When it comes to the manufactures export industry, finds the news is very good or very bad. It depends on many factors but one of the most important is how manufactures exporters are tackling our perennial tyranny of distance.
Has the China-led explosion of manufacturing in the developing world quashed Australia’s hopes for a thriving manufactures export industry? Does the strengthening Aussie dollar signal even tougher times ahead?
A new survey by the Australian Industry Group and PricewaterhouseCoopers shows that recent rises in the Australian dollar exchange rate have created ‘a significant headwind’ with more than one in 10 manufacturing exporters describing it as a major constraint on production.
“The short-term forecast for exports is the lowest since the September 2005 quarter and stands at a level that is typically followed by outright declines,” says Australian Industry Group chief executive, Heather Ridout.
This gloomy outlook contrasts starkly with the survey’s view of domestic production with manufacturing activity rising in four straight quarters, driven by solid domestic demand and economic growth.
Where does this leave Australia’s exporters of manufactures? Depending on who you talk to, they could be dangling over an economic precipise, succeeding comfortably in new, specialised market sectors, or establishing production plants on the other side of the world.
Ben Ford, senior economist at export finance specialists, EFIC, won’t hear a word of doomsaying about manufactured exports. He says the reality is that news of their death has been greatly exaggerated. “There’s quite a lot of good news about,” he says. “The sector has undergone a fair amount of change and restructuring but, effectively, what has occurred is a shake-out. Manufacturers have adapted to new circumstances, re-orienting to produce higher end products, such as medical and scientific equipment, and they’ve produced some world leaders. Export data suggests our manufacturing sector is far from uncompetitive globally.”
In 2006, Australia’s ETM exports grew by 5.2 percent to $27.4 billion. Simply transformed manufactures (mainly metals) were up 32 percent to $14.6 billion. Dr John Edwards, chief economist at HSBC Australia, has written a report called ‘Export Weakness, Investment Strength’ for the Committee for the Development of Australia (CEDA), pointing out that volumes of Australia’s manufactured exports have actually risen faster than the average for all goods in the past six years.
At the same time—and this is where it gets really interesting—direct investment abroad by Australian investors has almost caught up with foreign direct investment in Australia, giving us a long-term stake in the management of a raft of overseas operations.
CEDA’s director of policy and communications, David Walker, says it will not be long before Australian business assets abroad exceed foreign business assets in Australia. The value of Australian direct investment in the United States already exceeds the value of American direct investment in Australia.
“We don’t yet fully understand what’s driving the strong move into direct foreign investments—mainly into the United States, Britain, and New Zealand—but, in quite a short space of time, we have pretty much closed the gap between what they own of us and what we own of them,” he explains. “Some of it is related to the fact that if you are going to expand your trade overseas you will typically need a locally-based supplier to handle the trade.”
Ford adds that manufactures at present represent some 30 percent of all Australian exports by value—double what it was in the so-called ‘halcyon’ days of the 1950s and early 1960s. “At EFIC we think things are looking pretty good for capital intensive product manufacturers employing teams of expert staff and producing specialist products in ABS export categories like building materials, medical technology, banking, insurance, shopping mall development, inorganic chemicals, pharmaceuticals, fertilisers, plastics, chemicals, metals manufactures, power-generating equipment, general industrial machinery and equipment, electrical equipment, and professional, scientific and controlling instruments. Wine is another high value-added product, not included in the manufacturing totals, that has done well.
“You have to qualify this growth with the fact that circumstances may not be moving in favour of local ‘widget’ manufacturers, but small companies are discovering a whole range of new interests where they are excelling, such as the mining support industry where they specialise in mining equipment, the construction of production facilities or mineral processing at sites all over the world.
“Australian companies are moving beyond standard exporting—they are setting up factories or logistics centres overseas so that, for example, a South Australian wine producer, who has historically sent cases of wine to North America, may now be setting up a distribution centre in California. This is the direction—the new reality—Australian companies are moving towards.”
International Manufacturing Operations
To support this effort, EFIC has been given a new mandate by the Government to work with SMEs to help them build international operations. One firm now contemplating the leap into offshore investment and production is Brisbane’s family-familiar Frosty Boy ice-cream company, which already exports its soft-serve powder mix to round 30 countries—some taking several container-loads a month.
“Manufacturing in a country like China is probably inevitable for Frosty Boy,” declares Frosty Boy chief, André Van Rooyen. “Fortunately, for the foreseeable future, Frosty Boy will continue to export from its Australian factory, especially to new markets in Europe. Manufacturing in Australia brings out the best in us, but even the most determined manufacturer could find himself running out of cost-reducing options in Australia and be enticed to move to a more favourable tax regime.”
A driving force behind CEDA’s decision to commission reports on Australia’s export economy has been constant anecdotal reports over time that manufacturing, as a proportion of the Australian economy, is falling.
“We shouldn’t be concerned to see manufacturing shrink as an indicator of development,” Walker insists. “We expect to see that happening in any developing economy—even in China, where production in absolute terms is growing but is shrinking as a proportion of the total economy.
“The question for Australia is how we ensure our industries fit into the global supply chain as basic manufacturing moves to lower cost suppliers like China, eastern Europe and Latin America where labour costs are low. Frankly, no one seems to have the answer to this, and that includes CEDA.
“What we do know is that Australia, as a comparatively small economy, faces some tough challenges in the global supply chain. But we do have a bunch of advantages, one being that we are very good at systems integration, bringing several parties together in an effective and efficient way, as we have done in our IT industry.”
Walker also points to the continuing success of smaller exporters—both ‘born globals’ (firms created to engage in offshore trade) and companies that address export markets when they have the capacity.
So, who could have supposed that all Australian exporters would still be facing one of the oldest and hoariest of Australia’s trading bêtes noires—the tyranny of distance.
“An important theme in the CEDA report is that Australia’s distance [from other markets] continues to be a problem,” Walker says. “The tyranny of distance still deters trade and Australia is one of the least trade exposed economies in the world, based on our ratio of exports and imports to GDP. Australia rates in the 20s while other countries are ranked in the 60s and 70s. Like Paul Keating said, it has to do with being at the arse end of the world.
“The rapid increase in Australian direct investment abroad demonstrates that in this dimension at least, Australian industry has not lost the will or the ability to successfully compete in foreign markets. We are spending a lot of time on global supply chains—extended networks across the world of business, suppliers and customers. Some of our manufacturers are very globally competitive so it’s not a story of one-way decline.
“Manufacturing will be increasingly bundled up with services—as has happened in the car industry where you find the people who designed the interior of the Ford Territory vehicle also provided the design services for a vehicle created for the Indian market. Australia’s manufactured exports story is not one of decline. In absolute terms, manufacturing will continue to grow.”
How does this complex tale relate to the current debate over a high-speed broadband internet across Australia? “It’s not clear if a lot of our economy is being blocked by our relatively low speed broadband,” Walker says. “And it’s not clear what industrial development would be enabled if we rolled out a truly high-speed network. But since Australia’s distance from other markets continues to be a problem, it is very important that we ensure transport and communication costs are as low as possible.”
Has he no fears for the future? “Some people fear that the relationship between the US and China will deteriorate to the point where each seeks to limit the other’s trade,” he says. “Its not inevitable that the global economy will continue to open up, but the last thing we want is for Australia to revert to a position where it deliberately keeps itself from the rest of the world.”
Major Manufacturing Markets
Homegrown issues aren’t the only barriers to Australia’s manufacture exports effort. Some countries, like the United States, have laws that give automatic preference among official agencies to local manufacturers.
Fortunately, the US–Australian Free Trade Agreement (FTA) has prised open the doors of America’s ‘Buy American’ Act and firms like Canberra-based military and security IT specialists, Compucat Research, have used it to win deals with US armed forces.
Compucat’s expertise became known to the Americans through its work with the Australian, British and Canadian Governments, and they used defence supplier Lockheed Martin to check it out. They liked what they saw and negotiations began with Compucat. “After things started to get serious in the negotiations, questions were asked about the ‘Buy American Act’,” a company spokesman said. “We explained that, under the FTA, Australian companies enjoyed ‘national treatment’ status in America, meaning they should deal with us in the same way they deal with American firms. “Australian companies need to understand how the FTA can help them in America, how it raises perceptions of Australians as trusted partners.”
In recent months, China has overtaken Japan and America to become Australia’s largest trading partner. Two-way trade reached a combined $52.7 billion in the year to March. This sum could become small potatoes if negotiations for an FTA with China succeed, prompting a potential explosion in the number of Australian companies trading with the Middle Kingdom, currently estimated at nearly 4,000 firms.
And Austrade says it’s not just huge resources companies that would benefit. A Sensis-Austrade survey shows an increasing number of SMEs are already following majors into the Chinese market. The 2008 Olympic Games in Beijing should stimulate more interest.
A recent DHL Export Barometer also highlights a new focus by Australian exporters on India and Europe, indicating that 56 percent of Australian exporters are looking at increased sales to India. Some 65 percent of them also believe sales to Europe will boom next year.
Merchandise exports to the Indian market reached nearly $7 billion in 2005, making India our sixth-ranking merchandise market. India recognises Australia as a source of sophisticated manufactures, and purchases of our ETMs are expanding for products like the ‘twistlocks’—which anchor standard freight containers on rail flatbeds—from Melbourne-based Celtec Engineering.
This mightn’t sound significant until it’s understood that Indian Railways operates some 4,000 freight trains comprising around 222,000 freight wagons, every day.
The world’s second-largest economy, Japan, has also embraced a new spirit of entrepreneurship, opening doors for Australians to expand their trading relationships. Australia is negotiating another FTA with Japan which Austrade estimates could add $39 billion to Australia’s GDP.
