Because of cyclical demand and the capital-intensive nature of the machines and engineering industry, it’s highly sensitive to changes in the priorities and budgets of customers.
Geopolitical uncertainty tends to affect this industry more than most. Given the widespread volatility in worldwide economic conditions, businesses in this industry would be right to keep a close watching brief on current events.
These include the unpredictability of the Brexit process, continuing protectionism in the United States, the escalating trade war between the US and China, and higher trade barriers for exporters.
New technologies provide an opportunity for businesses to rise above these challenges. However, there are inherent risks in adopting new and emerging technologies, despite their potential benefits.
Businesses require access to the right skills and resources to climb up the value chain. Importantly, businesses will need access to finance to fund forays into emerging technologies.
Those that can manage it will find significant benefits in innovations such as additive manufacturing or 3D printing, robotics and plant automation, and the Internet of Things (IoT).
It’s important, however, to plan strategically to ensure that any investment in new technology will provide a strong return sooner rather than later. And, if credit conditions tighten in the wake of the banking royal commission, smaller manufacturers will need to provide a compelling business plan to secure the funding they need for these improvements.
Businesses can also consider credit insurance, which may help secure funding from banks and importantly will cover you if the customer fails to make payment.
Doing so is likely to be well worth it considering the significant competitive advantage that these technologies can offer. This will be even more important as Australian exporters will potentially find it challenging to win business in key markets.
For example, China’s machinery sector has been expanding for the past two years following a five-year deceleration.
The government has recently launched a series of favourable policies to promote the development of China’s manufacturing industry with a strategic “Made in China 2025” program encouraging businesses to use high-end machine tools. This will reduce the amount of imports China is willing to accept, even from long-time trading partners like Australia.
Furthermore, although the ongoing US-China trade dispute has increased economic uncertainty, the direct impact of US punitive tariffs on the machine industry specifically should be limited as the amount exported to the US market is just three per cent of China’s machinery revenue.
For Australian exporters continuing to find a market in China, it’s important to note that credit conditions are tightening there, which could affect liquidity for smaller and/or privately-owned businesses. Australian exporters would, therefore, need to keep a close eye on payments to ensure payment durations don’t blow out unsustainably.
When it comes to investing in plant and equipment, robotics is a key focus for Australian manufacturers. Many manufacturers have long relied on robots for manufacturing but next-generation robots could potentially change the face of the industry.
Important to avoid over-capitalisation
They are capable of much more detailed and precise work than their predecessors and are much safer due to features like sensors that can tell if a human is nearby, then adjust the robot’s actions accordingly.
Similarly, additive manufacturing or 3D printing can help manufacturers move faster and compete more effectively with customised or short-run products. And IoT sensors can help businesses run more efficiently with streamlined processes.
It’s important for Australian businesses to avoid over-capitalisation. However, with pressure to grow or else refuse orders, and an ongoing skills gap, businesses need to consider alternative ways to become more competitive.
Smart technology could be the key, as long as businesses do due diligence before investing.
Mark Hoppe is managing director, Oceania, Atradius, a global leader in risk management and trade credit insurance services