Developing markets, including Eastern Europe, India and China, are occupying Peter Scanlon – although he does have time to dabble in the Australian waterfront.
Scanlon, Australia’s most tight-lipped tycoon, can stop talking emerging market opportunities. For a man who has been a mastermind behind two successive business empires – Elders in the 1980s and Patrick/Toll more recently – the 64-year-old is relentlessly enthusiastic about the fortunes to be made in China and Eastern Europe.
But the man who made $400 million out of the Toll takeover of Patrick last year (he owned 6.5%) is very gloomy indeed about the prospects for the sub-prime plagued US economy, which he describes as a “basket case”.
On the ASX, Scanlon has recently emerged in partnership once again with former Patrick managing director Chris Corrigan, as a 5% shareholder in the new stevedoring company KFM. But it’s in China that Scanlon spends his money and much of his time these days …
Well Peter, you’re spending a lot of time in China lately. What do you think the prospects look like for China?
Peter Scanlon: I think the prospects for China are sensational as the middle class grows and the domestic economy grows. I think the opportunity for people who know how to run good businesses, to establish themselves in China with the Chinese management and partners, the opportunities are enormous.
What do you have to do to establish yourself?
I think the process is different from what we’re used to in the Old World, if I could put it that way. Certainly you need a lot more patience. Just the cycle of acquiring licences to make sure you are operating legally can take you one to two years. It just does demand a lot of patience. I think it demands a lot of training of the staff within China. There’s a lot of natural talent there but we need to spend time with them, understanding their ways but also making sure we get a chance to contribute the things we understand.
Can you see the China boom just going on and on? I suppose that’s the big question.
I think I’d probably break that in two parts. The China boom as it relates to the internal Chinese economy, I can see going for a long, long time. There will be a great growth of the domestic economy and that’s where we’re targeted, rather than import replacements or exports. In terms of the other part of China, whether it can carry the rest of the Old World for the reasonable period of time, I think the answer’s yes but at a lesser level than it has been in recent times.
And how do you feel about the global market at the moment?
I think the US is a basket case. I think it will have some effect in the developing world but given they want to restrain their growth rates a little bit, it won’t affect them so much but there will be a spin off to the Old World.
Define basket case.
I think there’ll be a significant downturn in growth in the United States for a period of time. Not a disaster – the Americans have been proven resilient because of their strong domestic economy but they will have negative growth for a while.
So are you loading up with cash in your investments in preparation for a significant problem?
No, we’ve taken the attitude to reinvest a fair degree of our resources in what we call the developing countries, primarily Eastern Europe, India and China. We’ve been talking to you today about our China arm. Maybe Brazil. We find Brazil a bit hard because in essence we’ve grown up in the Old World and really it’s not the world any more. It’s a small part of it. And getting smaller.
And what do you like about Eastern Europe?
High growth. Reasonable demographics and its economic performance will come up to the level of Western Europe, at the cost of Western Europe for a little bit but there will be good rewards for people everywhere, if you do the business well.
And what about Australia? I mean Australia’s going through a boom at the moment because of its proximity to China. Do you think that can continue?
Yes I do. I do. We need to continue to be tough on productivity. We have an unhealthy – but I can’t see it changing – reliance on the service sector. I think we still need to get some of our rules and regulations and taxes in tune so that corporations can work from here and service the Asian network. I think Paul Keating was pretty right with what he started but we’ve sort of stopped and stalled that process. I think Australia’s got an exciting future.
Are you happy about the change of government?
I’m not unhappy. I think it’s a reasonable punt but time will tell. I mean they’ve got the chance to do it. There are some talented people in the new Government. They have got some experience I think in there. As long as they start thinking about governing for the country and not winning elections, we’ll all be better off.
The key thing we spend some time at is the demographics around the world and a decline in the natural birth rates and the movement of migrants around the world. Demographics are going to play a very important part in the next 30 years of economic returns. It’s worth watching, of course. In Western Europe you have fertility rates as low as 1.1 in places like … Spain, I think it is. Which effectively means there’s half as many Spanish every generation. They are big numbers.
So how does an investor think about that and take advantage of those big changes, do you think?
First of all, you try and pick places where the demographics aren’t like that. Take a place like China: it has a low fertility rate because of their controlled policy of the past, which is now starting to change, but because it’s got such a high growth of the middle class over the next 20 years it more than compensates for it.
But if you take our own country, I mean there will be a real big change in the number of people in that 20–50 age category in 30 years’ time. Will they need as many offices. I doubt it. Will we need as many schools? I doubt it. It will change. Quite dramatically. People tend to try and service that older sector of the population but in due course it will decline too. That’s a fair way away, so natural growth allows you to make a lot more mistakes in business than when there’s no natural growth.
You mean natural population growth?
And so you’re looking around for countries that have got high birth rate?
If they don’t have population growth they have to have some compensating factor like the growth of the middle class from a low income base, which effectively has the same consequences.
And is that one of the things that’s attractive about Eastern Europe?
Right. Are there any other countries that are not at that sort of level where they’ve still got a high birth rate? I suppose it’s possible that in some countries the high birth rate is a negative because they can’t cope with it.
Yes, because they don’t have the infrastructure or the resources or the systems or the Government that we have. I mean, the European Union is an amazing social experiment where you’re actually allowing for the first time the freedom of movement of people between countries and various governments giving up their political power across to a central authority. It’s an amazing experiment. One day that may lead to the free movement of people around the world. Hard to believe yet but …
It’s certainly having an impact on Europe and Eastern Europe, as you’re saying, and now Turkey wants to get in.
Yes. It’s an amazing social experiment. The biggest one in my lifetime.