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Innovation and streamlining a necessity for survival in parts manufacturing

Private Matters, December 2012

Deloitte | Private MattersDamon Cantwell, Deloitte Partner, says a hard conversation has to take place between government and an industry under pressure.

“A few years ago if you wanted a stamped metal part in Australia you might have 12 different companies you could source it from,” Damon Cantwell estimates. “Now, with companies going out of business, jobs being lost and workers’ entitlements not being able to be met, the inevitable re-structuring from that situation is taking place.”

Nonetheless that’s what Cantwell says is both inevitable and necessary.

“The grim current situation in automotive parts manufacturing is an indication of the streamlining we do need through the supply chain; it is the hard way at the moment and there are certainly some mechanisms that could be put in place to try and smooth the process.

“But if you look at any benchmark in the auto industry around the world, then 180 companies making parts for only 230,000 vehicles manufactured locally is far too many.”

Cantwell agrees that it is politically very tough for the government to say to suppliers who have been receiving benefit under what is now called the Automotive Transformation Scheme for a number of years that those benefits are going to be no longer available.

(The current arrangements are part of a Federal government package of more than $5 billion for the industry over 10 years with assistance directed at the car manufacturers as well as the 180 component companies in the Australian sector).

“There is a very difficult conversation to have and I liken it to 25 years ago when John Button faced about nine car manufacturers at that stage. I think Button actually had enormous foresight suggesting back then that only three or four were sustainable.

“We are probably looking at a similar approach to the supply chain. For a current government to go down that path, they could go through a transition program with those suppliers – it wouldn’t be appropriate to turn the tap off over night.

“If there were suppliers that were either deemed to be too small to receive those benefits or suppliers where their future in the automotive space in Australia was questionable, you would probably be looking at 2- or 3-year transition process in regard to the benefits that they are receiving at the moment,” Cantwell says.

In recent months Cantwell has suggested streamlining the industry to 80 to 90 suppliers to increase the volume individual companies are making, reduce duplicate activities across similar companies, and make the sector more cost effective.
“Part of the latest automotive Federal government program – the New Market Initiative they are calling it – is actually to try and encourage suppliers to innovate to gain a foothold in new industries beyond automotive and export markets.

“Individual automotive suppliers have a much greater chance of long-term survival if they are selling into rail or mining or aerospace as well as automotive,” he says.

In specific response to the recommendations from the recent PM’s Manufacturing Taskforce paper, Cantwell suggests the automotive sector has set a good example to Australia manufacturing with the Automotive Supplier Excellence Australia (ASEA) initiative which sees around 60 of Australia’s automotive component companies maintaining involvement with the program for more than five years.

He says the ASEA initiative’s longevity is rare but an essential model in developing the management mindset that survival in Australian manufacturing must be about embracing innovation and change.

Cantwell says the other area government should consider in developing its response is that of inwards investment attraction.

“With $US350 billion in footloose global manufacturing investment forecast over coming years, Australia must be active in putting itself forward as a viable destination for the type of manufacturing investment that will be sustainable in the long term.  And on this point, almost everyone agrees that this is high-value add activity.

“There has been much discussion over the years around Australia’s capability as a location for niche manufacturing involving short runs. This undoubtedly has its place, but many of the current issues facing manufacturing can be addressed through an injection of greater volume at the top end of the supply chain. This gives other local manufacturers more business to bid for, and makes them less reliant on government support.”

For Cantwell a key part of the investment attraction story involves government working closely with Australia’s impressive list of multinational manufacturers to understand what their internal investment pipelines look like, and how they can work together to support local management in making bids to their global parent companies.

Once this dialogue is initiated, he says, it will quickly emerge that this is not solely a story about throwing money at manufacturers, but more about positioning and facilitating support.  

“There are not enough of these conversations currently taking place in the Australian manufacturing industry.

“We must also convert some of the excellent work that has been done around industry road mapping and planning and taking the next step of using this as a guide to where we should be positioning for new inwards investment projects,” he recommends.
Cantwell cites the Automotive 2020 Roadmap as key example, highlighting the areas within the sector that will be most sustainable for Australia over the next 10 years and beyond – and effectively providing a blueprint for developing the sector.  

“The Taskforce members have provided the government with a broad menu of options to support the consolidation and development of the Australian manufacturing sector.  In its response, it is crucial that the government keeps an eye on ensuring manufacturers see a future for their individual businesses, and that government see a role for Australia as a destination for inwards investment,” he recommends.

For further information please contact:

Damon Cantwell 
Partner
Deloitte Tax
Tel: + 61 3 9671 7543
Email

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