When the money runs out: Print 21 magazine article

As printers thronged the aisles at drupa, eager to inspect all the latest technology for sale, the question of how to pay for it all took on an added significance this year. Simon Enticknap looks at the impact that the so-called 'credit crisis' is having on the industry's appetite for new equipment.

We've all seen the headlines and read the reports. The continuing fallout from the sub-prime meltdown in the US has triggered what is commonly called a 'credit crisis' across the board, a wholesale disappearance of funds that is making it increasingly difficult for businesses to find the money to finance their operations and invest in new projects. Some companies, both locally and overseas, have been caught short in a spectacular fashion, forced to seek new sources of borrowing at greatly inflated prices; large and small investors have suffered in the aftermath.

In the print industry, the major offset press manufacturers have all recorded soft financial results for the past year, much of which has been blamed on the devastation of the US sub-prime crisis which resulted in investment funds evaporating faster than spit on a barbie. As it is now much harder to borrow money to invest, even well-run, profitable printing companies are finding it more difficult to re-equip and this has a knock-on effect to the suppliers. Although there is strong growth in developing markets, such as Eastern Europe and Asia, much of the suppliers' hopes now depend on the Western economies somehow finding the money and the nerve to fire up a post-drupa recovery. Time will tell.

Part of the problem is that the flood of easy money prior to the 'crunch' lasted so long and extended so far that people began to think that these were normal business conditions and that there would be no end to it. In retrospect, such optimism seems foolishly misplaced. While the correction has been very strong and may still end up being severe, that's exactly what it is - a return to business as usual and a consequent re-evaluation of risk. And while some may argue that the market response has been an over-reaction, affecting both sound and unsound businesses alike, the fact is that the money supply has slowed; the money-lenders have pulled down the shutters and every new request for cash is assessed with greater care and, at times, even suspicion.

So how accurate is this picture of tightened purse strings, particularly as it relates to a manufacturing industry such as printing?

"Definitely true," says Stan Solomidis of Synthesis Australia Pty Ltd, a business consultant to the industry. "Money flow has tightened, not dramatically but significantly. Whereas previously it might have taken three to four days to get a finance package approved, today it could take up to a month in some cases. Credit managers are being a lot more wary and submissions need to be spot on and cover all aspects."

In addition to a general tightening, Solomidis says there is mounting evidence that one of the four big banks appears to be giving the industry the cold shoulder and, for whatever reason, is becoming more conservative in how it deals with printing companies. Maybe they are being conservative with all industries? In any event, we will find out over the next year or so, says Solomidis.

"Meanwhile Synthesis Australia is avoiding this bank until we know for sure. We don't need to be supporting 'knee jerk' or 'good time' financiers," he says.

Everybody in the same boat
Naturally, when times are tight, we tend to focus on our own straitened circumstances, whether it's repayments on a car, a house or a multi-million dollar press but, in reality, if the cost of money goes up, it affects everyone and the consequences are multiplied beyond simply the cost of borrowing.

Solomidis points out that one of the consequences of the current credit freeze for the printing industry is that larger corporates are tending to slow down their payments to suppliers in order to hang onto their money for longer. Not surprisingly, this can place an added burden on printers, many of whom are smaller companies that find it harder to absorb the impacts of late payments. In a market in which everybody is fighting for liquidity, the small guy can get wrung dry very quickly.

And while it's getting harder to collect the money, interest rates keep going up and credit disappears; even the paper suppliers who could once have been relied on for favourable terms are toughening up their credit requirements in a cut-throat market. The tax office too is out-sourcing its debt collection and it's been suggested that this will lead to a more hard-headed approach to the recovery of unpaid taxes, currently standing around $10 billion, much of which is owed by small businesses in the form of unpaid PAYG.

At the same time, Printing Industries figures continue to suggest there is excess capacity in the market and that the pressure on prices is still downwards, while the tight labour market is encouraging employees to seek higher wages in order to compensate for inflation and the higher cost of living.

So when Solomidis suggests that the next year or so is going to be very tough, it's hard to argue otherwise.

The show must go on
And so we come to drupa.

In the current circumstances (which are not just limited to our neck of the woods) it's hard to imagine a worse time in which to hold the industry's major trade show. For suppliers looking to kick start their balance sheets with a flood of drupa sales, the signs look particularly ominous. And if the current conditions persist, what does that say about the prospects for Pacprint next year?

Perhaps surprisingly given the circumstances, Solomidis says that it is still extremely important for printers to go to these shows in order to look at new emerging technologies and plan for the future; staying competitive in a mature industry is critical and owners need to think very carefully about how they will incorporate what they see into their existing businesses.

"They need to be more much prudent than in days gone by," he warns. "And if ever there was a time to plan properly, it is now."

Sustainable businesses will always need to invest, to replace old equipment, to service new customer markets, to develop additional production capacity or produce more efficiently. But, as ever, there are rules for ensuring you don't get stung. The basic point to bear in mind, says Solomidis, is not to use short-term money to buy long term income producing assets, even in a market in which the cost of borrowing is going up.

"The key to capital equipment funding is to match the term of the loan to the competitive life of the asset and to keep sufficient working capital buffers for growth or any unforseen circumstances such as credit tightening," he says.

So if the press or whatever is going to be an effective asset for six years then the finance package should be for six years. Note that this is not the same as financing for the life of the machine - a press will run for a lot longer than six years - but if after that period it is not giving you a competitive advantage then you could be stuck with paying off a piece of equipment that's driving your business backwards.

Of course, with many emerging technologies that change so rapidly, that effective life can be far shorter and the finance package needs to take that into consideration as well. In these circumstances, short term financing may be the only option for ensuring that you can keep pace with technological change. Just don't expect it to come cheaply.