The Australian dollar and manufacturing exports: Shaping earnings and prospects

The Australian dollar and manufacturing exports: Shaping earnings and prospects
The Australian dollar
 and manufacturing exports:
Shaping earnings and prospects




                         June 2007
The Australian dollar and manufacturing exports: Shaping earnings and prospects
© 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 Australian dollar
 and manufacturing exports:
Shaping earnings and prospects




            June 2007
The Australian dollar and manufacturing exports: Shaping earnings and prospects



    The Australian dollar and manufacturing exports: Shaping earnings and prospects
The Australian dollar and manufacturing exports: Shaping earnings and prospects



The Australian dollar and manufacturing exports: Shaping earnings and prospects




                                                       Preface
The Australian dollar and manufacturing exports: Shaping earnings and prospects



    The Australian dollar and manufacturing exports: Shaping earnings and prospects
The Australian dollar and manufacturing exports: Shaping earnings and prospects



                                             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



    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
The Australian dollar and manufacturing exports: Shaping earnings and prospects



The Australian dollar and manufacturing exports: Shaping earnings and prospects




                         1. Key Findings
The Australian dollar and manufacturing exports: Shaping earnings and prospects
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.
You can also read
Next part ... Cancel