Results from the latest Australian Industry Group-Deloitte National CEO survey highlight an ongoing restructuring of the auto components industry as it responds to the impacts of globalisation, the high dollar, rising costs and climate change related issues.
These pressures have led to auto parts makers increasing efforts to search for overseas markets and greater integration in the global supply chain, particularly through closer liaison with customers and suppliers.
There has also been a greater focus on operational improvement, particularly through a strong focus on lean manufacturing and the creation of new products and services.
In addition, and mirroring developments in overseas competitors, firms in the sector are focussing on organisational innovation.
The survey, ‘Driving on Innovation and Competitiveness’ also shows that skill shortages are continuing to bite and is constraining innovation, with no less than 81.5% of respondents indicating that a shortage of skilled labour is affecting them to some extent.
The survey also reports the growing importance of environmental issues with increased interest in green products and in environmentally sustainable processes.
The survey involved the CEOs of 150 companies (98 producing automotive components and 52 who had exited component production and were now making other goods) employing 12,500 people and representing sales revenue of around $4.9 billion.
Ai Group Chief Executive Heather Ridout says the survey provides an important snapshot of the pressures on the industry ahead of the Federal Government’s Bracks Review of the sector due to be presented to the Government this week.
“The study shows an industry responding to intensifying global pressures,” Ridout says.
“The impact of the higher dollar in particular has resulted in a loss of competitiveness, higher import penetration, weaker export returns and lower margins.”
“Restructuring in the sector is understandably intense, with a remarkable 52 of the Tier two firms surveyed indicating that they no longer supplied to the auto parts industry.”
“In addition to this more drastic restructuring, businesses remaining in the sector are very active in exploring a range of new directions,” she says.
“These include expanding offshore activity through outsourcing or through new investments abroad. For example, one in five CEOs expect sales growth in the US and Asia-Pacific over the next three years and around 11% expect growth in China.”
Around 50% of automotive components manufacturers have switched (to varying extents) to lower cost suppliers in China over the past three years.
“In terms of the policy settings being considered by the Bracks Review, an important message from the survey was that any policy solution must be consistent with the rapid globalisation of the industry,” Riout says.
“Government support should be built around strengthening capabilities and competitiveness, and attracting investment into Australia from the three multinational car companies.”
Deloitte’s Australian leader of Manufacturing and Automotive Industry Groups, Tom Imbesi, says the report showed companies were committed to achieving international benchmarks.
“Global competitiveness and key initiatives such as the Automotive Co-operative Research Centre were seen in the report as helping companies to develop a stronger focus on innovation,” he says.
“The local industry also needs to develop a greater focus on building markets overseas given that local vehicle production is expected to be flat in the near term.”
“The most significant external change that will assist the local industry is a significant increase in local production numbers.”
“In this regard recent announcements regarding the production of the Ford Focus and the Hybrid Camry are very encouraging and highlight that Australia can successfully compete for new vehicle builds.” Imbesi says.
KEY FINDINGS FROM AUTO COMPONENTS INDUSTRY SURVEY
- Currently, around 90% of sales made by the automotive sector overall are made in the domestic market and the greatest proportion of anticipated sales growth of automotive components over the next three years is in the domestic market.
- Some progress in developing more diversified markets is being made. One in five components firms (18.4%) expect sales growth in the United States and the Asia-Pacific region over the next three years. However, only 11.2% of automotive firms expect sales growth in China over the next three years. Similarly, just 9.2% of CEOs anticipate growth in India over the same period.
- The relatively small shift towards the strong, growing Chinese and Indian markets indicates that the sector could miss potential sales opportunities and remain heavily reliant on the domestic market.
- Indicating the strong competitive pressures facing the sector, 63% of CEOs reported that demands for costdowns from vehicle producers were a key feature of customer relationships over the past year
- As competitive pressure has risen, 50% of firms experienced declining profits over the past three years compared with 36% which experienced increases. This decline in profitability reflects ongoing global competitive pressures, declining volumes, the sustained higher Australian dollar, greater import competition, and rising costs that have forced down automotive industry margins.
- Government policy, in the form of the Automotive Competitiveness and Investment Scheme (ACIS), has had a considerable positive impact on Tier one manufacturers. Export development programs have also played a limited positive role.
- Illustrating a strategic shift in input sourcing towards a greater integration in global supply chains over the past three years, 50% of automotive component manufacturers, to a varying extent, have switched to lower cost suppliers from China. An even greater proportion of firms (58.2%) plan to switch to lower cost suppliers from China in the next three years. 30.6% are planning to switch to lower cost suppliers in India; 23.5% to suppliers in other Asia; and 19.4% to suppliers in Thailand.
- In the past three years, the production processes most likely to have been introduced by companies are improved lean manufacturing (78.8%), expanded domestic production capacity (65.9%), and liaison with customers (62.2%) or suppliers (61.4%) before request for quotation (RFQ) process for design for manufacture. Over the next three years all companies expect to undertake improvements to production processes. 83.8% of companies will be involved with improved lean manufacturing, and over two-thirds of companies will seek to improve liaison with customers (72.2%) and suppliers (69.6%) before the RFQ process for design for manufacture.
- Over the next three years companies anticipate significant increases to overseas activity, with 39% to establish overseas production capacity, 34.6% to expand overseas production capacity and 54.3% to outsource production overseas.
- Just over half the respondents (53%) reported that they have made improvements to a significant extent through new products/services over the last three years, and 50% of respondents have also achieved organisational structure improvements to a significant extent.
- Technical skills are most scarce in the nations automotive components sector, with 81.5% of respondents indicating that a shortage in labour with these skills is affecting them to some extent
For a copy of the report : Ai Group or Deloitte