Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016 - (Page 5)
Are we in a new
Coming at the same time as this declining profitability, digitalisation
is turning the models of the past on their heads and contributing to
deteriorating profit margins. The "Uberization of the economy", a term
coined by Maurice Lévy of Publicis, is now an established fact. A huge
disruption or rupture between the old economy and the new has become a reality. It is as if a tsunami has hit every branch of business and
industry. Today any industrial or service model whatsoever can have
the bottom knocked out of it and find itself bled white. Anyone can become your competitor, appearing out of nowhere. No economic model
is safe, and everyone can suddenly find themselves "uberized" without
warning. However, these new models, for those that adopt them, do
not yet produce the full return expected of them and their valuations in
no way reflect their profitability. Sometimes they do not even generate
any revenue or have any "defined business model". They monetise only
a small proportion of "their customers". They are still a long way from
These three factors, in addition to others, will ensure that companies
will be different in the future, and sadly some of them will be less
profitable. Profitability will certainly be relative, and will be measured by comparison and in relation to the current low rates of inflation
or deflation. The transformation will be costly in earnings and in the
fullness of time will not necessarily yield the same return as in the past.
Shareholders, who are increasingly fragmented, will just have to get
used to this and can no longer expect permanently ebullient markets.
We have entered into another dimension and we have to accept lower
profits, which have to be comparable to other asset classes. A return to
family-based or smaller shareholding structures will also be a feature of
this economic revolution. No, the capitalist economy will certainly no
longer be the same as the one we have known for the last few decades.
We are going to see a sort of economic Darwinism. Natural selection
will take its course and the new economic function or environment
will create the body or the structure most suited to the new situation.
We have passed a milestone, and there is no doubt that it will mark a
stage in economic history in which companies are forced to reinvent
themselves through a root and branch transformation.
"They did not know it was impossible so they did it" (Mark Twain)
/ AUG / SEP 2016
We also need to be concerned about the disillusion of some companies
with stock market listings that are trying to escape from them. The cost
of the listing has become huge. Ever more restrictive new regulations
are costing companies dear, especially listed companies. The European
Commission's idea of expanding the capital markets with the CMU is
certainly laudable, but those companies that venture down that route
will find themselves embroiled in additional costs.
Businesses, like sequoias, are perceived as being entities that grow ever
bigger and ever higher. Profitability is not boundless. A budget must
not be what went before plus something else. Through having cut out
the fat and brought down costs, companies have ended up more efficient and profitable in spite the crisis, more pertinent and with lower
borrowings. However, the huge efforts made should not mask the fact
that they cannot go on being repeated forever. Tomorrow's businesses
will no longer be as remunerative as they were in the past, economic
crisis or no economic crisis. There is one thing that we find to be a fact:
profits are gradually dwindling. The prices and PEs seen in the stock
markets do not reflect this erosion in profitability. Low interest rates
have rerouted cash towards the stock markets. But current stock market valuations disguise this fall in profitability. The last financial crisis
in 2008, which was perhaps the worst ever known, should at least put
an end to these huge fluctuations and excessive peak to trough swings.
The vectors and economic fundamentals may be expected to keep on
moving but to a lesser extent and more smoothly, without the excesses
of the past.
The last reason that can be identified lies in the modern shareholder
structure of (listed) companies. From companies that were held mainly
by individuals in the 1960s, we have gradually moved to companies
controlled mainly by institutions and funds. The value creation revolution seems to have been left far behind. Quarterly profit has become
the yardstick for companies. Besides, people talk of "short-termism".
Company directors no longer come from the families that founded the
companies, and are far removed from the shareholders who are anyway
impersonal because they are investment funds. We also hear of double
agency, with assets held by millions of individuals who are in the hands
of a just few asset management groups. They obviously no longer think
like owners, and their lack of long-term vision could affect this muchneeded questioning of the economic model.
Surely some of the foundations of capitalism as we know them need
to be redrawn, and we have to accept that there have to be a different
fulfilling the promise people see for them. But in the meanwhile, every
company needs to reinvent its business or businesses and to refocus
intelligently and fast. Speed is the watchword for survival. You need to
get on board the digital train and not to be left standing at the station.
However, it is a matter of finding the right mix for the approach, of
avoiding over-enthusiasm and falling into the trap of "excessive digital
". This disruption and transformation is the challenge for the years to
come. It is a matter of finding the best mix and the right model that
bridges the old and the new economies. This second factor may be
explained by the theories of Adam Smith and the idea that increased
competition brings down costs (in the interests of consumers and to the
detriment of business). The feature of digitalisation as we know it is that
at the outset it produces a whole crowd of new competitors.
LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE
The year just past may perhaps turn out
to be a crux year in economic history.
In a few years' time we will think back
to that year as being a major turning
point in modern capitalism. Perhaps we have moved into a new era for
all commercial companies. Companies need to reinvent themselves
to survive in this new economic dimension. This major inflection is
explained by not less than three reasons that are totally unconnected
with each other, but that contribute to the evolution of tomorrow's
economic model. It is looking as if austerity may have its limits, and
that cost-cutting cannot go on indefinitely. Companies will have to
accept their future margins being lower. Yesterday's profit margins are
a thing of the past, even in the digital economy. The digital revolution
of the economy has speeded up dramatically. What went on here and
there seemed to be the stuff of stories and fairly harmless until UBER
made its appearance. UBER is only a minuscule part of this mega
digitalisation, but it is very much a symbol that has caught people's
imagination. And again, the structure of shareholdings in companies
has changed profoundly since the 80s. These three factors, which are in
no way connected with each other, explain amongst other things the
need to move towards a different approach to doing business.
Chairman of ATEL
Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016
Table of contents
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW Philippe Gelis - Kantox - Fintech and the future of banks
Lost in transformation
Everything has a price – a transfer price
Treasury Survey - an unprecedented picture of treasury activities in Luxembourg
The impact of negative rates on Treasury and Risks Management Systems
Towards reporting harmonisation?
Understanding the Treasury impact of BEPS
Impacts of Single Resolution Mechanism and Bail-in for European Banks
Supply chain? Not concerned?
Collateral management and the Corporate Treasury function.
Efficiently Managing Cross-Border Payments in Turbulent Times
How Mid-Market Companies Can Efficiently Manage Enterprise-wide FX Risk as they Grow
Investing surplus cash in repos
A wind of technology changes in the treasury management world
Invoicing can be fun….?
Comment améliorer la performance des fonds de pension européens
15 MINUTES WITH O2Finance
THE FINANCIAL RISK OBSERVATORY
LIFE BEYOND NUMBERS
Trésorier/Treasurer magazine - N°94 - Juil/Août/Sept 2016