Toyota’s announcement yesterday that it will shed 350 jobs at its plant in Altona has been blamed on the strength of the Australian dollar, which some commentators say is having a significant impact on the manufacturing industry’s capacity to remain globally competitive.
Minister for Manufacturing Kim Carr today ruled out government intervention to manipulate the value of the dollar. The Aussie was trading at $US1.05 this morning.
Professor Roy Green, the dean of business at the University of Technology, Sydney, argues that it’s not all doom and gloom. He believes the key to the industry survival’s depends on innovation and ensuring business models can adapt to the ebb and flow of economic change.
How has Australia managed to sustain a high exchange rate for so long?
In some respects, we have not been able to sustain it because as we’ve seen, some of the areas that are trade exposed — exporters or companies competing with imports — have had to downsize or, in some cases, go out of business. But largely — and perhaps surprisingly — many businesses have managed to make the adjustment. They’ve done so in many ways: some by reducing their margins; others by undertaking incremental innovation and quality improvement; and some — a minority perhaps — by reinventing their business model and introducing new technology and skills.
When you mention trade-exposed industries, you’re speaking of manufacturing, tourism?
Manufacturing, tourism, even retail to a degree, because as we’ve seen, retail is now exposed to the internet. A number of major retailers are beginning to complain. Many of those margins, historically, have been very high.
And to meet those margins, some companies have had to resort to cost-cutting measures, such as reducing labour?
Yes, in some cases. There are three responses. The first is cost cutting, by layoffs and downsizing. Another way is by improvements in quality, paying attention to lean methods of production.The third way is by overhauling the business model. Some companies have understood the business message and begun to apply it by thinking creatively.
Are there certain sectors in particular that have embraced the innovation message more than others?
Almost any sector can embrace that innovation message, whether they’re high-tech — areas like medical instruments — or whether they’re low or medium-tech, which is the bulk of Australian manufacturing. It also applies to services sectors such as tourism, who have to think of new ways of attracting people — they can’t just rely on price.
Australia is not unusual case in this respect. There are other countries that have experienced high exchange rates over many years — the Nordic countries, for example. They’ve learnt to operate in a high exchange rate environment and a high-wage environment by the way they undertake business and, in particular, by focusing on quality, design, branding, participation in global markets and supply chains. We can be good at these things too.
One should not underestimate the significance of design and branding. Countries like Denmark have made design the leading edge of their success and competitiveness in global markets.
What is the outlook for our exchange rate and, if it stays high, what are the long-term consequences?
The question that’s being asked is to what extent is the high dollar a temporary aberration. It could be, because it depends on the commodities cycle and, in the longer term, the dollar may return to the 75 to 80-cent mark, which would certainly improve the competitive position of many organisations and firms.
But we cannot be sure about this. It is a commodities cycle, and it will probably come to an end at some point — but we don’t know when. It depends very much on international factors, on how important our resources-based industries are to China and the emerging economies of East Asia over a long period of time.
But I don’t think we can bank on the high dollar being a temporary aberration. I think we have to make the adjustment now and assume that in the longer term, competitive conditions are going to be much tougher. This will be essential if we want to retain a balanced and diversified economy.
Experience around the world shows that constant innovation, strategic repositioning and organisational agility will be the key to success.
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Comments (10)
Iain Wicking
Director (logged in via email @gmail.com)
Agree with the other comments. It is very evident that 'Dutch Disease' is having a strongly eroding impact on manufacturing (and services) and the dollar value is having a negative impact . The figures show this.
In spite this evidence some economic 'commentators' insist that there is not a problem. Hardly, the mining boom is a very narrow one that benefits a small group in society - shareholders, Executives and the workers in that industry. The excess profits go to the shareholders with limited…
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Iain Wicking
Director (logged in via email @gmail.com)
Forgot to add that we currently allocate $6billion plus to subsidise non productive housing investment when that money could be better used to create a 'framework' that support innovation and manufacturing.
David Arthur
n/a (logged in via email @fastel.com.au)
Mitsubishi has its full electric MieV: isn't it about time the government withdrew all support for domestic car manufacturing, and used the funds on MieV production at Mistsubishi's mothballed Australian site?
Paul Regis
Business Analyst (logged in via email @live.com)
If the exchange rate was reflected fully in shop prices, then it may not be so bad. But, consumers don't see that currency benefit unless they import directly by transacting with overseas companies. That hurts domestic retailers. And if the domestic retailers really aren't making money from their high prices, then who is?
2 things on my mind:
1) interest rate differentials between Australia and Europe/US make the Australian Dollar attractive
2) the mining boom absorbs resource from other productive sectors of the economy. If over half Australian exports are mining related, then I fear any change in world resource consumption is going to be very painful.
Who knows, may be house prices will even collapse in the manner predicted?
William Raper
Mr. (logged in via email @optusnet.com.au)
As a retired Research Scientist (20 years with a multinational, then 25 with CSIRO), I have observed pluses and minuses from Government support of innovation. A few examples easily come to mind:
Australian Research has a proud record in universities and CSIRO - think Solar water heaters and Solar power generation, WiFi and the plastic banknote. Only one of these was developed into manufacture and sale in Australia, and this one was by an Australian controlled organisation.
Government handouts…
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Joseph Bernard
Director (logged in via email @parasoft.com.au)
Lessons are there for us to benefit from, Australia not the first to suffer from what is being branded as a “two speed” economy. Just google "Dutch Disease":
http://www.investopedia.com/terms/d/dutchdisease.asp#axzz1kMikrVur
or
http://en.wikipedia.org/wiki/Dutch_disease
High performing Australian companies have an artificial bias that is pushing them under ie the Australian Dollar. As pointed out, nobody is quite sure how long Australia can sustain this rate, but most people would hazard…
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Donncha Redmond
Software Developer (logged in via email @donncha.com)
"He believes the key to the industry survival’s depends on innovation and ensuring business models can adapt to the ebb and flow of economic change."
Isn't that just stating the bleeding obvious? If a car manufacturer hasn't figured that out in 2011 they have no business getting any assistance from the Govt.
When the Green Fund was announced to, allegedly, promote innovation all it did was pay for them to choose a different engine from within their empire and, for example, release a Commodore with *gasp* only FOUR cylinders, i.e: like cars the rest of the world has been building for 30-40 years!
Let's face it, it's wasted money.
wilma western
(logged in via email @bigpond.com)
Sorry to notice that agricultural exports and some locally processed foods don't rate a mention as industries adversely affected by the high dollar .
Iain Wicking
Director (logged in via email @gmail.com)
Good comment. Australian food producers are suffering also and we have the idiotic situation where the food retail duopoly (Coles and Woolworths) is importing food stuffs from overseas when high quality product can be sourced locally.
I read an interesting article about apple juice producers in the US. They have ripped up orchards as they cannot complete with imported Chinese apple juice. Reason - labour rates are next to nothing in China. But the thing that makes it economic is cheap oil costs so it is economic to ship to the US. When transport costs rise the global supply chain will dislocate.
Paul Regis
Business Analyst (logged in via email @live.com)
Some very good comments on this article. In theory the consumer benefits through paying less for imported things, but does society benefit? It depends what the collective does with the money it saved. Does it invest that spare cash to innovate? Or does it pump it into over-inflated property markets? Or does it just import even more?
Tried to get answers from www.dfat.gov.au Curiously little up-to-date info. Yes, mining is the major export, but interesting it has accompanied reductions in other export sectors, especially agriculture. So, Australia has re-biased its economy to mining and other productive sectors have experienced relative decay. The 'numbers' that politicians mention look good, because mining more than makes up for the loss elsewhere. The net wealth has both increased and moved to mining stakeholders and property. What a sad reality for the lucky country.