In the aftermath of the economic downturn, 2010 was still a rough ride for many Australian manufacturers, who struggled with intense overseas competition which was exacerbated by the strong Australian dollar.
Local companies experienced pressure from interest rate rises, skilled worker shortages, sluggish domestic demand and weakening consumer confidence in some areas, causing companies to seek ever more efficient and sustainable ways to do business.
However, there is no denying the 2010 environment for manufacturers in Australia was ‘quietly optimistic’, with production rising in the machinery and equipment, textiles and clothing, and construction materials sub-sectors towards the close of the year.
According to a report the Economics and Research Unit, Australian Industry Group (Ai Group), the Australian manufacturing industry employed just over 1 million people in 2008—09, which is approximately 10% of total employment in the economy and the third largest employer behind the retail trade and health/social services industries.
“The sector makes a disproportionately large contribution to total business expenditure on research and development and exports a wide range of goods including metal products, food and beverages, automotive equipment and medical devices and equipment,” Ai Group chief executive, Heather Ridout, told Manufacturers’ Monthly.
Manufacturing is said to be the second largest goods exporter behind the mining industry; the value of exports in 2008—09 was approximately $57 billion, representing 24.7% of all goods exported. Major exports come from the food and beverages, medical equipment and passenger motor vehicles.
According to Ridout, the increasingly ‘globalised’ nature of Australian manufacturing will become more prevalent in the future, and local firms would do well to look at export opportunities in 2011.
“In recent years we have seen a trend towards greater global engagement as manufacturers have complemented investments in Australia with investments in other countries and have integrated themselves into global supply chains much more than previously has been the case,” she said.
“The strongest performing manufacturing subsectors over the 2009-10 year were: food and beverages which grew by over 6% and machinery and equipment which expanded its output by over 5.5%. In contrast, the clothing, footwear and textiles subsector contracted by more than 17% and output of metal product manufacturers fell by an average of 5.7%.”
The manufacturing industry reportedly made up approximately 8% of the economy (on the basis of gross value added — GVA) during 2010 and, though it is the second largest behind financial and insurance services, its relatively small average annual growth of 1.49% since 1985-86 has lagged that of many service-based industries, which has resulted in a declining share of the economy. The industry’s output declined 5.9% from 2007—08 to 2008—09.
Though many businesses were forced to move production offshore and drop their standards due to increasing pressures of the economic breakdown in 2008 and 2009, 2010 is looking up for Australian manufacturers who are getting smarter about the way they do business.
Many are looking to swiftly-developing companies like China, like-minded economies like Brazil and discerning consumer landscapes like Europe to export their goods. Others are adopting energy and water management technologies and increasing their levels of automation and robotics in the plant to save on utility costs and heighten the quality of their offerings.
“Over the year to the end of June 2010 manufacturing output grew by around 3% as it continued to recover from the setbacks associated with the global financial crisis (GFC). Over the course of the 2010 calendar year, manufacturers have had to contend with a significantly higher domestic currency — particularly relative to the $US. This puts pressure on exporters as well as domestic producers competing against imports in the local market,” said Ridout.
According to the Ai Group’s Australian Economic Update — September 2010, the economic recovery in Australia has gained momentum this year, underpinned by significant increases in commodity prices, stronger corporate profitability, strengthening labour market conditions and higher wage growth.
The strength of the economic recovery in Australia reportedly rests firmly on sustained improvements in private domestic demand as the impact of fiscal stimulus fades.
Going forward, retail spending is likely to pick-up momentum, the report says, and the brightening of employment prospects and the continual pick-up in wage growth will continue to help ease consumer caution.
Still, the highly uncertain global economic outlook poses significant risks, with Ai Group’s manufacturing, services and construction performance indexes showing weakness in activity from July through to October. According to the report, businesses are becoming more cautious and weighing the impacts of a slowing Chinese economy and a fragile economic recovery in the United States.
“In addition to the high value of the Australian currency, a leading preoccupation of Australian manufacturers relates to finding and retaining skilled employees - particularly in the traditional trades where a combination of demographic forces and the competition from the booming mining industry is creating skill shortages,” said Ridout.
“During the downturn associated with the GFC, manufacturers in particular made very strong efforts to maintain their workforces and managed the downturn in sales by reducing hours worked rather than by retrenching employees. For many businesses, this strategy is paying dividends as skill shortages resurface.”
Following are some snapshots of the Australian manufacturing sub-sectors during 2010.
Food, Beverage & Tobacco
Australia’s food, beverage and tobacco manufacturing industry, which is typically our largest manufacturing export market, includes the $102 billion food and grocery industry which remains the nation’s largest manufacturing sector.
However, according to a new report from the Australian Food and Grocery Council (AFGC) and KPMG, it is under intense pressure from rising imports and falling exports.
Launched in late October, the second annual economic snapshot of the food and grocery manufacturing sector, ‘State of the Industry 2010’, found for the first time in decades, the industry’s international net trade position fell dramatically from a $4.5 billion surplus in 2004-05 to a $1.8 billion deficit in 2009-10, which is extremely worrying for Australia’s economy.
“This alarming result shows food and grocery manufacturing — which employs 288,000 people — is now a net-importer of food and grocery products which impacts industry’s growth and competitiveness,” said AFGC chief executive, Kate Carnell.
Carnell suggested the report showed industry remained large, however growth, employment and turn-over are flat.
The report, which examined the fresh and processed food, and beverage and grocery industries, showed that the industry: was made up of 31,000 businesses in 2009-10 (236 fewer than the previous year); spends about $3.5 billion a year on capital investment; and accounts for $44.8 billion of the nation’s international trade ($50.9 billion in 2008-09).
Carnell pointed-out that the industry represented 26% of the total Australian manufacturing industry by turnover (compared with 28% in the last report), and remained comparable ($102 billion in 2007-08) to Australia’s booming mining industry.
“Industry is still a major exporter but imports are rising fast, eroding the trade surplus historically enjoyed by the industry. To protect Australia’s food supply and overcome this challenge, there must be a ‘whole-of-government’ national strategy to ensure food and grocery manufacturing’s long-term growth, increase export earnings and boost competitiveness,” she said.
According to Carnell, we must focus on the future needs of this sector, which is so important to Australia’s economic well-being.
She cited the increasing cost of energy, availability of water, the surging Australian dollar and the availability and cost of good employees as real challenges to the sector in 2011.
Metal Products
Often called the ‘backbone of manufacturing’ the metalworking sector’s health is sometimes considered a good indicator of the strength of the manufacturing industry.
Given the wide use of steel in a number of industries and applications, the performance of the steel manufacturing sector likewise tends to be a good gauge for the wealth of the industry as a whole.
BlueScope Steel — Australia’s largest manufacturer of steel products — recently posted a $192 million profit turnaround on the Australian Stock Exchange, delivering a $126 million Net Profit After Tax (NPAT) for the 2010 financial year.
According to the company’s managing director and chief executive officer, Paul O-Malley, this is a pleasing result compared with the dramatic decline the company experienced during the second half of the 2009 financial year, which saw the company reporting a NPAT of just $56 million, and a Net Loss After Tax (NLAT) of $66 million.
“Given the unprecedented circumstances of FY2009 and the challenging business environment in FY2010, I am pleased with the improvement in our overall business performance,” he said, speaking at the full-year results briefing in Sydney in August.
"We delivered an outstanding improvement in our Asian businesses, including record profits in China, Indonesia, Malaysia and Vietnam. We also achieved a significant reduction in the company's permanent cost base. Also encouraging was increasing demand in Australia, strong export sales and good earnings results both in New Zealand and at North Star BlueScope Steel, our steelmaking joint venture in the United States.
"We have been successful in maintaining conservative gearing (held at around 11%, net debt over net debt plus equity) and a strong liquidity position (held at $1.6B of undrawn debt and cash). Our target gearing has been reassessed and we believe a range of 25% to 30%, down from the range of 30% to 35%, to be appropriate for a business operating in a cyclical industry whilst seeking to maintain strong investment grade metrics.
Turning to the outlook for the first half of 2011, O’Malley cites further improving market conditions over the medium-long term — however this will be met with certain challenges, including the strengthening of the Australian dollar.
"In the first half of FY2011, we expect continued strong performance from our Asian businesses and the benefit of ongoing cost reductions achieved during FY2010,” he said.
"However, in the first quarter we currently see: significant spread contraction (recent fall in export steel prices by more than US$100/tonne, coupled with higher raw material costs); softer demand where customers, particularly distributors, buy less during periods of price pessimism; continued demand weakness in the U.S.; and an ongoing drag due to the strong A$ vs. US$.
"We are seeing a modest real-time increase in export steel prices in our region for Q2 delivery.
"Overall, we are planning for significantly improved market conditions over the medium to long term, despite the short term concerns. Over the last couple of years we have strengthened the balance sheet and improved the effectiveness of the global BlueScope operations — particularly the reduced cost base and improved productivity.”
O’Malley says the strategic imperative now is to increase market penetration across BlueScope Steel’s footprint, enabling the company to capitalise on improving market conditions and to grow its presence in global building and construction markets.