Profitable Businesses Create Sustainable Jobs

"...the biggest responsibility of an employer is to provide work for people," said Johnny Copelyn, CEO of HCI which owns 70% of Seardel, speaking on MoneyWeb.

Copelyn’s words would seem to define the thinking of many who seek to promote economic wellbeing.

Against this background of political thought, companies attempting to grapple with the credit crisis seem to be shedding employees and productive capacity with unseemly haste.  Are they being smart, or cruel?

Consider two businesses, both in the same trade.  Both have been profitable through the boom years, but both have now seen dramatic declines in revenue, and both are losing money.  Both owners do their sums and figure that, if profits don’t improve soon, each can last 12 months.

They adopt different strategies.  The first closes business immediately.  The second continues on, shouldering the losses from historic profits.

If the crisis ends before the money runs out, then the second will survive.  However, even if the crisis does end, the management of the second business may be so demoralised that they may have difficulty taking advantage of any upturn.

The first business’s approach is to get out and pocket the profits.  This may seem harsh, but it is also more pragmatic and offers the best long-term hope for a return to investment.  Once the crisis is over, that money can be used to buy up distressed companies, re-establish a going business and use the protected cash-savings to re-invest.

Fortunately for HCI’s shareholders, Copelyn is pragmatic enough not to mix his sound-bites with his business strategy.  After Seardel, one of the country’s largest integrated clothing and textiles firms lost R 183 million in the six months to December 2008, he took the decision to close down Frame Textiles. The 1,400 jobs that were lost could have been financed out of HCI’s R 689 million headline profits from 2008, but that would have been a foolish waste.

Those that have attempted to tough out the lean times are likely to have too little cash, and too little energy, to benefit from any recovery.  In addition, markets will have changed.  Some industries will even have been lost forever.

No-one laments the loss of the jobs from manual telephone exchanges; thousands of women plugging and replugging individual lines in order to connect telephone calls.  Likewise, few think too much about what happened to companies that made telephone pagers, coal-driven trains, or horse-drawn carriages.  All these jobs and industries have been lost during previous episodes of boom and bust.

Economies change and evolve.  Would you really want hundreds of women employed in a manual telephone exchange doing mind-numbing work – and reducing communications efficiency to a crawl – just to keep their jobs safe? What would have happened to the mobile phone revolution?

South Africa’s problem is not that the government is not doing enough to protect existing jobs.  Rather it is that economic policy has so dampened innovation in order to protect chosen industries that the country is overwhelmed and dominated by unprofitable jobs.

Our factories have come to look more and more like museums as government steps up its financial support for obsolete industries.

The most dynamic economies are those that are best able to shut down obsolete industries as quickly as possible and move on to new ones.  The longer you wait to change, the harder it gets.

When a giant tree falls in a jungle, the sudden light provides an opportunity for an explosion of new plant growth.  Nature doesn’t try to prop up the dead tree or kill off the new competitors.  It simply lets the best rise and succeed.

There are smart, productive and profitable companies thriving even during this global recession.  Do we really want to blow the budget of taxpayer’s hard-earned wealth on propping up failing industries, or do we want to ensure that exciting new companies have an opportunity to achieve?