Pearls and Irritations

There is much discussion about the benefits of reducing tax so that Australia can be competitive with other countries in the world. This is only of consequence to multinational companies considering where to establish their headquarters. All small companies and medium-sized companies in Australia want more sales. From larger sales they get more profits and often lower cost of unit production. The emphasis in Australia should be to increase sales and the biggest problem is the structure of the market dominance by large companies.  

Most of them already have their headquarters in other countries and have tax arrangements which minimise their tax obligations in Australia. Their only interest in making any investment in Australia is to make profits which they transfer to other countries and not to pay tax in Australia. One might ask in this context whether there is anybody in Australia contemplating setting up a business who would actually consider going to a country where there is zero tax. It is obvious that you cannot make a great deal of money in any of these countries. It follows like night and day that investors will go to places where they think they can make money and profit and after paying taxes will still have a good return on their investment. The Coalition seems to think that by giving large tax rate cuts to large companies they will improve the Australian economy because the companies will pay larger salaries and employ more people with the available money. If the government actually believes this, then it should make the reduction in tax only payable to any company which pays the tax deduction directly to the lowest 95% of employees in the company or uses the money to hire extra staff. With over 70% of the benefit going to overseas shareholders, there is no or little point in passing the tax reduction to shareholders.

All small companies and medium-sized companies in Australia want more sales. From larger sales they get more profits and often lower cost of unit production. The emphasis in Australia should be to increase sales and the biggest problem is the structure of the market dominance by large companies. It is reasonably easy to produce something – it is much more difficult to distribute it to the marketplace profitably and this is because of the dominance of the large supermarkets, chain stores and franchise stores that fill up the shopping malls everywhere. It would be obvious to anyone who walks with along the main streets of suburbs that were once thriving and full of shoppers that there are very few people on the streets and a huge number of food establishments. It is interesting to examine the market structure in detail to make this clear.

The terms for selling to a large department store you are the demand that your product have a 55% discount, a financial contribution to a catalogue of unknown size, a large discount if you require immediate payment and an obligation to remove your product from the shelves if it doesn’t sell. Effectively this probably means that your selling price to the department store is at a discount of around 70% of the retail price which you will set. Should there be a sale where there is a 30% reduction, you will contribute half the 30% to help sell your product.

Selling your product on the web will require considerable expenditure on advertising to bring customers to your website and then you will face the problem of sending your product to the customer either by Australia Post or by local carrier. The delivery cost is very expensive when you compare it with purchases made on eBay from China and other countries where small parcels can be delivered for a total cost of one dollar including the product, the same as a letter in Australia.

The politicians are correct when they state that the way to get jobs and growth is through innovation but they have no idea how to get there. At the heart of innovation is the need to protect an idea and this involves getting a patent. The process basically involves spending a lot of money before the idea has been put into production and sold. There are reasonably inexpensive pathways but for cash-strapped inventors they are often too expensive. Engaging the services of a patent attorney will probably be among the most expensive acts you will ever engage in. The hourly rate for a partner in a patent company could be well over $600 per hour. There needs to be a government initiative to register a patent at the lowest possible cost to the inventor with delayed payment much as with the HECS scheme.

To encourage production and distribution the government should fund and organize small manufacturing premises with a wide range of machinery available to qualified individuals on a hire basis per hour or per day. These centres should be set up all around Australia to encourage local production to start. There should be similar centres for creative people to congregate and exchange ideas.

To get around the problems of distribution it is worth looking at what happens in some other countries. In Guangzhou in the main road of Tian He there was a very large shop converted into several hundred booths where individuals, in a space perhaps 1.5 m², were able to install a few shelves and a counter and sell electronic parts. Other malls have larger booths. In Yiwu, south of Shanghai there are buildings on two city blocks which contain 65,000 small wholesaling stalls as well as another building in the city with clothing wholesalers.

In Miami there is a defunct shopping mall which has converted a large area of the space into very small shops 3 m x 3 m x 3 m. The walls are strong and reinforced with wire netting as is the ceiling and there is a sliding door. The lower rents enable small merchants to develop their skills and start a business.

The key to encouraging innovation and new businesses is to reduce financial barriers and council regulations and encourage office, shop and factory owners to make space available for first-time innovators and entrepreneurs on an hourly or daily basis. Enabling legislation is required rather than Government expenditure.

Ian Bersten B.Com(Ecs) UNSW, created Belaroma Coffee in 1968 and has written five books on tea and coffee as well as producing many innovations in tea and coffee roasting and brewing over the years.  

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