Ai Group sees another tough year ahead for manufacturing

While the Australian dollar is back to more sustainable levels, the manufacturing industry is still facing considerable headwinds as we move into 2015. Alan Johnson reports.

With the manufacturing industry’s barometer, the Ai Group’s (Australian Industry Group) monthly PMI (Performance of Manufacturing Index), in negative territory for most of 2014, very few in the industry are optimistic the environment will change substantially going into 2015.

Innes Willox, Chief Executive of the Ai Group believes 2015 is going to be “another testing year” for the manufacturing sector.

“The signs are that the economy in general, and as a result of that the manufacturing sector, will remain sluggish for some time to come,” he told Manufacturers’ Monthly.

Willox said there are a few factors at play, with the sector going through a significant period of transformation which still hasn’t played out.

The way Willox sees it, the industry is at the end of Act 1 of a three Act play.

“The demise of the automotive sector, which hasn’t happened yet, still has to work through, and then there are changes to the structure and make-up of the resources sector, going from an investment and building phase to production, which will also impact on the manufacturing industry,” he said.

While he welcomed the drop in the Australian dollar over the past few months, he warned that it will take some time to play through.

“The economy as a whole is very sluggish, and if you take out resources exports, the rest of the economy is barely growing,” Willox said.

“Plus we have China’s economy slowing, Europe in the doldrums, Latin America hasn’t come on as many people had thought, and the US is undergoing a very slow, grinding economic recovery, all of which will put pressure on Australia in its own way.”

But on the upside, Willox pointed to our highly skilled workforce, our highly innovative companies with a big focus on design, R&D, exports, the development of new products and the ability to move into global supply chains.

However, unlike the federal government, Willox is not optimistic that the closure of our car industry in 2017 will have little impact on the economy.

“We are seeing a gradual slowdown in the sector. The issue is whether the supply chains are able to stay as production winds down, which we are already witnessing in some cases,” he said.

With over 3,200 companies in the supply chain in Australia, Willox said the question is how these companies make the transition.

He admitted it does vary, depending on their reliance on the automotive sector, but said those who are heavily involved will find it very hard, if not impossible, to remain in Australia.

“Already we are seeing companies moving their manufacturing facilities off-shore, closer to the markets in SE Asia – Malaysia and Thailand for instance – while others are working hard to move into new sectors such as the defence and mining sectors or to build up the other parts of their businesses; for that’s where they will survive and thrive,” Willox said.

He believes we are going to see enormous pressure on the automotive supply chain in Australia, “and they don’t have much time to find new products or new markets”.

“Already companies, not in the automotive sector, are moving into value-add manufacturing. By that I mean taking advantage of Australia’s competitive strengths around the resources sector, around water and around our existing highly skilled workforce. Many feel they have to move to survive,” he said.

When it comes to the controversial supply and the increasing prices of natural gas, Willox doesn’t believe a reservation policy, which is being suggested by the union movement, would work because it would be an inhibitor to investment.

“We need investment in that sector,” he said.

Willox instead believes we should be introducing a national interest test, which wouldn’t be a reservation policy, but follow a similar approach to the US and Canada where before gas is exported, there would be a determination about the supply availability within Australia for domestic use, and then that product would be sold at the same price.

“It’s not talking about price variation, it’s talking about supply,” he said.

“We are already seeing rises in gas prices, and tightness of contracts, with a real possibility that parts of NSW, Sydney in particular, will run very short on gas through 2016-2017 under the current scenario, which would have a very significant industrial and economic impact.”

Willox also believes the federal government should adjust the present industrial relations settings.

“They are not right. The government is trying to move in the right direction, but they are being frustrated by the parliament. But at some point, for all our economic well-being, the government will have to move on a range of measures around unions’ right of entry, and the establishment of Greenfield sites,” he said.

“We are not asking for the world, we are just asking for some balance brought back into the system, and to allow company managers to manage their companies.

“The productivity commission’s enquiry into the Fair Work Act is presently with the Treasurer, and we would like to see that enquiry begin as quickly as possible, with a focus on the productivity requirements of the Act and the enhancements that could be made to the Act around productivity. But the later it’s left; it gets closer to the next election with less chance of a proper discussion.

“As a high cost country, we desperately need to lift our productivity to remain competitive, and not just through IR, it can be through a whole variety of fields including skills, infrastructure, taxation regimes and the like. But IR must be a key component of the equation.”

Regarding the Australian dollar, Willox said there is no reason to think it will jump back up to over one US dollar, as it was a couple of years ago.

“Barring any significant changes in the American economy, our view is that the Australian dollar will remain about where it is, or maybe slightly lower,” he said.

“The reality is the Australian dollar is out of our hands; we can’t control its destiny, but we don’t expect it to move around too much.”

Overall, Willox said 2015 is going to be another tough year for the manufacturing sector with the global economy quite slow.

“Plus there’s a strong possibility that two new Free Trade Agreements, with China and the Trans-Pacific Partnership, will be signed next year which will have implications for Australia… plus the agreements with Japan and Korea coming into force,” he said.

“So we will see manufacturers competing in an increasingly globalised environment.”

“The key to success is developing niche value-add products, access global supply chains and finding new markets internationally…and hope that the Australian and global economies start their long path to recovery…and that the dollar remains low, for that’s the environment we are going to have to work in through 2015.”

Willox was quick to praise the Federal Government’s Industry Innovation and Competitiveness Agenda, announced recently, saying it contains a sensible set of measures designed to lift productivity, encourage innovation and reduce red tape.

“The Agenda addresses the need for rebalancing in our economy across industries to build an industrial base to ensure strength and resilience for the future,” he said.

Willox said this is particularly important today with the mining-investment boom winding down and commodity prices in retreat.

“New sources of growth from other sectors, including manufacturing and services, need to resume their contributions to economic development and the Competitiveness Agenda will help in that regard,” he said.

“We are especially pleased with the range of measures aimed at stimulating the investment in new ideas and processes that are so fundamental to innovation-led improvements in productivity and competitiveness.

“The proposals to build greater collaboration between Australia’s research organisations and the business community are particularly welcome as are the plans to lift the commercialisation of Australian research.”

Willox also welcomed the Government’s commitment to five Industry Growth Centres to build on the success of the initiatives of the Entrepreneurs’ Infrastructure Programme.

“It is vital that these centres are industry-driven, rather than research-driven and have a clear rationale and purpose. There should be a focus on the outcomes of the network, rather than creation of a network per se,” he said.

“This could be enhanced with a program designed to encourage the participation of small businesses and start-ups, and the creation of ‘linking organisations’ to facilitate the creation of partnerships between research organisations and industry.

“The changes to the Employee Share Scheme for start-up companies announced in the Agenda have the potential to improve the landscape for start-ups to attract talented employees and finance. We have some concerns that the eligibility criteria may be too tight and we will need to consult with member businesses on the design of the program.”

On labour migration, Willox said the Government’s streamlining of 457 visas will help remove the compliance burdens from businesses with a positive track record in using the program and put the focus rightly on the very few who misuse the scheme.

Willox also welcomed reform to the VET system that would enable training to be industry-led, which would ensure that businesses can find or train employees in skills that will be relevant.

“However we are concerned around the narrow range of industries that the Government has targeted for growth in training,” he said.

“The announcement of the pilot program to provide 7,500 scholarships to small businesses in regional areas that employ and train 18-24 years is a sound addition to the established apprenticeship path.”

Willow said Australia must find multiple sources of growth, rather than relying so heavily on resource and energy commodities as we have over the past decade.

“A broader range of businesses need to be encouraged to step up investment, employment and productivity if we are to lift the quantity and quality of jobs and to improve incomes and living standards across the community. This rebalancing is important not only for the strength of the economy but also to improve its resilience,’ he said.

Willox pointed to the latest Ai Group and World Economic Forum’s survey of Global Competitiveness Report which shows Australia’s relative Global Competitiveness Index has deteriorated since 2009-10, dropping continuously from a peak ranking of 15th place in 2009-10 to 22nd place in 2014-15.

“So the need for reform is urgent,” Willox said.