RCR collapse a classic case of overextension

The downfall of RCR Tomlinson is another reminder of the dangers of a business getting out over its skis.

Failure can often be a better teacher than success, which is why the collapse of RCR Tomlinson might not have happened if its management had studied the Forge Group crash of four years ago.

RCR’s demise also serves as a warning to those promoting the production of lithium batteries in Western Australia if they don’t take heed of past resources-sector flops.

RCR, like Forge, made the classic mistake of engineering contracting – biting off more than could be chewed.

In fact the similarities between RCR and Forge are much closer than a botched business plan, because both WA-based companies were trying to become leaders in the specialist field of ‘energy engineering’ in locations far from home.

Forge failed after it bought a business that built conventional power stations in Queensland and the north of WA. RCR failed while trying to build solar farms at multiple locations across Australia.

Apart from shared exposure to energy projects, both Forge and RCR were led by people who became overly interested in the engineering and technology, and lost sight of the business – a deadly error in any company.

Forge, unfortunately, is largely a forgotten example of how not to run a business. RCR is still being probed by accounting specialists, although the conclusion is likely to be that management forgot business basics such as knowing when and how to get paid, and why under-bidding to win contracts is a recipe for disaster.

How it could go so horribly wrong in a business building something as simple as a solar farm is perhaps the most remarkable aspect of RCR’s failure, because a solar farm is nothing more than an overgrown meccano set with parts bought off the shelf and then bolted together in a sunny location – or at least that’s the way RCR approached the job.

The fact that the work is so simple means there are few barriers to entry. The important parts, such as the solar panels, all come from Chinese suppliers, the metal frames can be made locally, and after that it’s up to a team of semi-skilled workers digging footings and wielding a few spanners.

It’s all so simple that contractors such as RCR agreed to fixed-price contracts and to take on the compliance-heavy job of connecting the solar farms it was building to the energy grid.

However, it seemed to overlook the fact that the grid is a government-controlled system and securing access approval can take months.

And then there was the problem of payment because RCR, according to what’s been reported so far, agreed to only take final payment from clients after connection to the grid; this part was a step over which it had no control, and that meant in some cases no payment, or worse still, liquidated damages.

Forgetting the most basic rule of contracting – make sure you get paid – was the final straw for RCR, but it was laid on top of a series of other mistakes, such as expanding too quickly, under-bidding, and failure to recruit sufficient skilled workers.

In other words, RCR’s collapse is a dead-ringer for the Forge failure of 2014.

Clearly there is the potential for a repetition in another form of the energy business in WA, amid growing calls from some business and political leaders for the state’s lithium industry to be expanded all the way to battery production.

The superficial logic of moving WA’s fast-growing lithium industry up the value-added chain all the way to the production of batteries for electric cars is appealing.

Dig deeper and the flaws are clear, however, because while mining and processing minerals to a quality preferred by customers is a WA specialty, manufacturing is not.

There are several reasons why talk of a WA battery industry should be ignored, including the fact that if any lithium producer might be considering a step into battery production it would the big US chemical company Albemarle, which is also WA’s biggest lithium producer.

For its part, Albemarle is quite happy to stay away from the business of making batteries for cars.

There is a world of difference between mining and processing minerals and manufacturing finished products, as proponents of aluminum smelting, steel production or diamond cutting have discovered when trying to develop those industries in WA using locally mined raw material.

A far better approach is to focus on continual improvement on what the state already does well, rather than branch out into a different type of business, which is what Forge and RCR tried to do (with the predictable result).

AHG woes

Are Australians falling out of love with their cars?

That’s a question no-one would have asked at any time in the past 50 years, but recent trends in vehicle sales and fuel consumption appears to indicate that a sea-change might be under way.

The best example of tough times for car dealers can be found in the painful decline of the local leader Automotive Holdings Group, which operates 113 vehicle dealerships across Australia, including 34 in WA.

The latest trading update from AHG, released late last month just before the company’s annual meeting, confirmed a continuation of a downward profit trend with little hope of a significant recovery as property prices plunge and consumers delay big-ticket purchases.

Other factors are also weighing on AHG, such as changes to consumer laws and the failure to sell a refrigerated haulage business, which has always been an odd asset on a vehicle retailing operation.

Being stuck with its refrigerated logistics operation after a potential Chinese buyer walked away means AHG is being forced to try and make the business succeed even as it battles the industry-wide car sales drought.

In the trading update, AHG managing director John McConnell said the entire private car-buyer market had been weaker.

“The east coast, especially NSW and Victoria, [have been] affected by a falling housing market and the negative flow-on effects to consumer confidence and auto sales,” he said.

Investment banks that follow AHG can’t see much change in future years. Morgan Stanley said after the trading update was released that the future was “still uphill from here” with the company’s share price expected to slip to $1.55 from its current $1.66.

That latest price compares with $4.82 little more than two years ago, meaning AHG’s share price has fallen by 65 per cent since the downturn started.

Perhaps related with the decline in car sales is a disturbing fall in fuel consumption across Australia, with premium grade petrol sales plunging by 10 per cent in September, almost double a 6 per cent fall in all fuel products.

Not only are consumers not buying new cars, they’ve also stopped by premium fuel, and some seem to have stopped driving altogether.