Manufacturing Industry Still Reeling Despite Weaker Dollar
The recent fall in the Australian Dollar has been welcomed by manufacturers after a challenging year for the industry however manufacturers will still need to endure tough conditions. Partner Domenic Calabretta and Senior Manager Duke Wolfgramm report.
The Aussie dollar recently fell to a 10 month low against the US dollar recently closing at US97 cents providing some relief for the industry’s export prospects.
In addition to unfavourable foreign exchange fluctuations, the manufacturing industry has been dealing with one crisis after another. This includes the hotly debated carbon tax and the uncertainty it has brought to the industry in terms of future job losses, investor confidence and cautious spending by businesses.
Higher interest rates coupled with an increase in wages and input costs continue to impact on profit margins and the well publicised skills shortage is another area which has yet to be resolved.
A review of the latest Australian Industry Group-PWC Performance of Manufacturing Index (“PMI”) only confirms the dire straits of the industry. The PMI provides a general indication of whether the manufacturing industry is expanding or contracting where a score above 50 points indicates expansion. For the month of August 2011 the PMI remained well below the 50 point level at 43.3. Over the last six months, the PMI has been recorded above 50 just once.
The PMI reviews the manufacturing industry across 12 subsectors, yet only two subsectors experienced expansions during August 2011 being food and beverage and clothing and footwear. In the past 6 months, several subsectors including textiles, food & beverages, transport equipment, paper printing and publishing and basic/fabricated metals have consistently recorded declines in activity.
Credit reporting agency Dun & Bradstreet have also recently downgraded its ratings for the industry citing that one in 10 businesses in the manufacturing industry may experience financial distress over the next twelve months. The agency defines financial distress as forced business closures (e.g. winding up) or external control (e.g. appointment of a Receiver and Manager or Administrator). Dun & Bradstreet’s ratings are based on each Company’s Dynamic Risk Score which is a general assessment of its financial position.
Even some of the so called bigger players in the industry are not insulated from the industry’s downturn with Bluescope Steel and OneSteel announcing thousands of retrenchments and redundancies for employees. A recent statement from the Australian Workers Union national secretary Paul Howes has likened the current crisis to the Great Depression.
Restoring sustained growth represents a significant challenge for the manufacturing industry and the government particularly during a time where there is continuing uncertainty both in the commercial and political environment.
For companies within the manufacturing industry, the writing is clearly on the wall. The companies that heed this warning by reviewing its operations with a view to boost business performance and improve profit margins might just survive the tough road ahead.
Suggestions for manufacturers to keep afloat
For manufacturers to stay competitive in the current market, they will need to look at new opportunities and solutions. Here are some key opportunities to consider;
Improve Cashflow -explore ways to create immediate liquidity through working capital managemement and cost reduction solutions
Business Performance Improvement -obtain external assistance that may add deep industry and functional experience to help the business improve its operations
Debt Restructuring - renegotiate favourable terms with creditors to keep a healthy and sustainable cashflow for the business
At Hall Chadwick, we can assist in exploring the above opportunities through our senior personnel and utilizing our extensive national and international network to help manufacturers in Australia navigate through difficult waters.
