Structural Shifts -Manufacturing outlook

While a global approach will drive the success of Australian manufacturing, the sector is fundamentally tied to the health and growth of the domestic economy.

Australian Industry Group associate director Economics and Research Tony Pensabene says the extent and flow on effects of consumer spending are very important, along with the state of the housing and construction market, the exchange rate and the Australian dollar, which is currently having major implications on the export market.

“I’m of the view that we’ll see some slow down in consumer spending,” Pensabene says.

“Interest rate adjustments late last year and early in 2008, will eventually have an impact leading to a slower growing economy.”

Pensabene says the competitive threats and challenges arising from the economic growth of China will continue to have an effect on the Australian manufacturing industry as will increased demand and supply opportunities in the region.

A recent AI review sparked by concern about competition from China found Australian companies adapting through a range of methods.

“They’re making better use of supply chains, including sourcing offshore if necessary to maintain competitiveness,” Pensabene says.

“There’s also a better use of global supply chains, with big companies moving offshore to take advantage of growing markets and low cost advantages.”

“We’re also seeing much more focus on new product development and innovation, which is particularly significant in the auto and TCS sectors.

About a third of sales now come from new products that have been developed over the last three years.”

“In addition, organisations are bringing in new technology, developing leaner production processes, driving down costs and improving efficiencies,” Pensabene adds.

“The real message is that manufacturers are adopting a range of strategies to gain a competitive edge,” he says. “Companies that are dealing with China look right across their whole operations for ways to drive better efficiencies and lift their productivity.”

“The overall evidence for the economy is that the manufacturing sector is becoming more capital intensive,” Pensabene observes. “Companies are trying to move quickly in terms of updating their technology and the strong Australian dollar is helping them bring in capital equipment at a cheaper price.”

Despite this, Pensabene foresees a softening in investment over time, as the economy slows with the impact of interest rate rises.

“Competitiveness is built around having the latest technology and keeping a fair degree of profits churned back into capital investment,” he says.

Pensabene says the manufacturing industry has taken supply chain issues on board as businesses recognise that it’s one area where big advances can be made.

“In recent years there’s been a focus on lean production process,” he says

“But I think increasingly that the focus has shifted to looking at suppliers, supplier relationships, the source of supplies and offshoring parts of production.”

While skills shortages have been a problem for a number of years. Pensabene observes the industry strategising to meet the problem head on.

“Essentially companies are importing skills where they have to and up-skilling their existing staff to make them more flexible and adaptable,” he says.

“They’re also becoming more capital intensive in order to reduce their labour ratios. They’re also making better use of supply chains, getting better value from production processes.”

Tony Pensabene predicts the future of Australia’s manufacturing industry lies in export opportunities in the growing Asia and US markets.

“At the same time I think we’ll see a refocusing of the industry towards whatever the changing needs of consumers are in terms of domestic demand,” he says.

In terms of underlying, growth potential, Pensabene tips off the pharmaceutical and health care sectors, which are increasingly responsive to changes in lifestyle preferences and manufacturers of advanced technology such as tooling, robotics and CNC’s, a sector constantly experiencing elaborate transformation.

Pensable points to the mining, engineering food auto and low value TCF sectors for growth opportunities through export.

“The structural shifts we’re seeing are likely to stay in place for the next five years,” he says.

“With the exception of technical textiles and low value products, our manufactured exports are falling, but it’s balanced by an increase in those sectors geared to commercial engineering and construction activity, which will be boosted by the housing market.”

Tony Pensabene believes the future of Australian manufacturing is in its own hands.

“It’s about how the sector positions itself globally, the nature of the operations, the sort of efficiencies being introduced and the level of investment,” he says.

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