Why all-sector innovation is the key to unlocking potential

By Luke Sayers

Thursday November 20, 2014

I’m not an elected leader, and therefore I don’t presume to tell Australia’s politicians what to do. I’m just an ordinary citizen, although admittedly a very fortunate one.

And as head of Australia’s largest professional services firm, PwC, I’m reasonably well placed to gauge the mood of businesspeople, public servants, educators, community leaders and everyday Australians about the lie of the land.

At PwC we spend a lot of time thinking about potential. In fact our vision is to realise and discover the potential of dot dot dot businesses, people, communities, reforms and ideas. And, inevitably, we aim to realise and discover the potential of the country itself.

That’s what I want to talk about today — realising Australia’s full potential.

Australia is considered the lucky country. Throughout history Australians have been known for their adventurous and enterprising spirit, their hard work, risk taking and reinvention, and general desire to “have a go”.

The year 2014 should be a moment for supreme optimism for the future of Australia. The basis for that optimism is multi-faceted:

  • Over two uninterrupted decades of growth;
  • Pole position in the Asian Century;
  • Modern, well-connected cities;
  • Well-educated and skilled young people whose talents are in high demand all over the world;
  • What by any international comparison is a decent and cohesive society; and
  • International commentators such as Joseph Stiglitz tell us how fortunate we are.

But yet — is this as good as it gets?

Australia’s adventurous spirit is waning; we seem stuck in our ways. Something is holding us back from achieving our full potential.

What is it?

I believe we have stopped innovating as a nation. And I think this is because we are lacking strong and courageous leadership.

Leadership in innovation takes long term vision, something way down on the priority list for business leaders who are focused on the next financial results call, or political leaders who are focussed on the next election.

Two leaders who are bucking the trend are ANZ’s Mike Smith and Telstra’s David Thodey, who are both pursuing long-term Asia strategies that may be hurting their share prices in the short term but should provide huge upside in the long term for their customers and investors.

But holding the line on a long-term strategy takes fortitude and courage when you have analysts, investors and media braying for a short term results fix.

And it’s not as if we don’t know how to innovate. On occasions, we’re still good at it.

Think of our newest social reform, the National Disability Insurance Scheme. It’s a great bipartisan policy-making triumph. And a great piece of social innovation.

PwC is incredibly proud to have had a role in helping design and kick-start the NDIS. And I have a personal stake in it, as my second of four beautiful daughters, Ali, was born with Down Syndrome. Now, along with hundreds of thousands of other Australians of similar abilities, Ali’s future is valued and secure. That’s the sort of better society that innovation can achieve.

Our proud history is peppered with great innovations, where passionate debate propelled our nation forward. So the questions I often reflect on are: Are we the same country that embraced the modernising surge of the Whitlam years? The country that opened its borders to refugees and skilled immigrants in such extraordinary numbers from the Fraser era onwards? The country that floated its dollar, opened its economy, privatised its state assets and started to break down its centralised wage fixing system in the Hawke and Keating eras? That doubled the proportion of Year 12 completions and university graduates in under a decade?

In the last 40 years, few countries have changed as much. And for the better.

The novelist L.P. Hartley famously wrote:

“The past is a foreign country; they do things differently there …”

I was born in Melbourne in 1969, and Australia was a far less prosperous and successful country back then. Through three decades we led the world in gutsy economic and social innovation. The core value of “have a go”, which runs deep in Australia’s identity, has led our country to punch way above its weight.

And there’s a simple reason why we must continue to have a go and innovate, which the business thinker Peter Drucker summed up succinctly:

“The enterprise that does not innovate ages and declines. And in a period of rapid change such as the present, the decline will be fast.”

I believe it’s the same for countries. Innovate or decline.

It’s easy to blame our high terms of trade for making innovation unnecessary. Why work smarter when you can just dig things up faster?

As the head of Australia’s leading professional services firm I am greatly concerned about our country’s short-term focus and lack of bold, courageous new ideas. And here are some facts to show I’m not the only one who is concerned.

Our latest CEO survey showed that 91% of Australian CEOs believe that technology will be the biggest transforming trend for their business. Yet in the same survey only 45% said they have a technology investment change program underway.

Innovation and digital technologies together have the potential to increase Australia’s productivity and raise GDP by 3.5% and $136 billion over the next 20 years according to our own report Expanding Australia’s Economy: How Digital Can Drive Change released earlier this year.

The same report showed that last year Australia invested just $111 million in venture capital. Yet New Zealand, which has no capital gains tax and the government backed Venture Investment Fund, invested some $400 million. These are our ideas — being wasted.

To take another example: right now more than half of Australian companies have no plans to invest and expand into Asia despite the booming market it represents. Our geographical advantage — being wasted.

Just 16% of our university graduates are studying the vital STEM subjects of science, technology, engineering and mathematics. Our young people’s futures — being wasted.

After two decades of growth, our federal budget is in deficit and without cost restraint, improvement in productivity and major tax reform, our national debt will exceed the size of our entire economy in about 25 years. Our fiscal resources — being wasted.

I am interested in how we can turn this waste into opportunities and this starts with a different mindset and strong leadership.

This is not the fault of our politicians; we all have to accept the responsibility for getting it right.

And yet there is hope.

The outpouring of nostalgic idealism for ambition and change that followed Gough Whitlam’s death proves it. We know as a country we are capable of better. And indeed, some green shoots are now making their way to the surface.

The recent release of the Industry Innovation and Competitiveness Agenda by the Australian government shows that our political leaders are on to the opportunities. I was particularly heartened to see its promises to promote regional centres for growth and to increase the proportion of young Australians leaving school and university with qualifications in STEM subjects.

And I welcome the commitments made last weekend at the G20 meeting to boost trade, promote competition and reform labour markets to add 2.1% to economic growth over five years compared with a “business as usual” scenario. This would equate to about $2 trillion globally. And I would like to thank Richard Goyder, who in his role as chair of the B20, achieved the difficult task of making this one of the priorities of the Brisbane summit.

But more still is needed to realise Australia’s full potential. At PwC, we have a global purpose to build trust in society and solve important problems.

Today I want to spell out the four priorities we believe can help drive innovation and re-engage our country in what it does best; having a go.

These ideas are not based on political ideology, or PwC’s self-interest, but on the type of rigorous, evidence-based analysis of business opportunities and social needs that is the hallmark of the work we do for government, business and our community at large.

Four policy directions for the nation stand out.

The first is a program to educate Australians about the profound benefits that flow from innovation.

Time after time, innovation is stopped dead by the question: “who benefits from all this change?”. The answer always seems to be “someone else”.

We have to change the public response to recognise that “everyone benefits”. Because that’s the truth, if innovation is done sensibly.

A PwC report from April this year indicates that 86% of Australian business leaders agree that innovation is the main lever to create a more competitive economy, and 84% think that innovation is the best way to create jobs.

Business leaders and politicians get it, but we need our broader community to get it too, by demonstrating that becoming a frontier for innovation will create prosperity.

Manufacturing is one of the crucial battlegrounds. Consider the enormous effort that has gone into protecting just 5,400 direct jobs in the heavily subsidised automotive sector in recent times. Our modelling tells us that in the next 20 years innovation will create 540,000 jobs. That’s 100 jobs for every one lost in automotive.

We need to be more assertive and better marketers for the cause of innovation. And we need to demonstrate that, like other industry sectors, manufacturing isn’t dying, it’s just changing.

For example, Local Motors unveiled the first 3D-printed car, the Strati, at the International Manufacturing and Technology Show in Chicago in September. And they will be on sale next year for around $25,000 each.

This tells us that there is a future for auto manufacturing, and that it lies in design — something Australians have been very good at historically.

The second area of priority for our nation is to facilitate a major increase in the study of the STEM subjects. The importance of this is blindingly obvious.

Rapid change is all around us. According to Australia’s chief scientist, Professor Ian Chubb, nearly half of the middle-skilled jobs we work in today will not be here when our children starting school today graduate from high school.

We are experiencing this change directly at PwC. These days we are just as likely to hire engineers, scientists and mathematicians to support the growth in our analytics and technology businesses, as we are to hire accounting graduates.

A lot has been said recently about our lack of interest as a nation in STEM subjects, but there is still a large problem to solve. A problem so complex that you don’t know where it starts and where it ends.

Does it start with the parents? Who don’t know that many of their own jobs will soon be obsolete and can’t advise their children on what skills they will need for the future?

Does it continue with the schools? Whose maths teachers are not required by law to have maths qualifications? Can you believe 40% of maths classes in years seven to ten are led by a teacher without specialist maths qualifications?

And does it end with the universities who, competing in a tough market, have stopped making maths a prerequisite to entry on even the most technical degrees? The University of Sydney, among many other prestigious institutions, does not have maths as a prerequisite for any of its subjects, including engineering.

In 2012 in the highly innovative manufacturing nation of Singapore, 52% of higher education students graduated from STEM-related courses. In Australia the proportion was just 16% and it’s going backwards.

Think about it: Australia’s production of engineering graduates went down in the middle of a long mining construction boom when engineering should have been a ticket to success for many of our young people.

Clearly what we have here is a deep cultural failure in both our education system and our society — one that needs to be addressed as a matter of urgency.

But this is not just a problem for the government or education departments to solve. This is something corporate Australia needs to play a critical role in. This is where our future recruits will come from as our businesses are rapidly transformed by the global megatrends: technology, urbanisation, climate change, resource scarcity and demographic change.

At PwC, we have put STEM at the heart of our strategy. Our vision is to help Australia become a global leader in problem solving and innovation underpinned by excellence in STEM capabilities.

We have started to collaborate with experts in the field to work out how we can help increase the engagement of young people in STEM subjects. We have started working with inspiring organisations like the Foundation for Young Australians and the Australian Council for Educational Research to help more young Australians find their passion for a STEM skill and the future it could create for them. And we look forward to engaging other corporates and working together with government to create a generation rich in STEM skills and the wonderful innovation that this will lead to.

This brings me to my third priority: the need to deepen our engagement with Asia.

For all the talk of the Asian Century, much of Australian business is still living in the American Century and dipping their toe into the many and varied countries of Asia. If the past can be another country, it can also be another continent.

As the vice chairman of the Asia Pacific network for PwC I spend a lot of time in Singapore, Taiwan, Japan, Indonesia and of course China among others. It astounds me that Australian business people think a couple of sakes and a handshake can seal a deal overseas as it does in Australia.

We are releasing a report on Asia soon which shows that only 9% of the 6000 Australian businesses surveyed are currently operating in the Asia Pacific region.

The report shows businesses think Asia is “very different” and uncomfortably so, for many. One of PwC’s core values is to embrace difference and this is essential when looking at the opportunities in Asia. We have to open our minds, explore different cultures and work out ways to work together for the benefit of both parties.

The report says, of Australia’s large companies, half are doing business in Asia but only 24 per cent have staff on the ground in-market.

And when researching the report, one businessman who wished to remain anonymous said:

“I just think it is a whole different ball game, if you tap into Asia, you’re dealing with communist countries, and fragile democratic countries, you’d have to learn the cultural side of things … that is why it is unattractive.”

And media buyer and entrepreneur Harold Mitchell told us:

“We don’t know them. We need to understand them.”

Australia risks losing the Asia opportunity. Without leadership, an open mind and the willingness to embrace difference, this will never happen.

The Abbott government’s leadership in securing Free Trade Agreements with Korea, Japan and now China is a fantastic step forward, and creates enormous growth opportunities for Australian businesses. It’s now up to businesses to lean in to these opportunities.

Finally, and most importantly, we must get our balance sheet in order and re-embrace fiscal responsibility as a nation. A huge part of this is tax reform, but it’s also about improving the productivity of our workforces and reigning in spending. We can’t keep spending what we don’t have or we are going to leave future generations with a debt burden that will rob them of the standard of living we are used to today.

Without major fiscal policy change, our debt will exceed our gross domestic product within 25 years. This fiscal irresponsibility is simply unacceptable.

Cutting waste and driving efficiencies in government is important, but it will not stop the bleeding. We need to spend far more carefully and direct funds only to things that lift productivity, create jobs and encourage growth, such as prudent investment in infrastructure. We also need fundamental tax reform. It’s not the panacea, but it is a large part of the solution.

Before I make a few comments on reforming Australia’s domestic tax system, I would like to briefly turn to the global issue of base erosion and profit shifting, which has featured so heavily in the media in the past few weeks.

Let me start by saying that the issue of where and how multinational companies pay tax is an important one. There is no doubt the tax regime we have today was not designed to deal with the global nature of many businesses or the digital economy in which we now operate. That said, the role of professional services firms like PwC is to provide tax advice to companies in accordance with current laws.

There is without a doubt, a moral angle to this debate. Morality and ethics needs to form part of the debate as tax laws are reviewed and changed but, once set, businesses and their advisers have to work within the framework of the law.

It’s important that tax law is not ambiguous or open to moral judgement since these interpretations are highly subjective and do not give businesses confidence or certainty. To ensure that businesses have a level playing field, we need clear tax rules that are applied consistently.

It is very timely that last weekend the G20 affirmed the work of the OECD to reform the global tax system. We support the broad direction of the seven OECD actions, particularly those that promote transparency and accountability in the global tax system.

To return to Australia’s tax system here in Australia, we have to recognise that the taxes we pay fund the services we have come to expect in our society: education, a strong health system, public infrastructure and a safety net for those who need it most.

If we keep going as we are, with an ageing population and growing fiscal deficit, future generations will not be able to enjoy these important foundations of our society.

To fund Australia’s future we need major tax reform. All facets — from GST to land tax — must be on the table.

Comprehensive tax reform must deliver a grand bargain that underpins economic growth, looks after the vulnerable and low income groups and delivers secure budgets at all levels of government. And the process of reform should involve genuine consultation with businesses, unions, social welfare groups and the wider community.

PwC entered the debate two years ago when we established a tax advisory panel including charities, unions and businesses that have informed a series of research reports. The third PwC report is coming out soon and aims to debunk some myths about where the solutions lie.

Importantly, the solution does not lie solely in tweaking any one tax, whether it be the GST, land tax, or the way funds are taxed in superannuation. The entire tax mix needs reform to underpin a sustainable and prosperous Australia.

I couldn’t agree more with Prime Minister Abbott who said recently:

“Economic reform is not just a job for government — it’s a job for all of us. We can be fans in the stands, we can be armchair critics or we can help to make it happen. We can criticise government for not doing enough or we can enter the debate and help make the case for change.”

I’m proud to say PwC is front and centre in the tax reform debate, and will continue to collaborate with all sectors of our community, until we realise our full potential as a country.

Ladies and gentlemen, the past is a foreign country, they did things differently there.

The Australia of 40-plus years ago has been improved — lovingly so — because a previous generation of leaders and reformers and business people had the vision, the values and the courage to be innovators.

I wanted to say these things today because I want my children to make this same claim:

“The past is another country: they did things differently there …”

Not because I want them to denigrate what Australia stands for, but because time moves on, the world changes, and if they are going to continue to live in a prosperous and cohesive society, they’re going to have to change and do things differently.

I’ve offered four examples here today that will help Australia reach its full potential:

  • Passionate argument for the benefits of innovation;
  • Educating a more STEM-literate workforce;
  • A greater effort to engage with Asia; and
  • A more efficient tax system.

I don’t claim these as original ideas. Many others are championing them too. PwC is investing its own resources in turning them into concrete proposals and building consensus around them.

It’s a job we do because we want the Australia our own children will inherit to be better and we want to see Australia realise its potential. And we want to work with all people of goodwill to turn this vision into reality.

This is an edited speech delivered by Luke Sayers to the National Press Club luncheon in Canberra on November 19.

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