Speech to CEDA Digital Disruption Series

It is a pleasure to participate in CEDA’s very important ‘Digital Disruption’ sessions.

The disruption of industry after industry by a better, internet based offering is one of the great constants of modern economics.

Ask Kodak about digital photography; Fairfax about Seek.com.au or Drive.com.au; the free to air TV networks about Apple TV or YouTube; Angus & Robertson about Amazon; Blockbuster about Netflix; or Taxis Combined about Uber.

It has a profound industry-by-industry impact; it is also, increasingly, having a profound national impact.

Some nations are doing well out of this massive economic transformation; some are facing grave economic threats.

The authors of a recent book, Why Nations Fail: The Origins of Power, Prosperity and Poverty, argue that:

during the critical juncture created by the Industrial Revolution, many nations missed the boat and failed to take advantage of the spread of industry.[1]

Today, one of the nagging questions for policymakers in many countries is whether, by failing to capitalise on the digital transformation sweeping through our economy, their nation is going to miss this particular boat.

I was intrigued to read a report recently issued by the Chilean National Council on Innovation for Competitiveness, which notes that the council was formed in 2005, because of:

… a growing conviction that something different must be done to change the country’s productive orientations, and innovation emerged as a promise for greater competitiveness, growth and quality of life for Chileans.[2]

In the brief time available to me today, I want to argue three things about our national policy response to digital disruption.

The first is that there is a vigorous and exciting national dialogue about the policy issues at stake here – and the prize we could capture.

The second is that some basic maxims of business and economic strategy remain just as important as ever – in fact even more so - in the face of digital disruption.  In developing corporate strategy, the first question you ask is, ‘Where do we have a competitive advantage’?

It seems to me Australian businesses – and in turn policymakers - need to think even harder about that question in a world where digital disruption means Australian businesses can both compete on the world stage – but also face competition domestically in sector after sector which used to be protected by barriers to entry.

My third argument is that one clear area of focus for our national innovation system must be the challenges faced by start-ups in attracting both capital and talent.

A Vigorous National Dialogue

We are seeing an increasingly vigorous national dialogue about how to improve our national innovation performance – and in turn capture the opportunities that digital disruption can offer.

To start with, there is growing awareness of how much is at stake.  For example, a report from Deloitte Digital found that almost one-third of the Australian economy faces imminent and major disruption due to the transformative power of the digital economy.[3] The sectors most likely to be affected include some of Australia’s biggest employers, such as retail and professional services.

I am pleased that many industry thought leaders - including people like Pip Marlow at  Microsoft, Alan Noble at Google Australia and John Riccio and his colleagues at PWC, just to mention a few - have been vigorously making the case that Australia needs to seize on the opportunities for innovation.

For example, Microsoft’s recent discussion paper, Joined-up Innovation, presents a vision for creating innovative, high value-producing businesses by ensuring that all elements of a business’s innovation ecosystem are better informed and better connected locally and globally.[4]

Thanks to John and his team here at PWC, we have an idea of the potential value of innovation to Australia’s economy in the future. Modelling by PWC shows that an ecosystem based on innovation and digital technologies has the potential to increase Australia’s productivity and raise GDP by $37 billion in 2024.

Startup Australia – an advocacy group established by a group of leaders in the Australian startup community - recently released an action plan entitled Crossroads with the aim of developing a vibrant tech start-up ecosystem in Australia.[5] 

I was interested to note some of its recommendations, including implementing a national visiting entrepreneurs’ programme; launching a national ‘learn to code’ promotion programme; establishing a young entrepreneurs’ start up loans scheme; and ensuring that computer science is taught in every primary and high school in Australia.[6] 

It also has a useful list of successful Australian startups over the last twenty years, including Seek, Wotif, Carsales, Freelancer and Atlassian. 

The growing visibility of some of these companies has itself added vigour to the national debate. For example, Atlassian co-founder Mike Cannon-Brookes recently said:

The biggest problem with government is it doesn’t understand technology. Technology is going to be the major driver of change over the next 25 years. It has been over the last 25.

Now, if we’re not participating as a country in creating that technology, we’re going to be purely a consumer of overseas technology.

We’re not going to have the wealth created here and I don’t think the government understands that in the way that they behave.[7]

Where Is Our Competitive Advantage?

In the face of these pretty vigorous criticisms, what should government do?  Earlier this year, I joined Minister Malcolm Turnbull on a visit to Silicon Valley.  It led me to reflect on how the policy issues in this space have evolved since the mid-nineties, when I was working for then Minister for Communications and IT, Senator Richard Alston. 

At that time, a commonplace call was that Australia needed to have its own ‘fab plant.’  We needed to manufacture silicon wafers, and if we did not then we were locked out of the information technology revolution.

Another common argument was that we needed to build our own Silicon Valley – what might be called the Silicon Billabong strategy, in line with Silicon Glen in Scotland, Silicon Fen in Cambridge, UK, and many other attempts around the world to replicate the powerhouse IT cluster of the San Francisco Bay Area.

Of course, as history now records, Australia stuck with its traditional industries and has enjoyed the fruits of a massive commodities boom.  Indeed by 2013 the Credit Suisse World Wealth Report would rank Australia second highest on average household wealth, and highest on median household wealth, of all the nations in the world. 

Now I certainly do not contest the proposition that there were profound digital transformations very much underway in the nineties, and twenty years on they are continuing at an even greater pace.  On the contrary, I strongly believe that digital disruption is one of the most fundamental forces affecting our economy.

I simply make the point that identifying such transformations is one thing; identifying the right strategic response, at the level of an individual corporation or at the level of a nation, is another thing.

In my view one sensible principle which should guide our decision making as a nation is to play to our strengths.

I was struck by a point made by the OECD in its 2011 Science, Technology and Innovation Scorecard: the degree of specialisation of every G7 economy except Canada has steadily increased in recent years.[8] In a world of ever-increasing trade, this makes sense and is consistent with the principle of comparative advantage.

Lest I be misunderstood, I am not arguing for a second that we should ignore the digital disruption of our economy and retreat to industries where we have traditional strengths. 

Rather, I am arguing that digital disruption is making the world an even more intensively competitive place.  On the plus side, that means that Australia certainly has the capacity to be world competitive in developing and exporting software – and unlike many other products, because it is weightless and incurs no transport costs, we do not face a cost disadvantage from being a long way from major markets.

But on the minus side, businesses located in lots of other countries can also be world competitive. So it becomes even more important to work out what your strengths are – and where you are going to be good enough to build not just a strong market share in Australia but a strong market share globally.

One implication of that principle, I believe, is that if Australia has a world class, large scale resources industry, or agriculture industry, then the development of IT applications and services to make that industry more productive and efficient might be a niche where Australian companies have an advantage.

I recently had the chance to visit the extremely impressive Rio Tinto Control Centre in Perth.  Some 300 people work in this centre, and it looks rather like a foreign exchange dealing room in a bank, enhanced with the largest and highest resolution wall size video screen I have seen since visiting the Foxtel network control room in Macquarie Park.

This centre controls 14 mines, multiple railway lines, and several ports – 1500 km away in the Pilbara.  It is a powerful demonstration that modern mining is extremely capital intensive, highly technologically sophisticated – and just as susceptible to productivity improvement through digital technology as is banking, travel, entertainment, or any other industry. 

Another example of the potential for digital transformation of our traditional industries is the Sense-T initiative led by the University of Tasmania & CSIRO.  The objective is to use sensor technology – gathering data which is aggregated in the cloud – to manage businesses in industries like agriculture and aquaculture more efficiently.  One application is monitoring the heart rate of oysters.

Of course another example of playing to our strengths is the Government’s recent announcement of a Medical Research Future Fund, to build to an endowment of $20 billion.  The capacity to fund Australian researchers to unpack the mysteries of the human genome is just one example of the data-crunching I hope we might see spurred by this fund.

Challenges faced by start-ups in attracting capital and talent

The third issue I would like to discuss today is the challenges faced by start-ups in attracting capital and talent. 

I recently met with a constituent, David Mills, who is a physicist and a world-class expert on solar energy. 

In 2002 David founded Solar Heat and Power with some fellow academics, and worked towards the development of a prototype solar electric plant using their technology. 

A deal with an Australian energy utility fell through, and ultimately they needed to go to Silicon Valley to raise venture capital funding.  This they successfully did, raising over $100 million. 

Going overseas for funding came with some consequences, according to David.  First, the management team of the company was gradually transformed until there were virtually no Australians left on it; and secondly, the location of the first prototype plant was in California rather than Australia. 

David argues that:

- There is world class research in Australia in a range of sectors – he cites renewable energy, biotechnology, and mining technology.

- But in some of these sectors it is hard to access private capital locally.

- If you access overseas capital, the consequence tends to be that the benefits from technology manufacture go overseas.

The Abbott government has a number of processes underway to look at some of the policy issues applicable to start-ups in attracting capital and talent.

The first is crowd funding. 

Last year the government asked the Corporations and Markets Advisory Committee (CAMAC) to look at crowdfunding, and it has now published a report.

Some of its key recommendations are:

- Companies should be permitted to raise funds in this way, and to do so they would need to have the legal status of an ‘exempt public company’

- They would be able to raise up to $2 million in a twelve month period

- Anybody could be a ‘crowd investor’ – you would not need to be a ‘sophisticated investor’ for example – and you could invest up to $2,500 in any one company, and $10,000 in total, in a twelve month period.

This is an important report and I hope it will provoke some vigorous discussion. 

The second area is employee share ownership plans and share options.  These are obviously a key staff attraction and retention tool widely used in the tech sector in the US and other countries.

Australian start-ups have a big problem attracting and retaining staff when they cannot match the equity and option offerings of tech firms overseas, including the US.

This is a concern regularly raised with all of us in the Parliament who take an interest in the tech sector.

In January and February of this year, officials of Treasury, Industry and Communications Departments held some industry consultations on potential changes in this area.  That work has also including looking at examples of how employee share schemes have been implemented overseas.

For example, in the UK, there are four separate arrangements that offer preferential tax treatment of shares or options.[10] Singapore operates an Equity Remuneration Incentive Scheme (ERIS) for new start-up companies.

This issue is being looked at by the taskforce which is working on the National Industry Investment and Competiveness Agenda, and that taskforce will report to the Prime Minister shortly.

Conclusion

There is no doubt that the world economy is facing a fundamental disruption due to digital technology.

How we respond could be critical to Australia’s future prosperity.

These are important issues – and I congratulate CEDA for establishing this forum to debate them.

[1] D Acemoglu & J Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty, 2012, Profile Books, p 217. [2] Chilean National Council on Innovation for Competitiveness, Surfing Towards the Future: Chile on the 2025 Horizon, p 15 [3] Deloitte, Digital disruption: short fuse, big bang? September 2012, page 9. [4] http://www.microsoft.com/australia/presspass/post/Unleashing-the-power-of-joined-up-innovation-in-Australia [5] http://startupaus.org/crossroads/ [6] StartupAUS, Crossroads: An Action Plan to Develop a Vibrant Tech Startup Ecosystem in Australia, p 2.  http://startupaus.org/crossroads/, pp 19-21 [7] http://www.businessinsider.com.au/the-atlassian-founders-say-the-australian-government-doesnt-understand-tech-2014-5, downloaded 9/6/14 [8] OECD (2011), OECD Science, Technology and Industry Scoreboard 2011, ‘Summary in English’ [9] CAMAC report Crowd sourced equity funding (May 2014). [10] https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis