Manufacturing Futures

Innes Willox

Director, International and Government Relations

Australian Industry Group

Outline of presentation

• State of the Australian manufacturing sector

• Challenges facing the sector

• Opportunities

• Regional manufacturing in Victoria

• Concluding comments

Current state of manufacturing sector

-40.0 -30.0 -20.0 -10.0 0.0 10.0

Gross value added

Employment

Job vacancies

Average weekly earnings

Year on year growth in manufacturing sector indicators

Data seasonally adjusted, volume terms where applicable

Current state of manufacturing sector

20

25

30

35

40

45

50

55

60

65

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Diff

usio

n In

dex

Australian PMI

Australian PMI 3-month moving average

Incr

easi

ngD

ecre

asin

g

Challenges for manufacturers

• Weakened cost competitiveness

-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0

Taiwan

Sweden

Finland

US

Korea

Singapore

UK

Canada

Japan

France

Belgium

Netherlands

Germany

Spain

Denmark

Italy

Australia

Norway

Average annual growth rate from 1990 to 2009 (%)

Change in unit labour cost in manufacturing industries(US$ basis)

Rising costs

Falling costs

Challenges for manufacturers

• Slow labour productivity growth

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Italy

Norway

Spain

Australia

Canada

Belgium

Denmark

Germany

Japan

France

Netherlands

UK

Singapore

US

Sweden

Finland

Taiwan

Korea

Average annual growth rate from 1990 to 2009 (%)

Labour productivity in manufacturing industries:real output per hour worked

Challenges for manufacturers • Increased import competition from emerging economies

0

5

10

15

20

251

98

8

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Pe

rce

nt o

f to

tal

imp

ort

s

ASEAN imports in Australia

Note: ASEAN comprises Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

Challenges for manufacturers

• Strong Australian dollar

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

20

40

60

80

100

120

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

US

do

llar

and

Eu

ro p

er

Au

stra

lian

do

llar

Yen

pe

r A

ust

ralia

n d

olla

r

Exchange rates (per Australian dollar)

Yen (LHS) US$ Euro

Challenges for manufacturers

• Strong Australian dollar weakens manufacturing exports

0.00

0.20

0.40

0.60

0.80

1.00

1.20

-30

-20

-10

0

10

20

30

40

50

60

70

Jun-84 Jun-87 Jun-90 Jun-93 Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-11

US

$/A

$ e

xch

an

ge rate

An

nual p

erc

ent c

hange

Negative impact of a strengthening Australian dollar on the export revenue and export volume of Australian manufacturers

Nominal manufacturing exports Real manufacturing exports US$/A$

stable Australian dollar;broadly stable manufacturing

profitability

weakening Australian dollar;upswing in manufactuirng

profitability

strengthening Australian dollar;downward trend in manufacturing

profitability

Challenges for manufacturers • Net impact of strong Australian dollar on manufacturing exports

-40

-30

-20

-10

0

10

20

30

40

50Co

sts

of c

apita

l equ

ipm

ent

Tota

l sal

es v

olum

es

Mar

gins

on

expo

rt s

ales

Volu

mes

of e

xpor

t sal

es

Cost

s of

inpu

ts

Sale

s vol

umes

in A

ust.

Prof

itabi

lity

Com

petit

or p

rice

s in

Aus

t.

Mar

gins

on

dom

estic

sal

es

Leve

l of c

apita

l inv

estm

ent

Impo

rts

shar

e of

ow

n sa

les

Use

of

impo

rted

inpu

ts

Impo

rts

shar

e in

Aus

t. m

arke

t

Perc

enta

ge o

f res

pond

ents

Net impact of strengthening Australian dollarhigher

lower

negative for Australian industry

positive for Australian industry

Note: Net impact calculated by subtracting respondents who cited (significantly and moderately) lower impactfrom respondents who cited (significantly and moderately) higher impact.

Challenges for manufacturers

• Shortage of skilled workers

0

500

1000

1500

2000

2500Ju

n-95

Jun-

96

Jun-

97

Jun-

98

Jun-

99

Jun-

00

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

$ pe

r wee

k

Average weekly earnings of full-time adults

(ordinary time earnings)

Mining Manufacturing

Challenges for manufacturers • Ageing workforce

0

50

100

150

200

250

300

350

15-19 20-24 25-34 35-44 45-54 55-64 65 and over

Pers

ons (

thou

sand

s)

Employed persons in manufacturing by age group

2001 2006 2011

Challenges for manufacturers • Ambiguous impact of mining boom

0

10

20

30

40

50

60

Higher wages and salaries

Greater difficulty in recruiting and

retaining employees

Expected sales to mining and related

businesses

Prices you pay for non-labour inputs

Sales to mining and mining-related

businesses

Availability of non-labour inputs

Pe

rce

nta

ge

of

resp

on

de

nts

Net impact of resources boom

Note: Net impact calculated by subtracting respondents who cited (significantly and moderately) lower impact fromrespondents who cited (significantly and moderately) higher impact.

Opportunities for manufacturers • Increase exports to booming Asian economies

Share of world economy in 2050

Developing Asia

Africa

Western Europe

North America

Middle East

Latin America

CIS

CEE

Aust & NZ

Japan

Source: W. H. Buiter and E. Rahbari (2011), “Global Growth Generators: Moving Beyond Emerging Markets and BRICs”, Centre for Economic Policy Research Policy Insight No. 55

Opportunities for manufacturers • Catering to emerging middle class in developing economies

Source: Court,D. D. & Narasimhan, L. (2010) , ‘Capturing the World’s Emerging Middle Class’, McKinsey Quarterly July 2010

2

15

32

23

28

0.1

1.8

13

23.6

61.5

0 10 20 30 40 50 60 70

Global (> $113,000)

Upper middle ($56,500-$113,000)

Middle ($22,500-$56,499)

Lower middle ($13,500-$22,499)

Deprived (<$13,500)

Per cent

Distribution of consumption and population

Percent of total population (100 per cent = 5.5 billion)

Percent of total consumption (100 per cent = $9.7 trillion)

Note: Annual household income displayed in parenthesis along the vertical axis

Opportunities for manufacturers

• Developing high-technology manufacturing

• Producing and selling green products and services

• Upstream processing of raw materials (from mining and agriculture sectors)

Regional manufacturing in Victoria • Regional economies are relatively more dependent on the

prospects of the manufacturing sector

• Relative importance of a few manufacturing sub-sectors within regional economies:

– Strong agricultural – food manufacturing links

– Machinery and equipment manufacturing, e.g. clustering around motor vehicles and parts manufacturing (e.g. Geelong)

– Concentration of petroleum, coal, chemical & rubber products manufacturing in some regions (e.g. La Trobe Valley)

Regional manufacturing in Victoria • Example: the Barwon region

0

20

40

60

80

100

Food, beverage & tobacco products

Textile, clothing & other

manufacturing

Petroleum, coal, chemical &

rubber products

Non-metallic mineral products

Metal products Machinery & equipment

pe

r ce

nt

Barwon region - manufacturing sub-sector sharesPer cent of total manufacturing in the region

Regional manufacturing in Victoria • Composition and relative importance of regional

manufacturing points to risks and opportunities

• Food manufacturing:

– Opportunity: great benefits for local economy as ‘food bowl’ for region, including exports to Asia

– Risk: heavy reliance on any particular sub-sector can be risky (relative to diversified economy)

• Same applies to other regions and industries – generally relying on a narrow manufacturing base is not enough for sustained economic growth

• The challenge is for regions to further grow existing industries that are competitive and attract new and diversified industries

Concluding comments • Investment in skills and workforce development to raise

productivity

• Improving cost competitiveness is key to ensuring long term survival and prosperity of Australian manufacturers

• Emerging Asian economies present both challenges and opportunities for our manufacturers

• Engage Asian businesses and gain local knowledge while exploring overseas opportunities

• Review traditional business models and explore new global supply chain links and new markets/products