Innovation is enabling a handful of WA manufacturers to survive in a market under increasing pressure.
Innovation is enabling a handful of WA manufacturers to survive in a market under increasing pressure.
INNOVATIVE companies are proving that R&D investment focusing on niche markets can boost their competitiveness, despite the increasing cost of manufacturing in Western Australia.
Local manufacturers such as Hofmann Engineering, VEEM Engineering and Matrix Composites have remained resilient despite the challenging conditions, while start-up innovators are taking advantage of niche markets to establish new business (see Grants helping innovators to reach the next level).
Founded by German immigrants John and Erich Hofmann in 1969, Hofmann Engineering has been quietly expanding its Bassendean manufacturing plant to its current size of 60,000 square metres.
During the past 40 years the business has acquired property and facilities from 15 of its neighbours, and is using the space to construct some of the largest gearing components in the world, ready for export to mine sites in China, Africa and South America.
Its operations are certainly not symptomatic of a company suffering from labour shortages or the high Australian dollar; and Hofmann believes its innovative culture is responsible for its ongoing success.
About half of the company’s products are destined for the export market, but business development manager Steve Hall said the dollar hadn’t significantly affected the company’s profit margins.
“We’re doing very well actually, but that’s because we make high-quality products and we’re one of the few companies in the world that can produce what we produce,” he said.
Hofmann Engineering maintains a dedication to reinvesting profits back into the company – specifically in leading-edge manufacturing tools that have enabled it to remain competitive in the global market.
For example, it has spent $10 million in specific machinery for gear manufacture and now owns one of the world’s largest gear cutters.
In addition, about 30 per cent of overall sales are products that involve some form of Hofmann-specific research and development, whether it be a Hofnut (a high-tension bolting system), or Hofalloy (the company’s own form of forged steel, which it uses as raw material for gears).
Turnover has increased by about 15 per cent year on year and recently topped $110 million, while the number of employees has increased to 550.
Despite admitting cheaper manufacturing prices on the east coast was a driver in its 2009 expansion to Melbourne – where about 15 per cent of products are manufactured – the company is content with keeping its main hub in WA.
Matrix Composites is another local company often heralded as a leader in the state’s innovation space.
The company engineers and manufactures products used in the oil and gas and resources industries – including subsea buoyancy modules – at its $80 million Henderson plant.
Matrix is forecasting revenue of about $145 million for the 2012 financial year, of which about 90 per cent will come from exports.
Chief executive Aaron Begley said the combination of the strong Australian dollar and increasing energy and labour costs meant some labour-intensive processes had been moved offshore.
“Wages here are 30 to 50 per cent higher than they are in Houston, where we also have an office,” he said.
“The strong dollar increases the impetus to move processes offshore and limits future investment in manufacturing.”
But Mr Begley said the Henderson plant had given the company an advantage in the global marketplace due to factors such as improved production capacity and waste reduction.
Despite the financial and share market pressures Matrix is facing (its share price slumped this year and it has projected a loss of $20 million to $23 million for the 2012 financial year), it allocates more than 50 per cent of spending on work containing at least a small amount of R&D.
Mr Begley said spending was necessary, as the company couldn’t simply rely on already developed products to bring profits.
“We cannot rely on commercialisation as the competitive advantages gained from commercialisation only last about two to three years, and then the competition catches up and surpasses your original product,” Mr Begley said.
“R&D is vital to the success of the business, so when profit margins fall we still have to remain focused on R&D in terms of new product lines and evolving existing products.”
Propeller and marine propulsion engineer VEEM Engineering also relies on inventive technologies and products to gain competitive advantage.
Managing director Mark Miocevich said the only reason it hadn’t abandoned manufacturing in WA was because of executives’ reluctance to live overseas, and hence it needed to find other ways to be competitive.
About 20 per cent of the company’s annual $40 million turnover comes from exports, which, given the strong Australian dollar, has caused a significant drop in profit.
Add to that the manufacturing costs, and the company has a challenge on its hands.
“We are considered horrendously expensive by world standards,” Mr Miocevich said.
“We’ve just had to focus on premium products to enable us to keep operating.”
The most recent of those products is a ship stabiliser, while VEEM has also transferred its skills in making propellers to engineering fans for the underground mining market.
It’s here that VEEM’s reinvestment of 10 per cent of profits into further R&D becomes integral to survival.
“It’s not about the product itself,” Mr Miocevich said.
“It’s the philosophy of finding the products, then developing new approaches to enable you to win the work – had we not done that we wouldn’t have survived.”
In Malaga, Alloy Steel International is one company not content with absorbing high costs in favour of local manufacturing.
The company has a specialty alloy named Arcoplate, which was invented by chief executive Gene Kostecki – a boilermaker with an interest in metallurgy – to reduce the rate of wear on mining equipment.
It’s claimed to be the hardest and most superior alloy on the market and has won Alloy Steel contracts with some of the biggest miners.
It has produced flagship products in WA for more than two decades.
Last month, however, the US-listed company announced its intention to move “substantial” portions of its manufacturing and production to Indonesia; a decision prompted by increasing costs in WA.
Director and chief financial officer Barry Woodhouse told WA Business News the company couldn’t get enough labour or compete with the wages offered in the resources sector.
“Some days we just get guys who don’t turn up … simply because they’ve got a better offer up north,” Mr Woodhouse said.
The company makes annual sales of about $25 million, but profit margins have reduced as clients opt to award contracts to cheaper fabricators offshore.
It’s not simply a matter of moving entire production capacity to where it’s cheaper, however; Alloy Steel is taking advantage of lower-costs in specific locations where it can pick up end-to-end fabrication work as well as maintaining manufacturing of its raw Arcoplate product.
The company is also taking the initiative to move closer to customers’ offshore operations to reduce the length of time taken to supply products.
Another player manufacturing for the subsea market – Velocious – has also moved some manufacturing business offshore, but chief executive Brett Silich said the company’s innovation and ‘ideas’ would always be Perth-based.
“This will be a centre of excellence for various subsea LNG and pipeline based technologies,” he said.
Those with established innovations spoken to by WA Business News were not envious of start-ups looking to make their mark; all agreed there was a dismal amount of support provided for those fledgling innovators.
“All innovative start-ups have sought investment and development abroad simply because Australia could not recognise the long-term value of this technology,” Mr Silich said.
“Australia has finite resources to exploit from the ground and these will run out.”
