk reaction of putting their prices up, by ensuring that you continue to provide a selection of low GB, 30 day ultra-budget plans, to cater for these users. Sure, put whatever reasonable conditions on them that you need to, to provide security for Exetel, but I believe you will benefit from taking advantage of other company's fears and phobias, Comment (1)
You're probably right.
The issues are never clear and, like the current sub-prime problems, 'suddenly appear'. As someone responsible for my family's investments (which are considerable for us as we are far from wealthy) in Exetel and for Exetel's emloyee's and customer's well being I have to take more conservative views than I have in the past. Comments (5)
What is full employment?
The definition of employment has adjusted over time and if the methods used to calculate the 'actual' figures remained constant over time, then I think you would see much higher real unemployment figures. As for new car sales... I know the figures are there showing over a million new cars being sold last calendar year, but will that trend continue? That is way too many new cars for the market IMHO with loads of monies lost in depreciation; and it means that second hand cars just keep on getting to be better value. Once the post petrol cars with drive by wire and more efficient fuel systems comes into play, that's when I think we'll see the most benefit in buying a new car although in the meantime, it does help that the manufacturers keep on giving 'more for less' to encourage the desire to upgrade a car. Comment (1)
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