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| Introduction |
| Output |
| Employment |
| Businesses |
| Research and experimental development |
| Profit growth |
| Conclusion |
| Postscript — the 2008 financial crisis |
| Annex tables |
Executive Summary
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Gross domestic product — the total market value of goods and services produced in Australia within a given period after deducting the cost of goods and services used up in the process of production but before deducting allowances for the consumption of fixed capital. Thus gross domestic product, as here defined, is 'at market prices'. It is equivalent to gross national expenditure plus exports of goods and services less imports of goods and services.
Gross operating profit — selected items are excluded from company profits before income tax to provide a measure of underlying company profits. These items include interest income and expenses; depreciation and amortisation; and selected items which do not involve the production of goods and services such as net foreign exchange gains/losses, gains/losses arising from the sale of non-current assets and net unrealised gains/losses from the revaluation of current or non-current assets.
Gross value added — the value of output at basic prices minus the value of intermediate consumption at purchasers' prices. The term is used to describe gross product by industry and by sector. Basic prices valuation of output removes the distortion caused by variations in the incidence of commodity taxes and subsidies across the output of individual industries.
Large business—businesses employing 200 or more persons.
Medium business—businesses employing 20 to 199 persons.
mfg— abbreviation for manufacturing
n.e.c—not elsewhere classified.
Net terms—takes into account gains and losses, e.g. in the number of businesses, in a given period
Real growth—growth measured in constant prices removing the inflationary impact on prices so that analysis of trends can be made on the basis of volumes produced.
Small business—businesses employing fewer than 20 persons, including non-employing.
TCF—textiles, clothing and footwear.
Manufacturing is an important part of Australia’s economy. In 2006–07 it accounted for 10 per cent of Australia’s gross domestic product (GDP) and employment and for about 25 per cent of merchandise exports. However, forces at work in the Australian economy combined with international developments and increased globalisation are having a profound effect on the size and structure of the industry.
In recent years, competition from cheap imports, a strong dollar, the drought and rising costs for raw materials and labour have created a very competitive business environment for many Australian manufacturers. At the same time the mining boom and infrastructure development have created opportunities for other manufacturers.[1]
The result is an industry that is more aligned with Australia’s comparative advantage in resource based industries and less focussed on the production of consumer goods such as clothing and furniture.
Using data on output, employment, business numbers, expenditure on research and development (R&D) and profits, this paper analyses the structural changes that have occurred in the Australian manufacturing industry during the period 2001–02 to 2006–07.
The Australian Bureau of Statistics (ABS) has developed a classification for defining industries by the nature of the goods and services produced; this is the Australian New Zealand Standard Industry Classification (ANZSIC). For the purposes of this paper the manufacturing industry is as defined by the 1993 edition of the ANZSIC.[2]
Any reference to industry in this paper refers to the manufacturing industry unless otherwise specified.
Average growth
In real terms, i.e. adjusted for inflation, manufacturing growth has been erratic in recent years. The industry has fluctuated between periods of above average growth and periods of contraction (see Graph 1). At the same time, the wider economy, as measured by GDP, has grown more consistently. As a result, the annual average growth rate for manufacturing over the five years ending 2006–07 was just one per cent. This compares with 3.2 per cent for the wider economy.
However, this aggregate level data presents a misleading impression of the industry. When the data are examined at the state level a much more varied picture emerges (see Graph 2).
Growth rates in the major manufacturing states of New South Wales and Victoria have been very weak. Measured in real terms, absolute levels of output declined in both of these states. In New South Wales manufacturing industry gross value added (GVA) declined by just under one per cent between 2001–02 and 2006–07; in Victoria, it declined by just over three per cent.
This trend was completely the opposite in Queensland and Western Australia. Queensland’s annual average growth rate was 4.5 per cent, increasing manufacturing GVA by nearly 25 per cent over the five years. In Western Australia the annual average growth was just over six per cent, increasing manufacturing GVA by 35 per cent.
Relative importance
The economic importance of manufacturing varies significantly between the states (see Graph 3). Manufacturing is most important in South Australia and Tasmania where it accounts for 13 per cent of gross state product (GSP). During the five year period covered by this paper the importance of manufacturing declined in nearly every state and territory. The only two jurisdictions to go against this trend were Tasmania and the Northern Territory.
As well as changes in the importance of manufacturing output within states there has also been a shift in manufacturing output between states (see Graph 4). New South Wales and Victoria account for the lion’s share of manufacturing output. However, between 2001–02 and 2006–07 there was a shift away from these states. At the beginning of the period the two largest states accounted for 64 per cent of total manufacturing output. By the end, their share had fallen to 60 per cent. At the same time Queensland, Western Australia and Tasmania all increased their share of the national total. The biggest gain occurred in Queensland which increased its share of manufacturing from 15 to 17 per cent.
Growth by industry sub-division
The ANZSIC divides the manufacturing industry into sub-divisions, groups and classes based on the nature of the goods produced. The sub-divisions for manufacturing are:
From 2001–02 to 2006–07 growth varied across these industry sub-divisions. Some experienced high rates of growth and others experienced a period of decline (see Graph 5).
Relative importance of sub-divisions
The three biggest industry sub-divisions are; Food, beverages and tobacco; Metal products; and Machinery and equipment. These three sub-divisions account for nearly 60 per cent of manufacturing output. The first two are heavily involved in processing Australia’s abundant agricultural and mineral resources. There are also a large number of manufacturers in the Machinery and equipment sub-division involved in the production of equipment for the resources based sector of the economy. For instance, at the end of 2006–07, over a 1000, or five per cent, of businesses in this sub-division were engaged in the manufacture of mining and construction machinery.
The trend in recent years has been for the Non-metallic minerals products, Metal products and Machinery and equipment industry sub-divisions to increase their share of total manufacturing output. At the other end of the spectrum the TCF sub-division lost ground and is now the smallest of the manufacturing industry sub-divisions (see Graph 6).
Aggregate growth
Manufacturing’s share of employment has been declining for a number of years. Annual average employment for manufacturing was 1 081 300 persons in 2001–02 which was equal to about 12 per cent of total employment. In 2006–07 annual average employment in manufacturing was 1 063 900 which was 10 per cent of total employment. The lack of employment growth in manufacturing contrasts with the wider economy. In the wider economy employment grew at an average annual rate of 2.4 per cent over the same period.
However, given that overall output in manufacturing increased over the same period, the lack of growth in manufacturing employment could be indicative of increased productivity in the industry.
Industry sub-division
As with GVA there were significant differences between the individual manufacturing industry sub-divisions. Some sub-divisions recorded positive growth while others dramatically declined (see Graph 7):
Contribution to state employment
At the state level manufacturing makes its most significant contribution to total employment in Victoria and South Australia. In Victoria it accounts for almost 13 per cent of total employment, and 12.5 per cent in South Australia. It is least important in the Australian Capital Territory and the Northern Territory where it accounts for three and four per cent of total employment respectively.
However, in the period 2001–02 to 2006–07 all states and territories experienced a decline in manufacturing’s contribution to total employment. This decline was most notable in the industry’s most important states. For instance, in Victoria it fell by over two percentage points from 15 to 13 per cent (see Graph 8).
Despite the decline in the relative importance of manufacturing, the actual number of people employed in the industry did grow in some states (see Graph 9).
In the period 2001–02 to 2006–07 employment in manufacturing grew most strongly in Western Australia, where it grew at an annual average rate of 2.4 per cent. Also, it grew at an annual average rate of 1.3 per cent in Queensland and 0.6 per cent in Tasmania.
All the other states and territories experienced a decline in the total number of people employed in the industry. The most notable decline occurred in the Northern Territory where it fell at an annual average rate of 4.7 per cent.
These differing growth rates have resulted in a change to the relative importance of the states. Victoria and New South are by far the biggest states in terms of manufacturing employment. In 2006–07 they accounted for 61 per cent of employment in the industry. However, this was down from 64 per cent in 2001–02. Whilst New South Wales and Victoria declined in importance, Queensland and Western Australia increased their share of manufacturing employment. Queensland increased its share from 17 to 18 per cent and Western Australia from eight to nine per cent.
At the industry sub-division level there were also some major differences in employment growth between the states and territories in the five years to 2006–07.
New South Wales
Victoria
Queensland
South Australia
Western Australia
Tasmania
Business numbers
Between 2002–03 and 2006–07 the total number of manufacturing businesses declined by four per cent from 111 000 to 106 000.[4] This compares with an increase in the total number of businesses, across all industries, of eight per cent; equal to about 143 000 businesses. The only other industry to experience a fall in the number of businesses was the cultural and recreational industry, which declined by two per cent or just over a thousand businesses.
Trends in business size[5]
Over the period covered by the data, the proportion of non-employing businesses in manufacturing declined by ten percentage points from 55 to 45 per cent. The proportion of small employing businesses increased from 35 to 45 per cent. As a result the overall size of the small business sector in manufacturing remained about the same, but as the data shows there has been a move away from non-employing businesses to employing businesses. Over the same period the proportion of medium sized businesses increased from eight to nine per cent. The proportion of large business remained virtually the same (see graph 10).
Trends by industry sub-division
By industry sub-division the biggest fall in the number of businesses occurred in the TCF sub-division, which declined by over 2000 businesses or 18 per cent. The Other manufacturing sub-division also declined by over 2000 businesses, which was a 13 per cent fall.
The Metal products and Machinery and equipment sub-divisions experienced slight rises in the number of businesses of about one per cent each.
State trends
The number of manufacturing business increased in Queensland at an annual average rate of 0.3 per cent. However, in every other state and territory, the number of manufacturing businesses declined. The biggest decline was in the Northern Territory which lost almost a quarter of its manufacturing businesses at an annual average rate of almost seven per cent. In the Australian Capital Territory and New South Wales the number of manufacturing businesses declined by about two per cent a year. The smallest decline was in Western Australia where the number declined by about 0.3 per cent a year (see Graph 12).
New South Wales
Victoria
Queensland
South Australia
Western Australia
Tasmania
By industry class
In addition to data at the sub-division level, data on the count of Australian businesses are also available at the next level of detail; that is, by industry class. At the industry class level a more refined picture of trends within an industry can be observed. In the case of manufacturing, the data can be used to ascertain what sort of goods are produced by those manufacturers who are prospering or struggling. From the data the following observations can be made.
For the period 2002–03 to 2006–07, the industries that gained the most businesses were:
At the other end of the scale, the industries suffering the biggest losses were:
In 2005–06, manufacturers spent $3.9 billion on research and experimental development (R&D). This was equal to nearly 40 per cent of total R&D by businesses in Australia. As a proportion of GVA manufacturing, R&D is twice as high as the national average making it the most R&D intensive sector of the economy.
As with the rest of the economy, R&D expenditure in manufacturing went through a slump in the late 1990s, but in recent years this trend has reversed. The latest data show that, in real terms,[7] manufacturing R&D grew at an annual average rate of seven per cent in the period 2002–02 to 2005–06. However, this was less than the 11 per cent for total business expenditure on R&D.
As with other indicators the aggregate picture for R&D in manufacturing conceals some notable differences between the various industry sub-divisions. In the period 2002–02 to 2005–06, the fastest growing sub-divisions for R&D were Printing, publishing and recorded media with an annual average rate of 45 per cent; Machinery and equipment at 22 per cent and Metal products at 20 per cent.
In real terms company profits grew at an annual average rate of 4.4 per cent for the period 2001–02 to 2006–07; compared with 6.1 per cent for all industries.[8] Again there were significant differences between the industry sub-divisions.
The data presented in this paper reveal the changing nature, size and location of the manufacturing industry. In aggregate, the industry has not performed as well as the rest of the economy in recent years. However, when the data are examined in more detail a much more complex picture emerges. In the time period covered by this research paper, some parts of the industry have grown at rates well above the average for the rest of the economy and others have declined.
Manufacturers closely linked to the mining industry have experienced a period of strong growth. For instance, the Metal products sub-division has experienced significant growth in output, profits and expenditure on R&D in recent years.
At the same time, other manufacturers exposed to increased competition from overseas producers have not fared so well. This trend has particularly affected the TCF and Furniture manufacturers, which have experienced significant declines.
There have also been geographic changes to the industry. Historically, New South Wales and Victoria have been the base states for manufacturing. However, in the last few years the industry has experienced a period of decline in these two states and their dominance has waned. At the same time, the industry has grown in Queensland and Western Australia. This growth is probably, in part, due to the general economic conditions in these states. It is also likely to be closely linked to the commodities boom and demand from the mining industry for manufacturers to process its products and provide it with machinery and equipment.
On the whole, the data present a picture of a key industry undergoing a period of structural change. Some parts of the industry have declined in the face of increased international competition and others have thrived on the back of the commodities boom.
The unfolding financial crisis and subsequent credit crunch have had a major impact on economic activity around the world. As 2008 draws to an end, the USA, Japan and most of the major European economies are either in recession or are very close to it. In China, growth has slowed from double digit figures to about eight per cent and may slow further.
The economic slow down has had a major impact on commodity prices which have fallen dramatically from the historic highs reached at the beginning of the year. This has impacted on the value of the Australian dollar which has fallen by over 30 per cent against the US dollar in recent weeks.
Despite all this, the major international and national economic policy institutions are predicting that, although economic growth in Australia will slow, it should avoid a recession. This is largely due to the continuing strength of the Chinese economy and stimulatory policies adopted by the Australian Government and Reserve Bank.
The impact of all this on Australia’s manufacturers is probably quite mixed. Falling interest rates should be beneficial. However, the credit crunch is making it difficult for businesses to obtain new credit. The falling dollar will improve the competitiveness of export orientated manufacturers, although slowing demand in overseas markets may counter this to some extent. The current slow down in Germany, for instance, has been blamed on its reliance on exports of manufactured goods. On the other side of the trade coin, the falling dollar will make imported goods more expensive. This will help to improve the competitiveness of Australian manufactures in the domestic market. Again, though this is not entirely clear cut. Many manufacturers rely on imported components; the falling dollar will make these components more expensive which will raise the cost of producing the finished goods.
In all likelihood, the economic slow down may hasten the trends highlighted by this paper. The commodity boom of the last few years may have ended for now, but demand for raw materials from a modernising China should continue for many years to come. Also, the Australian Government has said it will spend billions of dollars on infrastructure projects. Those manufacturers that are aligned with these two economic drivers will probably weather the economic slow down relatively well. However, those manufacturers that were struggling with competitive forces in the economy before the financial crisis may not fare so well.
Table 1.
Table 2.
Table 3.
Table 4.
Table 5.
Table 6
Table 7
[1]. Australian PMI, Australian Industry Group, Price Waterhouse Coopers, July 2008.
[2]. Australian and New Zealand Standard Classification (ANZIC), 1993, ABS, (1292.0)
[3]. Includes prefabricated building, furniture, jewellery, toys and sports goods.
[4]. The ABS provides an annual snapshot of its business register. This snapshot can be used to obtain data on businesses by business size, industry and location. The data are only available from 2002–03, the analysis in this part of the paper is restricted to the period 2002–03 to 2006–07.
[5]. For the purposes of this paper the following definitions of business size are used:
Small—employing less than 20 persons.
Medium—employing 20 to 199 persons.
Large—employing more than 200
[6]. Includes the manufacture of ball point pens; brooms; brushes; floor mops; hair brushes; musical instruments; paint brushes; pencils; pens; stamp pads; staplers; tooth-brushes; umbrellas; vacuum flasks and wigs.
[7]. Adjusted by non-farm GDP implicit price deflator.
[8]. As measured by gross operating profit.
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