The Onshoring of Manufacturing
COVID-19 has been the catalyst for organisations and Governments to re-think their supply chains and dependence on a single source of manufactured products. This report examines the outlook for domestic manufacturing and what sub-sectors we expect to grow over the medium- to longer-term.
Buying Australian Made
COVID-19 has driven stronger domestic demand for Australian-made products following the supply shortages we saw earlier in the year. Due to this, organisations quickly adapted to produce products that became in short supply and are now evaluating their supply chains with the aim of increasing domestic production. Sub-sectors where this trend is most prevalent are Food, Beverage and Tobacco Manufacturing and Basic Chemical Manufacturing (which includes health supplements, toiletries and pharmaceuticals) both of which were growing pre-COVID.
BIS Oxford Economics forecast all manufacturing sub-sectors to grow over the next 10-years. Food, Beverage and Tobacco Manufacturing is forecast to experience strong growth over this period whilst the other sub-sectors are expected to see more moderate growth.
Food, Beverage and Tobacco Manufacturing grew strongly between 1990 and 2000 before somewhat stabilising until circa 2016. This sub-sector is now forecast to experience strong growth as more consumers are expected to push for local production.
A recent example of growth in this sector is Kalfresh’s proposed Scenic Rim Agricultural and Industrial Precinct (SRAIP). Kalfresh, a vegetable farmer and manufacturer, have proposed the 40-hectare integrated agricultural, industrial processing precinct in Kalbar, South East Queensland. The vision of the SRAIP is to create a place where primary rural and secondary rural industrial activities are located within close proximity to each other to create opportunities not feasible in the typical food-to-retailer system.
According to the latest Australian Industry Group Australian Performance of Manufacturing Index, the 9.9 point increase to 51.5 points in June was heavily focused in the large food and beverage sector, as new orders from wholesale distributors grew as a result of restrictions easing. The return to expansionary conditions in this index is a positive for the industrial market in particular for refrigerated industrial space warehouses and distribution centres.
Building Supply Chain Resilience
Prior to the onset of COVID-19 we had already seen a rise in protectionist measures globally. During COVID-19, the shutdown of borders led to all layers of supply chains (including manufacturing, distribution and delivery) being tested, and in some areas, supply chains failed. The pandemic has highlighted Australia’s reliance on international manufacturers and potential issues with keeping low inventory levels, a feature of the ‘just in time’ delivery strategy.
Going forward, we expect to see the diversification of supply chains as well as multinational companies looking to regionalise their production operations to reduce the risk of having a central point of manufacturing and the chance of future shortages of critical goods. According to IBISWorld, circa 70% of domestic pharmaceutical demand is met by imports, with Australia importing 2.3x the number of pharmaceutical exports than it produces.
The rapid increase in demand for, and the decreased availability of, pharmaceutical and medical products as a result of COVID-19 saw some medical and non-medical manufacturers increase production of medical and personal protective equipment to cater to increased demand and to fill gaps caused by supply chain failings.
While many manufacturers have stepped up to fill short-term needs using additional labour, it is unlikely that many of these operations will continue long-term as they can be made cheaper elsewhere in the world. Australian manufacturers planning on spending fixed capital need to ensure they are going into areas where we have a competitive advantage or can add services that produce a profitable return post-pandemic.
Building approvals increasing
The ABS classifies industrial buildings into four categories: Factories and Other Secondary Production Buildings; Warehouses; Agricultural and Acquacultural Buildings; and Other Industrial Buildings.
Approvals for Manufacturing facilities fall under the Factories and Other Secondary Production Buildings classification which are defined as “buildings housing, or associated with, production and assembly processes of intermediate and final goods and those converting fuels or environmental energy into electricity.”
As highlighted by the adjacent chart, the rolling annual number of industrial factories approved nationally from 2006 decreased until the end of 2016, before stabilising and then increased marginally during 2019. The rolling annual value of industrial factory approvals is more volatile given it can be impacted by one-off large approvals.
A general increase in the total value of factory approvals has been seen in recent years as we move towards more advanced domestic manufacturing facilities. An example of a recently constructed advanced manufacturing facility is Simtech’s new circa 10,000 square metre global headquarters in Yatala (south of Brisbane). Simtech is an electronics manufacturer who have focused on using a ‘Lean Manufacturing’ methodology.
Manufacturing Modernisation Fund
In April, the Australian Made Campaign called on businesses and Government to adopt “buy Australian first” procurement policies. We expect the renewed push for local manufacturing will continue post-COVID-19. With many sub-sectors of the industrial market being highly competitive globally, the adoption of new technologies and business processes is critical to maintaining domestic competitiveness. Technological advancement has resulted in a decreased rate of growth of manufacturing employment; however, floor space requirements have increased with the need for customised, purpose-built and high-tech facilities.
The Federal Government introduced the Manufacturing Modernisation Fund in September 2019 to support manufacturers by co-funding capital investments and associated re-skilling to modernise businesses (through technology upgrades, efficiency upgrades or transformative changes that will allow production of new products or diversification into new markets). The $50 million fund provides co-funded grants of between $50,000 and $1,000,000 for small to medium manufacturing enterprises. The program is being run over three years and is being delivered through two streams.
The modernisation of domestic manufacturing is critical to manufacturers maintaining competitiveness and operational efficiency. Even in what is largely a declining sub-sector, printing, there are recent examples of how investment in the modernisation of facilities is expected to return positive outcomes.
For example, in 2019, Ovato consolidated its New South Wales sites into a ‘super site’ at Warwick Farm (having previously consolidated its Queensland and Victoria sites) and invested $20 million in new equipment. The consolidation of sites and investment in new technology will reportedly improve the group’s efficiency, flexibility and cost of production.
Proposed Cuts – R&D Tax Incentive
Legislation to enact proposed cuts to the Research and Development Tax Incentive (RDTI) are currently before the Senate, however will not be voted on for another month or two. The proposed cuts would save $1.8 billion over four years and be backdated for the 2019/20 financial year. The proposed cuts include changes to the rate of refundable research and development tax offsets, an increase in the research and development expenditure threshold rate, and a limit on the maximum claim amount.
Domestic manufacturing is highly volatile and impacted by changes in economic and global conditions. The value of the Australian dollar is an important factor that affects the competitiveness of domestic manufacturing. Domestic manufacturing declined between 2000 and 2013, largely due to the appreciation of the Australian dollar. Adding to this was the emergence of cheaper suppliers of manufactured goods during this time (most notably China whose share of global manufacturing increased from under 4% in 1990 to close to 30% in 2018). Labour cost concerns and better access to global supply chains and export markets further encouraged offshoring during this period.
When is the Australian dollar competitive?
According to a study by AIGroup, manufacturers feel competitive with imports in the domestic market when the Australian dollar is below US70 cents.
The value of the Australian dollar has broadly sat in the range of what most manufacturers view as a competitive band over the past five years. During this time, we saw growth in the economic output of Food, Beverage and Tobacco manufacturing; Petroleum, Coal, Chemical and Rubber Product manufacturing; and Metal Product manufacturing.
According to BIS Oxford Economics, the value of the Australian dollar is expected to increase over the coming five years, however, stay within a competitive range and this is expected to benefit domestic manufacturers.
Wages growth has been moderate over recent years. Australian wages remain high from a global perspective, making it more challenging to compete in terms of basic manufacturing. From 2022, wages growth is expected to strengthen, further reducing the competitiveness of domestic production. High-end manufacturing, however, requires a more highly skilled workforce, which commands higher wages internationally. It is this space where we expect Australian to remain competitive.
Outlook – Is domestic manufacturing viable over the long-term?
- COVID-19 has highlighted the need for supply chain resilience. COVID-19 is likely to be a catalyst for ensuring Australia’s supply chains are more resilient in the case of another global event that shuts down supply chains. This is particularly expected for the medical, pharmaceuticals and building manufacturing sub-sectors.
- The value of the Australian dollar is expected to remain in a competitive range for local manufacturers over the medium to longer-term. The lower the value of the dollar will result in increased benefits to manufacturing exports as well as import competing manufacturers, even though the production inputs are more expensive.
- According to an AMGC report, domestic manufacturers can improve their competitiveness through:
- Enhancing value through innovation and technological improvement;
- Shifting market focus to high growth and high-value products; and
- Reducing costs through monitoring of inputs, advanced techniques and increased scale.
- Wages growth has been moderate over recent years. From 2022, wages growth is expected to strengthen which reduces the overall competitiveness of domestic manufacturing. However, advanced manufacturing sub-sectors require a more highly skilled workforce, and this commands higher wages internationally. We expect Australia will remain competitive in this sub-sector.
- There is a future for advanced and specialised manufacturing in Australia. However, broadly speaking, basic manufacturing is unlikely to be viable over the long-term as wages growth increases and Australia continues to grow as a service-based economy.
GOING BEYOND THE LOCAL MARKET – A case study on advanced manufacturing
A recent example of growth in advanced manufacturing is the development of Rapid Access Composite Plus, a lightweight, fire resistant cladding that can be used on ships, developed by Tasmanian-based CBG Systems, in collaboration with CSIRO.
According to CSIRO chief executive Dr Larry Marshall: “This home-grown Aussie innovation has enabled CBG Systems to become an advanced manufacturer of globally-competitive marine insulation products and services, which is now bringing in valuable export dollars from around the world”.
Part of the development process involved training and up-skilling of employees on advanced manufacturing techniques.
Outlook by Sub-sector
- BIS Oxford Economics’ growth forecasts from 2019 to 2028 are shown below. According to BIS Oxford Economics, the growth outlook is strongest for the Food, Beverage and Tobacco sub-sector of the manufacturing industry. The Other Manufacturing subsector, which includes pharmaceuticals, is forecast to experience modest growth.
- For all sub-sectors, the embracing of Industry 4.0 or the digital transformation of manufacturing is critical to the competitiveness of domestic manufacturing and will provide opportunities for growth in our manufacturing sector over the longer-term.