Ame Systems Pty. Ltd

1

AME SYSTEMS PTY. LTD.

(ABN 41 056 177 569)

18 Gordon Street, Ararat, 3377,

Victoria.

Submission to an inquiry by the Victorian government into Victoria’s regional economic development strategy and service delivery model, conducted by the Victorian government department of economic development, jobs, transport and resources.

April 2015

AME Systems Pty. Ltd

AME Systems Pty Ltd is a privately owned proprietary limited company situated at Ararat, Western Victoria, and which is a “Tier 1” supplier to the heavy automotive and automotive related industry (trucks, off-road equipment, heavy mining equipment etc). The principal products are wiring harnesses which control the generation and transmission of on-board signals to a complex array of vehicle management systems on the vehicles in which they are installed. Some principal customers are Kenworth, Volgren, Caterpillar, Thales, and Macdonald Johnson Engineering to name a few.

The company is increasingly exposed to fierce competition from less costly imported products; such imports are principally sourced from India, Taiwan, Thailand, Malaysia, the Philippines, the PRC, and increasingly from Mexico and Brazil.

The company is approximately 30 years old, and has operated from Ararat for practically the entire company life. It also has a Melbourne warehouse/finishing and servicing facility based at Kilsyth, near to a number of its major customers. The company employs approximately 250 personnel, including a small team of senior managers. Essentially all staff and managers are domiciled in the Ararat district. Current turnover is in excess of A$30 million. The business is both labour and components intensive, but possesses well established capabilities to meet exceedingly high technical, quality, performance and product reliability demands. Market and sales development, financial management, labour relations and management, purchasing and supply management, innovation and R & D, and on-time-delivery are critical components of the success of the company.

The company has a strong balance sheet, and a quite significant net worth.The owner (and founder) of the business is Mr. Peter Carthew, who is also Chairman of the Board. The Board consists of five members, the Chairman, Mrs. Lyn Carthew, and Messrs Ross Hatton and John Gault, all of whom are non-executive Directors. The Managing Director and “full time” Executive Director is Mr. Nick Carthew.

The company operates from modern, fully owned premises at Gordon Street, Ararat. Well over 85% of the workforce is drawn from the surrounding district, and is regarded as reasonably stable; workforce turnover is less than 6% per annum. AME Systems is the largest single private sector employer in the region, and is a major benefactor supporter of the Ararat community.

Ararat, 204 kms from Melbourne, is a very well served and attractive city of approximately 10,000 people, and is situated in the midst of very rich farming country at the eastern end of the Grampians Ranges, and in the heart of some of Victoria’s best wine growing country. It is also just some 90 minutes drive from some of Victoria’s best coastline along the famous Great Ocean Road.

The Terms of Reference of the Inquiry

We understand the Terms of Reference of the Inquiry to be:

1. Identify best practice, evidence-based policy directions to foster regional growth and job creation. This will include:
2. Identifying the major economic, social and demographic issues facing regional Victoria. This analysis should include but not be limited to:

- Industry profile – key sectors,strengths and weaknesses etc.

- Education and training participation and attainment levels

- Inter- and intra-regional transport connectivity

- ICT/broadband capacity

- Inter-regional variations,cross-regional issues and flows

• Undertaking a broad, ‘first principles’ examination of what the evidence tells us about how to drive regional growth, with examination of key policy levers including: transport, infrastructure and planning; innovation and industry policy; trade and investment facilitation; education and training; and measures to foster a sound business environment such as regulation settings.
• Consider current regional strategic and related planning models and the evidence regarding the effectiveness of various models.
• Confirming key priorities for each region and broad policy directions, possible actions, and recommendations for further work to drive regional economic growth.

1. Identify the approach to regional service delivery best able to deliver regional growth and job creation. This will include:
2. Reviewing the history of regional delivery models in Victoria.
3. Reviewing other jurisdictions’ regional delivery models.
4. Reviewing key functions in DEDJTR (notably Regional Development Victoria,including the domestic Victorian Government Business Office network; Agriculture Services and Bio-security Operations; regional transport planning and investment facilitation; and the structural arrangements in place to drive tourism in regional Victoria),regional planning arrangements; and across Government (where appropriate).
5. Having regard for the Government’s election commitments for regional service delivery (e.g. establishment of new Regional Business Centres and Regional Cities Clusters).
6. Recommending the mix of structural, governance, and strategic models for regional service delivery best suited to promoting long term prosperity in regional Victoria

Throughout this submission, we make contributions on all of the first four terms of reference, and we make a general comment on the remaining five terms.

The changing nature of the Victorian Regional manufacturing industry

As a regionally based business, our lengthy intense involvement in a major sector of Victoria’s manufacturing sector, leads us to the following opinions and statements.

We understand that whilst over 30% of total Australian domestic manufacturing capacity resides in Victoria, and that hence the Victorian manufacturing sector is the largest of any state in Australia, the proportion of manufacturing as a % of national GDP has been steadily declining over the past ten to fifteen years.

Manufacturing industry in Victoria has until now been strongly represented in the automotive components and assembled goods manufacture, with a strong presence in the automotive, electronics, metal fabrication, aerospace, and precision engineering areas. Approximately 80% of Australian automotive production is CURRENTLY for the time being in Victoria. This will soon substantially disappear with the demise of the passenger vehicle assembly industry in Australia. Other manufacturing sectors strongly represented in Victoria are the processed food industry, plastics/fibre/glass and metal packaging, building products, paper and paper related products, and plastics fertiliser and chemical industries. Textiles clothing and footwear industries once employing nearly 90,000 persons (in the 1980’s) now struggle against the flood of inexpensive imports, and our understanding is that employment in the TCF sector is now below 10,000.

Manufacturing currently contributes more than $35 billion to the Victorian economy, accounting for 60% of Victoria's total exports and the sector directly or indirectly provides 30% of Victorian jobs.

Whilst many large multi-national manufacturers exist in Victoria, the industry comprises numerous small to medium, often privately owned businesses such as AME Systems.Manufacturing has until recently represented a large share of total output for many Victorian regional areas, with manufacturing employment exceeding 40%, in a number of regional municipalities, of which Ararat is one such.

Manufacturing has strong upstream and downstream supply chain linkages with other industry sectors and the generaleconomy. These synergies have declined over the past decade, and considerable flow on effects can therefore be expected with any material change in the manufacturing sector, be it on a global, national or regional basis.

Despite the effects of the global financial crisis of 2009/10, Australia has maintained a strong growth economy and strong consumer demand, a combination of statistical, anecdotal and actual events suggests that the Victorian manufacturing sector is under increasing pressure.

Over the past decade, the manufacturing sector:-

-Has become increasingly exposed to the effects of globalisation, with decreased government protection and subsidies, and the advent of Free Trade Agreements.

-Has experienced significant foreign competition from emerging economies, in particular China and India, who have significant cost advantages, particularly in labour, and fewer regulatory constraints, such as environmental requirements.

-Has experienced a number of business failures or closures.

-Has in aggregate real terms reported little if any growth to Dec 2014 in terms of both gross profits and sales; in fact there has been aggregate decay.

-Has endured a sustained and continuing period of higher exchange rates, increasing the comparative cost of exports and making imports more competitive.

-In a labour intensive industry such as ours, has faced higher wages and skills shortages.

-Has experienced considerable growth in the costs of other major inputs, with high commodity prices, in particular metals and oil, rising energy costs, and rising infrastructure costs.

-Has experienced over the past four years, the cost of energy, in particular electrical energy, escalating by nearly 100%.

-At the same time as having rising costs, has been at the mercy of large customers incorporating "price down” requirements into supply agreements.

There seems little doubt that a place still exists for a manufacturing industry in both Victoria and throughoutAustralia. However, the industry faces dramatic impacts, significantly from the closure of the passenger vehicle assembly industry, whilst many manufacturing enterprises faceintense import competition from nations such as India, China, Thailand and Malaysia. As new particularly foreign competitors become established, and as consumer demand remains volatile, participants are going to have to change and evolve in order to survive.

Key attributes and success factors for businesses going forward in the manufacturing industry will in all likelihood include some or all of the following:-

-An ability to compete on a global scale, including seeking broader domestic and foreign markets.

-Embracing innovation and research and development and value adding through developing and commercialising superior IP knowledge.

-Taking appropriate steps to protect to the extent possible IP and patents.

-Efficient production techniques and high capacity utilisation.

-Ability to identify and manufacture technology and quality driven products locally that are less likely to be subject to foreign competition.

-Have “balanced” contracts that enable the passing on of increases in input costs, such as for wages, metals, energy and transport, not just having "price down" clauses.

-Broadening customer and supplier bases with diminishing reliance on a few customers and/or suppliers.

-A focus on "value added" stages of manufactured goods, including potentially outsourcing part of or complete processes.

-Broadening opportunities, potentially becoming an importer and distributor through having operations in cheaper foreign-based manufacturing centres for certain components or complete finished products.

-Exploiting competitive advantages, offering superior quality, design and customer service, and being highly market responsive.

-Developing and investing in mutually beneficial long-term customer relationships.

-An ability to readily adapt to changing market conditions and demonstrate flexibility and adaptability in manufacturing processes and capabilities.

-Seek constant improvement and efficiency gains across the whole value add supply chain, through design to purchasing, manufacture and distribution.

-A move towards automated, more capital and less labour intensive manufacturing techniques.

-Recruiting, developing and retaining a capable workforce, with strong balanced employee and industrial relations.

-Ensuring the ability and strategies exist to address current and potential increased regulatory requirements,such as OH&S, environmental and emission requirements.

-Taking advantage of government support and initiatives.

The State of Victoria is the second largest economy in Australia (after New South Wales) accounting for a quarter of the nation's GDP. The total GSP at current prices for Victoria was at just over A$353 billion (for 2013/4), with a GSP per capita of A$59,000. The Victorian economy has grown steadily at a rate of approximately 3% pa since 1990 (Source: ABS data, December 2014):-

In a recent paper from the Reserve Bank of Australia, entitled “Structural Change in the Australian Economy” (Ellis Connolly and Christine Lewis) the author’s state:-

“Over time, the structure of the Australian economy has gradually shifted away from agriculture and manufacturing towards services, with the mining industry growing in importance recently. Economic activity has also shifted towards the resource-rich states of Queensland and Western Australia.

Changes in the structure of the economy have been driven by a range of factors including rising demand for services, the industrialisation of East Asia, economic reform and technical change. In recent years, the rate of structural change appears to have increased, driven by the rise in resource export prices and mining investment.”

The recent (2014) decay in the national terms of trade, and the collapse of iron ore and coal prices has dramatically changed that outlook. The significance of manufacturing has risen again as a proportion of GNP, and in Victoria, although it has declinedfrom 19% to 15%, manufacturing remains a key pillar of the State economy.

They RBA paper goes on to say:-

“Since the 1960s, the share of manufacturing in the overall economy has declined, although in absolute terms manufacturing production has continued to expand. Service industries have grown strongly over the past 50 years, rising from around 60 per cent of total output in the 1960s to around 80 per cent recently. In the 1950s, services were closely linked to manufacturing, with wholesale trade and transport supporting the production and distribution of manufactured goods.”

The demise of the passenger vehicle assembly industry is clearly going to make an absolute shift in decline in manufacturing inevitable, as will the decline of the supply chain to that industry. How long the local manufacture of heavy vehicles and related off-road equipment will withstand these structural economic pressures is debatable.

In the context of these remarks, we list the following as the key qualitative costs to the Victorian economy of continuing decline of the manufacturing sector in Victoria’s economy:

1. Employment loss. As employment (both skilled and unskilled) in manufacturing continues to decline, the cost to the Victorian economy in restructuring these jobs into other growth industries will be extremely high, particularly in regional areas. It is reasonable to predict that there will be a massive need for training and education to prepare dislocated employees if they are to create for themselves reasonable careers in the growth sectors of the economy. This will be particularly so in regional Victoria. We are unable to comment on the capacity of the balance of Victorian industry to accommodate employment dislocated form the manufacturing sector. However, given the very large proportion of employment in the manufacturing sector, we believe that it would be difficult for displaced employment to be quickly absorbed into the balance of Victoria’s productive economy.
2. Technology loss. As the structure of Victorian employment moves in the directions suggested by all economic studies, it is reasonable to predict that advanced manufacturing technologies (AMT’s) employed in Victoria’s manufacturing will also decline and eventually be lost to that sector. Loss of the advanced technologies employed in regionally based industries will be even more pronounced, simply due to the lower critical mass of AMT’s in regional compared to metropolitan centres.
3. Strategic losses. Manufacturing industry in Victoria is the repository of accumulated knowledge, capacity and capability to quickly and efficiently respond to the demands made on our communities by the onset of emergency conditions such as natural disaster, civil strife and defence needs. This is particularly so in regional centres such as the Ararat region. The cost to the Victorian (let alone the national) economy in quickly mobilising these capabilities from a diminished or dormant manufacturing industry would be of an incalculable magnitude, and would come with immense strategic implications.

Local/Regional Cost

In our own case (AME Systems P/L), the loss of significant manufacturing activity at AME Systems resulting directly in diminished employment in the Ararat region, would have immense costs to the Ararat community. At present levels of employment, AME Systems is directly responsible for injecting a total payroll in excess of A$10 million into the supply side of the Ararat and regional economy. There are in addition to this figure, injections of holiday pay, accumulating superannuation, and profit team reward for all 300 of the AME employees which would also be a cost to the local economy. In summary, the private sector of the local Ararat economy would be very severely and adversely dislocated.

Key drivers of future growth in Victoria

Based on our own experience, and irrespective of location, we believe some of the key drivers of future growth in Victorian manufacturing will be as follows:

• Continuing real growth in market penetration, with associated real sales growth
• Increased access to and penetration of sustained export markets
• Continuing increased investment in product and process focussed R & D, innovation, and technology enhancement in advanced manufacturing technologies
• A significant increase in training and education at all levels in the workforce
• A sustained increase in investment in 21st century technology plant and equipment, and at a real level when compared with depreciation of existing assets
• Continually improving the operating cost base of manufacturing industry
• Significantly upgrading the level of enterprise productivity
• Maintenance of and significant improvement in IR systems and practices
• Minimising of Federal, State and Local Government charges on individual enterprises, and minimising Government and bureaucratic intervention in what are essentially private sector processes
• Minimisation of “red tape” and regulatory burdens
• Significant upgrading of road, rail and port infrastructure to 21st century standards
• Significantly increasing the efficiency and utilisation of the digital economy
• Ability to positively respond to any Government initiatives aimed at minimising climate change/global warming, and mitigation of any adverse effects such policies may have on operating sustainability of individual manufacturing enterprises
• Improved flexibility to adapt to sectoral restructuring demands as they will inevitably from time to time arise

Building a competitive manufacturing sector in Rural and Regional Victoria

The challenges and opportunities for building a competitive manufacturing sector in regional and rural Victoria are many and complex. There is no “one size fits all” set of inflexible standards which can be applied to identify individual investment challenges, and each and every instance must be viewed on its individual merits.