AUSTRALIA | 22 March 2017 | Australian Financial Review
High-margin services and technology to take greater role: Ciobo
Minister for Trade Steven Ciobo says there has been strong growth in the export of services.
Edwina Pickles by Mark Abernethy, AFR
The future, says Minister for Trade, Tourism and Investment, Steven Ciobo, will include a diversified export effort, with the high-margin services and technology sectors playing a greater role – sectors that are often driven by small and medium-sized enterprises (SMEs).
“Australia’s trade landscape is changing, we’re seeing a real growth in services exports, with a 9.5 per cent increase from 2015 with a total export value of $71.5 billion [ABS data].
“We are committed to setting up Australian SMEs in the tech and digital sectors with the best possible resources to enable them to compete on a global basis. I’m seeing some of the greatest opportunities for export in the start-up and innovation space.”
Ciobo says that along with domestic support for innovation-focused firms, there are initiatives such as Landing Pad in offshore markets and the Export Finance and Insurance Corporation’s finance initiatives that include the Export Line of Credit, Small Business Export Loan, Working Capital Guarantee and the Export Venture Debt scheme. The Export Venture Debt scheme allows start-ups to raise loans between their funding rounds, against contracts and invoices.
“The Turnbull government is committed to giving Australian SMEs more options when it comes to export support and EFIC’s new products developments are a cornerstone of this.”
The Minister says the digital-tech space is filled with start-up businesses with equity funding arrangements.
“I’m pleased to say that EFIC’s new Export Venture Debt solution will be of particular help to SMEs in the digital and innovation space, and will further expand the government’s support for these important industries. It provides support to businesses that are experiencing high growth and need working capital to support an export contract between funding rounds. The loan would allow businesses to direct their investment funding to more strategic aspects of the business, providing an alternative to selling equity to raise capital or having to sell inventory at lower valuation.”
CEO of the EFIC, Andrew Hunter, says a lot of the export opportunities are being pursued by low-volume but high-margin companies, many of which are SMEs.
“We’re not a low-cost labour country, so we have to support our high-end, value-added businesses who sell at higher margins. Many of them are SMEs and their biggest barrier to opening markets overseas, earning revenues and employing more people, is access to export finance.”
In EFIC’s Exporter Sentiment Index, SMEs were confident about the year ahead, with over half of Australian exporting SMEs believing they are in a better financial position than 12 months before.
Hunter says more than half of SME exporters expected their overseas sales revenue to increase over the year, but the SME sector still struggled with export finance.
“We’re still seeing access to export finance as a key concern for Australian SME exporters. The results show that one in five exporters expect access to export finance to become more difficult,” says Hunter.
“We find that businesses are unable to access finance through traditional avenues, like their banks, and so are unable to take on new export opportunities.”
Hunter says banks generally do not lend to exporting businesses that lack collateral. “We wrote an export loan for an experienced exporter, with a large export contract. They came to see us because their bank said ‘no’ to a loan.”
EFIC’s SME lending books is $150 million, it turns-over its capital every nine months and Hunter says the default rate is around 1 per cent.
Filling the gap
EFIC does not compete in the finance market – its mandate is to fill the gap not serviced by banks and other lenders. The gap includes working capital facilities, where the business has a purchase order or contract for supply, but the bank can not make the loan.
“These are Australia’s best companies,” he says. “They have great expertise and they’re in foreign markets already. We don’t usually lend to first-time exporters.”
He says EFIC is a financier and an educator. “We’re trying to bring the banks on from the ‘real estate lending’ model. When we’re about to do a deal, we send the offer to the customer’s bank, and let them take it first.”
In the past eight months, banks have taken 12 of those ready-made deals, worth $18 million.
“The banks would have taken none of those deals three years ago,” says Hunter. “So we’re getting somewhere.”
One company using EFIC is COzero, a Sydney-based energy monitoring and management company that uses patented smart technologies to save energy users between 5 and 25 per cent of their annual power bills.
The business is 10 years old, having made large inroads in the Australian market with its EnergyLink energy management product. But exporting has not only happened relatively recently, says COzero chief executive Geoff Alexander, but it also occurred in a very large way.
“We were the successful tenderer to supply energy management solutions to the customers of a Japanese power company called Ennet,” says Alexander. “Ennet is a large organisation and we have 22 employees in Sydney.”
Alexander called the contract “incredibly significant” for his business; the three-year contract is measured in the “multimillions of dollars”, but he says the company needed working capital to operate at the higher corporate level.
“Just the legal work to operate with such a large company, is expensive.”
‘High rate of reinvestment’
Alexander also says that like most high-tech small companies, most of the revenues are ploughed back into research and development.
“We’ve got a high rate of reinvestment in R&D,” he says. “We have to stay on the cutting edge so we’ve invested heavily in artificial intelligence, cloud computing and software development.”
He says most of the 22 employees are high-level engineers, software developers and electrical engineers, so the business also has a large salary bill.
“When you’re selling products and expertise based on innovation, you have to have the best people
COzero used an EFIC facility called the Expert Contract Loan. The $1 million loan is written on contracts from Ennet and repaid over two years. The Ennet contract has a minimum payment and is also a revenue model as Ennet’s business customers take-up the EnergyLink product and service.
“The loan allows us to finance the implementation period with Ennet, before the revenues eventuate,” says Alexander.
He says the Export Contract Loan makes available crucial working capital so the export contract with Ennet can be fulfilled. He says EFIC can see from the contract that there are revenues to cover the loan.
He says Japan is a first exporting step for COzero and the company will be selling EnergyLink into other markets in North and Southeast Asia once Japan is established.
“There’s a big export market for our products, but to be in those markets we need finance solutions not offered by the banks.”
‘These are powerful systems’
Another innovative Australian company using EFIC finance solutions is BroadSource, a Melbourne-based innovator in the unified communications (UC) industry.
BroadSource employs 24 people and made its name integrating large telcos’ business clients into cloud-based telephony-mobile-internet (UC) solutions such as teleconferencing and collaboration technologies that allow teams around the world to work on shared screens.
“We install the mega-systems that can take 10 million users,” says the co-founder and CEO of BroadSource, Haydn Faltyn.
His clients include telcos such as PCCW, Digicel and Vodafone, which have major customers such as government departments and large corporates. BroadSource works all over the world – Asia, Europe, North America – integrating UC systems into telcos and implementing the systems in the telcos’ major corporate and government clients.
However, BroadSource has also turned into a leader in apps development and software IP, in what is known as the “Mobile Persona” space.
This is a new area where the power of a telco, a cloud-based application server and a smartphone come together to allow the user and the smartphone to control the cloud experience.
“If a typical unified communications system has one hundred features,” says Faltyn. “The average corporate user will use two or three of the features. These are powerful systems but users don’t use all the features because it entails logging-in and changing settings, and people are busy.”
BroadSource has developed an app called “PiPA”, which uses geo-fencing, cloud-computing, smart landlines and smartphones to put all the UC features into a phone.
With PiPA on your phone, you can “shake” a call from your mobile onto your landline, and “touch” a call in progress from the landline onto your mobile if you have to leave the office during a conference call. If you go into a meeting and turn your phone flat on its screen it immediately enables the “do not disturb” settings and messages.
The company calls these tools “recipes” and the PiPA app contains between 70 of them.
One of the recipes allows the employer to set the phone so it takes no calls or makes any text alerts when the user is driving. PiPA also switches automatically between personal and business profiles based on time- and location-based triggers.
“In Germany there is a strong cultural barrier between work and leisure, so if you’re in a pub and it’s after six in the evening, our app switches you to a personal profile.
“As work becomes global and people are collaborating in teams, we’ll all be communicating in the cloud, through landlines, mobile and computers screens. When we’re all in the cloud the distinction between personal and business will become important to individuals and organisations.”
‘We needed access to working capital’
BroadSource is currently located in Melbourne, London, Seattle and Dusseldorf and is about to expand into North America. Faltyn says the compound annualised growth is around 100 per cent for the company, based on project work alone, and the company expects a workforce of 200 within three years.
BroadSource is a technology player but has not yet taken an investor.
“We’re funded out of earnings, and in order to complete our project work and build our patented IP [PiPA], we needed access to working capital.”
That came from EFIC’s Export Line of Credit, which uses purchase orders or commitments to underpin a revolving line of credit up to $200,000. The company can download and top-up the facility on a needs basis, meaning the business activity supports the finance available.
“Our clients pay on 120-day cycles but our costs arrive faster than that.”
Like many technology firms, BroadSource’s biggest regular bill is the high-value employees who are mostly engineers and software developers.
Faltyn says the development lead-costs of an application are high before revenues materialise and the costs of patent attorneys is an ongoing cost.
“We have our US patent attorneys working to ensure we own and protect our IP,” says Faltyn. “It’s an investment, but it’s not cheap. Small Australian firms can compete with the world, but we need finance solutions to smooth out the inevitable cash flow problems.”
Read more: http://www.afr.com/news/special-reports/export-and-trade/highmargin-services-and-technology-to-take-greater-role–ciobo-20170319-gv1r6k#ixzz4c1t72uGT
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