Snapshot of Australian business landscape

| September 3, 2013

Have you been thinking about how the Australian marketplace is performing? IBISWorld chairman Phil Ruthven shares his view of local businesses.

There are a lot of businesses operating in Australia – 2.15 million of them in 2013 and nominally one in every five homes, after allowing for multiple business ownership by many households.

By the middle of the century, of course, all workers will be their own enterprise anyway as contractual arrangements supplant the concept of being an employee (which involves constraints on freedom and innovation). So there would be 11.6 million businesses in 2013, if that eventuality was a reality now.

Around 40 per cent of the businesses that were operating in 2009 have dropped out, but these have been replaced by more than that number of new entrants. Over the course of 2012-13, 48,000 to 50,000 went broke (2.25 per cent of all businesses) and another 150,000 or more (7.5 per cent of all businesses) just closed up shop.

Most businesses are small: 62 per cent  have annual revenue of less than $200,000 and 28 per cent have revenue of less than $50,000. Most are small employers too: 75 per cent employ less than 5 people and 61 per cent  have no employees at all apart from the owners. However, when we turn to the source of the nation’s over $4.2 trillion in revenue, the picture changes dramatically. The big end of town dominates, as we see in the first chart.

Just 35 corporations account for 17 per cent of the nation’s entire revenue, and around 1,800 corporations account for over half the nation’s revenue. So Australia’s businesses are dominated in numbers by small enterprises, but dominated in output by the big enterprises.

The preferred ownership structures are shown in the second chart. Companies account for just over one-third of all businesses, but are more than matched by unincorporated businesses in the form of sole proprietors (28 per cent) and partnerships (15 per cent).

Trusts have proven popular over recent decades, and now account for 22 per cent of the businesses in the nation. Their existence and growth are signs of increasing financial planning in an ageing society, and increasing financial literacy.

Australia’s economy, as with most nations in the OECD, is increasingly a services-oriented one. At the same time, it is always well to note that all industries in any economy are services based. The industries that produce products that you can touch (which we call “goods”) are, of course, the result of free raw materials being moved (i.e. mining) or altered by humans with labour, depreciation of equipment, profits and taxes (i.e. agriculture or manufacturing). But they are all the result of service industries be they agriculture, mining, utilities, manufacturing or construction.

Wholesaling, retailing and transport are service industries that move tangible products. So, we need to be careful in thinking that “goods” industries produce wealth that the “service” industries depend on! Codswallop and twaddle, of course.

All industries are service industries. Goods are simply products where the value-added is “frozen” into the product, temporarily (if consumed) or for a long time (if a capital good, like buildings, equipment or appliances).

That said, it is interesting to see the mix of businesses across the industries that make up our economy and the wealth (value-added) that they contribute to make up our economy with its GDP of $1.5 trillion and revenue of over $4.2 trillion.

The two charts below show the 2.15 million businesses across the nation’s industries and the allocation of GDP across the same industries.

There are some interesting apparent anomalies, but, in fact, differences are based on the prevalence or otherwise of very small or very large enterprises. Agriculture, for example, is dominated by small businesses; Mining by very large corporations.

This leads to the interesting question of the attrition rate in the various industries: businesses that either close up shop, so to speak, or go bust. The following chart shows the survival rate across the nation’s 19 industry divisions over the 4-year period to 2011-12.

Health, Agriculture, Real Estate and Manufacturing shed the least number of businesses. Hospitality, Administration & Support Services, Arts & Entertainment and Information Media & Telecommunications shed the most. That Government Administration, Defence & Safety sits at the top of the list of the most vulnerable is actually a result of the tiny number of business in that public sector industry, and many closing down through outsourcing to the private sector.

Which leads to the question of insolvency. As said earlier, around 50,000 businesses go broke each year (business bankruptcies and company insolvencies). Some 15,000 of these are companies and the number is growing, as the chart below reveals. This number does not include companies under other schemes of arrangement to avoid liquidation.

This number is growing at around 7 per cent per year. The losses are not yet each year quantified to our knowledge, but the total would almost certainly exceed $100 billion of the business world’s total investment of over $3.5 trillion. And ASIC suggests the following warning signs for looming insolvency.

Insolvency is a healthy sign for any nation’s economy. A failure to allow inept (and sometimes unlucky) businesses go under is to damn the economy to mediocrity. Australia has a fairly healthy dose of annual attrition of businesses, which is more than made up by new start-ups.

That is reason to be confident for the future.

This blog is first appeared on the IBISWorld Newsletter. It is republished here with the kind permission of the author. Phil Ruthven is the founder and Chairman of IBISWorld, an international corporation providing online business information, forecasting and strategic services. A regular speaker at congresses, seminars and conferences, he is one of Australia’s most sought after commentators on business economic and social issues.