A perfect storm of international and domestic pressures has taken its toll on Australia’s ailing manufacturing sector.
While the Australian economy has been sluggish across the board over the past 12 months, manufacturing has been particularly hard hit, Australian Industry Group Head of Research and Economics Jeff Wilson said at a webinar exploring our annual Manufacturing in Australia performance and outlook report.
The impact of global energy market volatility and trade challenges has been compounded by skills shortages, rising costs and declining productivity, Dr Wilson said.
“Navigating these issues makes it difficult for manufacturers to take a longer-term view on investments in technology and workforce upgrades that would contribute to an uplift in productivity.”
“Manufacturing is very much alive today in Australia,” Australian Industry Group Head of Industry Development and Policy and webinar host Louise McGrath said.
“It's about 5% of Australia's GDP and employs nearly a million people.
“Unfortunately, many people think it’s dull, dirty and dangerous. However, I like to say it's digitalised, diversified and, increasingly, decarbonised.”
“The bottom line for our report is that 2024 has been a pretty tough year for Australian manufacturing,” Dr Wilson said.
“The industry enjoyed a post-pandemic boom as the Australian economy reopened and public health controls came off, and there was an unleashing of suppressed economic activity resulting from Covid lockdowns.
“Unfortunately, that ground to a halt in 2024, and the industry fell into a recession in the middle of last year.
“While the food and beverage industry eked out a low 1% growth rate over the past 12 months, all the other branches are seeing declining output and, in some cases, by significant percentages.
“We've seen weak business conditions across other industrial sectors, but manufacturing is especially affected, owing to rising price pressures.
“Since the pandemic, the costs of manufacturing inputs have risen by 32.4%, which is significantly higher than the background inflation rate of 19-21% in Australia for consumer and industrial goods.”
This is largely related to international trade global supply chain pressures.
An especially pertinent factor for manufacturing hardship is the price of energy, particularly gas.
“Over the past five years — since the pandemic — gas import prices are up 49%, and for branches of manufacturing that use significant amounts of gas, this has been a huge addition to the cost base,” Dr Wilson said.
“That's very hard to pass on to other consumers.”
Manufacturers have also struggled with labour and workforce shortages, particularly for technical trades and professional roles.
The manufacturing workforce is increasingly digitised, diversified and high tech.
About half (56%) of the manufacturing workforce is comprised of those higher skilled roles — a much higher rate than in many other comparable industries.
“Manufacturers tell us they struggle to find all kinds of trained and skilled workers to fill roles in their business,” Dr Wilson said.
Tariffs imposed by the Trump administration will continue to be a significant issue over the next 12 months.
“You may be affected even if you're not an exporter to the US, because many other countries around the world, particularly China, and some in Southeast Asia, like Vietnam, are also facing steep tariffs,” Dr Wilson said.
“This will have the effect of locking some of their manufacturing exports out of the US market. In the short term, that product will need to go somewhere else around the world.
“It means manufacturers who aren't exporting still might be competing with imports in the local market.
“This would be particularly true for the metals industry and some parts of the chemicals sector.
“It's hard to assess the impact on Australian manufacturers, because the US is still negotiating these reciprocal tariffs with countries around the world, but it certainly means there's going to be a lot of additional trade barriers and pressure over the next 12 months.”
The issues all point to longer term challenges with productivity in the Australian manufacturing industry.
“It’s well-known Australia's productivity performance has been fairly poor over the past decade,” Dr Wilson said.
“The overall productivity of manufacturing today is 1% lower than it was 10 years ago.
“If you measure it just in terms of labour productivity — so, how many dollars of output are produced per hour worked in the industry — that's down by 3.7% over the past 10 years.
“The manufacturing figures compare poorly to the national average for Australia, where overall productivity rose by 4.7% over the same period.
“We’re not going to be able to keep up with the international frontier if we're not able to raise our productivity over the long run.”
These themes resonate with global multinational chemical manufacturing company Dow.
Fellow webinar panellist Karen Dobson, Managing Director of Dow Australia and New Zealand, said: “We have a manufacturing site in Geelong, but we also import products from our global operations, which we distribute locally.
“What we've seen broadly for our business in the recent few years is soft demand, driven by global macroeconomic and geopolitical conditions.
“Here in Australia, we've seen a significant increase in our input costs, mainly energy.
“We've also seen increased competition from China imports, owing to the tariff environment and overcapacity.
“These issues are collectively putting pressure on our pricing and, ultimately, on margins — so, very challenging conditions in terms of cash flow.”
The three most significant factors impacting Dow’s business in Australia are energy (gas, in particular), regulation and industrial relations.
“Our industry is particularly exposed to gas pricing because we use it as a feedstock, not just as an energy source,” Ms Dobson said.
“I would even be so bold as to say the gas market is dysfunctional, at least on the east coast of Australia.
“Despite what should be a competitive advantage for Australian businesses, domestic gas users essentially remain locked out of affordable and reliable supply.
“Market interventions have not been successful. Compared to 10 years ago, industrial gas users are contracting gas pricing at roughly almost four times what it was 10 years ago.
“That’s a significant structural disadvantage and a hit to our competitiveness.
“If we don't address the high cost of energy and, in particular, gas, much of the industrial manufacturing in Australia will become unviable.”
Unnecessarily complex, duplicative and overly burdensome regulation is an indirect additional cost to business, Ms Dobson said.
“It also disincentivises investment as it increases uncertainty and delays projects,” she said.
“A balance needs to be restored, in terms of the complexity and additive nature of regulation.”
Labour and raw materials are the two major input costs for Dow.
“Australia needs a modern and balanced workplace relations system that lifts performance, encourages flexibility and allows wages to increase with productivity,” Ms Dobson said.
“I think we'd all recognise R&D commercialisation as a powerful lever to drive productivity, and manufacturing is investing above its weight in this area,” Ms Dobson said.
Ms McGrath added: “There’s a common misconception that research is confined to universities, but the manufacturing industry does the most important part, which is the development or commercialisation.”
The most recent nationally comprehensive data for business R&D spending showed manufacturing spent about $5billion dollars on R&D in Australia, which, in dollar terms, makes it the second biggest generator of R&D in Australia, behind the professional scientific and technical industry.
“If we calculate this number in terms of the reinvestment rate — so, how much of the value added from manufacturing gets reinvested back into R&D — the rate is 4.2%,” Dr Wilson said.
“So, for every dollar the manufacturer makes, they put four cents in the dollar back into R&D and development activities. That's the highest rate of any industry in Australia and four times higher than what we're getting across the rest of the Australian economy.”
One of the reasons for this is trade exposure.
“Australian manufacturers are either competing with imports or trying to compete in third markets as an exporter,” Dr Wilson said.
“In either case, you've got to be at the cutting-edge. Manufacturers need to keep their products up to date with the world standard.
“In many cases, because we are a high-skill, high-cost manufacturer, you have to be even ahead of the curve. The Australian product needs to be better to be able to compete, and we also need to innovate our processes.”
“There is broad agreement between industry and government of the need for productivity and competitiveness improvement,” Ms Dobson said.
“Moving beyond the doom and gloom, this is a great opportunity for the manufacturing sector.
“We have an opportunity to explain to the regulators and government why manufacturing is so important to our country.
“It's not about sovereign self-sufficiency, it's more about economic security, resilience, and importantly, it's the value-add kicker to drive up productivity.
“Clearly, manufacturing in Australia is facing tremendous headwinds, but there are reasons to be optimistic.”
Australian Industry Group’s report on manufacturing explores the industry’s unique strengths and challenges with analysis of key performance factors such as economic and demand conditions, cost pressures, trade exposure, workforce needs and investment.
Our Chief Executive, Innes Willox, has been invited to represent industry at an economic reform roundtable to be convened by Federal Treasurer Jim Chalmers next month to address national productivity issues.
The Federal Government is launching an inquiry into the performance of the R&D ecosystem. In our submission, we urge the panel to place commercialisation at the centre of any reform agenda.
Members can keep up to date on the rolling set of announcements on the application of tariffs on imports into the US.
Wendy Larter is Communications Manager at Australian Industry Group.
A former journalist for newspapers and magazines including The Courier-Mail in Brisbane and Metro, the News of the World, The Times and Elle in the UK, she is passionate about giving businesses a voice.
