It’s been a tough few years for South Australian manufacturers, but many of those who survive face some enormous opportunities, writes Geoff Thomas, an ambassador of the Impact Awards.
The long-term outlook for SA-based manufacturing is now on the up-turn, with a weaker Australian dollar fuelling those who survived the high dollar days, along with smarter operations and a better understanding of how to compete against world-class competition.
“Whatever doesn’t kill you makes you stronger,” said 19th century German philosopher Frederick Nietzsche, and more recently, 21st century American philosopher Kanye West. And maybe South Australian manufacturers and exporters will also be singing “stronger” with Kanye, now that the Australian dollar has dropped.
It’s been a tough ride for these trade exposed sectors – businesses that are exporting, or competing against imports into the Australian market. Apart from a period during the Global Financial Crisis, the Australian dollar has been above 90 cents for seven years, and above parity for several of these. Many manufacturers have just given up – most notably the car-makers.
These car-makers, owned in Detroit or Tokyo, have global operations. They manufacture cars wherever they can do so at the lowest price. A high Australian dollar made labour, utilities and rates and taxes more expensive. As the only developed country that avoided a recession, Australia also became a very attractive place to sell into. While our car manufacturers struggled with costs, they also were exposed to the most crowded car market in the world. As an example, General Motors were selling cars into Australia not just through Holden, but also through their German brand, Opel.
But Australian owned companies couldn’t retreat to their offshore bases – they had to become stronger … and smarter. Those that have survived have done so by spending on Research & Development to produce innovative new products, based on market research to determine required features.
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Businesses also used the high Aussie dollar to buy production machinery to build efficiencies. Companies refreshed their production equipment by purchasing new, faster, more efficient machinery, typically from Germany or the US. With a high Australian dollar, this machinery was relatively cheap. It will provide a competitive benefit to these companies for many years.
The smart businesses worked hard to become efficient and ensure they had world’s best practice. For these companies, words such as “Lean Manufacturing”, “Six Sigma” and “5S” stopped being goals, and became ingrained practices. With every rise in the Australian dollar, they had to find new ways to reduce costs.
The recession in Europe and the US meant that to survive, Australian exporters had to seek new markets. They have forced themselves to go to East Asia, Eastern Europe, the Middle East and South America to find sales.
It’s been very tough for them. Three times in recent months Australian exporters have told me “thank goodness for the lower Aussie – it’s saved us”. The foreign exchange effect from the lower Australian dollar has meant a lot more Australian dollars from their exports, saving jobs and rebuilding profit.
But is it a one off sugar fix, or a sustainable advantage? Probably a bit of both, and smart companies know how much of each it is. Regrettably though, for many companies, foreign exchange is a poorly understood, and uncontrollable, line item in their profit result.
Many companies don’t manage and understand their foreign exchange – they use accounting systems that only have one currency, and that don’t even differentiate between 1 Euro, 1 US dollar, and 1 Australian dollar, except for a single “foreign exchange” line.
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Smart companies know some profit being made right now is due to the one off advantage from raw materials and inventory. Inventory has been bought cheaply at US dollar parity or 90c level, and is just now being converted into sales, made at a lower exchange rate. That won’t last, as new raw materials and imported consumables will be at higher prices. It’s a “sugar fix” – nice to have, but won’t be repeated.
They also know that their labour, utilities, rent, taxes and other local input costs are now lower, and hopefully will stay lower, when calculated in US dollars or Euro. This gives them an advantage that they can reflect in better pricing, better products or more money to reinvest in their people.
Right now, manufacturers and exporters need to be working to understand that “foreign exchange” line item, and know how much of their foreign exchange improvement is just a temporary result of stock being purchased at one exchange rate, and sold at another; and how much is sustainable. They need to have a strategy to best use the long term improvement.
Australian manufacturing has been through a very tough time. Many good companies have gone to the wall, unable to innovate faster than the Australian dollar was rising.
But there are many who have survived. They are now stronger. They now build very good products in efficient factories and sell them to a diverse export market. The lower Australian dollar gives them an opportunity to rebound and build employment and profits, and continue to reinvest and build on that advantage.
And if they do this, perhaps take another of Kanye’s songs, this time with Rihanna, FourFiveSeconds, and sing “Woke up an optimist”.
Geoff Thomas is an ambassador for the Impact Awards.
He is a non-executive director specialising in private equity and mergers & acquisitions.
The Impact Awards are now open for nominations. If your company would benefit from mentoring and support from one of the high achieving ambassadors running this initiative, enter today and help the South Australia win in an increasingly intensive globalisation game.
For more information or to nominate your business go to: www.theimpactawards.com.au
