Investment Round the World—Opportunities and Risks

Sonja Sinclair

As many of you know, The Canadian Club season doesn't normally begin until late September-and the same goes for The Empire Club. But there's an exception to every rule; and when an opportunity arises to welcome to our podium a guest speaker who, within the past year or two, has emerged as a major-league player in the international business arena, a man whom Fortune magazine featured early this year as one of the world's 50 most fascinating business personalities - when you hear that such a person will be in Toronto for all of 36 hours - well, obviously, you nab him, whatever the date may be. Which is essentially why some 600 of us are here today.

I dare say that 15 years ago none of us knew, or would have cared to know, that a young management consultant with an M.B.A. from the University of Melbourne had scraped together enough money to buy an obscure jam manufacturing business in his native Australia.

Today, after a series of spectacular acquisitions, John Elliott heads a business empire that spans three continents and includes some of the best-known brewing companies in the world. Thanks largely to television commercials that feature Paul Hogan, the actor who played the lead in Crocodile Dundee, more Americans associate Australia with Foster beer than with koala bears or kangaroos. With the acquisition of Carling O'Keefe earlier this year, Elders IXL became the sixth-largest brewer in the world.

But beer is only one of the conglomerate's products. Elders IXL is also one of Australia's largest non-banking financial institutions that offers services in the United States, Europe and Southeast Asia. Another division sells Australian wool and wheat to customers from Kansas City to Moscow.

Elders' sales last year amounted to a hefty $7.3 billion, its profits to approximately $180 million.

All of which, it seems, is only the beginning. In a recent television interview, Mr. Elliott said that Elders plans to invest more than $3.5 billion in the next few years, mainly outside Australia.

But John Elliott's activities are not confined to business. He is a lifelong football fan, a former halfback on his high school team and, currently, president of the Carlton Football Club in Australia. He is also treasurer of the Liberal Party of Australia-which I understand is their conservative party - and he doesn't deny rumours that, some day, he may want to run for office and become Prime Minister. After all, he's only 45, so there's plenty of time.

But much though he enjoys talking about politics and football, his speech today will deal with business, possibly with political overtones. His topic is "Investment Round the World - Opportunities and Risks." It would be difficult to find anyone better qualified to deal with this subject than John Elliott, Chairman and Chief Executive Officer of Elders IXL.

John Elliott

Thank you, Madam President, for that overrated welcome. I think having a combined meeting of The Canadian Club and The Empire Club and standing here in front of so many people is quite awesome. In fact it reminds me of a story. And that is the definition of heaven and hell. Heaven is defined as a French cook, an English policeman, a German engineer, and Italian lover, and everything organized by the Swiss. The definition of hell is an English cook, German policeman, a French engineer, a Swiss lover, and everything organized by the Italians. I don't know whether I am here in heaven or hell at this minute.

What I wanted to do was just cover three subjects: the major issues I think that will impact on continuing prosperity around the world; the key factors for various countries to achieve growth and attract investment; and some observations from my limited experience on how good I think the opportunities are in different countries.

Let's start with the first one. Probably the most amazing factor that's dominated the world in the last couple of years has been the deregulation of the financial markets around the world, which has created a world liquidity situation. Deregulation, combined with the fact that our banking friends will no longer lend to Third World countries, has created a huge increase in liquidity to corporations and has allowed them to in fact decide where they are going to invest without the limitations of getting money to do it.

I regard three factors as very important today to whether or not we are going to continue to see the growth we've seen in the last few years. And it's not the debt problems of the underdeveloped or Third World countries; and it's not the growth opportunities they provide.

The first and most important is quite dull and boring for you people in Canada but it is the growth that will take place in the United States. It is still the "engine" of economic growth in the world. And there's no doubt that when President Reagan came into power, he restored in people a belief in themselves. And his deregulation attitude as concerned with free trade, etc., has sparked some strong economic growth in the United States which has filtered through the whole world.

The American nation, as we know, is a huge consumer economy and the consumption and the debt of consumers have risen considerably in the last few years. There are obvious difficulties in America, but what concerns me today is that when you look at the ratio of consumer debt to spending, it is now at the highest level it has been in the history of the United States. It is difficult in my view to see that growth being sustained at those levels. So my conclusion is there's probably going to be a slowing down in the United States, in terms of real growth. I'm not talking about the equity markets, which seem to run on independently of everyone.

The second important factor is the increasing protection , going on around the world, particularly in agriculture, which affects my homeland as it does yours. The EEC is primarily responsible for the dreadful agricultural economic outlook we have, now being tackled by the United States. It's an amazing situation that by bringing all those countries together, creating probably the biggest market in the world, the EEC has decided in a political manner, mainly with the dominance of the French, that it would start subsidizing agriculture with huge sums of money and do it in a way that costs the consumer a fortune. It was not noticeable and the EEC didn't face elections. Now this subsidy system has created overproduction at guaranteed world prices.

We've seen the ludicrous situation where farmers, whether they're producing beef, butter, or grain, are being paid prices well above world market prices to sustain employment in the various countries. Then the EEC having subsidized them, goes out to the eastern bloc and, at a huge discount, subsidizes their purchases to the point, of course, where the United States lost about 15 per cent of its market share in the grain markets of the world. Notwithstanding countries like Australia, Canada, and the Argentine ... what we've seen in the last year or two is the United States starting to fight back for its share of the world grain markets. It decided to handle its subsidy in a different form, to reduce the acreage it would allow farmers to produce on and pay them a subsidy not to produce. That is ironic because, with the EEC subsidizing more production than the Americans and the United States reducing production, they're offsetting each other.

But what we've seen this season, after the final projections for the grain crops in the United States, is that, despite a 15 per cent reduction in land acreage, the crops will be up 2 per cent. Of course, the reason is that the farmer's no fool, he takes out his worst 15 per cent of land, applies the same amount of fertilizer as on the previous land plus the 15 per cent and gets higher yields with no reduction in production.

In speaking with Senator Dole a few weeks ago, it appears that both the EEC and the United States are on a treadmill which is going to be hard to get off for political reasons. And what this does to the efficient countries like Canada, Australia, New Zealand, parts of South America, is that we are no longer in a position to get free access to markets. One of the classic examples I saw just the other day was the United States, a small barley producer, deciding to subsidize its barley sales to Saudi Arabia under this program. So what do they do, they drop the price some 30 per cent although they needed to drop it only about 10 per cent to get their share of the market, damaging the market even further and leaving the Saudi Arabian government laughing. This is a major problem facing us around the world because we in the countries that do not subsidize as much depend still on agriculture as an important part of our economic growth. I don't know what the solution to that is other than countries like Canada and Australia have got to put on pressure, through GATT, to reduce this subsidy.

I talked to Margaret Thatcher. She'd love to do something about it but her hands are tied. It is a problem that is going to take a long time as nobody seems to have the solution.

The third point is negative, but could be a positive one. I think the key to the future growth in the world in the next few years is Japan. Japan has been able to maintain high relative performance of real economic growth, has kept low inflation, had high productivity and used an undervalued currency, which the United States did in the 1920s. Japan has won the political battle of getting its products into every other country in the world without having to accept other countries' products in Japan.

And we have a situation where, because it's so exportbased, Japan has kept the whole question of domestic demand under wraps. The country that is now almost the wealthiest per capita in the world has a low standard of housing. The quality of life is low in Japan. And yet the government in that country could do a lot, in fact probably more than any other country, to stimulate domestic demand. If it did that and lifted the lid on controlling its own domestic demand, then we would see tremendous growth in Japan, taking enormous pressure off its need to export, and providing other countries with an opportunity to export to Japan. The Japanese are reluctant to bring about change quickly and have resisted it. The only nation in the world that can do anything about it is the United States. Because of the huge trade imbalance between the two nations, the U.S. can exert the pressure necessary to make Japan come to terms.

There is no way any country in the world can continue to run a huge trade surplus and now Japan is using its funds to buy the assets in every other country in the world. There's growing resistance in most countries to Japan; the Japanese are very sensitive to that, but they are doing little about it. The United States is being, in my view, very reluctant for whatever political reasons, friendship probably between Nakasone and Reagan, to put pressure on that country. If it does, I think we will see the trade imbalance disappear, if Japan will stimulate its domestic demand. Otherwise, we're in for an increasing period of protection in the world caused by the fact that Japanese goods will be excluded from certain countries which will be very damaging to world growth.

I remain optimistic that something will happen, but I think the period of growth we've achieved as a result of financial deregulation will slowly peter out. We have to get some real demand growing, by reducing protection and forcing Japan to open up its economy.

Key factors for countries to succeed are the same old boring ones - stability of government, certainty of the rules when you're operating in a country, and management of the economy, which is usually reflected in the rate of inflation of that country and, as a result, the interest rates that pertain.

There are, however, a number of new factors that have been brought about because of the globalization of investment and the financial deregulation that's gone on in the world. Those countries that are embarking or have embarked on deregulation of financial markets have seen enormous growth in the cities and in the financial services business. In Canada, it's obviously happened, in Australia it's happened and, of course, the person who was the architect of it all was Margaret Thatcher. The day after she became Prime Minister, she deregulated London and made it, as it still is, the financial capital, in my view, of the world.

I suppose the second important factor today which the business community looks at is deregulation generally. That is the speed with which one can get investment decisions made in a country, the extent to which you are held up by government studies, and whether you are allowed to rationalize and run a business efficiently so that it can look to serving export markets from the country. I'll come back to one of my few observations about Canada, because most of you would have a much greater understanding than I have, but I think in this area this country leaves a lot to be desired.

The third important factor is an undervalued currency. Most countries that can manage their currency in an undervalued way attract people to invest because it becomes a cheap place to produce to serve the world. But the task is to do that, as the Japanese have done, without high inflation.

I suppose the fourth important factor today as one looks at global investment is the level of taxation and what is imposed on you as a company going to that country to invest. And the combination of taxation and interest rate structure is affecting companies like our own in deciding where to go. I had some statistics taken out which show dramatic differences and if you want to invest a million dollars in a number of countries and you gear it half with debt and half with equity, what do you have to earn to get 30 per cent return after tax? It's a reasonable return. On the equity, not on the investment. So how do you get a 30 per cent return on the half a million you invest if you borrow another half a million? It's not that difficult. For example, in the United States if you take an interest rate of about 8 per cent and a tax rate of 36 per cent, your profit before interest and tax, to get a 30 per cent aftertax rate on your equity, is 27.4 per cent. That's actually lower because of the gearing you've got out of the debt you're using.

Well, I did the United States, Canada, U.K., West Germany, France, Japan, Hong Kong, Singapore, Korea, Australia, and New Zealand. The country that comes out way ahead of everybody is Hong Kong, because Hong Kong has an interest rate geared to the United States, has an undervalued currency, has a corporate tax rate of 18.5 per cent, and has no capital gains tax. I said, all right, let's call that 100 as the index, how do all the other countries stand? The next best countries are basically Singapore, Korea, Taiwan, the growing Asian nations. They're the countries that have not imposed high taxation on the community because they haven't had the entrenched welfare systems and weren't caught up in the handout mentality that plagued the developed western world in the '60s and early '70s.

Canada comes in at 140 on the index. So you're going to earn 40 per cent more in Canada on a profit before interest and tax than you do in Hong Kong to come out with the same result. Singapore and Korea and those countries are about 115 per cent. The United States 122, the U.K. 128, West Germany 116, Japan, interestingly enough, 133, and the last two countries were Australia and New Zealand at 163 and 171. We've got some problems in our country because of socialist governments, and that's very true because they're the great increasers of the taxation burden. But I suppose what it shows is that the major corporations of the world are out raising capital, and I can say at this meeting I'm going to New York in the morning to launch a brand new Elders Investment Company which will be headquartered guess where, Hong Kong. We're going to raise $500 million U.S. equivalent to invest in different projects around the world. It's the most tax-efficient place to start a new company today. That's a practical example of what I'm suggesting. Unless countries understand that their interest rate structure and taxation structure affect where you put your money, as well as the level of regulation, etc., they will never understand how to compete globally. Let's be clear, the competition is going to increase because people who get real investment into their country get buildings and bricks and mortar and factories built, employ their people; those who don't, don't employ them.

Finally, a couple of observations about different countries, and I'll just run through them quickly. By far the most attractive area in the world is the countries I've mentioned in Southeast Asia. They provide real opportunities. The people are hard-working, they're probably the most productive in the world. As their standard of living rises they seem to be able to, as they get higher wages, offset that with improved productivity. I believe Singapore, Hong Kong, Taiwan, Korea are the countries that are benefiting most from the Japanese because their currency is now getting up, having to move the production offshore, just to serve Japan.

Of all the European countries, the U.K. is by far the most attractive. Margaret Thatcher, in my view, is by far the best leader in the world and has demonstrated since she's been in power that she has looked at the cause of what is going to solve Britain's problems and stuck to it. She's got 3 per cent real growth, strong private investment, rising living standards in the country and, for the first time in hundreds of years, the creation of new wealth by individuals who are not part of the old class system. In terms of opportunities today in Britain, the opportunity to manufacture and export into the EEC is second to none. In the services area, the city of London is booming. And in the property area, properties in the vicinity of the south and around London have been rising at 25 per cent per annum for the last three years. As the result of her election there's enormous investment going to the U.K. A lot of the traditional problems we still have in Australia, New Zealand and probably here with the unions and all have disappeared. It is harder to deal with unions in New Zealand, Australia, and Canada than it is now in the U.K.

The other country I wanted to mention was the Philippines. I was there about three weeks ago and met Mrs. Aquino. Until a few days ago I was going to say some very good things about the Philippines, but the one question mark is stability of government. In terms of solving the economic problems in that country, she's got inflation down to I per cent, real growth of over 4 per cent, not an overregulated economy and new investment is going into the Philippines. If she can survive the political instability, I think the Philippines is going to be an exciting place to invest.

Australia, New Zealand - high taxes, governments that haven't come to terms with managing their economy well.

New Zealand runs 14 per cent inflation still, Australia up around 8 or 9, big debt problems they're aware of. But today it is not one of the best places to invest.

The United States still has the greatest opportunity because it is a deregulated economy. In that respect you can go in there and you're not held up to anywhere near the same extent by the rules and regulations as in other countries.

As far as Canada's concerned, I really shouldn't say much because I know less than almost anybody in this room, but I'll make one or two comments. The financial deregulation going on in this country will be very important to its short-term growth. The changes in the rules from Investment Canada are attractive to global investors like ourselves. The one problem this country faces is the high level of regulation structurally built in between the provinces, and the fact that the federal government doesn't have enough power to override those. For example, you are negotiating a free trade agreement with the United States, something that is essential to the long-term success of Canada. The problem you've got, however, is because of the overregulation between provinces in a number of your manufacturing industries, they are not ready to compete actively with the United States.

If I can just take the beer business because it's one I know a little bit about. We are required to have breweries in every province if we want to sell beer there. If you had two to three brewers in this whole country you would be competing on about the same basis as the major plants in the United States. We have three breweries with about six plants each, so we've got about 18 plants in this country. And the fact that you can only brew beer in the province where you operate has hindered that rationalization that's so necessary to make you able to compete. Without it, of course, if free trade came overnight the beer industry in this country and the employment it provides would disappear. You've also inflated the price of raw materials by subsidizing the farming community in the production of beer, and you've limited the amount of advertising that can be done, and so it goes on. I'll just use that as an example because if Canada is to get a free trade agreement, which it must, it is essential that you give time to not only the brewing industry but to the many other manufacturing industries in this country to get them into competitive shape. That means one needs to deregulate between the provinces.

In summary, Madam Chairman, I've gone on a little long. I am optimistic. There are some problems. l think Asia and the United Kingdom look to be the best opportunities for investment. The world financial markets are becoming one. Investment for job creation is going to be one of the most important things in the next 10 years. Those who get the benefit of that will be the governments with less regulation and lower tax regimes. And governments will be required to address change much faster than in the last 10 years because competition for investment funds will intensify. Thank you.

Ronald Goodall

I have been especially chosen for this pleasant task, Mr. Elliott, on account of my ancestors. The Goodall name is found in the annals of the year 1181 and was given to those who could brew a good ale. As you well know, sir, Canada is a land of opportunity and I have taken this opportunity of combining a promotion for my inherited latent talent as a potential brewer with an appreciation of an address.

Your company's name has intrigued me for some time. I used to play for a rugby football XV. I thought therefore that the IXL after Elders meant that 39 players formed an Australian rules football team. No wonder it's a rough game.

For years, Fleet Street in London felt the presence of Canadian newspaper barons. Beaverbrook, Thomson, Black. Fleet Street now feels the presence of the Australian newspaper baron and North America feels the presence of the Australian industrialist.

And that unique IXL name appears to be part of a new, fresh approach to the business world by the Australian industrialist. Crocodile Dundee touts Fosters lager in a way that encourages people like me to drink it and ignore the lifestyle beer advertisements of your competitors which send a wrong message to Canadian youth.

I was pleased that you joined us today and have given us your views on Italian organization, the effects of deregulation, on agriculture. You have identified investment opportunities.

On behalf of the Empire and Canadian clubs, we thank you indeed for your address and wish you well in your future endeavours.