An arms race is a competitive build up of military hardware and personnel, accompanied by an escalation in technology, and potentially resulting in the bankruptcy of the combatants before the battle even begins.
Pre-credit crunch, the equipment finance divisions of banks in Australia may have been inadvertently financing their own deadly “arms races” across a number of capital intensive industries – including various sectors in manufacturing, civil engineering and transport.
For the business banker chasing sales targets, writing a finance lease for a $400,000 prime mover or a $3 million printing press is good way of putting solid “volume” on the books. And the commercial printing and road transport sectors in particular have been characterised in recent years by escalations in capacity.
The printing industry is a very illustrative example of how an “arms race” in an industry can develop. The larger high tech, high spec, high speed multicolour printing machines from Germany were once financially out of reach for all but the top small handful of players. This meant that competition for high volume/ low margin work was tight among those top few firms with the capacity to economically process large orders.
In the credit bubble, the game seemingly changed. With the easy availability of money in large licks, at cheap rates and on very favourable repayment terms, many smaller firms were able to “tool up” and take on their larger counterparts head-to-head for the bigger jobs.
But now manufacturing activity is shrinking, and for some privately held manufacturers, engineers and road transporters, a deadly game of reverse musical chairs is unfolding, with more seats chasing fewer back-sides.
The phrase “capital overhang” used to refer to the surplus of cash that was washing around the globe searching for a home, sending investment returns lower and lower. It now could also refer to the excess of industrial plant and equipment that exists in some industries, sending job quotes lower and lower, making the payment of equipment lease commitments harder and harder, to the growing discomfort of bank equipment finance credit departments.
On financial markets, the credit freeze may just now be thawing, and at the big end of town, the impact of the credit crunch on profits may end up being surprisingly limited.
But in industrial parks up and down Australia’s Eastern seaboard, some privately held firms dependant on their banks (not capital markets) for funding have credit bubble legacy debts that are now causing real headaches for their owners.
This article first appeared in the Business Spectator.
The Cash Flow Ninjas
