Engineering & Manufacturing Influence News – Issue 5 September 2012

ISSUE 5 – SEPTEMBER 2012

The most significant development in this last month has been the release of the report on the future of Australian Manufacturing from the non-governmental taskforce set up by PM Julia Gillard.  The full report of over 90 pages is the result of over 8 months work by two governmental working groups under the direction of a 25 person taskforce comprised of eight parliamentarians, eight high powered industrialists, six unionists and three academics.

The report identifies what it says is a simple strategy; “Smarter Manufacturing for a Smarter Australia” and concludes with forty-one recommendations for government action outlined over a one, four and ten year timeframes.  The report is not easy to digest but the executive summary identifies a number of key future actions to be focused on the opportunities created by the Asian century:

  • Building a new and stronger generation of capable manufacturing organisations
  • Turning the $9.4b of investment in science and research into better applied knowledge
  • Ensuring companies see good reason for continuing to invest in Australia
  • Building better global supply chains
  • Building a smarter and more efficient manufacturing industry
  • Building more productive and collaborative workplaces

It would be very difficult for anyone to disagree with these proposals.  As manufacturing is such a broad church covering at least sixteen different sectors, the report does stress that there cannot be a broad brush approach but will have to be targeted to sectors that can give the most national benefit and have the most opportunity.  In this regard and with respect to Asia, it is suggested the focus should be on the following:

  • Automotive components
  • Clean energy and the environment
  • Food and beverage
  • Health and medical
  • Infrastructure and Building Materials

Of course, the Vernier Society’s primary interest is in sectors associated with ‘making things’ notably in metal and so the rest of this synopsis will try to expand on issues in these sectors whilst providing facts associated with the manufacturing industry in general.

Manufacturing employs close to 1 million people or 8.5% of the working population (as compared to mining that employs 200,000) It has lost over 107,000 jobs in the last four years and the report forecasts that it may lose a further 85,600 over next five years.    Manufacturing contributes over $103b of Gross Value Added (Value of goods and services produced) to the national economy or 8% of GDP and contributes 29% of Australia’s exports.  The major contribution sectors to the $103b are; Food, Beverage & Tobacco $22b, Petrol, Chemical & Rubber $21b and the two sectors of main interest, Metal Products and Machinery & Equipment, both contributing $18b each.

The distribution of GVA was given over eight sectors but when the employment split is further analysed this is over sixteen sectors with the major ‘making things’ sectors employing:

Sector Number of people
Clothing and Textiles 38,000
Fabricated Metal Products 55,000
Machinery and Equipment 110,000
Furniture 61,000
Total % 27%

The report has a complicated forecast of reducing employment but shows that three of these sectors (excluding Machinery and Equipment) will suffer the bulk of the further losses.

Of the 945k people employed, Victoria has 310,000 in total manufacturing or nearly 32% share.   When classifying roles, 25% of the people are now classed as highly skilled up from 19% ten years ago.  However, the report identifies that 43% of the workforce have either numeracy or literacy skills and 50% have no formal qualifications.  Finally more than 500,000 people work for small or medium sized manufacturing businesses and there are over 50,000 SME’s that employ less than 200 people.

Australian industry is currently said to be multi-speed economy with mining disguising ills in other industries.  To examine this more closely the report uses analysis done by the McKinsey Global Institute Sectoral and Industry Analysis (page 33/chart 3.2) which shows some very interesting results based on two key drivers.  ‘Differentiation’ that shows how differing industry sectors have different levels of value adding based on the uniqueness of the products, services and features and ‘Tradability’ that is the sectors ability to withstand competitive pressures.  As the report says the chart is complex but it shows that “more than other sectors, manufacturing is dependent on its ability to succeed in traded industries”.  Put another way and pertinent to Vernier, ‘making things’ sectors are highly tradable (both export and import) and so increasingly compete on differentiation of unique inputs, capabilities and consumer relationships.  The report further finds that “within-industry developments have greater economic impacts that changes in the industry mix. Or put simply as Michael Porter says “How a nation or region competes in its industries matters more than the industries it competes in””.  The full McKinsey report (interesting read) expands on this by identifying four areas in which government involvement can assist or hinder competition:

  • ‘Setting the ground rules’ – through setting a roadmap or using regulations
  • ‘Building enablers’ – R&D support and skills and training
  • ‘Tilting the playing field’ – protectionism
  • ‘Playing role of principal actor’ – State ownership or intervention

It will be interesting to see how the government applies these tools across various industry sectors.

While the report list 41 specific recommendations, the proposals are covered under some major policy directions:

  • Meeting current pressures by helping with investment and industry participation, to reduce the risk of loss of jobs and core manufacturing capabilities.
  •  Lifting productivity growth and reducing business costs via economy-wide proposals in transport infrastructure, broadband, energy, regulation and taxation reform.
  • Improving the benefits flowing to Australian manufacturing from our research investments including through a new platform for systemic collaboration with innovation hubs and stronger networks.
  • Building a cohort of medium sized world competitive firms and improving SME competitiveness through a new SME Strategy that targets SME capability.
  • Forging of a shared competitiveness culture through a new national partnership for workplaces, focused on the capabilities of managers and workers.

Editorial Comment:

 

The document stresses repeatedly that it is from the non government members of the taskforce, which are primarily industry leaders and union leaders.  The report is likely to therefore be a compromise between what at times must be opposing views.  The report suggests that is will not be recommending radical change, rather iterative, albeit innovative steps and this is what is delivered.  In fairness, in the detailed expansion of the overarching policy directions listed above, there are many good recommendations, particularly around the linking of research and innovation more directly to the needs of business and industry sectors in which Australia hold or have the potential to hold, a global competitive advantage.

Detailed reading of the report reveals a number of issues to the editor:

From the report is seems there are currently a myriad of government funded organisations that seem to operate across the manufacturing spectrum offering opportunities to industries and businesses.  Organisations such as AMTIL, CSIRO and Austrade are well known, but the report mentions among others;

  • Manufacturing Technology Innovation Centre (MTIC)
  • Enterprise Connect
  • Australian Manufacturing and Materials Innovation Precinct (AMMIP)
  •  Victorian Smart SME’s Market Validation Program
  • Researchers in Business Program
  • Defence, Science and Technology Organisation (DSTO),
  • Australian Research Council Centre of Excellence (ARCCE)
  • Commercialisation Australia

Besides this there are private organisations such as Insight Economics who provided information (one assumes paid for) to this report.

How can all these separately funded organisations be well managed so as to not to duplicate purpose, be well monitored and regulated and still ensure focus on benefit to the comprehensive manufacturing sector?  This seems to me to be a classic example of bureaucratic madness  and the task of controlling  these separate organisations must be huge.   One of the organisations mentioned is the ARRCE – a Centre of Excellence for Knowledge.  One of the 2011 funded projects listed on their website is a $24m, 7 year study into the ‘History of Emotions’ by the University of WA.  However valuable this research may be, I would have thought there were more beneficial uses for the money directly associated with manufacturing.

The report clearly identifies that Australia has gone backwards in productivity growth and international competiveness in which we have slipped from 5th in the world a decade ago to 20th today.  The analysis provided suggests specific comparative Australian weaknesses are in innovation, technological readiness and business sophistication (which has been translated in the report into management capabilities?).  The report, interestingly, quotes a Treasury Secretary suggesting that “we will get the biggest benefits from reform efforts, not in the same areas as the past but in areas that we have not yet focused on”.  Yet the report completely avoids any suggestions that our system of industrial relations should be an area for review and overhaul.  It can be reasonably assumed that consensus could never have been reached amongst the non government members on such a provocative issue and would probably have been vetoed from the report by the government anyway, but it seems such a denial to the elephant in the room!  How can a system based on bargaining, on adversarial relations and ambit claims ever lead to a collaborative and progressive culture?  We now live in a world of instantaneous global connection; a 24/7 world of commerce and of societal interaction yet we still see the working week as Monday to Friday and 37 hours.

The report quite rightly suggests that knowledge, innovation, design capability and skills are what will differentiate us in a highly competitive world and there are numerous good ideas including the setting up of innovation hubs for various competitive strengths to collect and disseminate knowledge for the benefit of Australian businesses.  Unfortunately, the report also recognises that that such innovation takes time to set up and accelerate and 4 years is a realistic timescale.  Of course, these actual benefits will also need to be recognised and agreed and governments are always reticent of choosing such capabilities for fear of failure.  Also governments seem to be using the economic climate for cost reduction rather than investment spending.  But a very good point was made by Mark Carnegie (Q&A 24/9) that investing in education (in this case the Gonsky Report) should be seen as vital for the future, regardless of the debt.  Surely this argument applies to manufacturing.  Leading the world in tradable engineering products based on leading edge knowledge and innovation is the key to the future prosperity.  Unfortunately, I cannot see either of our political parties having the courage to shed the baggage of the past nor the visionary intellect for the future to lead Australian manufacturing into a resurgent twenty first century.

Engineering & Manufacturing Influence News – Issue 3 July 2012

ISSUE 3 – JULY 2012

Editorial

The big event this month was the arrival of the long awaited Carbon Tax.  The tax which is regarded by many as highly divisive is also linked to a household compensation package and a revision of personal tax thresholds.  Whatever your personal views on the need and level of this tax, it is clear that it does not come at the best time for the Australian manufacturing industry as it faces further contraction.  With the Coalition vowing to repeal the tax immediate upon taking power at the next election; this can only add further uncertainty to many sectors of the economy, which may also be further threatened by economic slowdowns in our largest export trading partner – China.

Trawling the news this month produced two Australian manufacturing success stories (see below) and an interesting article on the visit of NZ Prime Minister John Key.  Key’s was in Australia to take local manufacturing back home to NZ says the AFR 6/7.  Fresh from winding back the carbon tax, cutting the top rate of income tax to 33% and kicking off partial privatisations he said Government is a practical business; making a series of sensible decisions which build on each other.  During questions he was asked from the audience; “Prime Minister, I’m not sure what you are doing next week but the question is; Australian business would like you to run the country”!

On July 1 the government’s long awaited Carbon Tax finally came into being.  The tax will tax all companies that emit more than 25,000 tonnes of CO2 equivalent a year.  It will apply to about 60% of the country’s emissions with carbon units at a initial price of $23 rising in the next two years.  Companies can lower their tax bill by claiming carbon credits for emissions from a number of activities including transport and domestic aviation.  In addition, a clean energy finance corporation has been set up with an investment of $10 billion over 5 years to lend money and invest in clean energy companies.

Australia’s manufacturing sector contracted for its fourth straight month in June, a private sector survey shows.  The Australian Industry Group/Price Waterhouse Coopers Australian Performance of Manufacturing Index (PMI) remained below the key level of 50 points in June, indicating the sector continued to contract.  However, the index rose 4.8 points to 47.2 points, indicating the sector contracted at a slower pace compared to the previous month.  The index, released on Monday, showed eight of the 12 manufacturing sub-sectors – including wood products and furniture, food and beverages textiles and chemicals – recorded decreases in June.

(By AAP 02/07/2012 – www.thebull.com.au)

Manufacturing activity in China hit a seven-month low in June; a private survey has shown, due to a slide in exports and weak domestic demand.  HSBC’s preliminary purchasing managers’ index (PMI), which gauges the manufacturing sector, fell to 48.1 in June from 48.4 in May marking the 8th consecutive month of contraction..

Analysts said the results suggest China will move again to boost its slowing economy, after cutting interest rates earlier this month for the first time in three years and encouraging more government investment.  A spokesman said China is facing weak demand in key export markets such as the US and Europe.  The government has reduced its economic growth target for this year to 7.5 per cent, down from growth of 9.2 per cent last year and 10.4 per cent in 2010.  (ABC news.net.au)

National kitchen designer and manufacturer Australian Kitchen Industries has gone into voluntary administration, a victim of tough economic conditions for manufacturers and last year’s floods in Queensland.  The company has 20 stores across the nation, which operates under the brands Kitchen Connection, Wallspan Kitchen Connections and Impala Kitchen Connection, and it employs around 200 staff.  There are stores in Melbourne, Sydney, Adelaide and Brisbane, although Impala Kitchens in states other than Victoria is not part of the AKI group and is not affected by the administration. (www.smartcompany.com.au)

The Horsham foundry of failed car parts maker CMI Industrial will be closed next month after receivers failed to find a buyer for the business.  The company is a major parts supplier to Ford but it went into liquidation earlier this year. Twenty-nine employees will be made redundant and the factory is expected close by July 6 after the receivers who initially believed the foundry could stay open for another 6 months admitted they could not find a buyer for the foundry business.  (www.abcnews.net.au)

And now a couple of success stories:

Bartco a traffic management business, started  an off shoot manufacturing their own road signs has grown to become a multi-million dollar operation and has just secured a $2 million contract to deliver traffic management signs for the London Olympics. So we decided to build them ourselves, basically. We put the specifications together, contracted out the manufacturing, and then started building up things with LED technology. We put them on the road, and to cut a long story short, people started noticing them and wanted to buy them off us.  Using new technology, solar powered and LEDs and subcontracting manufacture they started building a technology company, investing substantially in R&D to keep ahead of the competition.  The contract for the Olympics came out of a new type of sign using new colour LED’s and solving power consumption by use of solar.

Barry Thomas’s Brisbane-based company, Cook Medical, is at the forefront of manufacture in the medical device field. Cook Medical Australia reported $164 million in revenue in 2011. This included $76 million in export sales of product manufactured locally in Australia, $8 million in sales of locally manufactured product into the Australian market and $78 million in sales of imported product from other Cook companies outside of APAC.

Thomas, who received a 2012 Australian Export Heroes award from the Australian Institute of Export, has some simple advice. Watch your input costs, keep management structures flat, make sure you are either making money out of the dollar or hedging yourself and, most importantly, look after your employees. It’s about making sure the people you have on board are the right fit, and then taking care of them so that they stay.  “It’s about having a workforce that’s working with you to maintain manufacturing,’’ Thomas says.   Cook Medical now employs about 600 people in Australia. It has a low turnover of staff because it works almost as a family company.

That doesn’t mean the company can’t cut staff when it has to. But it needs to be strategic in the way it goes about it, he says.