Specialist cogs in the industrial machine

The perilous state of Australia’s manufacturing sector has put the specialist industrial machinery and equipment sector under pressure. The industry’s only hope is to concentrate on niche exports. ROBERT BRYANT reports.

By Robert Bryant

The perilous state of Australia’s manufacturing sector has put the specialist industrial machinery and equipment sector under pressure. The industry’s only hope is to concentrate on niche exports

It has been another shocking year for Australia’s manufacturing sector. The global economy is spluttering, input costs such as steel and energy are soaring and the Australian dollar has spent most of the year at record highs. It’s little wonder we’ve seen job cuts at car maker Holden, boat maker Riviera Group and food manufacturer Don Smallgoods.

These conditions have made life extraordinarily difficult for Australia’s specialist industrial machinery and equipment suppliers.

These companies supply the equipment that forms the backbone of Australian factories, such as furnaces, industrial fans, generators, gas burners and boilers. Some of the largest players include Pall Filtration and Separations, ABB Australia, Shinagawa Refractories Australasia and Automotive Components Limited.

IBISWorld estimates that industry revenue grew at an average annual rate of 2.6% during the five years to 2007-08. For the bulk of this period, revenue growth was held back by sluggish growth in Australia’s manufacturing sector, import competition and a real decline in the average unit selling price of many types of industrial equipment.

In the last 12 months, slowing domestic economic activity and consumer expenditure has further weighed on the sector’s performance. In order to survive, many manufacturers in this sector have shifted production from Australia to low-cost countries, mainly in Asia, although this has the effect of increasing imports (and reducing industry revenue).

Another tactic has been to cut wages bills by increasing the use of labour-saving equipment (robotics and other automation) and will switch some production to offshore facilities. Unfortunately, these measures will do little to stem the bleeding.

IBISWorld estimates that this industry will contract at an average annual rate of 0.4% during the five year period to 2012-13 as a result of slow real growth in domestic demand, an increase in import penetration and slow real growth in exports. Revenue in next 12 months is particularly likely to suffer from slow growth in private equipment investment and by declining domestic demand for motor vehicles.

Over the longer term, the average value of the Australian dollar on a trade weighted basis is forecast to remain strong over the outlook period, which will not help exporters.

The strength of the dollar will also boost import penetration over the outlook period as manufacturers in the industry will relocate the production capacity of low-technology, high-volume product lines from Australia to low-cost Asian countries.

But the continued expansion of China and India, combined with Australia’s proximity to Asia, should present some opportunities to bolster exports – provided manufacturers zero-in on the right products. Manufacturers in this industry should focus on developing products in niche markets that are based on proprietary or licensed technology in order to gain competitive advantages in production costs or product utility.

Products and service segmentation

Geographic spread; Business entities, by state and territory

Key factors

The key factors affecting the performance of the specialist industrial machinery and equipment manufacturing industry include:

Capital expenditure – private sector. Industrial machinery and equipment is generally a capital expenditure item, and hence the overall level of private capital expenditure in Australia is a major indicator of demand. Capital expenditure by business is affected a number of factors including the level of overall economic activity, interest rates and business confidence generally.

Downstream demand – manufacturing. The major demand determinant in this industry is the level of activity in user industries. The manufacturing sector is a major user of industrial machinery and equipment.

Exchange rates – Trade Weighted Index. Exchange rates affect the price of competing imported end-products, the price of imported components, and the Australian dollar proceeds from export sales.

Real GDP growth. The level of economic activity and particularly the level of activity in industries that use industrial machinery and equipment affect demand for industry products.

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au