Radar Report: Manufacturing industry trends
Futurist Tommy McCubbin provides insights into how the manufacturing sector is being impacted now, soon and later under COVID-19, with supporting comments for accountants and bookkeepers from ABN director, Peter Thorp.
When the virus first appeared in the news headlines, we watched as China swiftly and systematically shut down it’s entire industrial engine. The stock market was the first signal this was going to be a huge economic blow to the West.
For almost half a century, we have outsourced manufacturing to Asia because of their cheaper labour costs and ability to scale fast.
When the lights went off across most Chinese factories, it revealed just how big our reliance on other markets, especially Asia, is.
With the threat of global supply shortages, local manufacturers of products like PPE and hand sanitiser were handed a golden opportunity.
As early as late March, industry experts were beginning to consider the scale of knock-on effects that COVID-19 would have on the way we produce goods..
At the time, Sara Caplan, Partner at PwC and chief executive of PwC’s Skills for Australia, said buying habits would change as a result of the lockdown, which could push manufacturing into new territory.
“It isn’t just medical supplies,” said Caplan. “What are we going to need to have in Australia that we previously relied on other countries for?”
“Manufacturing is going to grow after this, and we are going to see a resurgence in some areas that have declined.”
This article will focus on the trends impacting the manufacturing industry across three horizons:
- Soon: Grow, secure or prepare for life beyond stimulus
- Later: Post-vaccine, what will the new normal look like?
Soon (3-6 months)
Despite a variety of lockdown restrictions across the nation, most Australian factories are running while working within the tight constraints of the Government’s Health Guidelines.
But, with stimulus measures set to wind down into 2021, there may be direct or indirect impacts to manufacturing operators.
As key advisors to your client’s business, there are three options for your clients in manufacturing now;
Help — Some businesses have transformed their capabilities to manufacture medical equipment and clothing. Some inspiring examples are:
- From Gucci providing 1,100,000 surgical masks and 55,000 medical overalls
- LVMH switching their facilities of its perfume and cosmetics brands to process large amounts of hydroalcoholic gel
- James Dyson, famous for his vacuum, committed to design and produce 1500 ventilators
- Reminiscent of the war times, Ford and GM began racing to build ventilators with or without support from the White House
Reinvent — Luckily, and as recent events have shown, manufacturing business operators can be very open to change. Now is the time to work with struggling business owners to identify new opportunities and adapt their business plans accordingly. This can be done to take into consideration available innovation and manufacturing grants where available.
Expand — Can your clients experiment with expanding their skills and machinery to further diversify an already-healthy line of products? They may wish to explore opportunities to start manufacturing items that were previously made abroad, and could now benefit from being marketed as Made In Australia.
If you find your clients can source and produce products at a reasonable cost, they could benefit from filling a void left by global shortages.
Once stability starts to creep back, lead a strategy with your clients to explore opportunities to expand into making things otherwise exported.
Australian Made will continue to make a huge comeback because its effects are immediate and obvious; It supports Aussie jobs, and also means if (and when) we face another pandemic, we can rely on our country to supply us, without the dependency on other countries.
Going forward, advise your clients to ‘outsource the thinking, and in-source the manufacturing’. Exploit new technologies and platforms to grow the offering of your client’s business. Tap into the world’s hottest product design and development talent on platforms such as UpWork. There are specialists for everything ready to come up with ideas.
There could be ways to increase the speed to market using 3D Printing technology. It’s cheaper, faster and something that doesn’t require special skill or factory to start.
Sara Caplan said businesses ought to think about which products might be considered “essential” in the future. While we will always import some products, including medical supplies, Caplan said there will be something of a resurgence.
“There are various, critical products that we need to start to manufacture in Australia going forward,” she says, also pointing out that areas like food production will have their supply chains reviewed to stamp out any risks.
“Manufacturing businesses should be looking at those areas that might not have been important before. Who have you been relying on? Are there other businesses that you can start a relationship with and put in place all of the different building blocks to have a secure business that you can rely on.”
Caplan also agreed manufacturing businesses should do as much work as they can to utilise talent from outside their organisations.
“Something we recommend is making use of all the talent out there. In universities, people who are pushing boundaries of technology, and marshalling that talent to support your business,” she says.
“You don’t have to employ them, you can contract them. That collaborative way of working is a good idea going forward.”
This article is a follow up to the expansive MYOB Radar Report Volume III, released in 2019. With a depth of insight into key industries including retail, the Radar Report remains a useful resource for business advisors of all kinds.
READ: Radar Report Volume III
A practitioner’s perspective
Peter Thorp, Director, Australian Bookkeepers Network
Recession? Depression? Quick Recovery? Slow Recovery? – Media predictions of another great depression coming soon ignores one undeniable fact. The economy today (yes even the battered and bruised COVID-19 version) is nothing like the economy of the 1930s.
A bright part of the Australian economy in the lead up to coronavirus had been the manufacturing sector. I recall my Dad telling me many years ago that “manufacturing in this country is dead”.
No doubt, over recent decades, manufacturing in Australia has gone through major structural change. Cars, TVs and electrical appliances are largely produced in countries where labour is cheap. Australian manufacturing has become more nimble, more high-tech and more capital intensive, rather than labour intensive. The result? Over recent years, total manufacturing output as a percentage of GDP in Australia has continued to fall as more labour intensive manufacturing moved offshore. Interestingly, though, manufacturing is an increasing percentage of our Australian exports. It is the sixth largest sector in terms of output and the seventh largest in terms of employment (employing nearly a million Australians) and the most significant sector in terms of R&D expenditure. Success stories abound in the fields such as medical equipment, tooling, motor vehicle componentry and many more niche manufacturing industries.
Manufacturing in Australia is far from dead.
This sector has had more thrown at it over the last few decades than you can imagine. COVID-19 will come and go, but it is hard to see manufacturing in this country changing substantially as a consequence. Once Covid is old news then the same structural factors that reshaped our manufacturing sector will kick back in. Perhaps our manufacturers will retain production of a small number of products they pivoted into when COVID-19 drove them into short supply, but it’s hard to see these reshaping the sector.
For me, manufacturing as a sector simply needs to be unshackled from the government imposed shut down and it will largely restart itself. Our manufacturing sector is driven increasingly by export demand, and product will cross borders much faster than people, as lockdown restrictions end.
I was reminded of this the other day when reading an annual report for the Green Whistle company Medical Developments (an Australian technology and manufacturing success story) that now exports its Australian developed and manufactured medical appliance to the world. Clever technology, significant R&D investment and high-tech manufacturing underpin an Australian manufacturing success story and largely unaffected by COVID-19.
So what does that mean for tax practitioners?
Recognise who you’re dealing with. Because manufacturing has evolved into a less labour-intensive sector, many have either not shut down or been able to function in some capacity with lower headcounts during COVID-19. Whether your manufacturing client is a small player with a good market niche or a world-competitive player, these clients are great to work with. This sector is ready to hit the gas and blossom (world markets permitting).
As tax practitioners, how do we help this sector?
First up, you need to help them access stimulus incentives (if they are eligible) as this may even help them financially kickstart out the other side of the pandemic. Many will still qualify (even though some will not) for the Cash Flow Boost measures or JobKeeper incentives. Also be mindful of the various state and local government initiatives and those from the private sector such as the banks and landlords. As manufacturing is a capital-intensive business, the Instant Asset Write -Off may provide an incentive to invest in equipment for the next phase of growth.
Communicate with your clients. Once you understand what they are trying to achieve with their businesses post Covid (and how they are trying to achieve it) then your role will become clearer. Stay close to clients in this sector as they will have a thirst for your services as they put their foot on the gas and return to ‘normal’. This sector has the propensity to pay for your services so make sure they are aware of your capabilities and your willingness to be involved.
Technology is this sector’s friend, therefore you should look to become the conduit to new technology that furthers their business model. Understanding where they want to take their business in a post-COVID world and what their technology needs are. You may be able to assist in helping them source the right technology. Understand their reporting needs and see if you can help generate more targeted reporting both financially and of their nominated business KPIs.