"Australian Manufacturing and China: Deepening Engagement" has estimated that while Australian manufacturers in 2005-2006 have accumulated more than $6.8 billion in benefits from China (eg. through increased exports to China and savings from using Chinese global supply chains), the benefits fall short of the losses in sales in domestic and overseas markets from competition from China (totalling over $7.6 billion), resulting in a net financial loss of $880 million.
Ai Group chief executive Heather Ridout said the findings, based on a survey of 700 Australian manufacturers, confirm that China is imposing ever increasing competitive pressures on their businesses.
"Over the past two years, the proportion of companies impacted by China has grown from 70 percent to 84 percent and China is making deeper inroads into Australia's domestic and overseas markets.
"Manufacturers identified China as the strongest potential overseas market. The Study found that among surveyed companies around 8 percent of manufactured exports go to China; one in every 16 surveyed companies has an operation in China; and China is the chief source of foreign inputs into domestic production. Annual income from manufacturing investments in China is estimated to be close to $1 billion," Ridout said.
"While very large manufacturers and affiliates of foreign owned entities are starting to reap slight net financial gains, the majority of manufacturers are finding it tough to secure benefits. Overall there remain considerable concerns about non-tariff barriers in China, including the lack of intellectual property protection. A major finding of the study was that Australian businesses are highly concerned about the incidence of Chinese made counterfeit and pirated goods being sold on the Australian market. The perception of Australian manufacturers is that dumping of Chinese goods on the Australian market (at below the price to make and sell in China) is also accelerating significantly.
"Consequently, many manufacturers remain unconvinced of the overall benefits of a Free Trade Agreement, although support for an FTA is growing and has increased from 13 percent in 2004 to 24 percent in 2006," she said.
Ridout called on the Federal Government to put in place mechanisms as part of its planned Industry Statement so that Australian manufacturers can boost their competitive position in their business dealings with China.
"We need to strengthen our innovative capacities, build world-class skills among our manufacturers, and be prepared to deal with the ever increasing impact of Chinese competition, as well as helping to open up the Chinese market to Australian businesses so that they can establish partnerships and build supply chains," she said.
Ai Group has welcomed the recent clarification of the government's position that the existing tariff phase-down plans for the Textile, Clothing and Footwear and auto industries were "not negotiable" under FTA discussions with China.
A summary of the key findings of the study is outlined below.
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1. Key findings
- "Australian Manufacturing and China: Deepening Engagement" follows on from Ai Group's 2004 China study and examines the impact China is having today on Australian manufacturing activity and competitiveness.
- Ai Group's 2006 China study is based on a survey of 700 Australian manufacturers with total sales of $25.5 billion.
- The most significant development has been the growing Chinese penetration of domestic and export markets.
- Over the last two years, the competitive impact of China on Australian manufacturing has increased substantially, with the percentage of manufacturers impacted by China rising from around 70 percent to 84 percent.
- China is now regarded as a competitor of near equal importance as domestic producers with 43 percent of companies citing competition from China as an issue of concern for company profitability.
- In meeting the challenge of competition from China, more than 60 percent of companies stated that their comparative advantage came from speed to market, ability to customise, after sales service, ability to integrate and unique design.
- Companies are adopting a range of strategies to respond to competition from China, including investing in new products, using more imported materials, offshore production and skills acquisition/upskilling1.
- Around 8 percent of manufactured exports among surveyed companies went to China.
- China has emerged as the chief source of foreign inputs for most manufacturing companies.
- One in every 16 firms has a Chinese operation, either as a foreign owned company or a joint venture partnership. The study shows that there are substantial growth opportunities arising from our engagement with China. These opportunities come from four main areas:
- increasing exports to China;
- making greater use of China inputs in domestic production;
- selling Chinese completed products on the domestic market; and
- establishing Chinese operations.
| ESTIMATED IMPACT | |||||
| ($, MILLION) | % OF SALES | ||||
| 2005/6 | 2003/4 | 2005/6 | 2003/4 | ||
| Domestic Markets | -6,680 | -920 | -2.23 | -0.34 | |
| Chinese export market | 620 | 280 | 0.21 | 0.10 | |
| Other export markets | -1,000 | -190 | -0.33 | -0.07 | |
| Input costs | 3,630 | 240 | 1.21 | 0.09 | |
| Income from Chinese investments | 940 | 30 | 0.31 | 0.01 | |
| First round impact | -2,490 | -560 | -0.84 | -0.21 | |
| Additional sales from improved competitiveness | 1,610 | - | 0.54 | - | |
| Total (including second round) net impact | -880 | - | -0.30 | - | |
These opportunities have translated to gains estimated to be more than $4 billion in 2005-2006.
- The benefits of these growth opportunities, however, are being outweighed by the financial losses experienced by Australian manufacturers which have grown by over four times (since the 2004 study).
- Taking account of these "first-round" impacts of China, the financial loss to Australian manufacturers is estimated to be $2.5 billion.
- The 2006 China study has also identified that "first-round" losses are being clawed back substantially through "second-round" gains in sales from increased competitiveness, estimated to be $1.6 billion.
- Nonetheless, taking into account the sum of first- and second-round effects, the total net impact of China on Australian manufacturing is a loss of $880 million or 0.3 percent of sales.
- The financial impacts are not uniform across size and nature of ownership, with very large companies and foreign-owned entities starting to reap net financial gains while small manufacturers are experiencing significant losses.
- The overall negative net financial impact of China means that more than half of manufacturers experienced a significant deterioration in profitability over the last two years.
- While growth prospects remain strongest in the domestic market, almost one in four Australian manufacturers view China as the number one offshore market for pursuing growth opportunities.
- Australian manufacturers are encountering significant non-tariff barriers in trading with China - the key one being the lack of intellectual property (IP) protection (49 percent).
- Many companies see the enforcement of their IP rights as a futile endeavour.
- IP protection is not solely about trade in China, it is also an issue of significant importance on the domestic market. Nearly double the number of companies operating in China are concerned about IP abuse here in Australia from Chinese imports compared with their operations in China.
- The perception of Australian manufacturers is that dumping of Chinese goods on the Australian market (at below the price to make and sell in China) is accelerating significantly.
- Manufacturers continue to be unconvinced about the overall benefits of an Australia-China Free Trade Agreement. Nevertheless, support for an FTA has increased from 13 percent in 2004 to 24 percent in 2006.
