Fortune favours the brave, manufacturing survey warns

A recent study by professional services and advisory firm KPMG suggests that the Australian manufacturing sector suffers from a cautious attitude when it comes to product innovation.

The survey involved 460 manufacturers from across the globe, including 14 large Australian companies. All in all, many similarities were found between local and international companies in terms of strategic priorities. The highest reported imperative was enhancing sales growth, followed by improving speed to market and increasing cash flow from operations. Intended strategies were also similar – seeking better insights to find sources of growth; collaborating to innovate and integrating supply chains.

But there were some notable differences between local and overseas companies on other issues, and findings which raised ‘red flags’ over the future of Australian manufacturing. Findings included:

• Australian firms intended to spend a maximum of 9% of company revenue on new innovation and product introductions, while some overseas companies planned 10-15% spend in this area.
• 71% of Australian companies’ primary strategy for improving innovation was to enhance existing product lines with only 29% aiming for ‘breakthrough’ innovation.
• Over 70% of Australian companies claimed only a moderate or low level of confidence in the reliability of information available to assess customer profitability – yet only 36% had plans to invest substantially in enhancing systems to improve this.
• 57% of Australian companies saw increased regulation in their industry as a major challenge over the next one to two years compared with only 31% overseas.

Mal Ramsay, National Sector Leader, Industrial Manufacturing, KPMG Australia, said: “While there are some encouraging findings from this study – notably, Australian companies’ plans to more than double R&D spend in the next two years compared to the previous two – overall it shows our firms are comparatively cautious in their outlook, compared to their counterparts overseas. The greater focus on the domestic market here and the desire for incremental rather than transformational innovation raises a few concerns about the growth potential for manufacturers in Australia.

“Even the increased R&D spend is lower than elsewhere. And while Australia’s geographic distance can lessen foreign competition and create better margins for some manufacturers, the truth is that the domestic market is quite small and places a ceiling on growth potential. By way of comparison, if you look at Cochlear, it has obtained 65% global market share in its field and invests more than 15% of its sales revenue on R&D. Focusing on breakthrough innovation, finding a niche in high value-add contexts where you have intellectual property, and being ambitious has to be the goal for Australian manufacturing”.

He added: “It is good to see an increase in partnering and collaborating with others through joint ventures and alliances to achieve innovation. This is important, as is the indication that in three to five years, most companies will have genuinely integrated supply chains. But more clearly needs to be done to improve the use of data sources to understand product cost and customer profitability. Data analytics still needs to be embraced fully by many companies.”

The 2014 Global Manufacturing Outlook: An Australian perspective paper can be found here.

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