Consider the Risks before developing your future International Manufacturing Strategy

Manufacturing is complicated, make sure all your manufacturing cogs are lined up to maximise the returns

Australian manufacturers are facing high costs of production, and a high A$ beyond parity with the US$, which has resulted in a loss of competitiveness in international markets. If Australian manufacturers are to survive then the need to address these cost of production and regain the international markets. It is not in Australia’s long term Interest to have the manufacturing sector just get up and leave, as companies have developed years of knowledge and expertise, and in many cases have created substantial intellectual property invested in manufacturing in Australia. Manufacturers planning for the future need to consider how to effectively manage the international markets in which they will manufacture, and addressing the cost pressures and protecting intellectual property will be fundamental to developing a sustainable and effective international manufacturing strategy.

 Australia can no longer compete in low cost manufacturing with other countries in our region such as China due to our comparative high costs of production. As a consequence many Australian manufacturers have looked to China as the answer to cost of production issues, and moved manufacturing to China in recent years. This can be a great way to lower production costs, and many Australian companies have managed their Chinese operations successfully, however there are some downside risks to manufacturing in China. It is important to consider that the cost of production in China has been rising consistently over the last few years, with labour costs rising in excess of 10% a year for the past couple of years. To add to these cost pressures is the gradual appreciation of the Chinese RMB, which is making Chinese made products more expensive. These cost pressure, alone, suggest that China may not be the medium to long-term answer for absolute low cost manufacturing. Additionally another risk to manage is a loss of your intellectual property, which could result in either a competitor product entering the market, or a direct replica of your product which may erode brand confidence.  Can you be certain that your product designs won’t reappear around the corner for a fraction of the price? I know of many manufacturers who have been confronted with this very issue. Be careful.

Investing in Advanced manufacturing may allow your company to maintain its competitive advantage

One way of managing this risk is through maintaining the advanced manufacturing phase of production in Australia. In order to make Advanced Manufacturing work it is important to undertake Bulk manufacturing abroad while at the same time protecting your intellectual property. Assembling the bulk components, and installing the high technology components of the product in SA will go a long way towards protecting the most important assets Australian manufacturers possess: Intellectual Property. This can be a complicated task, particularly in relation to Australia’s geographic proximity to the low cost manufacturing centres in Asia. If manufacturing is undertaken in China it is important to consider the logistics time to freight components from China to Australia. It can take up to 5 weeks to get products from manufacturing facilities in China to the warehouse in Australia. Can your business cope with that time delay? In order to make Advanced Manufacturing work for Australian companies it is important to undertake bulk manufacturing of components in geographic locations that do not pose a substantial time disadvantage. 

The growing costs of production in China in recent years, and the need to protect intellectual property mean that manufacturers need to look beyond a reliance on the China solution if they are to find sustainable low cost manufacturing to compliment the advanced manufacturing in Australia.  I would advocate a look at other markets in South East Asia to undertake bulk manufacturing, and reduce the freight time.  The advantage South East Asia possesses is that the freight transport corridor stops in Singapore on the way to and from Australia. The closer the manufacturing centre to Singapore the faster it can be on a ship heading to Australia, where advanced manufacturing can then be undertaken.  Australian companies planning their international manufacturing strategy must plan for an Advanced Manufacturing future if it is to manage the intellectual property risks, while it is important to look north and consider the bulk manufacturing opportunities on Australia’s relatively closer northern doorstep.

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About Nathan H. Gray
Nathan H. Gray is Managing Partner of AsiaAustralis. AsiaAustralis is a stategic consulting service partnership established by experienced international management consultants to assist private and public organisations achieve their strategic objectives in trade, investment and government relations throughout the Australasian region with a particular focus on SE Asia. Based in Adelaide, South Australia, AsiaAustralis has a network of associates throughout Australia and Asia that can be called upon to assist and facilitate major projects, business opportunities and government to government trade and investment facilitation. To Contact AsiaAustralis check out the website: www.asiaaustralis.com or send Nathan an email: nathan@asiaaustralis.com

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