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Published 06 September 2012 05:01, Updated 06 September 2012 05:52
“Manufacturing is dead”: this catchcry has sounded through the Australian media since the beginning of the global financial crisis. However, some companies are bucking the trend, proving that staying local can be beneficial – not only for branding purposes but for the bottom line.
For companies that compete on price alone, continuing to manufacture in Australia is a battle they cannot win. More than 100,000 jobs in the sector have been lost since the beginning of the global crisis and another 87,000 are poised to go as the high Australian dollar takes its toll on the market, the Prime Minister’s Taskforce on Manufacturing reports in its August paper Smarter Manufacturing for a Smarter Australia.
Since Australian clothing brand Bonds slashed its local workforce and took its manufacturing to China in 2009, scores of other companies have followed suit. This year alone, popular brands such as Heinz, Aerogard and Detol have closed Australian manufacturing plants in favour of making their products overseas.
Manufacturing is still important, however. It makes up about 8 per cent of gross domestic product and about 29 per cent of exports, the taskforce says.
And while many companies are suffering, there are still success stories that can be unearthed – particularly for niche and specialist manufacturers who claim that remaining local is more than a branding exercise – it makes good business since.
For Australian made and owned furniture manufacturer and retailer Jimmy Possum, having its bespoke items produced overseas has never been an option.
Although co-founder Alan Spalding says he could import a dining chair for less than it would cost to buy the timber used to make a Jimmy Possum chair, he would never cheapen the brand by manufacturing in China.
“We are not trying to compete with that mass market furniture,” co-founder Margot Spalding says. “We don’t compete on price with cheap product and don’t try to.
“If price is your only differentiator for gaining sales, then the outlook has always been grim. There is always someone who can do it cheaper.”
Staff from Jimmy Possum, a family business from Bendigo, Victoria, noticed the Australian manufacturing market changing more than a decade ago, when local retailers began favouring cheaper, foreign imports to locally made and sourced products. At the time the company – which was formed in 1995 – was supplying its furniture to local retailers.
“Australian furniture retailers deserted Australian manufacturers in favour of cheap Chinese imported product,” Margot Spalding says. “We saw it coming so we thought OK, we will open our own stores. So in fact, we have been benefited by retailers importing Chinese product … it forced our hand.”
Jimmy Possum now has nine stores throughout Australia and has trained about 70 apprentices in everything from carpentry to upholstery. Although it makes most of its products in Bendigo, Spalding says certain products such as rattan-made items, need to be sourced from overseas. “We say if it can be made in Australia, we will do it.”
For women’s clothing retailer Cue, manufacturing locally allows it to offer better-designed product in a more timely fashion to its customers.
Co-founder Rod Levis, who started the fashion label with his wife Lynette 44 years ago selling Beatles shirts, says his company’s margins are tighter and the amount of stock it needs to clear is minimised by having smaller production runs and working closely with 16 local factories.
“Our bottom line is very strong. We are a very lean business,” he says. “We still operate like we began – like we still only have two small stores in The Strand Arcade [in the Sydney CBD].”
His business operates in a unique niche, between the high-street fashion labels and high-end designer wear.
“We are not trying to compete with the high-street retailers,” Levis says.
“We sell for a higher price and we have a different customer.”
Cue chief executive David Kesby says many of the 16 factories the company works with manufacture exclusively for Cue. Many have also worked with the company for many years, making negotiating prices somewhat easier.
“We are lucky in a way, because they tend to do their own quality control,” he says.
While the Australian owned and made message works well for some companies, cleaning products company Pental – a subsidiary of Australian Securities Exchange listed company Symex –- has found that a slogan alone will not keep a company afloat.
Pental – which owns distinctive Australian brands such as Lux Soap, Velvet Soap and White King and manufactures about 80 per cent of its products locally – came close to collapse by relying on the heritage and good name of its 100-year-old Australian-made brands.
Pental chief operating officer Charlie McLeish – who has restructured the business – says local manufacturers today need to rely on more than just the Australian-made label to survive. Its parent company, which is undertaking a capital raising, has had its own public struggles and experienced an ASX trading halt and management overhaul this year.
“We relied heavily on the heritage of our 100-year-old brands. We thought everyone knew us and we were too scared to change,” McLeish says.
“We are the last of the big manufacturers in this space [in Australia] … but we had to change or we would have gone under. We had to look at different ways of doing things.”
Pental has factories in the Victorian regional town of Shepperton and Port Melbourne but high-tech products that Australian factories do not have the technology to produce come from Asia and Europe. McLeish says his company could make a bar of soap from palm oil in China for about 10 per cent less than it costs to make in Australia but the product would most likely suffer.
McLeish, who has been in the role for 12 months, is attempting to restructure the brand to meet new market demands. He has implemented a flat management structure, removing “unnecessary layers” in the business. Sales staff now report directly to him and he reports to the chief executive. The company has about 100 employees, including head office and factory staff.
When supermarket chains Woolworths and Coles recently dumped Pental’s Huggie fabric softener, some company insiders were quick to criticise the retailers, however McLeish says Pental was to blame.
“We didn’t want to change,” he says. “We didn’t innovate ... we were terrified to.”
Cost savings from the Pental restructuring have been directly invested into product development and innovation, McLeish says.
As a result, new products have been created to cater for the Gen Y and Gen X market, such as gentle “greener” cleaning products and goats milk products and high-tech products that are new to the market. Old heritage brands, such as Velvet Soap have been re-branded for the 21st century.
Pental has expanded its sales changes to the industrial and pharmaceutical sectors, as well as to the traditional supermarket retailers and has appointed agency Gray Advertising to implement a new marketing campaign.
“In many ways we have to be better than our foreign competitors,” McLeish says. “You need to have a quality product, bring value to the customer, have a story and be seen as innovative, too. You have to keep moving and have more tricks up your sleeve.
“You need to have a point of difference to survive in the market and if you go offshore, then you’re just like everyone else. What is the point of difference then?”
As for the future of manufacturing in Australia, organisations such as the Australian Companies Institute Limited (trading as AUSBUY) – which represents Australian-owned businesses – say the federal government needs to balance the tax incentives given to foreign companies that pay less tax, with the needs of local manufacturers.
Chief executive Lynne Wilkinson says Australian businesses are competitive, however there are few of them left due to business pressures.
“We [the federal government] subsidise foreign-owned car companies but have little support for the small to medium-size component part makers who supply the big companies,” she says.
AUSBUY suggests manufacturers can achieve better results by investing in new equipment to improve productivity and reduce costs, as well as operating factories on a treble shift basis so the overhead portion of the product cost can be reduced.
It says managers should also examine the company structures of factories to improve productivity – using machines rather than labour – develop an innovative culture and invest in marketing.
“Increased mechanisation may ... lead to job losses but should, in the long term, result in increased job security,” AUSBUY chairman Michael Gallagher says. “It is not an easy decision for any of the stakeholders ... but represents a better prospect than sending production overseas.”
As companies struggle to source products locally, the federal government appointed manufacturing taskforce has released 41 recommendations aimed at reviving the ailing manufacturing sector.
Key recommendations of the Smarter Manufacturing for a Smarter Australia report involve a reduction of the tax and regulatory burdens facing companies, the creation of “innovation hubs” and more partnerships between the public and private sectors.
Australian Industry Group chief executive Innes Willox says the formation of a manufacturing leaders group to help implement the recommendations will give rise to new ideas and encourage better communication between industry, government and the unions.
“While the sector faces a unique coincidence of global, structural and cyclical pressures, the report proposes that Australia capitalise on its considerable strengths and builds new sources of strength to position the sector to take advantage of emerging opportunities,” Willox says.
“Without such an agenda we risk travelling further down a path that would leave us more vulnerable to commodity price fluctuations and more exposed to a reliance on the export of a handful of commodities to a handful of countries.”
Others aren’t so convinced.
“Our wages simply can’t compete,” Jimmy Possum’s Spalding says. “But then the creative maker in me says we can produce great product … boutique product.
“So maybe Australia’s future is in highly creative boutique manufacturing.”