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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
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