The Australian dollar and manufacturing exports: Shaping earnings and prospects
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© The Australian Industry Group, 2007 The copyright in this work is owned by the publisher, The Australian Industry Group, 51 Walker Street, North Sydney NSW 2060. All rights reserved. No part of this work covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical) without the written permission of the publisher. ISBN 0 9756763 8 5
The Australian dollar and manufacturing exports: Shaping earnings and prospects The appreciation of the Australian dollar is causing a great deal of anxiety amongst Australian manufacturers, around one-fifth of whom generate income from export markets. Export markets are crucial for many Australian manufacturers, providing both an important source of income and the scale needed to encourage investment in new capital equipment and innovative products and practices. Buoyed by continued rises in global commodity prices and a strong domestic economy, the Australian dollar returned to a 17-year high against the United States dollar in early 2007. Already confronting intense pressure from rapidly emerging low-cost competitors, the renewed appreciation of the exchange rate is an unwelcome development for local exporters, impacting on earnings and prospects. Despite generally favourable prospects for global growth and a successful wave of restructuring, The Australian dollar and manufacturing exports: Shaping earnings and prospects reaffirms the exchange rate is a critical influence on Australia’s manufacturing export growth. In the short-term, the recent sharp jump in the exchange rate stands to reduce the annual value of Australia’s manufactured export receipts by close to $1.7 billion. Left unaddressed, the erosion of competitiveness threatens further losses of global market share over the longer term. This report explores in detail the impact of exchange rate appreciation and a range of other factors on Australia’s manufacturing export sector. Encouragingly, while the exchange rate and overseas competition are the overwhelming forces currently shaping Australia’s manufactured export performance, over one half of survey respondents have implemented strategies to improve competitiveness. The Federal Government’s new Global Opportunities program and Australian Industry Productivity Centres will provide valuable support for the sector. Nevertheless, more needs to be done. The Australian dollar and manufacturing exports: Shaping earnings and prospects sets out a further series of policy recommendations to help lift export performance, building on the strong contribution Ai Group has already made in this area. I would like to thank the Australian manufacturers who participated in this survey, over 700 in total. Heather Ridout Chief Executive Australian Industry Group
The Australian dollar and manufacturing exports: Shaping earnings and prospects Contents 1. Key Findings 9 2. Introduction 13 3. Trends in Australian manufacturing exports 15 4. Factors affecting Australian manufacturing exports 25 5. Export markets for Australian manufactured goods 29 6. Trade policy 33 7. Policy directions 37 Charts and tables Chart 1: Manufacturing exports (annual percentage change) 16 Chart 2: AUD-USD exchange rates and annual growth percentage in nominal manufacturing exports (industry of origin) 17 Chart 3: Annual percentage change in average AUD-USD exchange rate and nominal manufacturing exports (industry of origin) 18 Chart 4: Contribution to growth in the volume of Australian manufacturing exports (2003-2006) 19 Chart 5: Cumulative change in the OECD’s & Australia’s share of world exports since 1990 19 Chart 6: Australian manufacturing exports 20 Chart 7: Australian export prices by sector 21 Chart 8: Volume of Australian exports by industry, 1996 to 2006 22 Chart 9: Percentage of Australian manufacturers exporting 23 Chart 10: Manufacturing exports as a percentage of total sales 23 Chart 11: Exports-to-sales ratio according to sector 24 Chart 12: Factors influencing export activity 26 Chart 13: Proportion of exporters uncompetitive at different AUD value (US cents) 27 Chart 14: Export markets with best opportunity for growth 30 Chart 15: Export markets hurt by increased competition from other countries 31 Chart 16: Export markets with best growth prospects (on balance) 32 Chart 17: Take-up of export programs 34 Chart 18: Benefits from Australia’s preferential free trade agreements 35 Chart 19: Firms benefitting from Australia’s preferential free trade agreements 36 Table 1: Changes to export values, volumes and prices, 1996 to 2006 20
10 The Australian dollar and manufacturing exports: Shaping earnings and prospects The Australian dollar and manufacturing the sizeable rise in metal prices and the significant exports restructuring that has taken place within the sector. The value of the Australian dollar appreciated significantly n Earlier work by Ai Group revealed that in November against the US dollar in the early months of 2007, lifting 2006, manufacturers expected 7.0 per cent growth to a 17-year high of more than US$0.84 in June. This in the value of exports in 2007. However, the further study suggests the stronger dollar and intense global appreciation of the Australian dollar since the start of competition, along with a forecast for slightly slower 2007 has necessitated Ai Group revising down these world GDP growth, is emerging as a significant constraint forecasts by 2.0 percentage points, to 5.0 per cent. on manufacturing export growth in the short-term. n The 2.0 percentage point fall in the forecast for nominal n A strong Australian dollar has been identified manufacturing exports is equivalent to a $1.7 billion by Australian manufacturers as the second most reduction in national export income in 2007. influential factor on export activity (behind n Having grown strongly throughout the 1990s, overseas competition). Australian manufacturing exports (in both nominal n Nearly two-thirds of manufacturers believe their value and volume terms) have been heavily affected exports are uncompetitive at an exchange rate in the current decade by a steady rise in the of US$0.80, while 93.7 per cent expect to be Australian dollar and intense competition from low- uncompetitive should the exchange rate exceed cost manufacturers in some of the world’s emerging US$0.85. economies. The nominal value of Australian n Since the beginning of the 1990s, there has been manufacturing exports actually declined in three a strong, inverse correlation between growth in consecutive years, from 2002 to 2004. the Australian dollar-US dollar exchange rate n The nominal value of Australian manufacturing and growth in the nominal value of Australian exports (according to the Reserve Bank of Australia’s manufacturing exports (based on industry of origin). narrower definition of manufacturing exports) grew The relationship between the two series appears to by just 4.4 per cent between 2001 and 2006, following have softened somewhat in early 2007, largely due to a 54.7 per cent rise between 1996 and 2001. Annual percentage change in average AUD-USD exchange rate and Annual percentage change in average AUD-USD exchange rate and nominal manufacturing exportsnominal manufacturing (industry of origin) exports (industry of origin) -30 30 -20 20 Percentage change in nominal manufacturing exports Percentage change in AUD-USD exchange rate -10 10 0 0 10 -10 20 -20 30 -30 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 AUD/USD exchange rate (LHS) Nominal manufacturing exports (RHS) Source: Reserve Bank of Australia, Historical Exchange Rates, www.rba.gov.au, April 2007 and the Australian Bureau of Statistics, ABS Cat. No. 5368.0 International Trade in Goods and Services, Australia: February 2007.
11 The Australian dollar and manufacturing exports: Shaping earnings and prospects Changes in export values, volumes and prices, 1996 to 2006 1996 to 2001 2001 to 2006 Change in Value Change in Volume Implicit Price Change in Value Change in Volume Implicit Price of Exports of Exports Change of Exports of Exports Change Rural 50.8 30.1 15.9 -14.0 -4.7 -9.7 Resources 70.2 30.8 30.2 67.5 6.0 58.0 Manufactures 54.7 46.5 5.6 4.4 18.7 -12.0 Services 43.8 28.6 11.9 25.2 8.3 15.7 Total Exports 56.3 32.4 18.0 32.3 9.1 21.3 Source: Australian Bureau of Statistics, ABS Cat No. 5302.0 Balance of Payments and International Investment Position, Australia: December 2006. n The price of Australian manufacturing exports has Trade policy fallen 12.0 per cent since 2001 (see table above). Over n There has been a relatively moderate take-up rate for the same period, manufacturers lifted their volume of the export programs currently available to Australian exports by 18.7 per cent. manufacturing exporters. n In particular, manufacturing export volumes n The Export Market Development Grants (EDMG) increased by 9.9 per cent between 2004 and 2006, and Scheme has the highest take-up rate with nearly one the nominal value of exports rose by 11.0 per cent in 10 manufacturing exporters having used it for over the same period, largely as a result of a more export assistance. stable Australian dollar and a strong recovery in n Trade missions were the next most popular program, global growth. with 7.1 per cent of manufacturing exporters having n The recent improvement in manufacturing exports taken part in one, followed by state-based export will be significantly eroded as the Australian dollar programs (4.7 per cent). rises towards US$0.85. n Just one in every 100 manufacturing exporters confirmed using the TradeStart program. Of course, Factors and opportunities the TradeStart program is only eligible to smaller n Australian manufacturers have identified competition Australian exporters (turnover of approximately from other countries as the factor having the greatest $20 million) entering global markets and not to influence on their export activity, with more than businesses already established in such markets. three quarters of the firms surveyed citing it as a n Australia is currently a signatory to preferential trade factor impacting on their share of export markets. agreements with New Zealand, Singapore, Thailand n The significant restructuring that has occurred and the United States. in many Australian manufacturing firms has, to n Australian manufacturers overwhelmingly identified some extent, eased the impact of the exchange rate an increase in exports as the major benefit flowing on manufacturing exports. More than half of the from the four preferential trade agreements. Nearly manufacturers surveyed indicated that improved two in every three companies identified this benefit. competitiveness from new efficiencies had assisted n The Australia-New Zealand Closer Economic their export activity in 2006. Relations Trade Agreement is considered the most n According to Australian manufacturers, New Zealand beneficial of these agreements, with one in five and China are the export markets with the greatest manufacturing exporters stating that it had assisted export growth prospects. them in gaining new market opportunities. n Manufacturing exporters have identified the United n The Australia-US Free Trade Agreement (FTA) was States as the export market most hurt by competition considered to be the next most useful with 14.8 per from other countries. cent of exporters finding it beneficial, followed by n The renewed appreciation in the Australian dollar the Thailand-Australia FTA (11.4 per cent) and the relative to the US dollar in early 2007 has contributed Singapore FTA (9.7 per cent). to the reduced competitiveness of manufacturing exports in the United States.
12 The Australian dollar and manufacturing exports: Shaping earnings and prospects Policy directions n An effective and rigorous anti-dumping regime is n To ensure Australian manufacturers are able needed to protect Australian companies competing to, firstly, maintain and then boost their global with imported goods from unfair practices by competitiveness over the remainder of the decade, overseas competitors. Australia must continue to pursue opportunities n Trade policy and trade facilitation programs should for global market access, including through look to maximise opportunities for Australian a revitalisation of the Doha Round of WTO companies to access overseas government multilateral trade negotiations, and bilateral and procurement markets. subregional preferential trade agreements. n Initiatives that assist the movement of skilled n Ai Group strongly welcomes the Federal and managerial labour and remove impediments Government’s recently announced Global to offshore investment will improve the global Opportunities program and Australian Industry competitiveness of Australian companies and should Productivity Centres, which together will invest also be given strong consideration. more than $600 million (over 10 years) in assisting The findings and implications are discussed in more companies access global supply chains and major detail in the remainder of the paper. products. n Ai Group is also supportive of other initiatives announced in the Federal Government’s latest industry statement, including a broader role for the Export and Finance Insurance Corporation and a two-year extension for the 30 export facilitators helping Australian firms seeking new business under the Australia-US FTA. n Existing Federal Government programs, including the EMDG Scheme and TradeStart, should be strengthened to ensure they are better able to assist Australian companies looking to enter and develop new export markets.
13 The Australian dollar and manufacturing exports: Shaping earnings and prospects xxxxxx 2. Introduction
14 The Australian dollar and manufacturing exports: Shaping earnings and prospects The economic environment in which Australian The Australian dollar and manufacturing exports: manufacturers operate has changed significantly over Shaping earnings and prospects discusses some of the the past 20 years. The greatest change has been the rapid opportunities open to Australian manufacturers to globalisation of the sector. Much of the move towards enhance their global competitiveness in this uncertain globalisation can be traced back to the international economic climate. It builds on the analysis and economic reforms in the past two decades which have recommendations provided in Ai Group’s 2006 study aimed to liberalise trade and investment. Significant of the forces reshaping Australian manufacturing, improvements in information and communications Manufacturing Futures3. technology (ICT) and the growing use of the internet Section Three of the report reviews recent trends have also contributed to greater integration. In recent in Australian manufacturing exports and assesses years, the economic emergence of the two most the short-term outlook for the sector. Section Four populous nations – China and India – has added a explores the factors directly influencing export growth further dimension to globalisation. in the Australian manufacturing sector. Section Five Like those of other developed economies, Australian examines the international markets where Australian manufacturers are now more than ever dependant on manufacturers believe the greatest opportunities for global trade opportunities. Many continue to view export growth lie, as well as the markets most hurt by export markets as a principal means of growth and increased overseas competition. expansion. Others are investigating the use of global Section Six reviews Australian trade policy, with supply chains to maximise their efficiencies and particular focus on the export programs available to minimise costs. Australian manufacturers and the preferential trade One of the major concerns for exporters at present is agreements to which Australia is currently a signatory. the strong value of the Australian dollar. In June 2007, Finally, Section Seven of the report highlights a number the value of the Australian dollar (AUD) exceeded 84 of proposals for improving the global competitiveness of US cents for the first time since 1990. As a consequence, the Australian manufacturing sector. the short-term outlook for manufacturing exports has The Australian dollar and manufacturing exports: deteriorated in recent months. Shaping earnings and prospects is based on a survey of The stronger exchange rate, coupled with forecasts Australian manufacturers, undertaken by Ai Group in of more moderate world GDP growth in 20071, the March quarter of 2007. The survey was provided to could reasonably be expected to curb the tentative a random sample of manufacturers from each of the six strengthening in manufacturing export growth seen over states and 12 major sectors. 2005 and 2006. The results presented in this report are based on Nonetheless, there have been some encouraging the responses of over 700 Australian manufacturers, signs for manufacturing exporters. Many Australian with total employees of nearly 77,000 and with exports manufacturers have faced the challenge of increasing exceeding $4.3 billion. globalisation and export competition by restructuring The survey collected information on export levels their operations, reducing costs, building global supply in the Australian manufacturing sector in 2006; the chains and becoming more productive. factors influencing export activity; characteristics of Firms striving for global competitiveness also reap a Australia’s export markets; the benefits of Australia’s number of indirect benefits, with a major benefit being preferential trade agreements; and the level of usage of that, by necessity, they tend to become more innovative. trade and export programs. In contrast to actual shares To attain competitive advantages in international of national manufacturing (based on ABS data), the markets, manufacturers need to incorporate the Ai Group survey is slightly weighted towards large and latest technologies into the products they sell and the internationally-owned enterprises. production processes they use2. The survey has been complemented with responses The end result is a boost to the overall levels of to export related questions from our annual Survey of innovation in the Australian manufacturing sector, often Australian Manufacturing, which was conducted in with positive “spillover” effects to other sectors. November and December 2006. It is vitally important for the health of both the manufacturing sector and the broader economy, that manufacturers are alert to future opportunities for export growth. Policy-makers also have an important role to play by reducing inappropriate regulatory impediments and by fostering an environment supportive of innovation and risk-taking. 1 International Monetary Fund, World Economic Outlook, April 2007. 2 Australian Manufacturing Council, Emerging Exporters: Australia’s High Value-Added Manufacturing Exporters, June 1993. 3 Australian Industry Group, Manufacturing Futures: Achieving Global Fitness, Ai Group, April 2006, p. 14
15 The Australian dollar and manufacturing exports: Shaping earnings and prospects 3. Trends in Australian manufacturing exports
16 The Australian dollar and manufacturing exports: Shaping earnings and prospects Defining ‘manufacturing exports’ particularly strong growth in the price of commodities The broadest measure of manufactured goods exports has caused the nominal value of metal product exports is on an industry of origin basis, in which Australian to increase significantly. In fact, on an industry of origin and New Zealand Standard Industrial Classifications basis, nearly two-thirds (66.0 per cent) of the growth in (ANZSIC) are used by the Australian Bureau of Statistics the nominal value of manufacturing exports between to group exports by ‘industry’. In 2006, the nominal 2003 and 2006 can be attributed to a lift in the price of value of Australian manufacturing exports on an metal product exports. industry of origin basis was $81.3 billion4. The nominal value of Australian manufacturing This represented nearly one half of the total value of exports in 2006, according to the RBA definition, was Australian merchandise exports (49.7 per cent). $31.5 billion6. However, this measure includes many commodities that have undergone only relatively basic transformation Historical growth in Australian (i.e. comparatively low levels of added value), primarily manufacturing exports mineral resource and agriculture products. Industry of Relative to the 1990s, growth in Australian origin data is also only available in nominal terms. manufactured goods exports has slowed markedly in the Further measures of manufactured exports (in current decade. both nominal and volume terms) are available from Throughout much of the 1990s, Australian Australian balance of payments (BOP) data. Using the manufacturers were able to gain new footholds in a Standard International Trade Classification (SITC) number of export markets, leading to strong rates of system, the BOP groups manufactured exports into export growth throughout most of the period. Annual three major categories: machinery; transport equipment; rates of export growth (in both nominal value and and other manufactures. The Reserve Bank of Australia volumes) are presented in Chart 1 (using the RBA (RBA) also defines beverages as a manufactured good5. definition of Australian manufacturing exports). The distinction between the two definitions of Between 1990 and 1999, the nominal value of Australian manufacturing exports is important. In recent years, manufacturing exports grew at an average annual rate of Chart 1 Annual manufacturing exports Chart 1: Manufacturing exports (annual percentage change) (annual percentage change) 30 25 20 15 Percentage 10 5 0 -5 -10 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Value Volumes Source: Australian Bureau of Statistics, ABS Cat. No. 5302.0 Balance of Payments and International Investment Position, Australia: December 2006. 4 Australian Bureau of Statistics, ABS Cat. No. 5368.0 International Trade in Goods and Services, Australia: February 2007. 5 Reserve Bank of Australia, Notes to Bulletin Statistical Tables, April 2007. 6 Australian Bureau of Statistics, ABS Cat. No. 5302.0 Balance of Payments and International Investment Position, Australia: December 2006.
17 The Australian dollar and manufacturing exports: Shaping earnings and prospects 12.4 per cent, while the volume of exports grew by 12.7 bursting of the internet bubble in 2000, many developed per cent per annum (on average). economies endured economic recessions of varying The relative strength of growth in both export length and depth. While the ensuing recovery in global volumes and values over the 1990s was largely growth has proved remarkably resilient, it has been attributable to the depreciation of the AUD through accompanied by a 35 per cent appreciation of the AUD much of the decade. The broad inverse relationship against the USD, and to levels well above the long-term between the level, and more particularly the change, in average since the floating of the Australian exchange rate the exchange rate and the value of manufactured goods in 1983. is plotted in Charts 2 and 3. The strength of the global recovery, along with the While the level of the exchange rate is a major accompanying surge in commodity prices and the AUD, determinant of price competitiveness and volume has been partly attributable to the rapid integration of growth over the medium to longer-term, movements in several large developing economies (principally China, the exchange rate also have a significant impact on the India, Russia and Brazil). Nevertheless, the strength of value of AUD earnings in the shorter-term. For example, growth in these and other developing economies has the moderate appreciation of the AUD in the mid-1990s been largely underpinned by high levels of industrial contributed to a sharp slowing in growth in the nominal investment and low-cost manufactured goods exports. value of manufactured goods exports over the same Despite the strengthening in global growth, these period. A further slowing in growth later in the decade factors contributed to three consecutive falls in the was attributable to the effects of the Asian financial nominal value of exports between 2002 and 2004. Export crisis, but was followed by a strong recovery in 2000 in volumes grew at a modest average annual rate of 2.6 per the wake of the upturn in global growth and the decline cent over the same period. in the AUD-USD exchange rate to under 0.5500. The weak growth between 2002 and 2004 has since However, the turn of the decade marked a been followed by an improvement in 2005 and 2006. considerable deterioration in the global backdrop for Assisted by a more stable exchange rate (although still Australian manufacturing exporters. Following the high in historical terms) and continued strong global Chartexchange Chart 2: AUD-USD 12 AUD-USDratesexchange rates and annual and annual percentage percentage change change in nominal manufacturing exports in nominal manufacturing exports (industry of origin) (industry of origin) 0.85 25 20 Percentage change in nominal manufacturing exports 0.75 15 AUD/USD exchange rate 10 0.65 5 0 0.55 -5 -10 0.45 -15 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 AUD/USD exchange rate (LHS) Nominal manufacturing exports (RHS) Source: Reserve Bank of Australia, Historical Exchange Rates, www.rba.gov.au, April 2007 and the Australian Bureau of Statistics, ABS Cat. No. 5368.0 International Trade in Goods and Services, Australia: February 2007.
18 The Australian dollar and manufacturing exports: Shaping earnings and prospects growth, manufacturing export volumes increased by 9.9 Australian manufacturing exports in the past two years, per cent between 2004 and 2006, with the nominal value Ai Group research suggests more modest growth in 2007 of exports rising by 11.0 per cent over the same period. (see Chart 6). Ai Group’s latest forecast suggests that the Nevertheless, the recent strengthening in volume nominal value of manufacturing exports will rise by 5.0 growth has been largely restricted to a narrow range per cent in 2007 (industry of origin basis). of sectors, with, for example, pharmaceutical exports In January 2007 Ai Group had forecast a 7.0 per cent contributing to more than half of the total growth in rise in nominal manufacturing exports in the current manufacturing exports volumes between 2003 and 2006 year. The original forecast was based on responses to an (Chart 4)7. annual Ai Group survey of manufacturers8, conducted Combined, these developments have contributed to in late November 2006. At the time, the AUD-USD a significant fall in Australia’s share of global markets. exchange rate was 0.7700. Most OECD countries have experienced a decline in Between November 2006 and June 2007, the AUD- their share of global markets since the beginning of USD exchange rate increased by around nine per cent. the decade, although Australia has suffered a relatively In a 2004 report entitled Aussie dollar challenges steeper decline. manufacturing competitiveness, Ai Group estimated According to the OECD, there has been a 21.0 per that a one per cent appreciation of the AUD against the cent cumulative loss of Australia’s global market share USD would lead to a 0.3 per cent reduction in export since the turn of the decade (Chart 5). The emergence of earnings9. This indicative rule of thumb suggests that, China has been a critical factor in the steeper decline in given the recent appreciation in the value of the AUD, Australia’s export share in its traditional markets. This is the actual rate of manufacturing exports growth in 2007 expected to increase to more than 25.0 per cent by 2008. may be closer to 5.0 per cent (rather than the 7.0 per cent originally forecast in January 2007). Forecast growth in Australian The 2.0 percentage point fall in the forecast for manufacturing exports nominal manufacturing exports is equivalent to a $1.7 Following the solid rises in the nominal value of billion reduction in national export income in 2007. Annual Chart 3: Annual percentage percentage change change in average in average AUD-USD AUD-USD exchange exchange ratenominal rate and and manufacturing exportsnominal manufacturing exports (industry of origin) (industry of origin) -30 30 -20 20 Percentage change in nominal manufacturing exports Percentage change in AUD-USD exchange rate -10 10 0 0 10 -10 20 -20 30 -30 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 AUD/USD exchange rate (LHS) Nominal manufacturing exports (RHS) Source: Reserve Bank of Australia, Historical Exchange Rates, www.rba.gov.au, April 2007 and the Australian Bureau of Statistics, ABS Cat. No. 5368.0 International Trade in Goods and Services, Australia: February 2007. 7 Had manufacturing exports been measured on an industry of origin basis, in nominal terms, metal exports would have made the largest contribution 8 Australian Industry Group, Business Prospects for Australian Manufacturing in 2007, January 2007. 9 Australian Industry Group, Aussie dollar challenges manufacturing competitiveness, January 2004, p. 18.
19 The Australian dollar and manufacturing exports: Shaping earnings and prospects Chart 4 Contribution to Growth in the Volume of Australian Chart 4: Contribution to growth Manufactured in the volume Goods of Australian Exports (2003-2006) manufactured goods exports (2003-2006) Total All other General industrial machinery & equipment Professional & scientific instruments Comprises SITC Divisions 5, 7, 8 and sections 11, 67, and 68 Beverages Pharmaceuticals -2 0 2 4 6 8 10 12 Percentage point contribution Source: Australian Bureau of Statistics, ABS Cat No. 5302.0 Balance of Payments and International Investment Position, Australia: December 2006. Chart 3 Cumulative Chart 5: Cumulative change change in the in Australia's OECD’s & Australia’sshare shareof ofworld world exports since 1990 exports since 1990 20 15 10 5 0 Percentage -5 -10 -15 -20 -25 -30 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f Australia OECD Source: Annex Table 44, Organisation for Economic Co-Operation and Development, OECD Economic Outlook, December 2006, p. 210.
20 The Australian dollar and manufacturing exports: Shaping earnings and prospects Table 1: Changes in export values, volumes and prices, 1996 to 2006 1996 to 2001 2001 to 2006 Change in Value Change in Volume Implicit Price Change in Value Change in Volume Implicit Price of Exports of Exports Change of Exports of Exports Change Rural 50.8 30.1 15.9 -14.0 -4.7 -9.7 Resources 70.2 30.8 30.2 67.5 6.0 58.0 Manufactures 54.7 46.5 5.6 4.4 18.7 -12.0 Services 43.8 28.6 11.9 25.2 8.3 15.7 Total Exports 56.3 32.4 18.0 32.3 9.1 21.3 Source: Australian Bureau of Statistics, ABS Cat No. 5302.0 Balance of Payments and International Investment Position, Australia: December 2006. If the AUD appreciates further in 2007, or the world Exports of metal products are classified as economy expands at a slower pace than currently ‘resources exports’ in Table 1, not as ‘manufacturing expected, the lift in nominal manufacturing exports may exports’. This is consistent with the RBA definition of be lower. manufacturing exports. Table 1 shows that between 1996 and 2001, there was Contribution of manufacturing exports strong growth in both the nominal value of Australian to total exports manufactured exports (54.7 per cent), as well as volumes The changing pattern of total merchandise export (46.5 per cent), consistent with the strong export growth growth is illustrated in Table 1. This table presents the that occurred in the other sectors of the Australian changes in the value, volume, and price (in Australian economy over the same period. dollars) of rural, resources, manufactures and services Growth in manufactured exports was significantly exports, over the period of 1996 to 2006. weaker (in both nominal value and volumes) between Chart Chart 6: Manufacturing exports 8 Annual (nominal, industrymanufacturing exportschange) of origin, annual percentage (nominal, industry of orgin, annual percentage change) 25 20 15 10 Percentage 5 0 -5 -10 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2007 Source: Australian Bureau of Statistics, ABS Cat. No. 5368.0 International Trade in Goods and Services, Australia: February 2007, Ai Group, Business Prospects for Australian Manufacturing in 2007, January 2007 and Ai Group, Aussie dollar challenges manufacturing competitiveness, January 2004.
21 The Australian dollar and manufacturing exports: Shaping earnings and prospects 2001 and 2006 than in the preceding five year period. five year period was attributable to solid rises in both This trend was broadly consistent across the other volumes and prices, the strong growth since 2001 is sectors of the economy. almost solely the result of the boom in metal prices. The slower growth in manufacturing exports Chart 7 shows that for most of the period following occurred despite a pick-up in global growth over the 2001, the export price of metals has grown at a same period. According to the International Monetary significantly faster rate than the price of exports for the Fund, the average rate of world real GDP growth lifted manufacturing sector. from 3.7 per cent between 1996 and 2001 to 4.2 per cent The strong growth in prices of resources exports between 2001 and 200610. boosted a rather modest 6.0 per cent rise in volumes, The nominal value of manufactured exports grew leading to very high levels of export income for firms in only marginally between 2001 and 2006, rising by just that sector. 4.4 per cent. Over this period, the prices received for Chart 8 provides a graphical representation of volume manufactured goods fell by 12.0 per cent, largely due to changes among Australia’s major export classifications the steady appreciation in the AUD. and it shows that the contribution of manufacturing Australian manufacturers managed to lift export exports to total exports has increased slightly since 2001. volumes by 18.7 per cent between 2001 and 2006. Since 2001, aggregate export volumes have grown Although this rate of volume growth was weaker by just 9.1 per cent. Over this period, the volume of than the 46.5 per cent rise in manufacturing exports manufacturing exports has grown at a quicker pace than in the preceding five years, it was higher than the rural, resources and services exports. rates of growth recorded for rural, resources and Australia’s ongoing drought has severely constrained services exports. rural exports, with the volume of rural exports actually The nominal value of resource-based exports has falling by 4.7 per cent since 2001. Meanwhile, under- continued to grow strongly in recent years, rising by investment in Australia’s resources sector and transport 67.5 per cent between 2001 and 2006. While the strong infrastructure has curbed growth in the volume of growth in nominal resources exports in the preceding mineral resources exports. Chart 5 Export prices by subsector Chart 7: Export prices by sector (annual (annual percentage percentage change) change) 60 45 30 Percentage 15 0 -15 -30 2001 2002 2003 2004 2005 2006 Metals Machinery Transport equipment Other manufactures Food, beverages & tobacco Source: Australian Bureau of Statistics, ABS Cat No. 6547.0 International Trade Price Indexes, Australia: December 2006 10 International Monetary Fund, World Economic Outlook, April 2007.
22 The Australian dollar and manufacturing exports: Shaping earnings and prospects xxxxx In 2001, manufacturing export volumes equalled with 45 per cent of the firms in these sectors earning 16.4 per cent of total export volumes. By 2006 the income from exports. contribution of the manufacturing sector had risen to By contrast, survey responses revealed that the wood, 17.8 per cent. By contrast, the contribution of resource- wood products & furniture (17 per cent); fabricated based exports to total export volumes slipped from 38.9 metal products (23 per cent); and basic metal products per cent to 37.9 per cent over the same period. (27 per cent) sectors have the lowest proportion of exporters. Export intensity Overall, more than one-third of the Australian Contribution of exports to total manufacturers surveyed (35 per cent) reported that manufacturing sales some proportion of their sales income was generated Chart 10 shows the contribution of nominal through the export of goods and services. According to manufacturing exports to total manufacturing the ABS, 20 per cent of Australian manufacturers export sales between 1990 and 2006, with nominal exports finished goods overseas11. The estimate in this report is aggregated according to their industry of origin. The higher than suggested in the official statistics and reflects contribution of exports to total manufacturing sales the fact that the Ai Group survey is weighted towards was below the period average (22.7 per cent) in the large and internationally-owned enterprises, who are three years between 2003 and 2005, partly reflecting the more likely to sell to overseas customers. The proportion relative strength of Australian domestic demand growth of manufacturers exporting varies significantly across over this period. sectors (Chart 9). The exports-to-sales ratio lifted above the period The propensity to export is greatly affected by the average to 24.0 per cent in 2006. While a fall in total type of product manufactured and the characteristics of sales caused by weaker demand conditions is partially the target export markets. responsible for the rise in the exports-to-sales ratio According to the survey results, the machinery & in 2006, the recent boom in international commodity equipment and transport equipment sectors have the prices is the major factor behind the recovery. The strong highest proportion of manufacturers who are exporters, rise in the prices paid for base metals, and the solid Chart 8: Volume of Australian Chart 6 Changes exports byvolume in the industry,of1996 to 2006 exports, 1996 to 2006 Australian 200000 150000 $A millions 100000 50000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Manufactures Rural Resources Other goods Services Source: Australian Bureau of Statistics, ABS Cat No. 5302.0 Balance of Payments and International Investment Position, Australia: December 2006. 11 Australian Bureau of Statistics, ABS Cat No. 8155. Australian Industry 2004-05 and ABS Cat No. 5638.0.55.006 Number and Characteristics of Australian Exporters, 2005-06
23 The Australian dollar and manufacturing exports: Shaping earnings and prospects Chart 9 Percentage of manufacturers exporting Chart 9: Percentage of manufacturers exporting Food & beverages Textiles Clothing & footwear Wood, wood products & furniture Paper, printing & publishing Chemicals, petroleum & coal Construction materials Basic metal products Fabricated metal products Transport equipment Machinery & equipment Miscellaneous manufacturing All sectors 10 20 30 40 50 Percentage Source: Ai Group Survey on Australian Exporters, March 2007. Chart 7 exports Chart 10: Manufacturing Manufacturing exportsofastotal as a percentage a percentage sales of total sales 30 25 Percentage 20 15 10 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Exports-to-sales ratio Average (1990 to 2006) Source: Australian Bureau of Statistics, ABS Cat No. 5368.0 International Trade in Goods and Services, Australia: February 2007 and ABS Cat No. 5676.0 Business Indicators, Australia: December 2006.
24 The Australian dollar and manufacturing exports: Shaping earnings and prospects overseas demand for such products, has flowed through in recent years has flowed mainly to the larger, globally- to strong growth in the nominal value of exports from oriented manufacturers, rather than the large number of companies in the basic metal products sector (which firms who focus on domestic markets. are included in the industry of origin definition of The machinery & equipment (25.8 per cent); food, manufacturing exports). beverages & tobacco (23.8 per cent); and textiles, The average contribution of nominal manufacturing clothing & footwear (23.1 per cent) sectors also generate exports to total sales varies across sectors (Chart 11). a large amount of income from exports. The sectors with the highest proportions of By contrast, less than 5 per cent of total sales income exporters are not necessarily those with the highest in the construction materials (2.0 per cent) and paper, export intensity. printing & publishing (3.1 per cent) sectors come According to ABS data, the metal product from exports. manufacturing sector is the most reliant on income from exports, with 50.4 per cent of the total sales income generated in these sectors coming from exports. This is despite the fact that less than 30 per cent of firms in the basic metal products (27.0 per cent) and fabricated metal products (23.4 per cent) sectors reported income from the export of goods. It is clear that the strong growth in nominal exports in the metal product sectors Chart 10 toExports-to-sales Chart 11: Exports-to-sales ratio according ratio of sector (nominal, industry according origin) to sector (nominal, industry of origin) Food, beverages & tobacco Textiles, clothing & footwear Wood & paper product manufacturing Paper, publishing & recorded media Petroleum, coal & chemicals Construction materials Metal products Machinery & equipment Other manufacturing All sectors 0 10 20 30 40 50 60 Percentage Source: Australian Bureau of Statistics, ABS Cat No. 5368.0 International Trade in Goods and Services, Australia: February 2007 and ABS Cat No. 5676.0 Business Indicators, Australia: December 2006.
25 The Australian dollar and manufacturing exports: Shaping earnings and prospects 4. Factors affecting Australian manufacturing exports
26 The Australian dollar and manufacturing exports: Shaping earnings and prospects While Australia’s manufacturing export performance More than three-quarters of Australian has been affected by the appreciation of the AUD manufacturing exporters (75.6 per cent) reported and competition from low-cost countries, other that increased competition from other countries had factors relating to company practice have also had a reduced their global market shares, and adversely significant impact. impacted on their level of export activity. International competitive pressures have led many In fact, more than half of the exporters reported that manufacturers to implement company strategies to greater competition from other countries had a ‘major’ lift competitiveness. influence on their level of export activity. In April 2006, Ai Group released a landmark study Exports of machinery and equipment appear to be on the forces reshaping Australian manufacturing the most hurt by the increased level of competition entitled Manufacturing Futures: Achieving Global from other countries, with 81.7 per cent of exporters in Fitness. Manufacturing Futures comprehensively this sector citing an adverse influence. reviewed the domestic and international pressures Other sectors in which exports have been heavily influencing Australian manufacturing, and proposed influenced by greater competition from other a range of policies to support the sector in becoming countries are basic metal products (80.0 per cent); more internationally competitive. food & beverages (78.4 per cent); and miscellaneous Manufacturing Futures revealed the major concern manufacturing (81.3 per cent). for Australian manufacturers was competition from By contrast, the wood, wood products & furniture low-cost countries. (60.0 per cent); clothing & footwear (66.7 per cent); and This factor remains the principal concern for fabricated metal products (69.7 per cent) sectors are Australian manufacturing exporters in early 2007. among the least affected in export markets. As noted in In this most recent survey, competition from other Section Three, however, these sectors are characterised countries was identified by Australian manufacturers by relatively low numbers of exporters (and a as the factor having the greatest influence on export correspondingly higher domestic orientation). activity (Chart 12). Chart 12: Factors influencingChart 11 Factors manufacturing influencing export activity export activity Uncompetitive AUD Offshoring of production New export markets Domestic demand Existing exports Overseas competition New products Barriers to overseas Capacity constraints Improved competitiveness 0 10 20 30 40 50 60 70 80 Percentage of companies Source: Ai Group Survey on Australian Exporters, March 2007.
27 The Australian dollar and manufacturing exports: Shaping earnings and prospects The strength of the exchange rate was identified According to the survey results, fewer than one as the second most influential factor affecting export in five manufacturers in the basic metal products activity. Nearly two-thirds of the businesses surveyed sector (16.7 per cent) become uncompetitive with an (65.5 per cent) believe their exports are uncompetitive exchange rate of US$0.75. This outcome reflects the at an exchange rate of US$0.80. Furthermore, 93.7 extent to which (USD) prices of metal commodities per cent of manufacturers believe that their exports have already outpaced rises in the AUD exchange will become uncompetitive should the AUD exceed rate, thereby cushioning some of the impact of an US$0.85. appreciating currency. Chart 13 shows the various levels of the exchange At an exchange rate of US$0.80, 40 per cent of rate at which Australian manufacturers become exporters in paper, printing & publishing and 50.0 uncompetitive in global export markets; for all sectors per cent in chemicals, petroleum & coal products and and across individual sectors. basic metal products lost competitiveness; the lowest One of the most important points illustrated in proportions across the 12 sectors. Chart 13 is that for each of the 12 sectors, over 85 Among other major factors, more than half per cent of firms believed their exports would be of the manufacturers surveyed (53.1 per cent) uncompetitive should the exchange rate rise above indicated improved competitiveness from new US$0.85. efficiencies had assisted export activity in 2006. Every firm surveyed in the wood, wood products Manufacturers have managed to lift their level of & furniture and transport equipment sectors loses global competitiveness by investing and engaging in competitiveness with an exchange rate of US$0.85. product and process innovation and by adopting lean Relatively high proportions of exporters in the wood, manufacturing techniques. wood products & furniture (80.0 per cent); construction The survey results suggest clothing & footwear materials (78.9 per cent); and fabricated metal products exporters have benefited the most from restructuring, (75.7 per cent) sectors identified themselves as with 71.4 per cent citing this as an influence on export uncompetitive with an exchange rate of US$0.80. activity. In fact, this was identified as the leading Chart 13: Proportion of manufacturing exporters uncompetitive at different AUD values (USProportion Chart 14 cents) of exporters uncompetitive at different AUD values (US cents) 100 85 cents 80 Percentage of companies uncompetitive 80 cents 60 75 cents 40 20 0 All sectors Food & beverages Textiles Clothing & footwear Wood, wood products & furniture Paper, printing & publishing Chemicals, petroleum & coal Construction materials Basic metal products Fabricated metal products Transport equipment Machinery & equipment Miscellaneous manufacturing Source: Ai Group Survey on Australian Exporters, March 2007.
28 The Australian dollar and manufacturing exports: Shaping earnings and prospects influence, excluding the exchange rate, on export More than half of the manufacturing exporters activity in the clothing & footwear sector. surveyed cited the opening of new markets (51.0 per Just under half of the manufacturing exporters cent) and growth in existing markets (55.3 per cent) surveyed (47.2 per cent) suggested that the movement as factors having a strong and positive impact on their of production offshore had positively affected their levels of export activity. levels of export activity. Of the other factors identified: 48.7 per cent of firms The growing adoption of offshoring amongst stated that barriers to entry in overseas markets had Australian manufacturers, and the accompanying influenced export levels; 46.5 per cent identified the cost reductions of sub-assemblies and semi- introduction of new products in overseas markets as processed inputs, was discussed at length in an influential factor; 43.9 per cent cited capacity and Manufacturing Futures. supply constraints; and 39.0 per cent highlighted the The movement of this production offshore is pressures of meeting domestic market demand. clearly boosting the competitiveness of Australian manufactured goods abroad and allowing firms to increase their share of export markets. In January 2007, Ai Group forecast a rise in offshore intensity (offshore activity as a percentage of sales) from 27.9 per cent in 2006 to 31.7 percent in 200712. 12 Australian Industry Group, Business Prospects for Australian Manufacturing in 2007, January 2007
29 The Australian dollar and manufacturing exports: Shaping earnings and prospects 5. Export markets for Australian manufactured goods
30 The Australian dollar and manufacturing exports: Shaping earnings and prospects Many Australian manufacturers are looking to export By contrast, Chart 15 plots the extent to which markets for growth opportunities. Some firms remain Australian manufacturing exporters have been impacted focused on Australia’s more traditional export markets, by competitors in offshore markets. Exporters have such as the United Kingdom, New Zealand and the identified the United States as the market where increased United States. Others are looking to the rapidly developing competition from other countries has hurt their sales the regional economies. most (14.6 per cent of responses). According to survey responses, Australian Following closely behind the United States, 14.1 per manufacturers expect the best opportunities for export cent of exporters find New Zealand the market next growth in 2007 will be in New Zealand (Chart 14), most adversely impacted by increased international identified by nearly one in five respondents (19.5 per cent). competition. A further 6.1 per cent nominated the While New Zealand has long been one of the largest Japanese market. The appreciation of the AUD against the export markets for Australian manufacturers, the relative Japanese yen in 2006 heightened the uncompetitiveness of stability of the AUD-NZD crossrate is likely to have Australian manufactured goods in the Japanese market. cushioned the loss of market share to local New Zealand Across most manufacturing sectors, the United States manufacturers. and New Zealand were the markets most recognised as The United States is the next most cited market for being adversely impacted by overseas competition. There growth opportunities, nominated by 14.7 per cent. were some exceptions, however, with Japan recognised as Almost one in 10 exporters (9.2 per cent) expect the export market affected most by increased competition China to provide them with the greatest opportunities for in the food & beverages and miscellaneous manufacturing market growth. sectors; Singapore in the clothing & footwear sector; and Other countries seen as offering greater export Asia (unspecified) in the chemicals, petroleum & coal opportunities include: Japan (6.2 per cent); the United products sector. Kingdom (4.3 per cent); Singapore (3.6 per cent); Australia’s major markets for manufacturing exports, Indonesia (3.4 per cent); the United Arab Emirates (3.0 New Zealand and the United States, continue to provide per cent); India (2.8 per cent); and Malaysia (2.4 per cent). manufacturers with their greatest opportunities for Chart 14: Export Chart 15with markets Export bestmarkets withfor opportunity best opportunity growth for growth New Zealand United States China Japan United Kingdom Singapore Indonesia United Arab Emirates India Malaysia 0 2 4 6 8 10 12 14 16 18 20 Percentage of companies Source: Ai Group, Business Prospects for Australian Manufacturing in 2007, January 2007.
31 The Australian dollar and manufacturing exports: Shaping earnings and prospects growth. However, given their relative importance to On balance, Australian manufacturers also see strong Australian exporters, they are also the export markets growth opportunities in the United Arab Emirates (2.0 most at risk from increasing overseas competition. per cent). Chart 16 adjusts export market opportunities by the Nearly as many exporters forecasting growth loss of market share to other competitors, to gain a net opportunities in the United States have been hurt in that measure of potential growth opportunities. market by increased competition from overseas. On balance, New Zealand remains the market By contrast, significantly more Australian with the greatest prospects for growth, with 5.4 per manufacturers have been negatively affected by increased cent more Australian manufacturers expecting growth overseas competition in the European market than those opportunities than citing negative impacts from increased who see opportunities for export growth (3.8 per cent international competition. more exporters). China is also considered, on balance, to be a market Other markets where more firms suffer from increased with promising growth opportunities with 3.1 per cent competition than see growth opportunities are: Asia more exporters anticipating growth than being harmed by (unspecified); the Middle East; and the United Kingdom. competition from overseas. Importantly, and on balance, these two export markets with the greatest growth prospects for Australian manufacturers have been assisted by the relative stability of the AUD against their local currency (the New Zealand dollar and the Chinese yuan). This is not to deny there are considerable concerns about the Chinese yuan being undervalued as the Chinese government seek to manage the currency within a tight range, as it moves towards a more liberalised economy. Charthurt Chart 15: Export markets 16 by Export markets increased hurt by from competition increased other countries competition from other countries United States New Zealand Japan Europe China United Kingdom Singapore Asia (unspecified) Indonesia Middle East 0 2 4 6 8 10 12 14 16 18 20 Percentage of companies Source: Ai Group Survey on Australian Exporters, March 2007.
32 The Australian dollar and manufacturing exports: Shaping earnings and prospects Chart markets Chart 16: Export 17 Export markets with with best best growth growth prospects (onprospects balance) (on balance) United States New Zealand Japan Europe China United Kingdom Singapore Asia (unspecified) Indonesia Middle East Malaysia India United Arab Emirates -4 -3 -2 -1 0 1 2 3 4 5 6 Net percentage of companies Source: Ai Group, Business Prospects for Australian Manufacturing in 2007, January 2007 and Ai Group Survey on Australian Exporters, March 2007.
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