Mike O’Donnell is a professional director, writer and animator, and a regular opinion contributor.
OPINION: Last weekend the Wellington Car Club held their annual Mt Victoria Hill Climb race in Wellington. Fifty-five cars showed up for the event and 44 finished, including your humble scribe and his daughter in their aging Honda EK9.
Mount Victoria Hill Climb is steeped in history. The club itself is 75 years old and the event has been around since 1959. Town center motorsport events were once common throughout New Zealand, today they are rare.
The other three – the Mt Victoria Hill Climb, the Cemetery Circuit in Wanganui and the Port Nelson Street Race – rely on friendly local councils and very well organized clubs.
The two fastest cars this year were two massively powered Mazda RX7s, but hot on their heels were two Semog cross cars.
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Cross cars (or cross karts as they are also called) are a cross between a go-kart and a circuit sprint car, and feature a 750cc motorcycle engine in a super lightweight single-seater frame. They only produce 150 horsepower, but that’s a lot when the cars themselves only weigh around 300 kilograms.
Basically, it gives a power-to-weight ratio akin to dropping a Ferrari V12 in your grandma’s Honda Jazz.
So they are very fast. The two who blasted Mount Victoria last Sunday left the ground repeatedly as gravity struggled to keep the mechanical roadrunners on the road.
Fifty years ago, Lotus founder Sir Colin Chapman said the secret to making cars fast and nimble was to “add less weight”. Chapman noted that adding power makes you faster on the straights, but slower everywhere else. But subtracting weight makes you faster everywhere – straights, turns and twists.
It’s a timely metaphor because after three years of pandemic-assisted financial ‘right-wing’, Aotearoa is about to have its share of twists and turns.
After seemingly unlimited cheap money – both borrowed money and money given as Covid-19 grants – it’s going to get much more expensive.
After controlling the official exchange rate at 0.25% for three years, there have been three increases in the past six months. And more on the way.
Meanwhile, New Zealand’s number one get-rich-quick scheme (owning a home and seeing the value soar) is now set to drop 10% next year.
Inflation is hovering at 6% (the highest in 30 years) and the ANZ predicts it will reach a staggering 7.4% by the middle of the year. This means that the real value of consumers’ net wages takes a real hit.
As another supermarket shopper pointed out to me last week, it looks like everything in the store went up $2 in a week.
And don’t even mention gasoline, which is expected to hit $4 a liter by the end of the year.
Going back to the fundamentals, this means businesses will feel the effect of consumers having less money to spend in real terms and feeling much less wealthy in their minds with falling house prices.
We will all pay a lot more to service their mortgages. Five-year mortgage rates are already well over 5%. This is going to be a bit of a shock to people who bought a new home for less than 3%.
The other thing businesses will feel is how much they will have to pay just to operate. During Covid, businesses were able to access the Business Finance Guarantee Scheme which lent working capital at rates of around 2.5%, with the government stepping in to cover 80% of the costs if lenders defaulted.
In contrast, last week two companies I work with were notified by their banks that new commercial lending rates had moved north of 10%.
Global bond markets are also starting to price in a recession in the United States due to overly aggressive credit tightening by the US Federal Reserve as it attempts to control inflation.
Put it all together and New Zealand business faces an uncertain few years, with many twists and turns. As ANZ economics ace Sharon Zollner said, the party is over.
In this environment, Chapman’s advice rings true. Add less weight. In other words, seek to reduce your overhead and control your costs.
That’s because in an uncertain world, you simply can’t control your income. You can plan, market, hope and pray. But ultimately, it’s out of your hands.
On the other hand, you can control costs, so that’s where companies need to focus. Reduce fixed costs and eliminate unnecessary variable costs. As part of that, keep an old-fashioned eye on cash flow.
It’s great to have a good business on the right track, but if you can’t pay your monthly bills, you’ll never achieve that success.
My favorite car on the hill climb was a 55-year-old Hillman Imp, driven like an absolute demon by James Sillay. The car was so light that after finishing the race, Sillay simply hoisted it onto the back of a truck and drove home.
In cars as in business, lightness and longevity are directly linked. In the difficult times to come, this will only increase, I think.