Korn Ferry

Australia: Digging Up Plan B

Shannon Sims

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It was 2012, and living amid the sparse outback land of Western Australia, young executive Francesco Favaro began to wonder whether his luck was stalling. The region, with rich resources under its red dirt, had made billionaires out of high-flying mining CEOs. Having arrived from his native Italy to launch his career, Favaro had fallen into a world drenched in boom-time opulence, with luxury cars and mansions making their way onto a landscape normally reserved for “Mad Max” movies.

But Favaro started to have a sense of uneasiness. The job market, for one, had slowed down a little—strange for boom times. And looking around the world, everyone could see the emerging Asian countries (particularly China), once the cash cows of Australia’s resource export economy, were beginning to hit a GDP wall, while other parts of the globe were struggling, too. Favaro saw that the number of new projects was drying up fast. “At the time, I am not sure that I quite realized that it was going to happen in such a dramatic way,” he says.

A Country in Transition

Australia’s economy is changing, and all around the country, businesses are adjusting to the new reality.

 

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But it did. In one of the harsher industry collapses in recent memory, the demand for commodities dried up just as one Aussie mining company after another was in full digging mode. Over a three-year period ending in 2014, prices for almost all of Australia’s most important commodity exports would drop by half. The so-called “Lucky Country” seemed to have run out of luck.

And yet, while other countries dependent on one industry would typically fall into a recession in such times, Australia had a different story to tell. This is the land that keeps on growing economically year after year, and remarkably, for more than a quarter of a century. That streak now seemed in jeopardy—only the country down under didn’t go down. It had a backup plan.

It’s hard to fathom how big Australia’s mining boom was between 2002 and 2012. The world’s emerging economies needed the iron, gold and other minerals buried under the barren landscapes of Western Australia, so mining firms blew up billions of tons of rock to create massive open-pit mines. The “Super Pit” in southwestern Australia is more than two miles long, a mile wide and 1,800 feet deep; it can be seen from space. Some iron mines started hauling out 20,000 tons of ore each day.

The minerals turned into money—a lot of it. Home prices skyrocketed, whether it was a Sydney beachfront property or a manufactured house nearly 2,300 miles away in tiny Karratha, home to some of the country’s biggest iron-ore operations. Australians with minimal education suddenly could command six-figure salaries driving trucks or excavating rocks at far-flung mining sites. Many of this group—called “cashed-up bogans” by other Australians—then spent their money on Jet Skis and muscle cars. The cash flowed to the top, too, propelling mining magnates like Gina Rinehart into the ranks of the world’s wealthiest people. In fact, at one point Forbes estimated her personal fortune at about US$18 billion.

But virtually every boom has an expiration date, and commodity-fueled ones can evaporate quickly. Throughout the decade, China had been Australia’s best customer, consuming seemingly all the minerals Australian mines could extract to fuel its own surging economy. But when China’s expansion slowed significantly, so did its insatiable need for Australian iron and coal. At the same time, iron and coal commodity prices plummeted. Australian mines fired workers by the hundreds; then those unemployed workers cut back spending on housing, cars and everything else. Citizens looked to the national government for help, and their attitudes soured quickly when things didn’t improve immediately. Australia has had five different prime ministers in seven years.

It was so bad that in 2014, nearly every economic pundit was predicting a full-blown recession for Australia, something it hadn’t seen since 1991. And yet, the seeds of the nation’s comeback were already in the ground. By that time, the country had managed to post economic growth for 23 straight years; by comparison, the United States’ longest streak was barely (and still is) only 10 years. Only Holland has had a better record in modern times.

Mining may have overshadowed everything else, but Australia’s economy is actually pretty diverse. Despite its arid outback reputation, it has more than 180,000 square miles of arable land. Experts estimate that Australian farms can supply food for 80 million people, but since the country has only 24 million people, it has become a veritable grocery store for the Eastern Hemisphere. More than half of the country’s US$27 billion-plus worth of beef, grains and other agriculture exports go to China, Japan, Vietnam and other parts of Asia. Tourism also supplies a similarly sized economic boost. The Sydney Opera House, the Blue Mountains National Park and a plethora of man-made and natural landmarks have been attracting a growing number of tourists.

Australia also has been quietly diversifying its economy further. To jumpstart an innovation culture, for example, the national government set aside funding for start-ups, hoping to bring back many software expats who left for greener pastures. Indeed, in some corners of the country, sunny Australia is starting to feel a bit like sunny Silicon Valley. The Australian state of Victoria (home to Melbourne and the Australian Open tennis tournament) spent heavily to help create new jobs in pharmaceuticals, defense and other high-tech industries. In 2015, it passed a US$282 million package designed to add more than 100,000 high-tech positions over the course of two years. “There’s an entrepreneurship vibe going on now,” says Korn Ferry’s executive chairman for Australasia, Katie Lahey.

But the key reason behind Australia’s quick recovery is its solid relationship with China, its largest trading partner. Their history goes back at least 200 years and may even predate 1788, when English convicts started a settlement in what is now Sydney. Over the last 40 years in particular, the economic ties between the two countries have strengthened significantly. China exports clothing, electronics and other goods to Australia, while the Land of Oz sends minerals and agricultural products the other way. Even during the mining bust, China bought more Australian iron ore and similar minerals than all other Australian goods combined.

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The Chinese—with encouragement from ­Australia—also began to see the country as a new home and a great training ground for learning English, nearly doubling its investment in real estate during the commodity-bust years. And as more Chinese moved there, more of their kids needed schooling; some 150,000 Chinese nationals are now studying in Australia. “They come here to study at a master’s level and then go back to work in China,” says John Shields, deputy dean of the at the University of Sydney Business School. He also says more Australian students are learning Mandarin and securing short-term placement in China, to get exposure to the economy there.

All of which is having a curious impact on corporate strategizing down under. Lahey at Korn Ferry says companies are increasingly aware that “if you want to grow these days, you’ve got to show that you can grow outside of Australia.” She notes that today there is almost an expectation that the board should include at least one Chinese advisor, and an increasing number of board meetings of Australian companies are being held in China.

It might not look like the Australia of the past, but it certainly looks like the Australia of the future. And that future brings new challenges. According to Lahey, the CEO lifespan is shorter in Australia than elsewhere, creating new pressures on the C-suite. She and Shields both suggest that Australian workers work abroad more to gain experience in a complex cultural environment.

“The executive board can’t be lazy; each member must be contributing,” she notes. And if the leadership falters, “they will shoot the CEO” and be on to the next. But it’s that tight-leashed kind of leadership, experts say, that will probably carry Australia into the future.

On a Friday night, the main squares of Sydney were filled with bright-red lanterns dangling from the streetlights. Chinese restaurants were packed with reservations, and celebrations were setting off around the city. It was just another Friday night in the western world, but in Sydney it was Chinese New Year. The Australian Tourism and Transport Forum estimated that January of this year saw a record-breaking 195,000 Chinese travelers visiting Australia, with 81,000 of them coming especially for the Chinese New Year celebrations.

New beginnings, it seems, are happening all over the Lucky Country. As the Chinese have shifted focus into areas other than mining, Australians have adapted. Many of the same people who worked in the resources sector during the boom have moved into construction, manufacturing and tourism.

Favaro, the young executive who sensed the resource boom’s collapse, made his own transition. Before the bust really hit, he studied for an MBA. While some of his friends in the mining industry remain without work, he landed a corporate finance job in Sydney right out of business school. “For the next four or five years, I see the economy here as growing or at least not declining,” he says. But if Australia’s recent history has taught the world anything, it’s that when it comes to global economies, nothing can be taken for granted. “The question mark is about the very long term,” he says, “and whether we can position ourselves for the next transition.”

Authors

  • Shannon Sims

    Contributor, Korn Ferry Institute

 

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