Australia's Still Too Expensive for Manufacturing, Even After Currency Drop

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For confirmation that even a 30 percent currency drop can’t turn round Australian manufacturers, look no further than Boeing Co.’s metal component factory in Melbourne.

Actually, you can’t. Because the machinery has gone -- to India.

Hobbled by labor costs that more than doubled in the decade to 2011, Australia’s hopes that a weaker dollar would revive its industry aren’t panning out. Shuttered factories aren’t being restarted and planned capital spending by the country’s manufacturers is at record lows.

“Lose an export market and it’s challenging to get it back,” Andrew Charlton, a former adviser to Australian Prime Minister Kevin Rudd and co-founder of economic consultancy AlphaBeta Pty., said in Sydney. “A reversal of the exchange rate doesn’t automatically reverse the market erosion. You’ve lost capabilities and customer relationships.”

Boeing’s Melbourne factory is now being used to make more specialized carbon-fiber flaps for the 787 Dreamliner’s wings, under a A$5 billion, 20-year contract.

Mahindra & Mahindra Ltd. bought metal manufacturing machinery from Boeing’s Melbourne plant in 2010 and will restart it later this year near Bengaluru. Other Australian-based suppliers also acquired machinery from the factory, Boeing said.

Australian Microcosm

“The Boeing situation is a microcosm of what’s happening across the country,” said Roy Green, dean of the University of Technology, Sydney’s business school. “Businesses in the low-cost space, based on repetitive manufacturing, are not going to stay.”

Australia lost one in nine manufacturing jobs over the past decade while as many as 50,000 more could go by the time the last car plant closes in 2017. Its manufacturing sector as a proportion of the economy is the smallest among members of the Organization for Economic Cooperation and Development after Luxembourg.

Manufacturing Retreat

On a drive through the country’s manufacturing heartland west of Melbourne, heavy industry’s retreat is clearly evident.

About eight minutes from the city center is General Motors Co.’s Holden plant. It produced Australia’s first wholly locally-made car in 1948, and will close in 2017. Two minutes down the road is Boeing’s Fishermans Bend factory, from which equipment was shipped to India.

Further on and across the Yarra river is Toyota Motor Corp.’s plant, which will close in 2017. In the port city of Geelong 45 minutes away, Ford Motor Co.’s 90-year-old factory will be shuttered next October. Nearby, Alcoa Inc.’s Point Henry aluminum smelter shut last July, cement-maker Boral Ltd. cut jobs at its Waurn Ponds site in 2012 and Qantas Airways Ltd. last year closed its heavy maintenance base for 747s.

Australian labor costs were higher than any Group of Seven economy in 2013. They’re now lower than all but Japan, Canada and France, according to the OECD, yet there’s still no sign of an investment revival.

Australian businesses currently expect to dedicate just 6 percent of their long-term capital spending to manufacturing, or A$6.27 billion, down from a peak of 28 percent in 1992, according to government data. That’s less than Melbourne-based BHP Billiton Ltd. has budgeted to upgrade just one of its pits, the Escondida copper mine in Chile.

‘Future Growth’

“Business is reluctant to invest in future growth, so we’re going to continue to see capex disappoint,” Katrina Ell, an economist at Moody’s Analytics, said in Sydney. “Hopefully by 2016 the lower currency will cause some improvement, but we still probably need to see another 5 percent to 10 percent depreciation.”

The Australian dollar fell to a six-year low of 73.72 U.S. cents on July 8 and is down from a post-float peak of $1.10 in 2011.

Green says Australia’s manufacturing hopes lie with specialist firms in select areas, similar to Germany’s Mittelstand -- small producers that dominate that country’s industrial sector.

“We have probably 1,000 to 1,500 small and medium enterprises in Australia that are the best in class globally,” he said. “Niche production spaces in the global value chain are going to make progress, and did make progress even when the dollar was at its height.”

Fishermans Bend

Boeing has more than 3,000 employees across Australia -- its largest presence outside the U.S. -- and continues to invest in the nation. More than 1,000 people work at the Fishermans Bend site, company spokesman David Sidman said by e-mail.

“Years ago, we transitioned our Melbourne manufacturing facility to design and produce high-tech carbon fiber components for Boeing aircraft including the 737, 747, 777 and 787, and today, Boeing Aerostructures Australia has the single-largest aerospace manufacturing contract in the country,” he said.

Mahindra’s purchase of the Boeing metal manufacturing plant isn’t the first time an Indian company has taken advantage of redundant Australian equipment. Tata Motors Ltd. built its first wholly locally-produced car, the Indica, using an unwanted Nissan Motor Co. plant bought in Australia during the 1990s for a “bargain basement price”, according to a company website.

Australian governments may regret letting the country’s industrial sector decline further, according to Gary Pisano, a professor at Harvard Business School who’s written several books on innovation and manufacturing.

“The key is to think about the capabilities that are embedded in manufacturing industries, and what happens when those capabilities erode,” he said. “Australia would be making a big mistake to simply let manufacturing die.”