Watch out for those ASX zombie companies warns KPMG
Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast site, my own website, the Apple Podcast store or wherever you go to get your podcasts. Or you can get it at the Business Acumen website at www.businessacumen.biz or at Banking Day.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 40 in our series for 2023 and today’s date is Friday November 3.
First, I’ll be talking to Scott McKinnel, the country manager for Australia and New Zealand of Tenable, the exposure management company that helps organisations and reduce cyber risk. We’ll talk about what companies should be doing to improve their cybersecurity.
And I’ll be talking to EY economist Cherelle Murphy about the latest inflation figures and what it means for the RBA.
But first, let’s talk to Scott McKinnel.
So what’s happening in the news?
The World Bank is warning that even a small disruption to crude supplies due to escalating Middle Eastern conflict could remove between 500,000 and 2 million barrels a day from global markets. If that happens, prices could rise to between $93 and $102 a barrel, the bank said in a report Monday. The outlook could “darken quickly” if the latest conflict widens its scope, with a medium-sized disruption of 3 to 5 million barrels a day driving prices as high as $121 a barrel. The biggest potential disruption foreseen by the bank could remove 6 to 8 million barrels of oil per day, comparable in magnitude to the 1973 Arab oil embargo. That worst-case scenario could see prices reach $157 a barrel.
President Joe Biden signed an executive order on artificial intelligence that establishes standards for security and privacy protections and requires developers to safety-test new models — casting it as necessary regulation for the emerging technology. “To realize the promise of AI and avoid the risk, we need to govern this technology,” Biden said at a White House event Monday, detailing his most significant action yet on a technology whose practical applications and public use have skyrocketed in recent months. The order will have broad impacts on companies developing powerful AI tools that could threaten national security. Leading developers such as Microsoft, Amazon and Alphanet Inc’s Google will need to submit test results on their new models to the government before releasing them to the public. Biden said the Commerce Department will also develop standards for watermarking AI-generated content, such as audio or images, often referred to as “deepfakes”. Biden said he will direct the Department of Energy to ensure AI systems don’t pose chemical, biological or nuclear risks and the Departments of Defense and Homeland Security to develop cyber protections to make computers and critical infrastructure safer.
The competition regulator is stepping up its push for UK-style laws to rein in big tech, branding Google, Meta, Apple, Amazon and Microsoft “serial acquirers” while warning their early dominance in generative AI threatens to squeeze out smaller rivals. The regulator is also looking at forcing Apple and Google to open up their app stores to more developers, highlighting the UK as a potential model, to promote more competition. Freedom of information documents released by Treasury reveal the extent of the Australian Competition & Consumer Commission’s lobbying of the federal government, including sending letters to the Communications Minister and Attorney-General that call for action. The push comes as the ACCC’s five-year inquiry into the local market power of the digital titans is drawing towards its close, with the need for reforms becoming more urgent as the biggest tech companies are spending tens of billions of dollars in the AI race. Microsoft’s $US10bn ($15bn) investment in ChatGPT owner Open AI catapulted generative AI into the mainstream with the platform attracting 100 million active users within two months of its launch – forcing governments to play catch-up with enforcing regulation. The ACCC sent Treasury a briefing document from the UK Department of Business & Trade about its new “pro-competition regime for digital markets”, which forces Google and Apple to open up their app stores to mobile developers. The British document calls for the companies to stop favouring their own business on app stores or “in some cases distorting competition between third parties” and allow users access to alternative app stores, subject to meeting “reasonable” and “sufficient” security conditions.
A massive trade deal with the European Union appears all but doomed after “endgame” negotiations between the two sides collapsed before they even began. Trade Minister Don Farrell was due to hold talks with his EU counterpart in Osaka on Monday but told negotiators he was walking away from the deal — for the second time in three months — because the offer on the table is still not good enough. The EU is a massive, high-income trading bloc of 445 million people and is one of the few markets with whom Australia currently has no free trade deal. As a result, the EU imposes strict quotas and high tariffs on Australian agricultural imports which negotiators have been trying to remove or, at the very least, substantially reduce. Five years after talks began, Australian farmers say the existing offer is a “dud”, arguing it barely improves market access for sugar, red meat and dairy and would, in fact, impose conditions or European-mandated restrictions on local farming practices. The other major sticking point has been EU demands for Australia to give up naming rights to hundreds of products – including prosecco, parmesan and feta – to protect so-called “geographical indications”. Talks have been deadlocked since July when Senator Farrell walked away from Brussels empty-handed, but he was holding out some hope that European negotiators would come to Osaka with an improved offer. However, Agriculture Minister Murray Watt said the European side had “not budged significantly” since then and expressed frustration about its notoriously protectionist market for agriculture. “They have not been prepared to put on the table a significantly better offer than what they’ve offered before,” he said. With European Parliament elections due mid-next year, Senator Watt warned it could be months, if not years before talks would resume. “I think it will be quite some time before any Australian government or any EU leadership is able to negotiate a deal and that’s a bit of a shame for both Australia and the EU,” he said. A delegation of farming groups, including the National Farmers’ Federation (NFF) and Meat and Livestock Australia, is in Osaka with the Trade Minister and has backed his decision to stand firm. As part of the agreement, the EU has been pushing for greater access to Australia’s vast critical minerals, and for the abolition of the $1 billion Luxury Car Tax, which would benefit Australian consumers. The two sides agree a trade deal would help both markets diversify away from China, which slapped eye-watering tariffs on Australian imports during the height of the COVID-19 pandemic in what was widely viewed as economic coercion. The Albanese government has been gradually restoring trade ties with Beijing since coming to power and it is hoped the prime minister’s upcoming trip to China will see a further relaxation of sanctions.
The insurance industry was underprepared for floods that lashed the east coast last year, with antiquated technology and a lack of skilled staff, tradies and materials turning the disaster into a gruelling experience for many of its customers. Those are some of the findings of a landmark review into the insurance industry released on Tuesday by the Insurance Council of Australia after months of investigation into the sector’s response to the floods by consulting house Deloitte. The ICA has pledged to accept, in principle, seven recommendations to improve the insurance industry’s response to natural disasters in future. This will see insurers move to improve preparedness and resourcing, as well as rework chunks of the General Insurance Code of Practice at an upcoming review. Deloitte’s review, commissioned by the ICA in the wake of the 2022 floods, finds the insurance sector was not prepared for the $6bn disaster, which triggered more than 242,000 claims in what stands as the most expensive catastrophe in Australia in the past century. Insurers faced a massive disaster spread across the east coast, with the response to the damage hampered by shortages across the board. The review found insurers entered the disaster with a short supply of workers in the sector amid a broader tight labour market. In addition, building materials to repair damaged properties were in short supply and trending towards historically high prices. This was coupled with a shortage of used and new cars and car parts, amid a pandemic overhang. Regional and rental accommodation was also in short supply, amid high domestic tourism and reduced capacity, leading to a shortage of options to rehome people affected by floods. Deloitte finds some insurers entered the disaster with antiquated computer platforms for claims handling, with several still using DOS-based systems. DOS was a computer operating system commonly used between 1981 and 1995. Deloitte found these old computer systems were “difficult to integrate with other systems, more inflexible in adapting to new functional requirements and ultimately impact negatively on the policyholder experience”. The review found insurers failed community expectations around communicating to those affected by the floods, with many missing deadlines to report to insured customers about their claims. The report found more than 34,000 complaints were lodged with seven insurers, with many due to delayed claims handling in the wake of the floods. The report makes seven recommendations to apply to all insurers as a result, including warning the industry to better prepare for catastrophes and extreme weather. Insurers are also urged to improve their communications with policyholders and better resource capabilities to respond to catastrophic events. Deloitte calls for insurers to invest in process, technology and infrastructure “in the context of responding to a catastrophe”. Deloitte said insurers must better co-ordinate with governments on “improved customer outcomes”, including supporting access to government payments, consistency to approach in cleaning up debris, and incentivising investments in disaster resilience. Under the proposed recommendations from Deloitte, insurers would also rework their code of practice and definition of “extraordinary catastrophe”.
Qantas disputes the notion that customers are buying tickets for a particular flight, as it blamed its booking systems and the “sheer scale” of travel changes for it selling flights that had already been cancelled. In its statement of defence filed with the Federal Court, Qantas said the Australian Competition and Consumer Commission’s case hinges on a definition of the “services” that Qantas supplies. “The ACCC contends that Qantas supplies carriage on ‘particular flights’. Qantas disputes this. The ‘service’ that Qantas supplies is not carriage on any ‘particular flight’ but rather a bundle of rights that includes alternative options to which consumers are entitled in respect of a cancelled flight,” the airline told the Federal Court. The airline’s statement of defence filed on October 27 says it “makes clear to ordinary and reasonable consumers that, while Qantas will do its best to get consumers where they want to be on time, it does not guarantee particular flight times or its flight schedules.” The ACCC said in late August that Qantas sold tickets for more than 8000 already cancelled flights for, on average, two weeks and as long as 47 days after they had already been scrapped internally, causing confusion, higher costs and delays for travellers.
It might be Halloween but the number of ASX-listed zombie companies has exploded in the past six months and is expected to continue to rise as inflation and rising costs put pressure on business cashflows. An analysis by auditors at KPMG has revealed companies that have exhibited its indicators of financial distress for three or more consecutive quarters has risen by 51%, to 127, from 84 in May. Over the same time the total market cap of the zombie companies – or those that are refusing to die – increased by 82% from $1.7bn to $3bn. KPMG head of turnaround and restructuring services Gayle Dickerson said given the speed and duration of the current interest rate tightening cycle it was not surprising to see the rise in the number of zombie companies. “The current inflationary environment is driving rising input costs, and for companies unable to pass this on to their customers, it is eating away at their margins and starting to put serious pressure on their cashflow,” she said. According to KPMG there were 22 ASX-listed zombie companies in March 2022, 66 in September 2022 and 84 in May 2023. These figures are based on financial stress indicators such as share price volatility, short and long- term debt, liquidity, profitability, net assets and other analyses. Ms Dickerson said an important factor in the “zombification” of companies was an increasingly aggressive ATO which is owned about $50.2bn of collectable debt.
Uber Australia, says one technology industry source, is the “crown jewel” for the global gig economy company. One former food delivery executive describes Australia as “a big profit centre for UberEats”. Figures lodged with the Australian Securities and Investments Commission show just how large it is, underscoring what’s at stake in the federal government’s plans to impose new pay rules on the food delivery and ride-sharing behemoth under the banner of fair wages for workers. Uber Australia’s “collections” through a third party surged 20% last year to $9.2 billion, which represents the best proxy for the full size of spending on its platforms in the country. The accounts for the 12 months to December 31, which never give a complete picture of a company because they are designed only to comply with corporate and accounting rules, show revenue of $2.6 billion and gross profit of $1.2 billion. Uber spent $1.4 billion on providing services, which includes its payments to delivery workers.
The global economy is now more at risk from major technological, political and environmental changes that will slow growth, put upward pressure on inflation and leave interest rates higher, a senior Reserve Bank official has warned. Brad Jones, the bank’s assistant governor responsible for financial services, used a speech in Sydney on Tuesday morning to argue the advent of social media and fast international movement of money was amplifying the risks facing the financial systems and the broader economy. Jones said debt servicing by borrowers would become more challenging if interest rates remained higher than the growth in incomes. Another issue was the way social media meant information could be passed among investors almost instantaneously, which meant runs on banks could happen overnight. “Herding effects associated with social media present a new challenge for financial regulators. And it is clearly easier to withdraw deposits at the stroke of a keyboard than it is to stand for hours in the rain outside a bank branch and bury cash in the yard,” he said. Jones said outside of these risks to the financial system were issues caused by geopolitical tensions, cyber and digital threats plus the impact of climate change. He said even before Russia’s invasion of Ukraine, there were issues with the global trading system caused by tensions between countries. These had now grown after the pandemic highlighted supply chain issues. Cyber risks were a major issue for all financial institutions, he said, arguing they now needed the “highest standards of management and governance”. Jones said risks to the stability of the financial system due to climate change would be with the world for years to come.
And that’s it for this week. And next week, I’ll be talking to Steve Orenstein, the founder and CEO of Zoom2U Technologies. And I’ll be talking to Indeed economist Callam Pickering about the latest jobs figures.
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Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week