“The times they are a changin’” for the manufacturing industry of Western Australia amid recent events that have been making headlines in the political landscape, writes accountant and Bob Dylan fan James Hillgrove of William Buck.
The ability of government, at both federal and state levels, to impact change has been demonstrated by two recent developments. The first was the release of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry final report. The second was the recent announcement by the WA State Government to launch a Future Battery Industry Strategy, designed to aid the state’s growth as a battery minerals exporter.
Putting on our manufacturing helmets (for occupational health & safety) to reflect on the Royal Commission’s report, a couple of obvious questions arise: How will this affect the manufacturing industry? And what, potentially, could be the repercussions?
William Buck’s small-to-medium enterprise (SME) clients are experiencing a tightening of available lending as the most immediate effect of the Royal Commission. These effects were reflected in the January edition of the Australian Performance of Manufacturing Index, which surveys 200 industrial companies to measure the performance of the manufacturing industry. January’s PMI stated that: “New orders from smaller customers in regard to plant and machinery have fallen as a result of this tightening.”
That’s because an area of concern highlighted by Commissioner Hayne was that the Code of Banking Practice was being interpreted too widely. In particular, a code in relation to small business states banks should “exercise care and skill when issuing business credit and assess whether a small business customer can repay a loan based on their financial position and account conduct”.
This means that the application process for loans is becoming more strenuous. The banks are now more focused on a SME’s position to pay the loan, previous loans and the current state of their balance sheet. This will be experienced in all new bank applications, where they will be now asking for a wider range of documents, which could include cash flows, financial reports and income tax returns.
As an accounting firm for many SMEs, William Buck has noticed banks are asking for more information. This includes ATO Debts and year-to-date financial statements. For SMEs seeking finance, this highlights the importance of two things – being up to date with your lodgements and financial records, and having high-quality, professional three-way forecasts to give maximum confidence to the bank that you can meet your repayments.
Innovating for the future
Like mining and agriculture, manufacturing still represents a significant component of WA’s economy – producing a vast array of different goods, from fabricated metal products and petroleum, to fertiliser and milk. Manufacturers in WA added a total of almost $12.5bn to the state economy, accounting for 5% of Gross State Product. This was the fifth-largest contribution of any sector, behind mining ($63.5bn), construction ($32.9bn), real estate ($19.1bn) and healthcare ($12.7bn). It also represented 12.3% of Australia’s total $103bn in manufacturing production.
Although the sector as a whole continues to make an important contribution to the nation’s economy, Australian manufacturers have faced numerous challenges over the past 50 years as the economy has transformed. While the manufacturing industry was able to produce almost $103bn worth of goods in 2014-15, ranking as Australia’s sixth‐largest sector, it has not kept pace with growth in the remainder of the economy. This has resulted in its share of GDP dropping from about 25% during the 1960s to the current contribution of about 6.4% – the lowest level in recorded history.
However, the blooming battery production industry represents one area for expansion and innovation within the sector.
The WA State Government recently announced the establishment of a Future Batteries Industry Cooperative Research Centre (CRC) devoted to battery industry growth. This presents an excellent opportunity for the manufacturing industry within WA, a state that produces around half the globe’s supply for lithium within seven mines.
As part of the program, the State Government is looking for SMEs to manufacture key components for research and testing, which should promote the local industry. With the increased adoption of battery-powered electric vehicles and power storage, the increased pressure to create and design new processes can be applied not only to the battery industry but to all spheres of the manufacturing industry.
So, is there room for Australia – and importantly, WA – to grow in research & development?
Quite simply – yes.
According to ‘Productivity, industry engagement and the PhD workforce’, a 2013 study by the then-Chief Scientist Ian Chubb, the proportion of R&D workers in business in countries such as Sweden, Denmark and Finland was more than three times that of Australia. Chubb found that the number of researchers in Australia’s manufacturing and service sectors in 2009 was 3.1 per 1,000 employed in industry, compared with 10 per 1000 in Scandinavian countries; and 10.5 per 1,000 employees in the USA and Canada.
Putting my business advisor hat back on, the Federal Government offers incentive for research & development, which can take the form of a cash payment or a tax offset. This incentive is aimed at boosting innovation, but its complexity means uptake has been low. There are many other grants from bodies such as Austrade and trade offices that can assist in promoting research and development within a company.
With changes in the manufacturing industry continually occurring, it is important to not only have a grasp of where your company is right now, but also where your company is going into the future. The time is right for manufacturers in WA to take advantage of big changes in the political landscape, whether it be by favourably positioning your business for growth with high-quality reports and forecasts, or by taking advantage of the State Government’s vision for the future.
Western Australia’s manufacturing sector is looking up.
James Hillgrove is a Senior Accountant at William Buck based in Perth.