Apr 21 2020
As COVID-19 has wreaked havoc on global supply chains in 2019-20, the risks of international interdependence have become increasingly obvious. Many Australian sectors heavily rely on foreign suppliers for vital goods, such as medical equipment, and have struggled with the recent sudden changes in global trade. New barriers to trade have emerged rapidly due to closed borders, travel bans and export restrictions. As a result, globalisation in Australia is anticipated to take a hit from 2020-21 onwards. Local firms are expected to re-evaluate their supply chains in terms of global risk. On top of the COVID-19 outbreak, Australian firms are forecast to increasingly hedge themselves against geopolitical factors, such as escalating tariffs between the US and China, and disruptions caused by Brexit, as individual countries aim to become more self-reliant.
Reshoring Australian Manufacturing
The Australian Manufacturing division has been in decline over the past decade. Many firms have offshored most or all of their local manufacturing capacity, seeking to benefit from lower operating costs in countries such as China. However, reshoring is anticipated to become increasingly common over the next five years, as firms re-evaluate the risk of relying on international suppliers. The Australian Manufacturing division, currently worth $104.5 billion or 5.5% of national GDP in 2019-20, is projected to benefit from this trend.
The Prime Minister has spoken of plans to increase Australia’s ‘economic sovereignty’. This involves reducing the country’s reliance on imports and increasing the domestic manufacture of vital goods, such as those produced by the Medical and Surgical Equipment Manufacturing industry. This industry’s capacity has become a particular point of contention, as Australia has experienced critical shortages of medical supplies such as face masks during the COVID-19 outbreak. Similarly, the Pharmaceutical Product Manufacturing industry is also anticipated to benefit from reshoring trends.
More broadly, Australian businesses are forecast to increasingly place greater value on domestically manufactured production inputs across all supply chains. Many supply chains will return to relying on overseas products after the outbreak subsides. However, some will remain connected to local suppliers over the long term, as COVID-19 has made businesses more aware of the risks associated with relying too heavily on foreign economies.
Supply Chain Risk Mitigation
To assess and mitigate supply chain risk, businesses require a clear understanding of both their suppliers, and the suppliers of their suppliers. They must also ensure that these suppliers are reliable and consider any potential supply chain disruptions. To do this, companies require a reliable source of information on Australia’s economy, such as IBISWorld’s industry and risk reports.
As the COVID-19 outbreak subsides over 2020-21, firms will likely continue sourcing a low but rising proportion of their input supplies from domestic sources. This trend is anticipated to occur despite locally manufactured goods typically commanding higher prices than imported goods, as firms seek to ensure that supplies remain available during future supply chain shocks. Local firms are now recognising the benefit of having a local supply relationship ready and available when global supply chains are in doubt, rather than attempting to begin that relationship during a supply shock.
As well as shoring up local supply chain links, local businesses are also anticipated to increasingly invest in additional inventory space to keep supply inputs on hand in case of future supply disruptions. Over the past decade, businesses have sought to increase their efficiency by minimising inventory and manufacturing on a just-in-time basis. However, COVID-19 has revealed a weakness in this supply structure and may result in more firms moving away from leaner manufacturing operations.
While the COVID-19 outbreak has not signalled the end of globalisation, global supply chains are forecast to become less integrated over the next five years. The outbreak has highlighted the risk of relying too heavily on foreign economies, despite the significant cost benefits that resulted in globalisation expanding over the past three decades.
Australian firms that continue to operate with supply chains that are heavily exposed to global trends will inevitably struggle in the event of future shocks. If you are worried about how your company will manage in the event of future global disruptions, IBISWorld’s collection of reports on over 700 Australian industries can help you assess your supply chains and suppliers.
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IBISWorld reports used to develop this release:
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