Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA

 
Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
Trends                                                        November 2017
                                                                 A bulletin of
                                                     economic developments
                                                           in South Australia

Manufacturing South Australia’s future
Advanced technology underpins the state’s industrial prospects

                                                         banksa.com.au
Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
TRENDS NOVEMBER 2017

    Chief Executive’s
    Foreword

    Optimistic
    future for
    manufacturing

Welcome to the latest edition of BankSA’s economic
bulletin, Trends, compiled in conjunction with Deloitte
Access Economics.
In this edition, we examine South Australia’s
manufacturing industry, including the challenges the
sector has experienced in recent years, but also why
there is cause for optimism for the future.

Manufacturing has long played a major           financial crisis hit, while the industry’s     manufacturing and construction sectors
role in the South Australian economy, but       output has also fallen by a proportionate      account for only 15% of the nation’s
its contribution has declined in recent         amount over the same period.                   economy, they actually consume 27% of
years due largely to the rise in low-cost                                                      Australia’s total energy production.
                                                The globalisation of manufacturing has
manufacturing capabilities globally,
                                                led businesses to increasingly seek out        Despite all the doom and gloom though
particularly in Asia.
                                                the lowest cost sources of supply, which       about South Australia’s manufacturing
This edition of Trends outlines recent          has been to the detriment of developed         industry, there is cause for optimism.
developments in manufacturing in South          economies worldwide – including South
                                                                                               It is worth noting that manufacturing still
Australia, including the major challenges       Australia – who simply cannot compete with
                                                                                               comprises a significant share of economic
the industry has faced, but also the            regions like Asia on wage and production
                                                                                               activity and accounts for approximately
opportunities on offer now and into the         costs.
                                                                                               one in 11 jobs in the state. Indeed, around
future as we transition from traditional to
                                                Making matters worse, the dramatic             70,000 South Australians are still employed
advanced manufacturing.
                                                rise in energy costs in recent years has       in the sector today.
Last month's closure of Holden’s Elizabeth      inflicted even more pain on the state’s
                                                                                               Specifically, food and beverage product
plant in Adelaide’s north signalled the         manufacturers and further deteriorated
                                                                                               manufacturing remains a shining light,
official end of car making in South Australia   their competitiveness against their overseas
                                                                                               with the sub-sector accounting for one
and again put the spotlight on the plight of    counterparts.
                                                                                               in three manufacturing jobs in the state.
the state’s manufacturing industry.
                                                Manufacturers are particularly vulnerable      Importantly, this sub-sector enjoys relative
It’s certainly been a tough decade for the      to increased energy prices because they        protection from globalisation (and the
sector, with around 20,000 manufacturing        generally use substantially more energy        associated squeeze on production costs)
jobs lost in South Australia since the global   than other industries. In fact, while the      due to the premium quality and popularity

2
Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
CHIEF EXECUTIVE’S FOREWORD

                                                                                                   20,000
of South Australian produce nationally and        electric cars, solar panels and custom-built
throughout Asia.                                  furniture.

And promisingly, there’s potentially an even      Furthermore, 87% of South Australian
brighter future ahead for local food and          business owners want to produce
beverage manufacturers, who are likely to         graduates and workers skilled in advanced        The number of
benefit from the increasingly affluent Asian      manufacturing to help develop a new              manufacturing jobs
market, as well as via improved trade access      homegrown industry, while using old car          that have been shed
thanks to the China-Australia Free Trade          manufacturing sites (such as Holden’s            in South Australia
Agreement, which is already boosting our          former Elizabeth plant) as modern
                                                                                                   since the global
export levels. For example, following the         manufacturing hubs is overwhelmingly
agreement coming into effect in late 2015,        supported by consumers (85%) and
                                                                                                   financial crisis.
wine exports to China spiked by more than         businesses (88%).
50%.

                                                                                                   1in 3
                                                  As noted in this Trends report, the precise
Defence manufacturing is also a strong            definition for advanced manufacturing
performer and is set to continue as a good        varies, but it is generally accepted as a sub-
news story in South Australia over the            set of manufacturing industries in which
next decade, with the $35 billion Future          research and development is a significant
Frigates Program and the $50 billion Future       proportion of revenues. With that being
Submarines Program to generate thousands          the case, and with developed economies
of new jobs and help entrench the state as a      set to continue to struggle with wage cost       The current number
defence powerhouse.                               competitiveness at a global level, ideas
                                                                                                   of food and beverage
                                                  (rather than cost) appear likely to become
Already, South Australia contains a
                                                  an increasingly key component in the             product manufacturing
quarter of the nation’s specialist defence
                                                  competitiveness stakes, which could favour       jobs in South Australia
businesses, and is the beneficiary of 32%
of the country’s defence spend, so its
                                                  South Australia.                                 as a share of total
contribution to the state economy cannot          To that end, our state is already progressing    manufacturing jobs in
be questioned.                                    as an innovation hub, including Technology       the state.
                                                  Park Adelaide which comprises more than
In addition, South Australia’s established
                                                  85 co-located bioscience and technology
technical skills base that we have developed

                                                                                                   100+
                                                  companies, while we are rapidly earning an
over many years through our automotive
                                                  impressive reputation in advanced medical
and defence sectors holds the state in good
                                                  manufacturing through the South Australian
stead. Critically, it provides a solid platform
                                                  Health and Medical Research Institute and
for new and existing manufacturers to grow
                                                  the new Royal Adelaide Hospital.
and invest in their businesses – and in South
Australia – and ultimately capitalise on          Crucially, South Australia has already made
the transition from traditional to advanced       strides in promoting the state’s advanced        The current number
manufacturing.                                    manufacturing credentials, and with
                                                                                                   of South Australian
                                                  advanced manufacturing identified as one
Importantly, there is a groundswell in this
                                                  of the state’s ‘Seven Strategic Priorities’ to
                                                                                                   businesses
state to make South Australia a centre for
                                                  help grow our economy in the future.             specialising
advanced manufacturing, both to enhance
                                                                                                   in advanced
existing manufacturing industries and to          So while we may not be able to compete
create new ones.                                  with Asia on wage costs for manufacturing,
                                                                                                   manufacturing,
                                                  we can compete on ideas and innovation.          medical devices and
In fact, a recent BankSA survey found that
                                                  And given our strong skills base and cost-       pharmaceuticals.
pursuing new advanced manufacturing
                                                  competitiveness relative to other states
industries was the highest ranked
                                                  in Australia, South Australia is well placed
preference among South Australian
                                                  to seize on growth opportunities in the
consumers (81%) to modernise the state’s
                                                  advanced manufacturing sector – we just
economy, rating ahead of premium food,
                                                  need to be prepared to rise to the challenge.
software development and renewable
energy industries amongst others.

More specifically, 77% of consumers agree
with developing an advanced manufacturing
bio-medical industry for the production
of pharmaceuticals and other medical
products, as well as building high quality,
                                                  Nick Reade
low cost whole products such as driverless
                                                  Chief Executive, BankSA

                                                                                                                                   3
Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
TRENDS NOVEMBER 2017

Manufacturing
South Australia’s
future
“No pain, no gain.” -                 Jane Fonda

“Those who look only to the past … are certain to miss the future.”
- John. F. Kennedy

“Here comes the sun.” -                        The Beatles

The sands have been shifting for the South       farmers on the back foot amid that strength in   Yet although the costs to manufacturing have
Australian economy.                              credit and currency costs.                       been high, some of the drivers of job losses
                                                                                                  in the sector are less damaging today than
The first decade of the 2000s was marked by      And the pain continues. The headline grabber
                                                                                                  they were for a long time. Today’s Australian
a China boom which pushed up interest and        is that Holden stopped making cars here
                                                                                                  economy has a different complexion: these
exchange rates in Australia.                     last month. That closure means a direct
                                                                                                  days interest rates are at record lows, while
                                                 loss of around 1,600 jobs, with further job
As a state vulnerable to a period of high                                                         the Australian dollar now sits closer to its long
                                                 losses likely in car parts manufacturing and
currency and credit costs, South Australia                                                        run average.
                                                 elsewhere.
was done no favours by that boom. It left us
                                                                                                  That combination is helping the broader South
on the wrong side of Australia’s ‘two speed      That risks the unemployment rate rising here
                                                                                                  Australian economy, where unemployment
economy’, placing our manufacturers and our      in the near term.

4
Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
MANUFACTURING SOUTH AUSTRALIA’S FUTURE

now sits below 6% for the first time in several     CHART 1
                                                    SOUTH AUSTRALIA AS A SHARE OF AUSTRALIA’S ECONOMY AND POPULATION
years.

While the legacy of the elevated currency is               9%
still being felt in manufacturing (Holden being
a prime example), and while high energy costs
are a particular problem for some in the sector,           8%
the current levels of these key economic
drivers have helped to get some of South
                                                           7%
Australia’s manufacturers back in the game.

Combined with increasing liveability for
young professionals (given that Sydney and                 6%
Melbourne house prices have gone haywire                                                             Economy                                      Population
in recent years), and a strong manufacturing               5%
legacy (including the strength of the local skill
base), there are reasons for optimism in South
Australia’s manufacturing industry – and for
our economy more widely.
                                                    Source: Australian Bureau of Statistics, 2016-17 as estimated by Deloitte Access Economics.
Most notably, the drivers of sectoral success
are evolving. As manufacturing becomes              manufacturing is unlikely to drive much                                 shrinking share of Australia’s economy and
increasingly capital and IP-heavy, Australia        growth in the state (due to the structural                              population (as seen in Chart 1).
will benefit from that. That’s important            decline of the sector), it can provide a
because while we cannot compete with Asia                                                                                   And absent an accelerator to jump firmly
                                                    meaningful level of diversification in our
on wage costs, we can compete on ideas.                                                                                     into the ranks of the resource states, South
                                                    economy and support South Australia’s
So there are future growth opportunities in                                                                                 Australia found itself stuck in the slow lane
                                                    transition to an increasingly prosperous state
advanced manufacturing and high quality,                                                                                    of a two-speed economy during Australia’s
                                                    economy.
niche offerings.                                                                                                            mining boom years. Our state’s economy was
                                                    With appropriate agility, that means:                                   saddled with higher interest rates and a higher
Our state is also a defence manufacturing                                                                                   exchange rate, but without the matching
powerhouse. Short-to-medium term prospects          • South Australia can continue to punch above
                                                                                                                            money spinners in place that warranted these
will be boosted by the $35 billion Future             its weight in manufacturing, even though car
                                                                                                                            settings (at the national level).
Frigates Program and by the $50 billion Future        making in the state has now ceased; and
Submarines Program. Some of the spending                                                                                    That combination led to weaker population
                                                    • As has been true for a long time, there
on those projects will add to local jobs,                                                                                   and economic growth than seen more broadly
                                                      will be plenty of opportunities outside of
beginning in the early 2020s.                                                                                               in Australia, a trend which has been persistent
                                                      manufacturing.
                                                                                                                            since the onset of the global financial crisis in
Yet there are also vulnerabilities. With car        The pressure on South Australia’s economy                               2008, as shown in Chart 2.
manufacturing now a fond memory, South              – and its manufacturers
Australia will have an increased dependence                                                                                 That long period of strength in exchange
                                                    Let’s get the bad news out of the way upfront.
on defence-related manufacturing, and hence                                                                                 and interest rates increased the pressure on
on the Federal funding required to support          Recent years have seen some major                                       the state’s manufacturers, who were already
such jobs. That says we will have eggs in           challenges for South Australia’s economy.                               under pressure from the rise in low-cost
fewer baskets than before, which could result       For example, it was a blow when BHP Billiton                            manufacturing capability in Asia. That led
in increased volatility in the performance of       decided that it wouldn’t be expanding its                               to a range of casualties, the most headline-
South Australian manufacturing down the             Olympic Dam mine in the near future.                                    hugging of which was the announcement that
road.                                                                                                                       Holden would no longer continue to make
                                                    That $20-$30 billion hole in what would
                                                                                                                            cars at its Elizabeth plant.
So despite the rise of new opportunities, it        otherwise have been the outlook for the
won’t all be smooth sailing for manufacturing       state’s construction sector sent a shudder                              That decision was announced a long time
in South Australia. The structural decline of       through South Australia. Many observers                                 ago, but the Elizabeth plant finally closed
manufacturing around the world is coinciding        had hoped that the expansion of Olympic                                 on October 20, 2017, with almost 1,600
with the current energy price squeeze in            Dam would set the state on the road towards                             workers in production, engineering and
Australia.                                          becoming a resource powerhouse, selling into                            support roles lost. And nor is that closure
                                                    the rapid growth in emerging Asia, thereby                              the end of the story, given that a range of
Yet, as we’ll explore in this report, while         turning around what has long been our                                   parts manufacturers – including some in this

                                                                                                                                                                            5
Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
TRENDS NOVEMBER 2017

state – sold their products to Holden (or to       CHART 2
                                                   SOUTH AUSTRALIAN AND AUSTRALIAN ANNUAL ECONOMIC GROWTH
Toyota, whose own car making operations in
Victoria closed down at much the same time
                                                              %               South Australian GSP growth                               Australian GDP growth
as Holden’s did here).                                        6
Not every closure proves permanent. For
example, Whyalla’s Arrium Steelworks                           5
entered voluntary administration in 2016, but
has subsequently been rescued by Liberty                       4
House Group, which has committed more than
$1 billion to revitalising the works.                          3

Yet that says more about the ups and downs of                  2
the global iron ore price than it does about the
broader story of prospects for manufacturing
                                                               1
enterprises once they’ve closed down. Sadly,
for the bulk of such closures, the jobs are gone
                                                              0
and they’re not coming back.                                 2001-02               2004-05             2007-08              2010-11              2013-14   2016-17
That’s part of the reason why South Australia
                                                   Source: Australian Bureau of Statistics.
has been shrinking as a share of the national
economy and of its population over time.           CHART 3
Chart 3 shows the close correlation between        SOUTH AUSTRALIAN MANUFACTURING IMPORTANCE

manufacturing as a share of the South
Australian economy and South Australia as a                                              South Australian share of national economy
share of the national economy.                            7.0%                                                                                                  12%
                                                                                          Manufacturing share of South Australian output
These two have moved together. As South                   6.8%                                                                                                  11%
Australia’s manufacturing base has eroded,
                                                          6.6%                                                                                                  10%
so has our relative importance within the
national economy. This indicates the key role             6.4%                                                                                                  9%
of manufacturing inside the South Australian
                                                          6.2%                                                                                                  8%
economy, and the way in which its presence
has also supported a range of other industries            6.0%                                                                                                  7%
(such as service industries) in the economy.
                                                          5.8%                                                                                                  6%
Chart 3 is worth a close look. The correlation
it shows implies that losses in manufacturing
have a disproportionate impact on South
Australia’s economy – although manufacturing
accounted for between 7% and 11%                   Source: Australian Bureau of Statistics, 2016-17 as estimated by Deloitte Access Economics.
of the state’s economy over the period
examined here, each percentage point loss in       such as tourism, farming, manufacturing and                             the gap between the state’s unemployment
manufacturing was correlated with a matching       international education.                                                rate and that nationally has eased a little of
loss of 20% of a percentage point as a share                                                                               late.
                                                   In turn, that combination has helped support
of the national economy.
                                                   growth and to see our unemployment rate                                 Recent trends in manufacturing in South
Yet it hasn’t been all bad                         move lower across a time in which fears about                           Australia
Against those challenges, there have also          our economy have been heightened.                                       Yet most of that good news hasn’t been
been positives for the South Australian                                                                                    showing up in manufacturing – it has been
                                                   In fact, and as Chart 4 shows, the
economy.                                                                                                                   showing up elsewhere within the state’s
                                                   unemployment rate is now below 6% for
                                                                                                                           economy. Both manufacturing output and jobs
In particular, record low interest rates have      the first time since 2013 and well below the
                                                                                                                           have continued to disappear. Around 20,000
helped to stimulate interest rate sensitive        intervening high of over 8%. With optimism
                                                                                                                           manufacturing jobs have been shed in South
industries such as housing and retail. And         around the global economy improving, the
                                                                                                                           Australia since the global financial crisis (with
a more accommodative exchange rate has             outlook for the South Australian economy is
                                                                                                                           roughly 70,000 jobs in the industry remaining
helped exchange rate sensitive industries          brightening as well, with Chart 5 showing that

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Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
MANUFACTURING SOUTH AUSTRALIA’S FUTURE

currently), with the sector’s output falling by a   CHART 4
                                                    SOUTH AUSTRALIA’S UNEMPLOYMENT RATE
proportionate amount over the same period.

And those data points are yet to reflect the
                                                                8.5
latest round of trials and tribulations now that
Holden’s car making operations have closed.                     8.0
                                                                7.5
However, and despite the well-documented
struggles of manufacturing in the South                         7.0
Australian economy, this sector still comprises                 6.5
a significant share of economic activity. Chart
                                                                6.0
6 shows the share of jobs and of output
accounted for by manufacturing in the South                     5.5
Australian economy.                                             5.0
Despite all the years of doom and gloom,                        4.5
manufacturing still accounts for around one
                                                                4.0
in 11 jobs here. Furthermore, with a more                          2001          2003          2005          2007         2009        2011        2013   2015   2017
supportive currency in recent years, the pace
of the drop-off in manufacturing intensity          Source: Australian Bureau of Statistics, Deloitte Access Economics.
in the economy’s job base has slowed
                                                    CHART 5
significantly.                                      SOUTH AUSTRALIA’S UNEMPLOYMENT RATE LESS THE NATIONAL RATE (SMOOTHED SERIES)

                                                                        2.0
“Despite all the years                                                  1.5
                                                                                South Australian unemployment higher than Australia

of doom and gloom,                                                      1.0
manufacturing still
accounts for around                                                     0.5

one in 11 jobs here.                                                    0.0

Furthermore, with                                                      -0.5
                                                                                South Australian unemployment lower than Australia
a more supportive                                                      -1.0
currency in recent
years, the pace                                     Source: Australian Bureau of Statistics, Deloitte Access Economics.

of the drop-off in                                  CHART 6
                                                    SOUTH AUSTRALIAN MANUFACTURING; SHARE OF STATE ECONOMY AND JOBS
manufacturing
intensity in the                                                 15%
                                                                                               Economy share                     Employment share
                                                                 14%
economy’s job base has                                           13%
slowed significantly.”                                           12%
                                                                 11%
                                                                 10%
Chart 7 makes explicit the importance of the                      9%
exchange rate for the state’s manufacturers.                      8%
As the Australian dollar rose (making imported                    7%
manufactured goods cheaper and our exports                        6%
less competitive), manufacturing jobs fell                        5%
from around one in eight of all jobs in South
Australia at the start of the mining boom, to
around one in 11 today.

                                                    Source: Australian Bureau of Statistics, 2016-17 as estimated by Deloitte Access Economics.

                                                                                                                                                                         7
Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
TRENDS NOVEMBER 2017

However, as the Australian dollar has fallen        CHART 7
                                                    SOUTH AUSTRALIAN MANUFACTURING EMPLOYMENT AND THE AUSTRALIAN DOLLAR
from its 2012 peaks, the drop in the job share
has eased back somewhat, as manufacturers
have benefitted from a currency tailwind                        Manufacturing jobs out of total in South Australia                     $A/$US
                                                               12                                                                           1.2
against the ongoing structural challenges.
                                                               11
That said, those ongoing challenges explain
                                                                                                                                              1.0
why the jobs ratio simply held steady, rather                  10
than improved, despite what has been a pretty                    9
                                                                                                                                              0.8
large fall in the currency in recent years.                      8
And nor is the long since flagged closure at                     7                                                                            0.6
Holden the only devilry of the moment. Power                     6
prices are problematic in South Australia,                                                                                                    0.4
                                                                 5
and they’re particularly problematic for                         4
                                                                                                                                              0.2
manufacturers.                                                   3
                                                                                      Manufacturing jobs     Exchange rate
Energy sapping                                                  2                                                                           0.0
A sharp rise in energy prices in recent years                  2001-02             2004-05     2007-08     2010-11      2013-14      2016-17
has exacerbated the structural challenges
faced by manufacturers. Australia is amid           Source: Australian Bureau of Statistics.

an energy price crisis; reflecting a myriad of
                                                    CHART 8
factors such as LNG export contracts, changes       AVERAGE RESIDENTIAL ELECTRICITY PRICES (CENTS PER KILOWATT HOURS)
in energy policies and strategies, and bans
on onshore gas production in some state and                       Retail electricity price (cents/kWh)
territory jurisdictions.                                          50
Manufacturers as a whole are hit particularly                               NSW          SA         QLD           VIC
                                                                  45
hard by rising energy costs because they                                    WA           ACT        NT            TAS
tend to be more intensive users of energy                         40
than other industries. The Department of
Industry estimated that, as at 2012-13, the                       35
manufacturing and construction sectors
accounted for 15% of Australia’s economy                          30
and 27% of total final energy consumption;
indicating an energy intensity of almost                          25
double the national average.
                                                                  20
Indeed, South Australia was predicted to                            Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17
overtake Denmark as having the world’s
most expensive electricity after major energy       Source: Bruce Mountain, CME Australia.
retailers increased their prices in mid-2017,
and some estimates (see Chart 8) suggest that       “We’ve got this enormous headwind in                    announced measures of its own.
since that happened, the typical household in       front of us with energy costs. Nearly every             Composition of manufacturing in South
South Australia is paying more than the typical     company that reported in the past earnings              Australia
household in any other OECD country.                season had a figure in the millions (for rising         Holden manufacturing may no longer be a
To delve into the intricacies of energy policy      energy costs). Brickworks has a $20 million             hallmark of the state. But exactly how big is
is beyond the scope of this report, but it is       adjustment to make. We’re so uncompetitive              – or was – car making as a share of the wider
apparent that high energy costs are worsening       in our labour rates and now we’ve got higher            manufacturing sector?
our competitiveness compared to overseas            energy costs that hurt manufacturers.”
                                                                                                            Detailed job data can yield insight into the
manufacturers. In the worst case scenario, this     If there’s any good news on this front, it’s            composition of manufacturing activity in the
could manifest itself in a further contraction      that the issue has become sufficiently dire             South Australian economy. Chart 9 shows the
in output and in jobs as firms exit the industry.   that it is achieving real attention. The Federal        shares of manufacturing employment in South
Brickworks’ Chairman Robert Millner summed          Government has announced a $2 billion                   Australia accruing to the relevant parts of the
up the competitive pressures:                       extension to the Snowy Hydro scheme,                    sector.
                                                    while the South Australian Government has

8
Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
MANUFACTURING SOUTH AUSTRALIA’S FUTURE

In terms of notable trends:                           CHART 9
                                                      SOUTH AUSTRALIAN MANUFACTURING SECTOR; EMPLOYMENT SHARES BY SUB-INDUSTRY
• Food and beverage product manufacturing            100%
                                                       100%
  has been increasing as a share of total jobs;      90%
                                                       90%
                                                        100%
  from around one in five manufacturing              80%
                                                       80%
                                                         90%
  sector workers back in 2001-02 to around           70% 80%
                                                       70%
  one in three in 2016-17. Due to the quality        60% 70%
                                                       60%
  and proximity of our farm produce (such            50% 60%
                                                       50%
  as grapes for wine production), this part of       40%
                                                       40%
                                                            50%
  the wider manufacturing sector is relatively              40%
                                                     30%
                                                       30%
  more shielded from offshoring forces.                     30%
                                                     20%
                                                       20%
                                                            20%
• Transport, equipment and machinery                 10%
                                                       10%
                                                            10%
  product manufacturing, which includes car            0%
                                                        0%
                                                              0%
  making, has been falling as a share of total
  jobs; from around one in three workers in
  2001-02 to around one in four in 2016-17.
                                                           Primary
                                                              Primary
                                                                    metal
                                                                      metal
                                                                 Primary  andand
                                                                         metalfabricated
                                                                               andfabricated
                                                                                           metal
                                                                                    fabricatedmetal
                                                                                                 product
                                                                                               metal product
                                                                                                     product              Non-metallic
                                                                                                                            Non-metallic
                                                                                                                           Non-metallic mineral
                                                                                                                                          mineral
                                                                                                                                        mineral product
                                                                                                                                                   product
                                                                                                                                                product
• Petroleum, coal, chemical, polymer product               Petroleum,
                                                              Petroleum,
                                                                       coal,
                                                                          coal,
                                                                 Petroleum,  chemical,
                                                                                chemical,
                                                                             coal,     polymer
                                                                                           polymer
                                                                                   chemical,     andand
                                                                                             polymer  rubber
                                                                                                     and rubber
                                                                                                             product
                                                                                                         rubber product
                                                                                                                product   Printing
                                                                                                                             Printing
                                                                                                                           Printing(including
                                                                                                                                       (including
                                                                                                                                    (including thethe
                                                                                                                                               the  reproduction
                                                                                                                                                       reproduction
                                                                                                                                                   reproduction ofof recorded
                                                                                                                                                                      of recorded
                                                                                                                                                                   recorded    media)
                                                                                                                                                                                  media)
                                                                                                                                                                             media)
  manufacturing has seen its share of jobs                 Wood Wood
                                                             Wood
                                                                pulp, pulp,
                                                                   pulp,
                                                                      paper paper
                                                                         paper    andconverted
                                                                             andand   converted
                                                                                  converted     paper
                                                                                            paper
                                                                                                paper product
                                                                                                   product
                                                                                                      product              Textile,
                                                                                                                          Textile,  leather,
                                                                                                                             Textile,
                                                                                                                                   leather,  clothing,
                                                                                                                                       leather,
                                                                                                                                             clothing, footwear,
                                                                                                                                                clothing,
                                                                                                                                                        footwear,furniture
                                                                                                                                                           footwear,       and
                                                                                                                                                                   furniture
                                                                                                                                                                      furnitureother
                                                                                                                                                                             andand
                                                                                                                                                                                 other
                                                                                                                                                                                     other
                                                           Food, Food,
                                                              Food,    beverage
                                                                 beverage
                                                                    beverage
                                                                           andandandtobacco
                                                                                      tobacco
                                                                                tobacco       product
                                                                                          product
                                                                                             product                       Transport
                                                                                                                          Transport  equipment,
                                                                                                                             Transport
                                                                                                                                     equipment, machinery
                                                                                                                                       equipment,
                                                                                                                                                machinery and
                                                                                                                                                           andequipment
                                                                                                                                                   machinery  and
                                                                                                                                                               equipment
                                                                                                                                                                  equipment
  contract significantly, from over 8% in
  2001-02 to around 3% in 2016-17. This
                                                      Source: Australian Bureau of Statistics.
  likely reflects the end to oil refinery activity
  in Australia and Asia’s continued rise in
  capability in this space.                           store. Employment in transport, equipment                           the time of the 2011 Census) was 3,119,
                                                      and machinery product manufacturing can                             with parts making accounting for a further
So car making (or more broadly, employment            be expected to continue to fall away with                           3,401 people. This ratio of roughly one to
in transport, equipment and machinery                 Holden’s recent closure.                                            one indicates that job losses in car parts
product manufacturing) has itself been a                                                                                  manufacturing, depending on how reliant this
shrinking share of manufacturing, whereas             Indeed, the recent closure of car
                                                                                                                          industry is on local car manufacturing, may be
other parts of the sector, such as food and           manufacturing will hurt car parts
                                                                                                                          significant as well.
beverages, have done rather better.                   manufacturing as well. In a past Trends article,
                                                      we noted that direct employment in the car                          On the other hand, food and beverage
Looking ahead, there’s more of the same in            manufacturing sector in South Australia (at                         manufacturing employment has been

                                                                                                                                                                                             9
Trends Manufacturing South Australia's future - Advanced technology underpins the state's industrial prospects - BankSA
MANUFACTURING SOUTH AUSTRALIA’S FUTURE

manufacturers to grow and invest. That’s a      CHART 10
                                                SOUTH AUSTRALIAN DEFENCE INDUSTRY
reminder that the manufacturing industry is
the beneficiary of a strong accumulation in
human capital. Defence manufacturing has                   35%
been the historical counterpart to automotive
                                                           30%
manufacturing in South Australia.

Given this, South Australia is well placed to              25%
receive further manufacturing investment.
In addition, the industry is poised to                     20%
receive ongoing opportunities in defence
                                                           15%
manufacturing in coming years, thanks to the
Federal Government, while there are also
                                                           10%
great opportunities in advanced (or hi-tech)
manufacturing in coming years.                               5%

                                                             0%
“South Australia is                                                       National economy           Defence businesses       Defence spend
well placed to receive                          Source: Australian Bureau of Statistics, InvestSA.

further manufacturing                           up (with North Korea at the forefront at the                 announcing the successful designer for the
investment. In                                  moment, though the South China Sea has also                  Future Frigates in 2018. Three designers (BAE

addition, the industry                          been a source of concern) Federal defence
                                                spending as a share of total spending is, if
                                                                                                             Systems, Fincantieri and Navantia) have been
                                                                                                             working with Defence since 2015 to refine
is poised to receive                            anything, likely to increase further – and                   their designs. The three shortlisted designers
                                                thereby provide more opportunities to the                    must demonstrate and develop an Australian
ongoing opportunities                           manufacturing sector in this state.                          supply chain to support Australia’s future
in defence                                      Partly in response to the recent challenges
                                                                                                             shipbuilding industry.

manufacturing                                   that South Australia has faced, the Federal
                                                Government announced the $50 billion
                                                                                                             So defence manufacturing looks set to be
                                                                                                             a good news story in South Australia going
in coming years,                                Future Submarines Program involving the                      forward. However, in contrast to the likes of

thanks to the Federal                           construction of 12 new submarines in
                                                Adelaide, securing thousands of jobs. French
                                                                                                             car making, it is far more volatile; depending
                                                                                                             on project-by-project outcomes. As a result,
Government, while                               shipbuilder Naval Group (formerly DCNS)                      the reliance on Federal Budget spending may
                                                has been chosen for the project over rival                   give defence manufacturing in South Australia
there are also great                            bids from Japan and Germany. The project is                  a more variable complexion.
opportunities in                                expected to result in an estimated 2,800 jobs
                                                                                                             To provide a reliable base of manufacturing
                                                being created, with 1,700 of them at the ASC
advanced (or hi-tech)                           plant at Osborne where the submarines will
                                                                                                             activity, it makes it even more important
                                                                                                             that South Australia continues to diversify
manufacturing in                                be constructed. These jobs will include naval
                                                architects, marine engineers, electricians and
                                                                                                             into other classes of manufacturing, such as

coming years.”                                  painters. A further 600 jobs are expected to
                                                                                                             advanced manufacturing.

                                                be created offsite, including mechanical and                 Advanced manufacturing
                                                electrical engineers, along with 500 in combat               Although definitions for it vary, advanced (or
Defence manufacturing remains a star for
                                                system integration.                                          hi-tech) manufacturing is generally accepted
this state
                                                                                                             as a sub-set of manufacturing industries
According to InvestSA, our state contains 25%   Defence manufacturing in Adelaide will also
                                                                                                             in which research and development is a
of Australia’s specialist defence businesses    benefit from the $35 billion Future Frigates
                                                                                                             significant proportion of revenues.
and is the beneficiary of 32% of the nation’s   Program. That program is currently the largest
defence spend. That makes South Australia       shipbuilding program of its kind in the world,               Industries which fit this criteria internationally
a defence powerhouse relative to the size of    according to Minister for Defence Industry,                  are pharmaceuticals, aircraft manufacturing,
our economy, as shown in Chart 10. And with     Christopher Pyne. Construction is on track to                professional and scientific equipment
geopolitical tensions in the region heating     begin in 2020, with the Federal Government                   manufacturing (including medical

                                                                                                                                                            11
TRENDS NOVEMBER 2017

technologies), and computer and electronic       precinct, with a strong focus on defence           happening outside of manufacturing has been
manufacturing.                                   electronics, systems development and               good.
                                                 integration.
In a global market, commercial success for                                                          For manufacturing itself, yes, there’s been
Australian manufacturing companies relies on     In addition, South Australia already has a         a number of challenges and a continued
being the world’s best; otherwise customers      notable presence in terms of advanced              decline in manufacturing output and jobs. An
will simply move to better offerings. In         medical manufacturing. This form of                elevated Australian dollar put pressure on an
high technology fields, unique offerings,        manufacturing encompasses several areas            industry already in structural decline across all
whether due to patents or otherwise,             such as medical devices, pharmaceuticals           advanced economies. That double-whammy
provide businesses with economic moats.          and medical life science products. The new         has seen a range of high-profile casualties,
This can be contrasted with the production       Royal Adelaide Hospital development, in            with Holden’s recent closure being the last
of a basic good, such as a t-shirt, which can    conjunction with the South Australian Health       reminder of that.
be manufactured at a fraction of the cost in     and Medical Research Institute (SAHMRI)
                                                                                                    Even now, as macro-economic settings have
Asia. So the field of advanced manufacturing     facilities, forms the backbone of one of the
                                                                                                    become more favourable (with a lower
provides a more level playing field for higher   largest health and biomedical precincts in the
                                                                                                    exchange rate and low interest rates), the
cost, developed economies to play on.            southern hemisphere.
                                                                                                    state’s manufacturers are battling an energy
In effect, ideas rather than cost become the     With over 100 businesses in advanced               price headache.
crucial component of competitiveness.            manufacturing, medical devices and
                                                                                                    Yet there’s still room for genuine optimism
                                                 pharmaceuticals, South Australian technology
South Australia has a significant presence                                                          here. In terms of food manufacturing, we’re
                                                 companies export a range of high value
in terms of advanced manufacturing: it is                                                           benefitting from reduced trade barriers and
                                                 products. South Australia has a proud history
one of the South Australian Government’s                                                            an increasingly affluent Asian consumer. And
                                                 in this field, having developed the burner
‘Seven Strategic Priorities’. The $200 million                                                      South Australia has a great skills base and is
                                                 systems used in the Olympic torches, and the
Future Jobs Fund announced in the 2017-                                                             cost-competitive relative to other locations
                                                 leading micro pipettes for IVF used by fertility
18 State Budget also contains a strong                                                              in Australia. Our state is Australia’s defence
                                                 clinics worldwide.
focus on manufacturing, whether advanced                                                            manufacturing hub, and short term prospects
manufacturing or other forms.                    With a strong skills base and a competitive        will be boosted by the $50 billion Submarines
                                                 cost profile within Australia, South Australia     Program and the $35 billion Future Frigates
The key sectors listed are:
                                                 is uniquely placed to take advantage of the        Program.
1. Shipbuilding and defence;                     future growth opportunities in advanced
                                                                                                    Then there are emerging opportunities in
                                                 manufacturing. Attracting the best and
2. Renewable energy and mining;                                                                     manufacturing where advanced economies
                                                 brightest to come up with innovative
                                                                                                    can participate. Hi-tech, advanced
3. Tourism, food and wine;                       manufacturing solutions will be key.
                                                                                                    manufacturing will be increasingly IP
4. Health and biomedical research; and           And as we remarked in the introduction,            and capital intensive. That will erode the
                                                 Adelaide may find it easier to retain or attract   longstanding ‘labour arbitrage’ of low-wage
5. IT and advanced manufacturing.
                                                 budding professionals given that housing           manufacturing hubs overseas (particularly in
There is obvious potential here too. Adelaide    affordability has deteriorated significantly in    Asia), where manufacturing essentially relies
is already a bright spot for innovation, with    Sydney and Melbourne in recent years.              on doing things cheaper, rather than better.
Technology Park Adelaide comprising over
                                                 Final words                                        That opens the door for manufacturing in
85 co-located bioscience and technology
                                                 At the outset, it is worth noting South            South Australia, however we’ve still got to rise
companies, including global players such as
                                                 Australia has more strings to its bow than         to the challenge to step through it.
Optus, BAE Systems and Saab Technologies.
                                                 just manufacturing. And the news on what’s
The park is the state’s high-end technology

12
SA TRENDS

                                   !"#$%&'&                Source: ABS Cat. No. 9314.0
                 NEW MOTOR VEHICLE REGISTRATIONS - Trend

7000                                                                           105000
       South Australia       Australia
6500                                                                           97500

6000                                                                           90000

5500                                                                           82500

5000                                                                           75000

4500                                                                           67500

4000                                                                           60000

                              STATISTICAL SECTION
Trends November 2017

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