In a recent webinar, BDO delved into this two-part question, focusing on giving manufacturers the knowledge and tools they need to rise to the top locally and around the world.
What is the state of the Australian manufacturing industry?
Australian manufacturing has a strong identity as a sector that creates goods for export, especially high-tech solutions such as green and smart energy infrastructure. Partnerships between research universities and manufacturers are good sources of these products. The recent Federal Budget announcements confirmed the sector as a priority for job creation, particularly through the Modern Manufacturing Strategy.
“Australia was world-renowned in the inter-war period as a source of high-quality, manufactured goods” says BDO Partner, Bill Cole. “The same is true now, but the formations that produce those goods are different.”
While the specifics have changed, that general picture remains true today, with the ‘made in Australia’ brand carrying weight around the world. This raises the idea of re-shoring manufacturing operations and using that reputation as a mark of quality and reliability.
In late 2019, the World Trade Organization noted that for the first time since 2012, barriers to international trade had increased. With the global pandemic now setting the tone for international trade, it is clear that a reliance on single target partners is a weakness, as are vulnerable supply chain links. Australian businesses should be envisioning a world market beyond North Asia, applying the portfolio effect to make their manufacturing efforts more sustainable.
When asked about how they are planning to change their supply chain operations in the next few months, respondents in the webinar audience answered:
- 40 per cent are considering re-shoring their supply chains
- 20 per cent are interested in near-shoring manufacturing
- 40 per cent plan to trade with more locations and different partners
- 40 per cent want to combine on-, off- and re-shoring into a ‘best-shoring’ strategy
- 27 per cent have considered global expansion.
Acting on these ambitions will bring varying levels of challenge and opportunity within the worldwide market, which has taken nine years to recover to pre-GFC levels. The higher costs associated with local manufacturing will have to be balanced against the increased scale of global markets and greater opportunities that come along.
How can Australian SMEs using near- or re-shored operations thrive in global export markets?
Building scale in domestic markets is difficult due to brakes created by ACCC small-market competition rules — but succeeding overseas will require a determined approach. Small organisations that manufacture domestically and own their own intellectual property rather than white-labelling and being anonymous parts of a larger supply chain can break into global markets. These SMEs are more likely to represent the future of Australian exports than large, diversified manufacturers.
Manufacturers will have to rethink the very type of business they are, rather than simply looking for a place to sell a small percentage of unsold inventory. Overseas markets are places where SMEs can pursue scale and growth. With that said, trying to re-shore production while simultaneously pivoting to exports is “probably a leap too far in terms of risk” says BDO Partner, David Fechner, as organisations attempt to grow while reshaping their supply chains.
The process of re-shoring comes with its share of struggles, especially for companies that have struck up long-term relationships with their supply and manufacturing partners. The international logistics challenges associated with COVID-19-era complications make this even harder. There is precedent, however: companies that sought to move to China in the 1980s experienced decades of struggles.
Fechner says specialised, adaptable manufacturers will do well: “Specialty, innovation and being close to and understanding the market you’re supplying into, I think that is the secret of success for Australia”, he says.
What is the financial picture for manufacturing SMEs?
Some of the issues facing SMEs come from the way the Australian financial sector operates. For instance, business lending is usually secured against property or assets, rather than on the basis of a company having good people or a solid strategy. With that said, Australian banks have strong international reputations, so they can issue letters of credit and bills of lading that will be well received around the world.
While local companies with strong IP can draw interest from international partners for mergers and acquisitions, COVID-19 has slowed the due diligence and inspection processes, in turn slowing this market. As for large Australian companies, they have been resistant to add specialist SMEs to their portfolios — a strategy where significant opportunity lies that they would do well to further consider. “There is a significant opportunity domestically to do bulk-togethers of SME’s. For businesses sitting in their own market, they’re probably not putting enough time into looking at growth through acquisition” says David Fechner.
As for direct government investment in local manufacturing, all levels of government have committed funds for projects such as circular economy sustainability initiatives. The Modern Manufacturing and Supply Chain Resilience initiatives, for example, were announced in the recent Federal Budget. With that said, direct policy changes are needed to deliver sustainable success for Australian manufacturers. As of now, the World Bank states it is five times more expensive for an Australian company to sell goods at export than it would be for a Canadian firm.
“Australia needs to remember the portfolio effect that is so characteristic of low-risk behaviours in finance and any other broad-based sector, and diversify our trading partners. We cannot rely on two or three economies to determine how we manufacture and what we manufacture, the fact is there is a range of possibilities out there that we need to explore more fully” says Bill Cole.
At this pivotal time, expert help and guidance are more valuable than ever — reach out and find out how our team at BDO can help.