Going The Distance

When it comes to the manufactures export industry, Joe Parkes finds the news is very good or very bad - It depends on many factors but one of the most important is, how exporters are tackling our perennial tyranny of distance.

Has the China-led explosion of manufacturing in the developing world quashed Australia’s hopes for a thriving manufactures export industry? Does the strengthening Aussie dollar signal even tougher times ahead?

A new survey by the Australian Industry Group and PricewaterhouseCoopers shows that recent rises in the Australian dollar exchange rate have created ‘a significant headwind’ with more than one in 10 manufacturing exporters describing it as a major constraint on production.

"The short-term forecast for exports is the lowest since the September 2005 quarter and stands at a level that is typically followed by outright declines," says Australian Industry Group chief executive, Heather Ridout.

This gloomy outlook contrasts starkly with the survey’s view of domestic production with manufacturing activity rising in four straight quarters, driven by solid domestic demand and economic growth.

Where does this leave Australia’s exporters of manufactures? Depending on who you talk to, they could be dangling over an economic precipise, succeeding comfortably in new, specialised market sectors, or establishing production plants on the other side of the world.

Ben Ford, senior economist at export finance specialists, EFIC, won’t hear a word of doomsaying about manufactured exports. He says the reality is that news of their death has been greatly exaggerated. "There’s quite a lot of good news about," he says.

"The sector has undergone a fair amount of change and restructuring but, effectively, what has occurred is a shake-out. Manufacturers have adapted to new circumstances, re-orienting to produce higher end products, such as medical and scientific equipment, and they’ve produced some world leaders. Export data suggests our manufacturing sector is far from uncompetitive globally."

In 2006, Australia’s ETM exports grew by 5.2 percent to $27.4 billion. Simply transformed manufactures (mainly metals) were up 32 percent to $14.6 billion.

Dr John Edwards, chief economist at HSBC Australia, has written a report called ‘Export Weakness, Investment Strength’ for the Committee for the Development of Australia (CEDA), pointing out that volumes of Australia’s manufactured exports have actually risen faster than the average for all goods in the past six years.

At the same time—and this is where it gets really interesting—direct investment abroad by Australian investors has almost caught up with foreign direct investment in Australia, giving us a long-term stake in the management of a raft of overseas operations.

CEDA’s director of policy and communications, David Walker, says it will not be long before Australian business assets abroad exceed foreign business assets in Australia. The value of Australian direct investment in the United States already exceeds the value of American direct investment in Australia.

"We don’t yet fully understand what’s driving the strong move into direct foreign investments—mainly into the United States, Britain, and New Zealand—but, in quite a short space of time, we have pretty much closed the gap between what they own of us and what we own of them," he explains. "Some of it is related to the fact that if you are going to expand your trade overseas you will typically need a locally-based supplier to handle the trade."

Ford adds that manufactures at present represent some 30 percent of all Australian exports by value—double what it was in the so-called ‘halcyon’ days of the 1950s and early 1960s. "At EFIC we think things are looking pretty good for capital intensive product manufacturers employing teams of expert staff and producing specialist products in ABS export categories like building materials, medical technology, banking, insurance, shopping mall development, inorganic chemicals, pharmaceuticals, fertilisers, plastics, chemicals, metals manufactures, power-generating equipment, general industrial machinery and equipment, electrical equipment, and professional, scientific and controlling instruments. Wine is another high value-added product, not included in the manufacturing totals, that has done well.