Dollar is painful but no predator

Despite the strong Australian dollar, exporters are continuing to supply overseas markets profitably, but it’s not easy. 

To remain competitive, Keech Australia has invested considerable amount of money and resources in developing its IP.

Cook Medical’s Brisbane plant focuses on the quality part of the process.

As I write this article, the Australian dollar is sitting at an incredible $US1.07 and many exporters are facing sleepless nights as they struggle to compete internationally. 

However, for most manufacturers there is no alternative, and are forced to find ways to remain competitive.

For Herbert Hermens, CEO of Keech Australia, a 78-year old family owned foundry based in Bendigo, the investment in the new technology is the long term answer.

“Of course the high A$ is having an impact on our competiveness, however we have invested a lot of money and resources in developing our IP and making sure that we can validate the value, particularly going overseas.

“Just 18 months ago or so, the dollar was around 70c, so now we are around 35% more expensive. 

“We must justify that increase by pointing out to our customers that that value can be validated in the application of the product.

“We have put a lot of time into that, we have also put a lot of time rationalising our production costs, and investing into our equipment to improve our efficiencies and value.

“Our number two foundry has been refitted with the latest pouring and moulding technology for steel casting. 

“We need to fill existing customer orders and future contracts, so we are putting on new weekend shifts and more full time positions in foundry operations, patternmaking, engineering, IT, logistics and R&D,” explained  Hermens.

“We are also attacking our fundamental underlying costs within the organisation as well.”

However, Hermens says protecting the company’s IP is a continuing problem, especially as the company exports to China. 

“You just have to keep improving and finding new developments within your products. You can’t sit still. It’s an enormous problem, and an enormous challenge.

“The good thing is it’s not always easy to copy our products; they have to invest in new patterns and engineering and pouring high quality steel; that does limit their opportunities,” Hermens said.

While he admits the company does get ripped off, “it gets found out very quickly in the field as the counterfeit products fail very quickly.

“We manufacture and export steel castings for the rail industry, but the biggest part of our business is in the mining industry, manufacturing and supplying ground engaging tools, the teeth on the huge buckets, both locally and exporting to China, Japan, Chile, Russia, Sweden Canada and Brazil. 

“The issues with these products are the quality of the steel, the design and how quickly they can be changed when they wear out. 

“Some of these teeth only last one shift on a bucket. The material they are digging out, such as gold and uranium, can be very aggressive.”

Hermens believes Australian companies have a good reputation overseas, but admits some Australian manufacturers are setting up operations in China and elsewhere.

He warns companies that do set up in China and transfer their technical knowledge there that the advantages are going to be very short lived.

“Instead, we at Keech have made a conscious decision to continue to manufacture and develop in Australia.

“We have increased our engineering here massively, because we know we are not only competing against external manufacturers, we are also competing against Australian companies who are manufacturing in some of these low-cost labour markets.

“We deal with this by being better. We have automated many of our processes, and that’s the future for us. 

“We are improving our productivity all the time and have a very good team willing to go on this growth journey with us. 

“We currently employ more than 160 people across Australia, 150 of who are located at our headquarters in Bendigo.

“With this new foundry we will have three times the production with roughly the same number of people we had in the original foundry,” Hermens said.

Aerospace industry 

Philippe Odouard, MD of Quickstep Holdings, manufacturer of composite materials for the aerospace and defence industries, is also working at improving its productivity to overcome the problems of a very high dollar.

“It’s difficult. We export 100% of our products at this stage, and the high dollar is by far the largest problem we have. 

“We have no problems with the quality of our products, it’s just the competiveness of our product; the rate of the Australian dollar compared with the US dollar.

“We need better margins and recover as much as we can, which means buying as much as we can in US dollars ourselves, shifting some of the risk to others and hope the Australian dollar will go down,” Odouard said.

While not overly optimistic that will happen in the short term, he says our government could do more to address the issue and take a lead from the Swiss Government.

“When the Swiss franc was too high, and was damaging its industry, the government sold Swiss Francs until a particular threshold was reached. 

“The Swiss Franc dropped relatively quickly and their industry regained its competiveness,” Odouard said.

Medical industry

While Barry Thomas, MD of Cook Australia, a division of Cook Medical, the world’s largest privately owned medical device manufacturing company, has the luxury of being in a high margin industry, he remains concerned.

“How do you compete with such a high Australian dollar is a big question with a number of angles to it.

“All our export business and all our interaction with other countries is all done in US$, so we don’t have to worry about fluctuation of other currencies. And luckily we import all our raw materials in US$ which allows us some natural hedging.

“And like all companies we are looking at all our costs and with labour our single biggest input we are looking at efficiencies in manufacturing wherever possible.

“In our needle manufacturing, for example, we have outsourced to China the labour-intensive part of that process.

“The first part of the manufacturing process we do here in Brisbane, then we send that off to China where they do all of the fabricating of the product and the packaging, then they send it back to us for sterilising.

“We have looked at automating the manufacturing processes, but we have found it very difficult. Presently we are looking at automating our needle grinding process and we have some machines that are helping us do that, but in our biggest area which is aortic stent grafts, it’s all hand sewing and we can’t find a machine that will do it.

Thomas says the number one benefit of manufacturing in Australia is quality. 

“We are in health care and quality is very important in all our work, coupled with being able to protect our IP for a significant amount of time is also very important. 

That’s part of the reason we only send the needles to China where the IP risk component of that manufacturing process is kept here. 

“Here in Brisbane, we tend to focus on the high end part of the manufacturing process and the quality part of the process.

Thomas explains that contracts with overseas distributors and suppliers are becoming more important.

“In the past it was a case of out of sight out of mind, but now if there is any issue, anywhere it comes back to the manufacturer, both on the side of how you manufacture, but also on how you do business. 

“With the new laws around the foreign corrupt practices act, the UK bribery act, etc, companies that act for you are in fact an extension of you. 

“So if they are doing something that is not the correct way to do business, then we are held accountable as well.

“Recently, we have just spent a great deal of time and effort travelling through Asia training all our staff and all our distributors’ staff on the issues of corrupt practices and the bribery act and how to conduct businesses ethically.

“That’s certainly becoming a business challenge, however we are getting extremely strong feedback from the market that we took that initiative.

Thomas advises manufacturers looking to export to new markets, China and India for example, to spend a considerable amount of time, “several months” understanding their culture and learning how they do business differently to us.