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A Fair Profit?

Entry 203, on 2005-08-05 at 13:13:45 (Rating 3, Comments)

Two events recently have made me want to launch into a rant against greedy big business people and their tactics.

First, a large timber production company wants to reduce their staff and close down part of a factory because current business conditions, including the high value of our dollar, makes operating conditions difficult.

I expected to hear the factory was running at a loss and that "downsizing" the workforce was the only viable option. But it turns out that the factory is still making a profit, its just not making enough profit to keep the senior management and shareholders happy. Laying off a few staff to make a few extra dollars for the rich shareholders isn't a problem to them, apparently.

I'm sure there have been times in the past when this business made more profit than expected because of favourable conditions. Surely it isn't too much to ask that they keep their staff working when things aren't quite so good. They even admitted they expect to re-hire them at a later date when it suits the company. These are people, not another commodity that can be traded in any way that benefits the company.

Its about time businesses looked at the big picture, and didn't focus only on that one magic number, their annual profit. If the shareholders don't like it, that's OK. Do we really want people investing in local companies who are only interested in greedily extracting every last dollar whatever the cost? I don't think so.

The second piece of news I heard was a huge profit for New Zealand's main telecommunications company, Telecom. They proudly announced a profit of almost one billion dollars. Most of this will disappear overseas to shareholders from other countries who don't feel too bad about exploiting another country, in this case New Zealand.

One of our previous new right governments sold our state owned phone system to overseas ownership and they've done nothing but provide overpriced mediocre services, and ship vast amounts of money, as profits, overseas ever since. Well thanks a lot - its yet another example of the failure of the new free market economy!

Comment 1 (60) by SBFL on 2005-08-07 at 12:31:26: (view recent only)

Oh dear, I don't know where to start. OJB - let me ask you a question: If you had a $1000 to invest and you had it in a saving account with a return of 5% per annum and then you later came across a managed fund that gave 10% return, would you leave your money in the saving account or transfer it to the managed fund? Now replace $1000 with $10,000,000 and saving acocunt with company A and managed fund with comapny B. I think you can see where this is going (if you choose to stay with the savings account/company A I don't believe you). Just because you are making a profit doesn't guarantee survival. This is reality. You mention the 'people' factor. I think what you need to realise is that it is usually the option of last resort to close down the company or business unit and that's when everyone loses their job. Before a company failing altogether it will try to cut costs. If this means downsizing the workforce to save the company and all the remaining employees then surely this is a good thing from an overall perspective. You need to realise that when conditions are less favourable for the company, such as a market downturn, the player with the lowest costs will survive the longest. By maintiaining high costs (and lower profit than your competition) you are only delaying the inevitable.

On your second point I haven't studied the Telecom case closely over the years but I think it's fair to say that it's making it's huge profit because it was sold...it now has investors and management that are competent and interested in the telecommunications industry. Do you really believe that it would have made that same profit today had it still been government owned and operated over all those years? By allowing foreign investment, we pump money into the New Zealand econonmy where we can't do it ourselves. Sure, share dividends will be taken out as well but that money would never existed anyway because we don't have the means (investment) to realise or generate it ourselves (we are a small country). This doesn't apply to all cases, but in scenarios on the scale of Telecom, more often than not it does.

I actually believe that the government should retain some ownership of the SOE's it's wants to sell. Just a minority shareholding where it allows the experts to manage the business, the big investors (local or foreign) to grow the business and when payday comes the New Zealand public wins out (and because the business is growing the investment stays and everyone keeps their jobs!). We are dreaming if we think this will happen with the government maintaining majority ownership and management.

I can't say the consumer is winning much though so will agree with you on the point that the services are mediocre. It is definitely better than it used to be though (at least you can get a new connection hooked up within 24 hours these days) but Telecom still have a long way to go. We all know the reason for this though - little competition. The government need to change the rules to make it easier for TelstraClear and other players to enter the market. Telecom is a bit like Microsoft - it abuses its strength in its core market to win the battle in value-added markets (eg Microsft did this using Windows to promote IE, Telecom are doing a similar thing with its bundling of services such at mobile, land and internet).

Comment 2 (62) by OJB on 2005-08-08 at 15:40:38:

But is that true? There have been companies threatened with closure, who have been run as a cooperative by the workers, or run by other alternative forms of management, which have gone on to survive OK (I admit I can't think of the names right now, but it has happened). I think laying off staff and downsizing is just an easy option these companies take. They need to be forced into looking at other options instead.

Of course Telecom is making a huge profit because it was sold! What I'm saying is that it making a huge profit is a bad thing for the country. I would prefer it make a small profit - that way less of our money disappears overseas. And we do have the funds to do telecommunications ourselves, before the sale a lot of modernisation had already been done.

How does a business growing help the New Zealand public? By growing you mean making more profit? They are taking our money and sending it overseas instead of re-investing it here. How is that an advantage to the public?

Remember that the technology has changed a lot. When you say a connection can be made more quickly now, that's a lot to do with the computerised exchanges. I still hear horror stories of incompetent bugling at Telecom, so if you think they are that good, you are sadly mistaken!

OK, so at least we agree about monopolies being a bad thing.

Comment 3 (65) by SBFL on 2005-08-09 at 13:10:52:

On the first point, I think you need to get involved with a real situation like this to appreciate the reality. I don't mean to be smart but there's no way I am going to convince you unless you see it for yourself.

I appreciate that profits are leaving the country and that's not good. I mentioned that before. What I am saying is you need to look at the whole picture... funds coming in as well. Where do think this modernisation comes from? Thin air? Or maybe investment from overseas?

By growing I mean generating more cashflow and investing it to grow the business (more R&D, new product lines and services = more jobs). If it doesn't grow you will end up with the same dinosaur we had in the 80's, and then we will have job losses because Telecom is obsolete and making a loss... just like what happened to NZ Rail.

I believe the free market economy is working in NZ. It was started by Labour in the late 90's and is being well looked after by Labour currently (and of course National did a lot of the hard yards in between). That is why we have a strong economy and low unemployment... and this is pretty much the majority viewpoint in NZ.

Comment 4 (69) by OJB on 2005-08-10 at 19:25:43:

Modernisation is available to everyone, we don't need to have our companies owned overseas to have them modernised. And if we have an extra billion per year not disappearing overseas, we can use it for even more investment.

Telecom growing has provided more jobs? I don't think so. As soon as these organisations were sold off they eliminated huge numbers of jobs.

You're using NZ Rail as an example? Have you seen what a mess our rail network is now? Tracks falling apart because overseas owner were more interested in profit that running a good service!

I know the free market economy is accepted as a good thing by the majority, but the majority are often wrong. Maybe they are in this case, as well.

Comment 5 (82) by SBFL on 2005-09-04 at 20:21:04:

You say "Modernisation is available to everyone". This must explain why African companies are doing so well and NZ has a space program just like NASA's. Get real, modernisation is not available to everyone. You need money/investment for this.

They eliminated huge numbers of claytons jobs. Pen pushers on cushy numbers. SOE's are famous for their inefficiency, though I accept things are pretty good in NZ at this time.

If you don't think the free market is a good thing you should go to protected (or formerly protected) countries. Like Eastern Europe. You should have seen Mexico before NAFTA - miles behind their northern neighbours in quality and innovation, and very little choice for consumers.

Comment 6 (87) by OJB on 2005-09-05 at 10:11:18:

Well you need to pay for it, but a government or state company can acquire it as easily as a company funded by foreign investors. That was my point.

Its easy to say only meaningless jobs were eliminated. I know personally of many skilled people who lost jobs, and because of this services suffered, so clearly that isn't always true. Maybe it isn't true at all.

I probably didn't make this clear, but I support moderation in economics. I don't reject free markets entirely. I just want controls on them so that the worst excesses of the system are avoided.

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