How Australian manufacturers are navigating CI challenges in the digital age

How Australian manufacturers are navigating CI challenges in the digital age
Executive Summary
Australia has experienced over a quarter century of economic success or comparatively smooth navigation through troubled global cycles. But – despite increasing EBITDA 10.8% to A$36 billion in 2018 – its manufacturing sector has lagged, and a new wave of disruption, enveloped within Industry 4.0 and the rebalancing of the worldwide economy, will test the agility, resilience and competitiveness of the country’s production enterprises. This requires a new culture and breed of leadership among Australian manufacturing companies, one which embraces and deploys deep-rooted continuous improvement strategies encompassing operational excellence, product innovation and future-focused investments.

 

Introduction
Australia, in the past quarter century, has forged one of the world’s most prosperous economies. With a 2018 per-capita GDP of US$57 380, it ranks in the world’s 90th percentile, surpassing the likes of manufacturing and industrial powerhouse Germany. And it has demonstrated admirable resilience through global downturns, being the only advanced economy to avoid recession for nearly 30 years.

But 2019, GDP of A$1.89 trillion (est.) comprised unimpressive growth, reflected in near-stagnant increments of 0.5% or lower for the last four consecutive quarters. There are signs of a looming downturn, such as declining growth in household spending, which has tracked weaker, and below population, growth data since Q1 2018.

Indeed, a weaker growth outlook – linked to global conditions and a stuttering local economy – is the primary current concern for 80% of Australian CEOs.

The country’s economy also faces a recovery hurdle in the aftermath of the devastating wildfires which have destroyed or scarred over 25 million acres of land since September 2019. The fires have hit massively in New South Wales, home to an established, innovative food and beverage manufacturing industry of some 3 600 businesses employing 70 000 workers. Economists’ consensus is that the fires will cut a further 1% from Australia’s GDP growth, with the economic damage rippling through all sectors of the economy. Australia’s business and consumer confidence – already anaemic – has been dealt a blow by nature.

Leaders of manufacturing companies should grasp that future-focused ROI requires a package of strategic opportunities and actions – including investments and enhanced CI initiatives.

Indeed, a weaker growth outlook – linked to global conditions and a stuttering local economy – is the primary current concern for 80% of Australian CEOs.1 This is the context for the multifaceted challenges facing the country’s manufacturing organisations.

Gradual decline of manufacturing despite presence of multinational companies
Many of the largest manufacturers in Australia are the local operations of multinationals, notably in petrochemicals, food and beverage, and pharmaceuticals.2 Its manufacturing sector was dealt a blow in 2016-2017, when auto manufacturing giants GM-Holden, Toyota and Ford ceased production in Australia. But companies such as Caltex, BP and Fonterra bring global scale and world-class acumen to the country’s business landscape, including the implementation of lean and continuous improvement (CI) principles and practices. And Australia has home-grown global leaders such as packaging titan Amcor and pharmaceutical and biotech innovator CSL.

But manufacturing has consistently declined as a proportion of the country’s GDP. From 13% two decades ago, it dipped below 10% from 2008-2019, and is in the 5%-6% range for 2018-2019.3 Output is trending downward, Q3 2019 reflecting a -0.5% decline from Q2, and a -3.6 drop in production volumes compared to the same quarter in 2018.4 The country’s Purchasing Managers’ Index (PMI) is in negative territory, having fallen 6% in three of the last four months to January 2020.5

Reluctance to invest means a slower uptake of new technology
The signs point conclusively to Australia’s suboptimal investment culture. Despite very low interest rates, new capital expenditure dropped in both Q2 and Q3 last year. Current R&D investment levels stand at just 1.9% of Australia’s GDP; manufacturers account for 23.5% of this – but the sector’s proportion has halved in the last decade.

Australia’s Productivity Commission has noted a ‘shallowing’ of the capital-to-labour ratio. In the context of Industry 4.0, this reluctance to invest means a slower uptake of new technology, in turn further capping innovation, productivity and competitiveness.

Indeed, Australia has a productivity problem. Labour costs rank among the highest in the world.

Too many manufacturing company CEOs are prioritising downsizing and operating cost reduction as a growth strategy. The starkest vantage is provided by the 2020 Bloomberg Innovation Index. Australia remains in the world’s top-20 – in position 20. But it ranks 55th in terms of manufacturing value-add, the lowest position across any of Bloomberg’s seven measures, among the top 22 countries.

The government may stimulate capex investment through corporate tax cuts or capital allowances. But such reforms may take years to legislate. In the immediate term, leaders of manufacturing companies should grasp that future-focused ROI requires a package of strategic opportunities and actions – including investments and enhanced CI initiatives. Cutting costs, alone, is not enough.

Talent strategies must address productivity issues and the lack of skilled tradespeople
Australian manufacturing employs 840 000 people.6 But, according to James Abbott, CEO of Sydney-based CNC machining tool manufacturer Challenge Engineering, “the biggest issue facing manufacturing today is the lack of skilled tradespeople.” Like many business leaders, Abbott believes Australia’s talent issues have reached crisis point. “[The] sellers’ market drives up the cost of labour which in turn makes it difficult for Australian manufacturing to remain competitive.”

Indeed, Australia has a productivity problem. Labour costs rank among the highest in the world. Nonetheless, in parallel, Gallup’s State of the Global Workplace 2018 report classifies 86% of the Australian workforce either unengaged or actively disengaged. Unsurprisingly, Gross Value Add (GVA) per hour worked has fallen in each quarter since Q2 2014, as has GDP per hour barring two periods in 2016.7 Overall, labour productivity in 2019 was -0.8% weaker than 2018.8

Moreover, a 2018 World Economic Forum report ranks the country’s population just 23rd in digital skills, and Australian industry association Digital Industry Group shows that the national ICT sector, proportionate to GDP, is smaller than all OECD nations except Mexico.

Australia’s CEOs recognise the issue: 78% see skills weaknesses as a fundamental inhibitor of growth. There is an enormous task ahead to transform Australia’s manufacturing workforce in the face of productivity pressures and in the context of the Industry 4.0 technology revolution.

New technologies burnish massive potential
Business leaders in Australia are yet to leverage the opportunities of technology.9 Industry 4.0 – summarised by the country’s Advanced Manufacturing Growth Centre as the data volumes, digital technologies, connectivity and computational power able to augment industrial processes – burnishes massive potential. Artificial Intelligence alone is projected to boost the global economy by $16 trillion in the decade to 2030, and – with other digital technologies – may boost Australia’s GDP by A$315 billion.10

The take-up of robotics in Australian factories is illustrative. South Korea leads the world at a ratio of 631 robots per 10 000 manufacturing workers. At a ratio of 83, Australia ranks outside the top-20, just marginally better than the global average, and behind countries such as the Czech Republic and Slovenia.11

“Leadership in the 21st century isn’t about leadership anymore. It’s about the ship: it’s about how to pull the talents, the skills, the capabilities of an entire organisation together,” says economist and policy analyst Pippa Malmgren.

A company leveraging the opportunities of new technologies is dairy multinational Fonterra, whose Australian operation has embraced a digital-first strategy. Its manufacturing sites have implemented data sensor monitoring at multiple intervals per second – milk temperatures, liquid flows, silo capacity status, and myriad other measures. Integrated operational- and information-systems data analytics instantaneously model performance, enabling improved real-time operations as well as business decisions.

Australian manufacturers need to restore trust among consumers and workers
The country’s retail and services sectors have been criticised for reduced customer-centricity. Many companies “rewarded behaviours aimed at achieving profits at all costs,” notes Professor Gregory Whitwell, management education specialist at the University of Sydney Business School. Even for B2C manufacturing enterprises, there is a clear implication: “a major leadership challenge in Australia is restoring trust among consumers and workers,” he says.

China’s economic and infrastructure development is a crucial contributor to Australia’s economy
Regionally, Australia is strategically positioned in proximity to the huge developing markets of Asia, projected to comprise 60% of global growth and 90% of the 2.4 billion new middle-class citizens by 2030. China’s economic and infrastructure development, and surging consumer consumption patterns, have been a crucial contributor to Australia’s economy. At 34%, China currently accounts for the highest-share destination for Australia’s merchandising exports.12

As such, Australia’s manufacturing sector is significantly exposed to the US-China trade tensions. The IMF/Stanford World Trade Uncertainty Index hit a record high at the end of 201913, spiked by trade and tariff disputes. China’s economy continues to show robust expansion, but continuing trade conflict could cut global GDP by 0.75% in the year ahead. And the recent coronavirus outbreak threatens a major human and economic toll.

Leadership nowadays is more about the ship and less about the leader
This volatility and left-field disruption epitomises the complexities facing manufacturers today. Leaders need to thread these multiple, varied disconnects, and diversify organisational skills to add agility and creativity. “Leadership in the 21st century isn’t about leadership anymore. It’s about the ship: it’s about how to pull the talents, the skills, the capabilities of an entire organisation together,” says economist and policy analyst Pippa Malmgren.

Purpose-led leadership starts with a positive vision. Australia’s stagnating economy, stuttering manufacturing sector and poor productivity indicators combine to dampen prospects for the near-term. But a view of new horizons is evident in the $6.8 billion acquisition by Australia’s Amcor of US-based Bemis in August 2018, making Amcor the world’s largest manufacturer of consumer packaging. Beyond the documented scale, synergies and projected productivity gains, the company’s most powerful transformation may lie in its commitment to the Ellen MacArthur Foundation’s ‘New Plastic Economy’ pledge, one part of a circular economy calculated to unlock $4.5 trillion in economic value.

CI transitions in these directions magnify the potential of Australia’s powerhouse manufacturers. Assuming they harness the potential of Industry 4.0, leaders who champion change, and transform their organisation’s culture to embrace iterative improvement, will gear global competitiveness and capabilities for renewed returns.

1‘PwC 23rd Annual CEO Survey 2020: 51% of Indian CEOs believe ‘uncertain economic growth’ is a threat.
2IBIS analysis, sourced from Australian Manufacturing Forum, based on annual reports for F2017/18
3Trading Economics (based on World Bank data)
4Australian Bureau of Statistics
5Moody’s Analytics
6Australian Bureau of Statistics
7Australian Bureau of Statistics (ABC), 3-year rolling annual averages
8Australian Bureau of Statistics (ABC)
9‘PwC’s Australia’s 23rd CEO survey: Opportunity within uncertainty’. 73% of Australian CEOs believe ‘speed of technology change is an obstacle to growth’.
10Australian Government / CSIRO Science Agency, AI Roadmap news release
11World Economic Forum report 18 April 2018, International Federation of Robotics 2016 data
12Australian Government Department of Foreign Affairs and Trade
13See drastic spikes from Q3 2018

Sources:
‘Business leadership for the 21st century’, ABC Radio, 10 February 2020 podcast
‘Circular business models can unlock $4.5 trillion of economic value’, Amcor ‘Big Ideas’ podcast, 19 February 2020
‘Halting the dangerous trend of capital shallowing’, Australian Financial Review, 1 August 2019
‘Australian Manufacturing in 2019’: Local and Global opportunities’, Australian Industry Group (Ai Group), May 2019
Australia Institute Centre for Future Work
‘Australia’s economy under threat as national innovation slips yet again’, Australia Manufacturing, 20 January 2020
Australian Trade and Investment Commission
‘Building a data-driven organisation: Insights from Fonterra’, CIO Magazine, 24 August 2018
‘No surprise, but shocking: there’s no other way to spin Australia’s GDP’, The Guardian, 4 September 2019
‘New Amcor: Assessing the impact of the world’s largest manufacturer of consumer packaging’, Packaging Digest, 13 August 2018
‘NSW food and beverage manufacturing industry development strategy’, Department of Industry, NSW Government, 2019
‘PwC’s Australia’s 23rd CEO survey: Opportunity within uncertainty’, PwC, 2019
‘Australia’s mismatched workforce’, Australia Matters, PwC Australia, 2020
Australian Bureau of Statistics
aumanufacturing.com.au
cio.com/au/
theconversation.com/au/business
countryeconomy.com/gdp/australia
www.manmonthly.com.au
weforum.org/
data.worldbank.org/

 

Disclaimer
This resource has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained herein without obtaining specific professional advice. Competitive Capabilities International (CCi) does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this resource or for any decision based on it.

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