Posted on: April 6, 2022

Does your Business rely too much on Offshore Manufacturing?

Australia’s reliance on offshore manufacturing during the pandemic has come under the spotlight.

Our dependence on overseas supplies for much-needed masks, vaccines, and even the diesel engine additive AdBlue, has highlighted just how little we manufacture here in Australia.

How the pandemic exposed our reliance on global supply chains

Today, domestic manufacturing accounts for a mere 6% of our country’s GDP. It was already slipping before the pandemic hit, which had exposed Australia’s reliance on offshore manufacturing, global supply chains and product development.

The Productivity Commission’s July 2021 report looked at how vulnerable our supply chains had become thanks to COVID-19. It detailed:

  • Immediate impacts on logistics and transport creating unpredictability and uncertainty of supply
  • Supply disruption due to a global surge in panic buying and demand for some essential goods, such as personal protective equipment
  • Some overseas governments’ restriction of particular exports.

Clearly, Australia’s reliance on free-trade and offshoring has ended.

However, the commission found our supply chains proved “generally resilient” and that only one in 20 imports were vulnerable to concentrated supply sources. But the business sector may disagree. Even as the latest COVID-19 infection rate wanes, the international shipping crisis sparked by the pandemic continues and may not be resolved until mid-next year.

Case in point: Australia’s reliance on China is two way

Some 14 industries and 141 sectors in Australia strategically rely on China, according to the Australian Strategic Policy Institute. In fact, our country depends on China for 595 categories of goods, which we’d find difficult to import from elsewhere.

For instance, China supplies 86% of our semi-conductors, 75% of lighting, 72% of generators and 68% of computer imports. We rely on China for 100% of our manganese supply, essential for making stainless steel and other alloys.

Despite this, we’re one of the few countries to enjoy a trade surplus with China, our largest trading partner. High commodity prices largely underpin this surplus, but it may not last – China is diversifying its imports from other countries and continues to place significant tariffs on Australian wine, barley, and other items.

Good to know, though, that as of December last year, Australia exported $8.356M more than it imported. As well, Australia is among 15 countries, including China, that forms the world’s largest free-trade trading bloc. In January, that trade deal came into effect.

Companies bringing production back to home soil

Pandemic-induced disruptions have prompted more than half of Australian manufacturing chiefs to say they plan to revive or increase onshore capacity within the next two years. They’re looking for greater flexibility and the ability to pivot when needed.

The Australian Manufacturing Outlook survey identified growth areas as downstream lithium processing, defence and space exploration, particularly in Western Australia, the Northern Territory and South Australia. As well, the Federal Government has pledged $2.2 billion to help commercialise six national manufacturing priority areas. Indeed, the CSIRO has described as ‘megatrends’ moves to onshore and reshore, essentially move manufacturing closer to home base.

Nearshoring – a compromise?

Another option for Australian manufacturers is to move production operations to countries closer to Australia, that is, ‘nearshore’. Benefits include:

  • Limited liabilities
  • Similar time zones
  • Diversified supply chain
  • Slimmer outsourcing costs, such as for labour
  • Easier to visit.

Popular countries that Australian businesses turn to for reshoring are Vietnam, Indonesia, and Thailand. Check out these insights about them and other ASEAN nations in this report on Australia’s trade and investment.

Whether near or far, scaling your business offshore could be a good move. Professional services consultancy McKinsey points out that nearly half of the ASX’s top 100 companies earn more than 30% of their revenue from overseas. They also spell out the four most successful models here.

How to refine your risk management strategy

So, ‘rightshoring’ your operations to transform your business and build resiliency against future shocks could be the future. This may entail a new suite of risks and you’ll need to consider the risk appetite of your business.

We can work with you to identify your business risks and manage them, so they remain within your risk appetite. Transferring some risks through appropriate and customised insurance cover is a valid option.

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