The manufacturing sector showed healthy signs during 2018, but does that mean a full recovery from the slowdown in recent years? Tara Hamid speaks to experts and business-owners to find out more.
The year 2018 reaffirmed for many trend observers that the manufacturing sector in Australia is not dying, but simply going through a transition.
The Australian Industry Group (Ai Group), an employers’ organisation that has been monitoring the manufacturing sector closely, reported positive trends for the sector in terms of growth and profitability stabilisation throughout 2018.
In October, Ai Group’s Australian Performance of Manufacturing Index (Australian PMI) indicated 25 months of uninterrupted recovery and expansion for the manufacturing sector, which is the longest run of recovery or expansion in this data series since 2005.
In the year to August, the Australian Bureau of Statistics (ABS) estimates that the sector created 94,000 jobs and was the third largest contributor to jobs growth, after health and construction.
“Year 2018 has continued a two- to three-year trend of positive growth and change in Australian manufacturing. It’s a very positive story that is becoming more widely known and understood,” Mark Goodsell, Ai Group’s national director for manufacturing told Manufacturers’ Monthly.
Rise of the startups; increased collaborations
Another sign of health in the sector, according to Goodsell, is a stabilisation in businesses’ profitability.
“Our analysis of the ABS statistics show that, in manufacturing, the corporate profits have been growing since 2012. The profits-to-sales ratio in manufacturing has grown from seven to 10 per cent over the past five years. Actual dollar profits have gone up over that period from $6 billion per quarter to $8.5 billion per quarter in the corporate sector.
“This data shows that people are getting revenue from both price and volume improvements. So, it’s quite a healthy mix. We are not getting more money just because we are selling more, it’s a combination of selling more and getting better prices,” Goodsell said.
Goodsell also sees the increased activity in the manufacturing startups domain as a promising sign.
“Perceptions around the startup community has often been dominated by the fintech and pure IT players in the past. But very good companies are now emerging in the manufacturing sector that are exploring new technologies, materials and markets,” he said.
The Advanced Manufacturing Growth Centre (AMGC) is another organisation that has been advocating for change within the manufacturing community.
A not-for-profit organisation, AMGC was established by the Australian Government in 2015 to develop a dynamic and export-focused manufacturing sector. As of August, the organisation was facilitating or developing more than 26 advanced manufacturing projects across the country.
AMGC’s managing director, Dr Jens Goennemann, believes the sector has lived up to expectations during 2018.
“Within one year, nearly 100,000 jobs have been created in the manufacturing sector. Who would have predicted that one or two years ago?” he told Manufacturers’ Monthly.
Goennemann sees an increased level of collaboration among manufacturers, and between manufacturers and research organisations, as a positive change in recent times.
“What’s more, the language in manufacturing has changed. If you compare it with the language being used two to three years ago, a lot more positive news and stories are being circulated now,” he said.
Drivers of growth
According to the Ai Group’s analysis, export of food and food by-products, as well as a strong market for Australian health and cosmetics products – particularly among Asian countries – were key contributors to the sector’s overall growth during 2018.
“We have a trusted supply chain for cosmetic products that go back right to the source material,” Goodsell said.
The market for building products was another strong driver of growth.
“Although the mix of demand for construction material has shifted over the last few years from mining infrastructure to housing and more recently to public sector infrastructure, at an aggregate level it’s still a strong growth driver,” Goodsell said.
“There’s also good signs that the mining industry is re-investing, which is starting to pick up as a source of demand. And finally, our figures also show an encouraging profile of medical and scientific and/or industrial instrument and equipment manufacturing,” he added.
One company that experienced first-hand the expansion in mining investments over the year was SEW-Eurodrive. The Australian division of the global mechanical power transmission systems and motor control electronics manufacturer penetrated new markets, with mining being a major growth segment.
“Mining in Western Australia has been a massive market for us over the last 18 months. Addition of a new Heavy Industry service centre in Mackay has provided local end users with unparalleled service and load-testing capabilities currently unavailable from any other drives manufacturer,” the company’s marketing officer, Michael Kitanovski told Manufacturers’ Monthly.
“Through 2018, we focused on sales consolidation across all segments of SEW Eurodrive’s vast product range. Growth has been particularly strong in the Gearmotor portfolio across many industry segments.”
The company penetrated new markets with its decentralised technology and mechatronic product range, MOVIGEAR and DRC motor within parcel logistics, airports baggage handling, and conveying in the food and beverage industries. On the heavy industry product segment, the company saw an increased demand in the mining, sugar, cement and water treatment industries, particularly in Queensland and Western Australia.
The government’s defence investments are seen by experts as another potential driver for a stronger manufacturing sector in the coming years.
AMGC has identified defence as a high-priority area for its future investments during the year, Goennemann said.
“We are looking for opportunities that have the most impact on the sector. Projects in defence manufacturing space are very attractive for us, because they can provide better opportunities for on-shore manufacturing for future defence programs,” he said.
Last year, AMGC partnered with global 3D design and virtualisation software company Dassault Systèmes in developing the Virtual Shipyard Program – an education program to deliver digital skills to Australian SMEs.
The first tranche of the participating manufacturers, involving 14 SMEs, will soon be graduating from the program and the second tranche is expected to start with their training next year. “These companies are now in a position to better benefit from the future opportunities in massive defence procurement projects,” Goennemann said.
Full recovery in sight?
While all indicators point towards a partial recovery and continued expansion over the past two years, the sector has not yet regained the profitability levels before the Global Financial Crisis.
Australian market research and analysis organisation, IBIS World, estimates that the overall revenue from the manufacturing sector has declined around 1.5 per cent over the five years to 2017-18. The decline was roughly two per cent during 2017-18 – indicating a sharper decline compared to the previous year.
Liam Harrison, an analyst from IBIS World, says while the sector’s overall revenue has declined, the trend varies considerably among the various sub-sectors.
“Manufacturing is a slowly declining sector, but that doesn’t mean that Australia’s manufacturing as a whole is declining. If you take some industries that are declining significantly – such as automotive or clothing – out of the equation, then you get a much slower decline. That’s because some of these industries have been on the decline for a number of years so it can skew the results and suggest that Australia’s manufacturing is much less competitive than it necessarily might be,” Harrison said.
The challenge of maintaining the profit margins is particularly a concern for energy-intensive industries, according to Goodsell. “Certainly there is a challenge for those manufacturers for whom energy is a major input. The continuing lack of certainty over the policy also feeds into the uncertainty over long-term price stability.”
Another complex challenge that the manufacturing sector is currently grappling with is a gap between the availability of a trained workforce and the requirements that a digitised manufacturing environment demands, according to Goodsell.
“The other major challenge – which is, to some extent, a product of the sector’s success – is the skills shortages. It’s a complex feature which is partly driven by the changes in manufacturing technologies running ahead of the skilling system,” Goodsell said.
“But I think a broader issue is that the recovery in manufacturing has not been fully absorbed by the community yet,” he added.
“There is still a shallow understanding regarding the nature of the good jobs and careers that can be had in manufacturing. And all of the pessimism about its long-term and permanent demise of manufacturing seems to be still discouraging people from taking up the opportunities on offer at all levels – from apprenticeship openings through to technical and professional levels.”
Goennemann sees the debate over skills shortages as an evidence of the change in the language surrounding the manufacturing sector.
“The fact that the manufacturing sector now demands higher skills and has identified skills gaps as an issue is proof enough that the industry has changed and transformed. Who would have thought just two or three years ago that we would be having this debate today?
“It is good news for the sector, because the industry has created demand for higher-skilled, higher-paid and more sustainable roles. We don’t have a short answer for that now, but the supply usually follows the demand. We have done some research that explores this,” he said.
Resilience through diversification
In its report, “Building Resilience in Australian Manufacturing,” the AMGC pointed out that Australia is home to one of the most volatile manufacturing industries in the world.
Analysis commissioned by AMGC found that local manufacturers, ranging from motor vehicle and parts manufacturers to cheese producers, have experienced much larger changes in fortune over the past three decades than their counterparts in other advanced economies.
The report distinguishes between the factors that manufacturers can influence and those that they cannot.
“While we cannot influence the dollar value and the distance to other markets, we can influence the superiority of our product offerings and the flexibility of manufacturers to react to market shifts. We can also become more resilient through improved diversity: by offering more products, reaching out to more markets or better service offerings,” Goennemann said.
SEW Eurodrive’s Kitanovski said one strategy that has helped the company remain agile and responsive to the market demands was through offering a diverse range of products and continuously supporting the clients.
“Our strategy has been to support local manufacturers and machine builders with a vast power transmission and control product offering backed by industry-leading service 24/7. We also regularly adapt our product portfolio, stock, assembly and service offering to meet and exceed market demands,” he said.
The global industrial adhesives manufacturer, Henkel, was another successful company that added to its product offerings during 2018. In June, the company launched its new portfolio of Loctite hybrid adhesives in Australia. The innovative products merge two different technologies to create fast curing adhesives with gap-filling capability.
Loctite products provide solutions across the whole spectrum of adhesive technologies and manufacturing processes. They are used in markets as diverse as electronics, automotive, aerospace, biomedical and many manufacturing industries.
Levelling the playing field
A view that is echoed by most experts in the sector is the need for Australian manufacturers to shift their focus towards high-value, unique and customised products that can target niche global markets.
“We’re seeing an evolution of the industry from traditional, machinery-based manufacturing towards higher-value, advanced manufacturing. Like so many industries, technology is driving many of the changes: today’s smart factories are more efficient and sophisticated, reducing labour costs and allowing more customised solutions,” Andrew Eastwood, executive manager of Bank of Melbourne’s manufacturing and wholesale segment, told Manufacturers’ Monthly.
“Like the revolution in home entertainment with services like Netflix and Stan, an emerging trend in manufacturing is pay-for-use or subscription-based services. One of our clients makes cardboard boxes on demand for clients in B2C e-commerce – so there are no storage or shipping costs, and no wastage. That kind of business model means our clients can focus on investing in automation and technological innovation to open up a whole new client base wanting to outsource their capital expenditure.”
On that note, IBIS World’s Liam Harrison said that while the clothing manufacturing industries have been on the decline over the past years, there has been growing activity in high-end fashion and high value added products.
“Competing on the low ends of scale and producing low-quality, generic products is simply not competitive,” Harrison said.
“A similar trend is seen in the computer and electronic office equipment manufacturing sector, where local manufacturers are producing customised gaming laptops instead of generic laptops and hardware,” he said.
Mark Goodsell noted that the growth in digitisation could mean a more levelled ground for Australian businesses in the global market.
“A big change is how technology is sweeping through global manufacturing with increased digitisation and innovations such as smart materials. The upside to that is that these technological changes can challenge the view that manufacturing should necessarily go to lower cost countries.
“What we are seeing is a much more distributed model of manufacturing where there can be real value generated out of higher cost countries like Australia, if we get the settings and the mentality right,” Goodsell said.