Manufacturing News

Top 100 Manufacturers – Tough year ahead for many

Australia’s manufacturing industry looks set for a challenging year ahead, but as Alan Johnson and Katherine Crichton report, there will be exceptions.

WHILE 2007 has been a reasonable year for Australia’s leading manufacturers, with revenue and profits up, the next 12 months could be another matter.

Competition from Asia coupled with a stubbornly high Australian dollar are having a major impact on Australian manufacturers, says Richard Robinson, senior economist with BIS Shrapnel.

And while the research company is forecasting the Australian dollar to eventually fall below US70¢ by the end of 2009, Robinson expects to see it trade in the 85 to 92 cent range next year.

“But once demand slows, and investment starts to plateau, the market will start looking for a cut in rates, and that, combined with some weakening in commodity prices, around the middle of next year, will probably be enough to drive the dollar back down towards 80 cents,” Robinson told Manufacturers Monthly.

However, Heather Ridout, the Australian Industry Group’s CEO, is not so optimistic.

“It is increasingly likely that the lift in the dollar won’t be just a short term spike but may be sustained for a longer period of time. This suggests tough competitive conditions ahead for manufacturers which will necessitate ongoing reviews of their business models.”

Ridout describes 2007 as a year where exporting and importing competing manufacturers have been put under intense and unrelenting pressure by the stronger exchange rate and ongoing competitive pressures from low cost producers including China.

“Some sectors have performed very strongly (such as metal based products), helping to largely keep the manufacturing sector in the black.

“Overall some encouragement can be drawn from the fact that there has been a broader pickup in 2007, albeit a moderate one.

“Any significant strength the value of manufactured exports has been concentrated in the metals products sectors, reflecting strong global metals prices, although volumes have been weak. More broadly, export values have been slugish.

“As well, wages and input cost pressures remain significant as the labour market has tightened and capacity utilisation risen. Positively however, these pressures do not appear to have accelerated over the year,” Ridout told Manufacturers Monthly.

Looking forward, Ridout says that while there are some important uncertainties around the Australian and global economy in 2008, the year should be generally positive for growth in demand for manufactures.

“The challenge will be for Australian industry to win its share of their markets. For exporters and import-competers, the competitive climate is likely to remain very tough, because of the higher exchange rate and the deflationary impact of China on the prices for global manufactures.

“There have been some bright spots in manufacturing, especially in those sectors which have been able to broaden or specialise product ranges or diversify their markets.

“Examples which come to mind are the increasing shares of sales taken up by new products in the textile clothing and footwear and transport equipment sectors,” Ridout said.

Robinson agrees there will be growth, but said, “Overall manufacturing growth is forecast to average 2.2% per annum over the next five years, which while double the 1.1% per annum averaged in the last five years, is still slower than the projected GDP growth of 3.4% per annum to 2012,” he explained.

Ridout admits Australia’s manufacturing industry is facing formidable global challenges.

“Over the medium term it is vital that the Government fosters an environment which enables businesses to deal with these challenges and capitalise on the opportunities the current economic climate provides.”

While innovation has traditionally meant a focus on research and development (R&D) in order to achieve new products, processes and technology, Ridout says in a globalised environment, innovation is taking on a broader meaning.

“With manufacturers needing to have a global outlook, utilise global supply chains, develop alliances and have highly efficient production processes, innovation needs to be seen as whole of business strategy.

“As innovation becomes the underpinning element for organisational strategy, in turn this means that innovative skills and capabilities need to be developed and maintained for all individuals within companies. Skills are being seen as a way of bringing about innovation to drive success.

“With the pressures on industry so intense, innovation management skills will be particularly to the fore in the next 12 months,” she said.

As well as management skills, Ridout says a lack of skilled labour is right up there with the top issues challenging manufacturers today, “and is set to continue for some years to come”.

Robinson agrees. “Manufacturers are certainly going to come up against skills pressures while this mining boom goes on,” he said.

But how long the resources boom continues, Robinson is non-committal, “much depends on China’s growth”.

“It has been growing at an unsustainable 20% plus for a number of years, but they are now taking measures to slow that down to single digit growth,” Robinson said.

Closer to home, Robinson suggests a marked pick up in inflation remains a real threat for our economy.

While the RBA raised interest rates in November, Robinson says he still expects another one in the first half of next year.

“There’s even a risk of more than one or two. The RBA wants to bring the economy back to what they think is the speed limit, about 3%.”

Saying that, Robinson says it’s still a good time for manufacturers to invest in capital equipment.

“There are a few factors here. Number one, credit has still not out-paced expenses, plus with the dollar so high, now’s the time to expand and import any capital equipment.

“Of course on the flipside, the high dollar’s going to punish manufacturers for another year or probably two,” Robinson said.

“However, if you’re servicing the strong parts of the domestic economy and you’re not suffering from import competition, 2008 will be a great year. But if you’re exposed to imports, then your margins are going to come under pressure,” Robinson warned.

For a full breakdown of the key issues, trends and predictions for 2008 by industry sector, click on the links below.

Machinery & Equipment

Non-Metallic & Mineral Products

Food, Beverage & Tobacco

Metal Products

Paper & Wood Products

Petroleum, Coal & Chemical Products

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