Manufacturers in developed economies face ever-increasing competition from their counterparts in emerging markets where many costs are lower. To remain competitive, chemical manufacturers in developed countries are redefining manufacturing as more than just production. The Australian chemical industry provides a case study in how a holistic understanding of High Value Manufacturing can help increase the competitive edge of high-cost chemical manufacturers and provide an effective strategy for long-term domestic and international growth.
Traditional thinking about manufacturing is often focused on production, specific industries or products, but in a global economy, that thinking needs to change. Today’s manufacturing is evolving into a complex ecosystem that includes various industries, government policies, regulations, and customer markets at home and abroad.
Industry leaders need a holistic view of manufacturing that involves the entire value chain, from research and development (R&D) and design to supply management, production, go-to-market strategies, logistics and after-sales services.
Manufacturing competitiveness must be understood as the result of key influencers such as government policies, taxes, regulations, energy and feedstock sources, regional infrastructure, logistics support and other factors.
The High Value Manufacturing model acknowledges the essential interdependence of production and services. Based on revenues and costs, four business areas can be identified:
The High Value Manufacturing model for chemicals requires a collaborative effort across the chemical industry, unions, academia and government. Accordingly, government policies, analysis, and industry-wide efforts need to address the following objectives:
Manufacturing competitiveness in Australia1
Abundant domestic reserves of natural resources have helped to mitigate the effects of the global economic downturn in Australia, the mining boom has created opportunities and challenges for the domestic economy, including the chemicals industry.
As noted in other countries, “Dutch disease” ― which is generally defined as a decline in a country’s manufacturing sector triggered by rising costs and a strong currency that hampers exports. In Australia, a strong mining sector and troubled global economic environment have helped the country’s dollar surge, encouraging a multi-speed economy with a decline in manufacturing activity, including specialty and petrochemical manufacturing.
At the same time, liquefied natural gas (LNG) facilities are being constructed to support export to Asian markets where LNG enjoys high pricing. This creates the risk of a shortage for competitively-priced energy and feedstocks used by Australian manufacturers. Current government policies are strongly in favor of gas exports, which are predicted to rise from 2 million tonnes in 2015 to 24 million tonnes in 2023.2
Australia lags in productivity compared with many of its overseas competitors, a fact made more worrisome in the face of the strong Australian dollar. The Australian government may want to consider a revised policy agenda across a number of portfolios, ensuring funding is sufficient to match stated policy goals.
Areas of concern for the chemical industry include regulatory complexity across state and federal jurisdictions in the areas of labeling, dangerous goods transportation and new chemical introduction. In addition, Australian businesses must implement strategies in the workplace to increase efficiencies and drive down operating costs.
In Australia’s multi-speed economy, chemical manufacturers can minimize activity in slow-growth markets while focusing on areas with more revenue potential.
For example, Orica has become the world’s largest supplier of mining explosives through a process of organic growth, divestment, cost-cutting and restructuring3. Global agricultural chemical manufacturers such as Bayer, Dow and BASF as well as Australia’s Nufarm, have substantial investment in crop research in Australia, often in partnership with the government or universities.
Australia can serve as a valuable model for both developed economies facing similar challenges and developing countries as they look to build their chemical industries.
In both cases, players in chemical industries need to identify and prioritize opportunities in the local market to drive revenues, innovation and other key factors in business success. They should also maintain a focus on non-production initiatives to drive more efficient cost-structures and services.
Sector Leader for Chemicals
KPMG in Australia
1 Weighted by trade partner but not adjusted for inflation. Cited in Chart of the day: Nominal Effective Exchange Rates, Marc Chandler, August 17, 2012
2 New Report Highlights Risks of Gas Export Boom, press release, Australian Industry Group and the Plastics and Chemicals Industry Association, October 17, 2012
3 Australian Chemicals, IHS Chemical Week, June 25, 2012