How your IP investment is contributing to a smarter country
At FB Rice, we work with you to protect and commercialise one of the most important assets in your business - your intellectual property. The latest report from Phil Ruthven of IBISWorld indicates that the trend of investing in intellectual property must continue to grow and will be one of the keys to having a successful economy over the next century.
As informed by Phil Ruthven of IBISWorld Pty Ltd as of 16 May 2013:
Australia’s fastest growing decade in the post-WWII years was the 1960s, averaging 5.5% per annum growth in GDP, and that corresponded with the nation spending its biggest share of GDP on investment (capital expenditure). So to grow the economy, we must invest. The first chart shows our history of investment over the past half century or so.
We have not managed to emulate the investment level of the 1960s (30.1% of GDP average) since then, nor have we ever sacrificed over 45% of GDP to get GDP growth of over 8.0% per annum, as China currently does. However, Australia is on the road to investing a lot more of its total capital expenditure in intellectual property, or IP for short, as the second chart reveals.
Much more of the nation’s annual investment is going into IP these days: from nothing over 50 years ago to about 11% in 2012 (or approaching one-fifth of all private business investment excluding dwellings and government capital expenditure). Intellectual property has become a serious factor in business at large over recent decades, and is being encouraged by our governments.
Of course, in retrospect, intellectual property and uniqueness explain the extraordinary success of entrepreneurs such as James Hargraves (Spinning Jenny), Thomas Edison (phonograph, light bulb, etc), Henry Ford (mass-produced cars), our own H V McKay (Sunshine Harvester) in Australia, Steve Jobs (Apple Inc), Tim Berners-Lee (the internet) and thousands of others that have created new goods and services that have grown the economy and enriched our lives and businesses.
Intellectual property is the Holy Grail of an enterprise, its core and its most valuable balance sheet asset, whether recorded as such in dollar terms or not. We’ll come back to the “whether recorded” bit later.
So what is intellectual property? In effect it is a cocktail of:
Our annual IP investment levels are probably understated, as many businesses – especially but not only SMEs – do not record a lot of IP effort or are not permitted to claim it as capital expenditure. This has certainly been true through virtually all of the Industrial Age for corporations until the mid-1960s, and for most businesses for much of this new Infotronics Age until recent decades.
The value of IP as part of our national resources is equally interesting, as the third chart reveals. IBISWorld estimates IP as some 5.4% of the nation’s assets of over $11 trillion in 2012-13. This includes the undervalued value of company assets (including listed companies on the ASX, which we will return to shortly). This IP includes:
Interestingly, the value of IP is within reach of overtaking the value of all natural resources (7.7% of the total) in the not too distance future. And not before time for a modern economy!
The accounting profession still does not value IP to the extent it exists – due to the prevailing accounting standards – but the investing public does. The Melbourne Institute, in a recently updated research paper headed by Professor Elizabeth Webster, has evaluated the intangibles value of shares on the ASX. The next chart shows these non-recognised intangibles (IP) as a share of stock market prices over the past 50 years. That proportion is now around 60% of share prices, and heading for three-quarters of the market value of an average listed share by the end of the first quarter of this 21st century!
Even at the end of the Industrial Age in the mid-1960s, the IP proportion was over one-quarter of a share price. But then, there was a much larger component of hard (or passive) assets on most balance sheets in the form of land, buildings, equipment, stock and debtors.
Such passive assets are now considered to be lead-in-the-saddlebag by smart CEOs and their boards.
So the smart businesses are eschewing passive assets on their balance sheets via outsourcing, operating leases and factoring. After all, passive assets can only yield a rental-level internal rate of return, say 9.0% to 11% at best.
Service industries, of course, have an easier job with less need of hard assets and stock anyway, and nearly 60% of our economy is now in service industries that carry no meaningful level of stock.
Why have any asset on a balance sheet that cannot earn 21% to 25% returns (after tax) on shareholder funds? This is the new world best practice standard profitability established by New York’s Dow Jones Index over the past three decades, and achieved as an average even through every year of the global financial crisis. When one notes the composition of the NYSE Top 30 (dominated by IT, pharmaceutical and other companies with high IP assets) compared with Australia’s ASX Top 30 (dominated by companies with lower IP content, such as banks and miners), it is not surprising that the US companies have easily outstripped our profitability for decades.
Intellectual property is the only active asset in this new age and it is winning over passive assets, which are being relegated to managed funds and superannuation funds. It is one of the keys to success in this increasingly competitive new Infotronics Age and new century.
And it will make us a smarter country, which we need to be in the very fast growing and very competitive Asia-Pacific region, which is now our economic and social arena as well as our geographic arena.
Source: IBISWorld Pty Ltd
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