Manufacturing and A Future Made in Australia

Rebecca Archer
Welcome to Beyond the Numbers with Grant Thornton – a podcast exploring trends in business and the marketplace. 

I’m Rebecca Archer and today I am joined by Innovation Incentives Director – Simone Barker, specialising in Government Grants, and Michael Climpson, National Head of Manufacturing and a Partner in our Audit & Assurance team. 

As part of the Federal Budget in May, there was a clear focus for the Government of fostering a Future Made in Australia. The Government has committed $22.7b to facilitate investment to reinvigorate Australia’s sovereign manufacturing capabilities and firmly position Australia within the global economy. While this investment will have a transformative impact, how will it affect the manufacturing industry in practice and who will the money trickle down to?

Welcome Simone & Michael!

Michael Climpson
Thanks for having us.

Simone Barker
Thanks, Rebecca. Good to be here.

Rebecca Archer
Now, Michael, if we can start with you, firstly, what's your focus for manufacturing? And secondly, what does the manufacturing sector in Australia currently look like?

Michael Climpson
So, Rebecca, our focus is really on mid-sized manufacturers in Australia. So, mid-sized being $30m sales turnover up to about $600m. We do service either side of that, but that's sort of our focus area. It covers a range of different sub sectors of manufacturing, but really, it's just anything being made in Australia we're very supportive of and it's a sector we want to continue to stay strong in this country. 

In terms of your second question, how’s manufacturing been going? Well look, it's a good time to ask because there's a lot of interesting data coming out at the moment. Obviously, we've got the Budget that's come out. We have done our Grant Thornton benchmarking analysis, which is a unique data set that only we do. That one's almost finalised, but I do have the numbers at my fingertips so I can share some of those.

So, I might start with the PMI, which is the Purchasing Managers’ Index, which people are familiar with. It's really showing the level of production and how that's going. A measure of 50 is considered neutral, so neither growing nor declining, anything above 50 shows growth. 

From a global perspective that has come in at 52.6 – so pretty strong and sounding good for global production. So as global inflation is easing and I think that, you know, a positive sign, that'll flow down to most manufacturers. Australia by no means is a large manufacturer in the global sense. We're only a smaller player, and if you look at the Australian sort of PMI that's come in pretty close to neutral.

So, it’s 49.7 for May; it was 49.6 for April. So, it's sort of declining, but only by a little bit and there's some sort of positive signs in there. The employment index is neutral at 50. So, there was a period, I think, of about twelve months where Australian manufacturers were sort of, right sizing a little bit for demand and I think they're stable now. So, I think there's stable signs there, and as I said, as inflation is easing not just globally but domestically as well, I think the future, the outlook over the next twelve months – I'd say I'm on the optimistic side of that one, Rebecca.

Rebecca Archer
And Michael, what sort of businesses make up the manufacturing sector here in Australia? Given, as you say, we're not really one of the biggest global players when it comes to manufacturing.

Michael Climpson
If you look at our history, I mean, a big part of Australian manufacturing was automotive assembly, and that used to make up a larger percentage, and basically the total workforce employed by manufacturing in Australia was probably double that of what it is today proportionately, and a lot of that did come from those automotive assembly manufacturers, which have all shut down several years ago. 

But what's left is still manufacturing capability that fed into that and various others. So, there's no particularly dominant manufacturing. There's lots of different subsectors of manufacturing covered in the Australian market, and really what's left of resilient businesses. There was a shakeout over years following those closures and those manufacturers that sort of fed into that, and they've shown a certain amount of maturity and resilience. So, what I see is a pretty stable manufacturing industry in Australia – what's left? And now it's well positioned to keep growing. 

So, if I do reflect on what our benchmarking studies have shown for mid-sized manufacturers, they've achieved 7.7 per cent growth for the year, which is a very healthy growth number, and that really picked up over the last three years. It's kept climbing. We do think that'll sort of stabilise off; it'll probably fall back down to maybe 5 or 6 per cent. You know, it's achieving an average EBITDA of 10 per cent, which we think is a healthy return for shareholders and stable enough, but you do, Rebecca, you talk about the different subsectors, but we're sort of looking at it overall, saying, well, overall it looks quite stable and everything looks easy, but that's not the case.

It really does depend, you know, your customer as a manufacturer and what industry they're in and how they're going, and that dictates their demand and largely flows back to the manufacturer in their ability to have a good year. So, you know, our top ten performers were doing really well. They had 20 per cent sales growth, they had an EBITDA of 14 / 15 per cent. So really strong returns, and you look at that sales growth overall of 7.7 per cent, there's a lot of up and downs that make up that average of 7 per cent. 

So, you know, what we actually found was 40 per cent of all those mid-sized manufacturers were unable to achieve sales growth two years in a row. So, it seems reasonably stable overall Australian manufacturing, but it's not without its challenges.

Rebecca Archer
How has inflation affected manufacturing here in Australia?

Michael Climpson
It's another challenge. I think we keep throwing challenges at manufacturers and it never lets up. So, you know, energy costs over the last five years have gone through the roof, really, and they seem to be easing. But that's a challenging one because you're competing to some extent in a global market, and if only if Australian energy prices are increasing more than other countries, it just makes it that much harder to compete with imports. Freight costs are another big one, and that's adding to inflation. I mean, that went right up and that was a real challenge for manufacturers. But again, I feel that settled; that's come right back down. But that was coming off crazy high prices there for a while that were quite shocking for a number of manufacturers, how high that got.

Property costs in Australia are high, so that flows down as well. Whether you're buying and you're financing that, that comes at a cost or whether it's on a lease, the cost of holding those premises is going up and that's a harder one to pass on, and probably the main one, I think, from inflation, Rebecca, is with such high inflation that we've had, it's really forced the RBA to keep rising rates. I think we got to twelve in a row. So, we're at elevated sort of interest rate levels now, and that's a cost that will flow to the P&L for manufacturers. That's not a cost they can necessarily pass on, like the increased input costs of production that they pass on through pricing adjustments. 

Higher sort of cost to finance debt does put pressure on manufacturers. So that one, I think, is a big one. Also puts pressure on your ability to meet debt covenants and have that sort of safety net there, and the final one is probably just the impact on consumers. So, consumers are really feeling cost of living pressures, and that impacts the demand for products, and those products are made by Australian manufacturers as well. 

So inflation, it has come down, but we're still feeling the effects.

Rebecca Archer
And Simone, what about the skilled labor issue for manufacturing? Is this continuing to be an issue or a challenge?

Simone Barker
I think finding a strong and skilled workforce in Australia continues to be an issue for a number of businesses. Getting apprentices in the door and getting them trained up in those more traditional manufacturing sectors. A lot of our clients worry where the future of their workforce is coming from.

And then, of course, you know, aside from that traditional manufacturing sector, we're starting now to look at clean energy and the decarbonisation agenda, and that's all a very new manufacturing sector for Australia and one that we haven't historically participated in. 

So, yes, a lot of new skill will be required there, and sort of that old automotive workforce that Michael mentioned is a really good one that's transitioning with the changing manufacturing environment in Australia, and hopefully we'll be able to transition further into where we need them to be for the future.

Rebecca Archer
And, Simone, given your experience, what you're doing in the business, can you give us any examples of how clients who are, you know, relying on grants or submitting grants are maybe being affected at the moment?

Simone Barker
Well, grants obviously are a great support to industry and to the manufacturing industry particularly, and some of the grants are out there to help businesses in these times of inflationary pressure or industry transition, but certainly in terms of inflation, I've seen a number of clients that are dealing with this impact or being thought out by it as well. 

I mean, I had one client who submitted an investment proposal in late 2023. Grant programs are not fast moving, unfortunately. This particular one took about nine months to go through the two-stage process and review all the applications, and my client was successful in the end, which was great for them, but in that nine-month period, the budget that they put forward in relation to the grant funding had doubled, and that was, you know, cost of equipment, as Michael said, freight to ship, you know, the technology from overseas, construction costs are going up a lot, and that affected this green fields build and then the cost of land; they were purchasing land as well. 

So ultimately that project was double the cost of, you know, the proposal that they put in, and that almost saw the project unable to go ahead even with grant funding. So that's an issue. 

Another client I have is New South Wales based at the moment; they want to expand, but the cost of land in New South Wales is just so prohibitive that they're actually looking at South Australia now as an opportunity to purchase land at a more reasonable rate. So, yeah, we're definitely seeing these market forces materially impacting the businesses that we're working with.

Rebecca Archer
Are you able to speak to the importance of sovereign manufacturing in Australia and maybe explain why it's so crucial?

Simone Barker
Sovereign manufacturing capability, at its very simplest level, is making things onshore in Australia. So having the ability to do that. It sounds simple enough, but establishing this sovereign manufacturing capability is actually quite complex, particularly given those golden days of globalisation saw the lion's share of Australia's manufacturing sector move offshore. 

We tend to think about it as, okay, we'll build more manufacturing facilities. You know, let's say a battery manufacturing facility is a particularly topical example, but it's actually a lot more than that. It means having the supply chain in place onshore in Australia to service that one battery manufacturing facility. So that's all the components and inputs required to make that one product we have here. 

Aside from bricks and mortar, it’s that skilled labor force that we were just discussing, and that's needed across the whole manufacturing value chain. Aside from that, there's manufacturing technology, there's computing technologies, and that's around supporting efficient production. Again, as Michael mentioned, Australia needs to be able to compete on a global scale against manufacturing that happens offshore, and to do that, we need to be incredibly efficient to be able to manufacture at a price that's globally competitive.

Michael Climpson
I’ll add to what Simone said there. I think the starting point is the desire, right? The desire for Governments, for people, for business, to have things made in Australia. Now, if you think back to the lockdowns and people couldn't get the products they wanted, everyone started caring about where things were made right. So where did this come from? Why can't we make it? 

So, there's been a real shift in, I think, in the way people think about our own manufacturing capability here in Australia, and you've seen that. You've seen surveys where consumers are wanting things made in Australia, seeing Governments jumping on that and making statements saying they're supporting that, the actions, we'll wait to see them, but they're making statements. So, they're making good noise, and you’re hearing businesses would prefer, even if they're paying more, they would prefer to be buying locally and supporting that capability. So, I think you've had a shift in the thinking and the desire for Australian manufacturing. That's the big shift I've probably seen in the last three years.

Simone Barker
Yeah, I think that's absolutely right, that consumer demand, but we also have the geopolitical tensions that are coming in, too. So Covid – yes, we were having supply chain disruptions and consumers were looking for products manufactured here because they could get their hands on it. 

There's also the environmental and ESG aspect of people wanting to know where their goods come from, who's manufactured them, what the environmental impact is, but bigger than that, or running alongside that, and I think we'll get into that when we start talking about the Future Made in Australia Act – the geopolitical tensions that are building globally means that we are less sure of being able to access really key products that are coming from some of the major manufacturing centres around the world, such as China. 

So, when we're thinking about products that we're going to need for our future, namely renewable energy components like solar panels, wind turbines, the Government's really starting to think about, well, if we're not manufacturing them here, how can we be sure of getting a secure supply of those really pivotal pieces of equipment that we're going to need?

Rebecca Archer
From what you're both saying, I'm getting the real sense that manufacturing is a pretty vital component of the Australian economy. Just how important would you say that it is?

Michael Climpson
There's been studies done sort of saying any country over a long period of time that is successful economically, has a strong manufacturing capability. So that's sort of the broad picture and that's my view as well.

Simone Barker
The innovation as well, isn't it, Michael, that, you know, if you're a country that manufactures research, development, innovation, commercialisation and manufacturing can all happen here, as opposed to perhaps where we have been, which is having research and development done in Australia, but then no pathway for that commercialisation, and it's actually gone offshore and other countries have then been able to benefit from the commercialisation and the ongoing manufacture of really innovative products that we've come up with here in Australia.

Rebecca Archer
Do you think globalisation is as relevant as it used to be?

Simone Barker
The viewpoint of an economist, which I'm not, is that globalisation is really still very important, but I think that… I guess there's a bit of a, not a backlash, but a push against globalisation in terms of those political tensions that I mentioned earlier. It's becoming much, much more important now to think about making sure that we have what we need in Australia, and we are able to support our allies as well with supply chain and product.

Michael Climpson
Yeah, I think it's a fair point, Rebecca. I think it’s embrace globalisation with caution.

Rebecca Archer
Let's now talk about the Future Made in Australia. What's your take on this initiative?

Michael Climpson
Well, I guess the fact that we're talking about manufacturing is something important for us in Australia.

I love it. I love the fact that Governments care. They're making announcements, they believe they'll be politically popular. It's a sector we're passionate about. Therefore, you know, I'm very supportive once we get down to the detail of the how, you know, I'm more cautious and I think we need a bit more time. So, the headline number, it's a $22b investment as a starting point. Sounds great.

Simone Barker
Yeah, and I think you're right, Michael. You know, when we look at some of the detail and obviously a $22.7b investment, we can't go through line by line, but things like the critical minerals production tax incentive and another tax incentive for hydrogen production – we've got a really clear focus on this green energy and decarbonisation agenda, which I think is really important because we haven't had that clear support and direction for a long time, but those two incentives are not scheduled to start until FY28, and between now and then, if we look at the past five years and how much change has occurred, the frequency of change is increasing rapidly and we also have a federal election coming up next year. So, to be sure of how it's all going to roll out and when, they're really big questions still.

Michael Climpson
And as you say, Simone, you know, you've got critical minerals getting $7b of it. You've got the hydrogen production in a decarbonisation aspect for $7b. So, it's a big chunk of the $22b. 

They are tax incentives. So initially when the Future Made Australia was announced, you know, there's a lot of talk about well, how was it going to fund these industries? And I think talk of having an equity stake in a business, you know, from the Government or talk of Government loans. 

I think there's a fair bit of caution because business don't understand how they work and that it would raise a number of questions versus what they're used to, which is tax incentives. Business understand that, they know how to operate around that and within it, so I think a large part of it is tax incentives, which is probably a good thing.

I don't know of the remaining $8b, a $3b of that's funneled through ARENA, an organisation managing that renewable aspect and the actual Future Made in Australia fund is $2b of it, and then you've sort of got solar, $1b, batteries, $0.5b, and that kind of makes up the total. 

So yeah, look, I'm excited about the $22b number. I think Simone correctly points out we've got elections before then. So, the number sounds great and it may influence the election, but it's, you know, not necessarily a lock in. So, there's a bit of time to play through yet.

Simone Barker
Yeah, and I think, you know, we've seen previously with the Albanese Government, you know, they came to the 2022 election with the promises around the National Reconstruction Fund, and then very quickly thereafter started talking about the industry growth program, which is a grant program. 

But both these two supports for industry have actually taken quite a long time to actually be a viable use to businesses. So, the Industry Growth Program as an example, the grant stream of that program only opened early May this year, just before the Budget announcement actually. 

So if we think about businesses that were excited about the possibility of using that program for support just post the election win and announcements, which I think were made in early 2023, it's been a long time coming and now, like from my perspective, supporting businesses to access this funding, there's a huge backlog of demand and businesses are seeing really quite long wait times in terms of getting through the different stage gates of accessing that funding. 

So, some of the programs you mentioned through ARENA, which will be grant funding, they're still at industry consultation phase. The actual programs haven't been designed yet. So, it's probably a little while to wait before industry can actually make use of those programs.

Rebecca Archer
And of course it is a Federal Budget initiative. But are you aware of any State level programs that exist?

Simone Barker
Yeah. So as far as State level Government grant programs, yes, there are a number of different programs across the States. They obviously announced in the State Budgets and we haven't seen all of this year's State Budgets come out yet. 

But I think the really good news as far as State and Federal Governments is that there's really strong alignment between the policy agenda at both levels, which is good. So, I think states and Federal Government are working together in a way and that is really clearly around this clean energy and decarbonisation agenda, but I guess the differences among the States does seem to lie in where each state landed after COVID and their Budget position. 

And that's really different, you know, if you look at a State like Western Australia versus Victoria, there's a real discrepancy in terms of, you know, surplus versus deficit and how much money there actually is to support industry through grant programs.

Certainly, in Victoria, unfortunately, it's quite limited at the moment. Somewhere like Queensland has been historically very good in terms of supporting manufacturing sector, the traditional sectors, but also these future green circular economy remanufacturing sectors. But again, in Queensland, we've got a State election coming up at the end of this year. So, election cycles do slow down grant programs, and then do slow down the support that flows through to industry unfortunately.

Rebecca Archer
My last question for you both is one that's probably taken on notice. How ready would you say industry is for the Future Made in Australia initiative? And I guess if you can look into your crystal ball and give us a bit of a prediction for how it might play out.

Michael Climpson
In terms of mid-sized manufacturers, Rebecca, my view is they're not quite ready for this yet. It's just been announced. They're absorbing it. When I'm talking to my clients, it's not in the top five things they're mentioning, if it's mentioned at all. I think it will take some time. I think they're larger investments in sort of areas that to some extent were still fairly immature in our capability. So, it may not sort of suit existing mid-sized manufacturers in Australia. It may need larger global players to sort of step in to make it happen.

Simone Barker
Yeah, I agree, Michael. I think that's the thing. We're so nascent in terms of this, you know, developing as a clean energy superpower. We do have good manufacturing in this country. We've got some great businesses, as Michael's been talking about throughout this podcast. 

But, you know, we just don't have businesses operating in the sectors of focus identified through the Future Made in Australia fund, and like I was saying earlier, to make that happen, it's not just about investing in that final manufacturing facility. It's about bringing the entire value chain along, which is a really complicated and large undertaking.

Rebecca Archer
Simone and Michael, thank you very, very much for your time today. You've been very generous with your perspectives and sharing your expertise. 

If people are wanting to get in touch with you who might be listening today and are interested in hearing more or learning more about specifically what it is that you do and how you might even be able to help them, how should they find you?

Michael Climpson
I'm sure Rebecca will leave their contact details at the bottom of this podcast, so feel free to reach out to Simone. She can certainly help with government grants. She's an expert in that space. I'm there for anything manufacturing, and my contact details will be there. So, thank you.

Simone Barker
Yeah, and I try to maintain quite an active LinkedIn presence, so I try to post on State and Federal level Government grants as they come out. If any of the listeners are interested in just keeping abreast of what's going on in the grant space, I would encourage you to connect with me on LinkedIn.

Rebecca Archer
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