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PREPARED FOR MEMBERS

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ProfessionalsAustralia

MANUFACTURING INFORMER

WHAT’S INSIDE:

• International trade• Technological Advances• The Budget

Carbon fibre wheels made by Geelong company, Carbon Revolution, to feature on Ford Mustang. (Supplied: Ford)

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Summary

Manufacturing plays an integral role in driving the Australian economy. The sector is one the nation’s largest employers, responsible for 8.4 per cent of the labour force. However, despite its importance to the economy, Australian manufacturing has struggled to maintain growth over the past decade. Despite losing some ground to foreign manufacturers, the local industry contributes enormously to the health of the Australian economy, and will become more important as Australia’s reliance on mining subsides. The manufacturing sector continues to produce world-class goods, and local manufacturers are renowned abroad for the quality of their products. A focus on quality, combined with rising demand from China’s middle class are likely to provide opportunities for growth over the coming years.

Current performance

Demand for Australian manufacturing remains high, with local producers manufacturing a wide array of high-quality goods. Australian manufacturers maintain significant advantages in training and skills when compared with competitors throughout Asia. Despite these advantages, profitability within the industry has declined markedly over the past five years. Profit margins declined by an annualised 7.1 per cent over the five years through 2012-13, despite relatively steady revenue. As a result, the sector’s contribution to Australia’s total value added has declined slightly to $98 billion or 9.8 per cent of GDP in 2012-13.

Informer – Manufacturing

The economy

The difficult economic environment since the global financial crisis drove many businesses to cut spending. However, as economic growth strengthens, businesses are likely to focus on value-for-money, instead of low cost. At present, the economy appears to be stuttering in its recovery, with several major economic indicators – such as GDP growth and unemployment – looking slightly worse than 12 months ago. In the face of this ongoing uncertainty, the RBA has lowered interest rates to historic lows, significantly lowering the cost of capital and encouraging businesses and individuals alike to invest.

International trade

For much of the past decade, the conversation surrounding international trade has focused on the high local currency, and the competitive advantage that this has given to imported products. However, since 2013 the Australian dollar has plummeted, providing a shot in the arm for local exporters. Successive interest rate cuts and improving economic data out of the US have aided the fall, pushing the dollar lower and making locally produced products more competitive. With interest rates expected to stay low for the foreseeable future, local manufacturers will continue to benefit from a lower exchange rate.

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Economic Growth

Unemployment Wage Price Index

2.5%2.8%

6.1%

1.3%

2.6%2.9%

2.3%

5.9%

Released:Dec 2014

Released:April 2015

Released:March 2015

Released:March 2015

12 months ago

Participation Rate0

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30

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60

70

64.8% 64.8%

12 months ago

Released:April 2015

ABS Cat. 1345.0, ABS Cat. 6401.0, http://www.rba.gov.au/statistics/cash-rate/

Economic Indicators

Informer

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Competitive edge

The Australian manufacturing sector has again led the way in research and development, accounting for 24.0 per cent of total R&D expenditure. According to the latest ABS data , Manufacturers spent a total of $4.5 billion on research and development in 2011-12. Research and development is particularly labour intensive, and requires highly trained staff. The importance of these activities to the sector underlines the integral role that quality staff play in the overall success of the sector. This reliance on skilled labour is only going to increase as manufacturers seek to maintain their advantage over cheap imported products.

Employment

Employment in the manufacturing sector has trended downwards over past decade. Manufacturers shed a combined 10,943 jobs in 2013-14. A lack of ongoing Government support for struggling industries - such as automotive manufacturing – has driven substantial staff cuts at some major firms. Despite declining, the industry employed a sizeable 949,700 employees in 2013-14. The sector benefited from employment growth across food and beverage manufacturing, while a rising housing sector also supported some growth from industries producing construction inputs.

The outlook

The outlook for the manufacturing sector remains challenging. However, there are some opportunities for growth. The industry has invested heavily in research and development, and will see much of this investment come to fruition. Free Trade

The Australian Government has confirmed free trade agreements with Japan, South Korea, and China over the past year. The agreements, while promoting international trade, have been met with mixed responses, with many manufacturers fearing the removal of tariffs will cause a rise in imports. There are also some concerns about the use of foreign workers distorting the local labour market and costing Australian jobs. However, manufacturers targeting lucrative export markets are expected to benefit, as their products become more accessible and more affordable abroad. The growing middle class in China is expected to drive growth in demand Australian products. According to research by McKinsey in 2012, China’s upper middle class accounted for just 14 per cent of households, while just 3 per cent of households could be considered affluent. By 2022, 54 per cent of Chinese households will fall into the upper middle class, with the percentage of affluent households having tripled to 9 per cent. This represents the largest opportunity for growth in the local industry over the coming years.

Technological Advances

Australian manufacturing will move further up the value chain over the coming years, as operators leverage their strengths. A 2014 report by the Australian Workforce and Productivity Agency points to competitive advantages in “precision, high value-added products including aerospace components, machine tools, medical devices, electronics, scientific instruments, advanced materials and pharmaceuticals”. These areas provide significant opportunities for growth over the coming years, as many low-cost foreign producers simply cannot compete with the quality of local manufacturers.A recent report by the NSW Chamber of Business suggests that a shift away from high volumes towards customised products provides an area of competitive advantage for local manufacturers against cheaper, high-volume imports. Most consumers understand the additional value gained through customised products, and most are willing to pay a premium for this level of specialisation. The profitability, efficiency and productivity of factories will be driven by the skills of highly-trained staff, requiring manufacturers to employ, train and retain a high-quality workforce. An eventual shift towards mass customisation is likely to deliver the most value, as the model merges the benefits of specialised products with larger economies of scale.

The Budget

The 2014-15 Federal Budget announced a range of assistance measures for small businesses. Small businesses with revenue under $2 million will receive a cut in the corporate tax rate, to 28.5 per cent, down from 30 per cent. The Federal Budget also encourages small businesses to invest in the future, allowing them to immediately claim tax deductions on individual asset purchases under $20,000. If the measures are successful, greater investment in the short term is likely to drive improved growth among small businesses in the longer term.

International trade

ABS Cat. 5368.0ABS Cat. 8104.0http://www.mckinsey.com/insights/consumer_and_retail/mapping_chinas_middle_class http://www.awpa.gov.au/our-work/sector-specific-skill-needs/Manufacturing_workforce_study/Pages/default.aspx https://www.nswbusinesschamber.com.au/NSWBC/media/Misc/Policy%20Documents/NBC-515_Manufacturing_Futures_Paper.pdf

International trade

2012-13 ($ billion) 2013-14 ($ billion) 1 Year Change

Imports 205.8 219.3 6.6%

Exports 86.8 90.4 4.1%

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Manufacturing Informer

Level 1, 163 Eastern Road SOUTH MELBOURNE VIC 3205 rpeng@professionalsaustralia.org.au 1300 273 762 +61 3 9695 8902

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