Is the Oil Price Boom a Boost for Australian Manufacturing?

23 Aug 08

Could it be possible that the increase in oil prices is giving the local Australian manufacturing industry a boost?

We have all felt the sting of increasing oil prices at the bowser when we fill up our cars. The manufacturing industry has also felt the oil price increase. But if new survery results from the US are anything to go by, this increase may mean more orders for local manufacturers.

Recent reports from the U.S. suggest that some manufacturers are bringing some production and sourcing 'home'.

US near-shoring refers to sourcing or manufacturing from a foreign country that is relatively close in distance and time to the U.S. such as Canada or Mexico. Currently, according to a recent survey of manufacturing executives by AMR Research Inc., 68 per cent of respondants near-shore manufacturing in Mexico, followed by 49 per cent in Canada.

The survey found that companies are looking to build a balanced portfolio for sourcing and manufacturing. The scenario for manufacturers trying to stave off higher operations costs overseas is an increase in U.S. capacity or more near-shoring to Mexico and Canada. What’s happening is not so much closing plants in China; it’s more that companies are putting in additional volume, whether it is in the U.S. or Mexico or Canada.

Reasons for near-shoring include: increase in local cost competitiveness compared to traditional low cost countries such as China; better trade incentives; less supply chain risk due to proximity to market; less transportation risk; lower transportation costs; more control over environmental compliance; and more flexibility to respond to changes in supply chain.

The AMR survey showed that 21 per cent of U.S. manufacturers planned to increase manufacturing activities in the United States over the next year, while another 21 per cent expect to increase near-shore production. (64 per cent of the companies in the survey had more than $5 billion in revenue.)

For some U.S. manufacturers it makes sense to source back in the U.S. or nearby where the cost of offshoring outweighs the higher cost of labour that exists in the U.S. and Canada, which is why some companies are considering similar sourcing models, according to a recent survey by MFG.com.

Out of more than 500 responses, 40 per cent say the current value of the U.S. dollar has an effect on where they choose to source their business. Nearly half of the survey participants say they are already sourcing more business in the U.S. They also indicated that they’re sourcing closer to home in either Mexico or Canada. In the AMR survey, 30 per cent of those responding say they plan to increase their near-shore sourcing activities through next year.

While it may be too early to tell whether this trend will continue and what, if any, effect it might have for Australian manufacturing, the situation deserves to be closely monitored.

Subscribe free-of-charge to the Advanced Manufacturing Bulletin and be kept informed about manufacturing industry news and new manufacturing technology.