CHAPTER 7
PROSPECTS FOR VALUE-ADDING: EXPORTS AND STRATEGIES
Introduction
7.1 The export of value-added products are in many cases essential
to the viability of particular enterprises involved in value-adding. The Australian
domestic market is simply not large enough to support large scale value-adding
enterprises. For these enterprises to be profitable they must be involved in exporting
their products as well as selling on the domestic market. .
7.2 It is also primarily from exports that Australia can hope to
reduce its level of foreign debt. The importance of exporting value-added agricultural
products to the national economy was discussed in Chapter 1 of this report.
7.3 In this chapter Australia's performance in exporting value-added
agricultural products is discussed with reference to the requirements necessary for
enterprises to successfully enter and operate in foreign markets. Factors impacting upon
Australia's entrance into export markets and restrictions on operations in these markets
are also examined.
7.4 The importance of the Asian market for Australia's value-added
exports is examined along with the difficulties Australian exporters face in gaining
access to this market.
7.5 The impact of the General Agreement on Tariffs and Trade (GATT)
agreement on Australia's exports, including value-added exports, is appreciated by the
Committee and is discussed below, particularly in relation to the cotton, beef and dairy
industries.
7.6 The significance of initiatives taken by the Asian Pacific
Economic Cooperation forum (APEC) to open up international markets is also canvassed in
the report. Particular attention is paid to how these initiatives could impact on
Australia's food producing industries in relation to Asian markets.
7.7 The content of this chapter has been arranged under these major
headings:
- Australia's export performance;
- Asian export markets;
- Effect of the GATT agreement;
- The Asian Pacific Economic Cooperation forum;
- Prospects for value-adding in specific industries; and
- Suggested strategies applicable to particular industries to support
value-adding activities.
Australia's export performance
7.8 Although statistics indicate impressive increases in Australia's
export of processed foods over the years, criticisms have been expressed
concerning Australia's export performance. According to the then Department
of Industry, Technology and Regional Development (DITRAD) Australia's
export growth of processed food and beverages had been patchy in some
years resulting in the country loosing out in some key Asian markets.
DITRAD was of the view that Australia's food processing industries had
performed relatively poorly in exporting to Asia when compared with the
opportunities available. [1] Mr Ray Block,
Director of SBC Dominguez Limited, asserted that despite the appearance
of progress in exports during the years the reality is that “Australia
has slipped over the last 20 years in its ranking as a world food exporter.”
[2]
7.9 Mr Botsman of the Professional Resource Group, in evidence to
the inquiry, stated that:
While our exports to South - East Asia are increasing, our participation
in that market or our market share is actually falling. Everyone is
variously happy or complacent because our exports are increasing. But
our market share is actually falling. [3]
7.10 Mr Keith Hyde, Managing Director of the Rural Industries and
Research Development Corporation, told the inquiry:
In terms of export performance our rate of processed export goods into
Asia has not kept pace with the rate of Asian imports. We have lost
ground. Despite a significant increase in our exports of processed products
into Asia we have not kept pace with some of our competitors. [4]
7.11 The Managing Director of INSTATE Pty Limited, Mr Denis Gastin,
stated in February 1996:
We are supplying just 0.2 per cent of total Asian food consumption
and just a fraction of food imports, in all major individual markets
in the region ... despite our capabilities and untapped capacities as
the low cost food surplus country in the region, we have made little
impact on the markets overall. [5]
Requirement for the export market
7.12 It has been argued that a food processing company needs to have
a solid base in Australia's domestic market before it launches itself
onto the often more complex international market place. The export of
products overseas should be seen as the logical outgrowth of successful
domestic marketing. [6]Although some
firms have been able to successfully enter international markets without
first establishing their product in the Australian domestic market this
is not the norm. Professor Nicholas Samuel was of the opinion that “typically
firms would be expected to have a solid base in the domestic market before
they take a quantum leap into far more complex international markets.”
[7] According to Professor Samuel, the
entry of food processors into the international market is usually a logical
outgrowth of successful domestic marketing “it takes place as a strategic
and innovative response to saturation of the domestic market and the relatively
greater attractiveness of international markets.” [8]Mr
Curran of UMT told the inquiry that without a strong local market it was
difficult to enter an export market. As stated by Mr Curran “if you
have a nice domestic market where you can get a return on your capital
expended in the domestic market and the export then becomes the cream.”
[9]
Factors acting against entrance into export markets
7.13 Some observers have detected a lack of enthusiasm by large
companies in Australia involved in value-adding to agricultural production to become
involved in marketing their products overseas. Professor Samuel stated in his submission
that:
The firms considered the best equipped for international marketing
by government are likely to have the least incentive for the purpose.
These are the large corporations with well established brands. Firms
would be prepared to risk capital for international marketing only if
its incremental profitability is greater than from domestic marketing
over a relevant planning horizon. ... why should these larger firms,
especially foreign firms bother with international marketing if they
are making high enough profits from domestic marketing, and are doing
so despite minimal investment in technology, research and development?
[10]
7.14 The Department of Primary Industries and Energy told the
inquiry that for Australian companies:
It has been very easy to be quite comfortable just servicing the domestic
market, and we have not necessarily had the imperative to export some
of our products, such as our colleagues across the Tasman have always
had to do. [11]
7.15 The high cost of product and market development necessary for overseas
exports, along with the uncertainly of returns from such investments appears
to have reinforced the lack of action by some Australian companies to
develop overseas markets. [12]
7.16 Mr Bill Pritchard of the Evatt Foundation has stated:
I think we're pretty good at farm production. Most of the commodities
we grow, we grow pretty well. But in terms of value-adding processing,
for a whole range of historical reasons I suppose, Australian producers
have never really captured export markets in the way they might have
otherwise. I think size is important and for companies trying to build
and export, or a global presence let's say, it's very difficult to do
that from Australia. [13]
7.17 Professor Samuel was of the view that the same structural factors
that have impeded the improved performance of the Australia's food processing
industries in the domestic market have also constrained these industries'
development of international marketing. [14]
The major companies, with brand names, have been quite profitable over
the years even considering the structural problems they suffer from. Until
these companies face intense competition in the domestic market, particularly
for shelf space at the retail level, there is no real incentive for many
of these companies to look for, and develop, markets overseas. [15] Although Professor Samuel admitted that
he had no definitive evidence that large retail chains and dominant food
suppliers have acted together to reduce competition, and provide themselves
with apparently large profits, he wondered how these companies could be
so profitable, despite relatively low productivity, if some form of vertically
integrated arrangements had not been put in place. [16]
7.18 A survey for the then Department of Industry, Technology and Commerce
(DITAC) in 1990 involving 80 Australian food processors led to the conclusion
that Australia's food processing industries are not able, or willing,
to respond to international opportunities. This survey found that only
a minority of firms are strongly active in export development and that
export development was not a “top priority in most firms.” [17]
7.19 These views were countered, to a certain extent, by evidence to
the inquiry provided by Mr Calder of DPIE who stated that many value-adding industries
were experiencing a change in their cultural attitude. According to Mr Calder these
companies:
Have not had to export in the past. ... they have had it a little bit
easy for 20, 30 or 40 years. Now it is becoming tougher because the
economy is opening up overseas markets to imports and they have not
got any choice but to get more efficient. [18]
7.20 Mr Graeme Taylor of the then Department of Industry, Science and
Technology told the inquiry that he did not believe there were too many
large companies “out there in the current environment who feel that
exporting is something they can ignore”. [19]
Mr Taylor went on to note “I cannot believe that there are many companies
around that are saying to themselves consciously or unconsciously, `we
need not worry about the global market'.” [20]
7.21 In respect to the manufacturing industry there is evidence of a
relationship between size and a willingness to become involved in export
markets. A survey of 2 300 manufacturing firms in 1990 showed that the
smaller a firm the less likely it was to become an international exporter.
[21] It is probable that inhibitions
concerning involvement in export markets experienced by smaller manufacturing
companies are shared by small Australian food processing companies. These
smaller companies probably appreciate that their size, lack of managerial
expertise in relation to exporting, and their weak brand power are likely
to place them at a serious disadvantage overseas in competition with foreign
based multinationals. Mr James Kennedy of the Ricegrowers' Co-operative
Limited told the inquiry:
Domestic policies make it very difficult for value adding agricultural
exporters to obtain adequate scale to be internationally competitive,
and they are continually taking suboptimal decisions because of fear
of TPC [Trade Practices Commission], inquisitions, and so on. [22]
7.22 An additional factor inhibiting Australian companies developing
overseas markets is the fact that Australian subsidiaries of multinational
corporations are unlikely to enter markets where other subsidiaries of
the corporations are established. Foreign owned companies often employ
a policy of export franchising. Under this arrangement export markets
are reserved for the parent company and foreign subsidiaries are excluded
from competition. As Professor Samuel stated “the global business
priorities of the Australian subsidiaries of foreign firms may not accord
with Australia's national interests.” [23]
7.23 In evidence to the inquiry concerning Australia's tobacco industry
Philip Morris Limited claimed that being a member of an international
organisation has allowed it access to overseas markets without having
to go in and establish expensive facilities there. However, later in its
evidence Philip Morris Limited admitted that its parent company could
prevent it from entering a particular market if it chose to do so. [24]
7.24 The Ricegrowers' Co-operative Limited, in evidence to the inquiry,
submitted that multinational or transnational companies have the ability
to dominate any opposition in Australia because they have the “critical
technology and economies of scale globally to slot those [Australian]
plants into their operations” allowing them to maintain a high national
share of the Australian market for value-added products. [25]The
Co-operative went on to state:
Those multinationals have optional origin sourcing ... they can source
material from the most economic as they wish, which is a good reason
for their existence. [26]
7.25 It has been suggested that subsidiaries in this country of large
international food processing firms are so profitable that they are being
uses as “cash cows” by these foreign companies. [27]
7.26 Following the sale in August 1995 by the company Pacific Dunlop
of its food division to Nestle and the J R Simplot Company it was alleged
that this sale represented the “death throes of an Australian owned
food industry”. [28]Mr Bill Pritchard of the Evatt Foundation
stated:
Most foreign multinationals use Australia as a consumer base ... What
they do is make money out of selling branded products to Australian
consumers and then sending the profits back home to head office and
they don't do much else. [29]
Mr Pritchard went on to state:
Australia is increasingly a branch-plant economy for foreign transnational
food companies ... the historical evidence to date has proved that they
are mainly interested in satisfying Australian consumer needs rather
than building Australia as a base for the Asia-Pacific region. [30]
7.27 This concern with the takeover of Australian companies by overseas
interests was not shared by all observers. Mr Peter Action, a consultant,
told the inaugural meeting of the Australian Food Council in October 1995
that it was a misconception that Australians suffered when large foreign
companies took over Australian brand names. According to Mr Action local
producers, processing plants, packaging businesses and freight services
could make a living supplying brands in Australia and overseas regardless
of who owned the brand. [31] The then
Minister for Industry Mr Peter Cook, at the same meeting, supported this
view when he stated:
We should not seek to stop, nor can we stop, the internationalisation
of the food industry. Rather our goal must be to increase investment
opportunities by growing the industry. We must look to fully exploiting
the industry's international links and build on those to boost export
income. [32]
7.28 Mr Denis Gastin of INSTATE Pty Limited commented in February
1996 that Australia had only one company which made the Fortune 500 list of world food
companies, Goodman Fielder. As a result of the relatively small size of Australian food
processors:
In the short term Australia has no choice but to rely heavily on the
multinational and other foreign owed food companies ... for its penetration
of Asian markets with Australian processed product. [33]
7.29 Some industries have faced unique difficulties in entering
export markets. Noodle producers in Western Australia provides an example of an industry
that declined to enter the Japanese market due to unique problems it faced. Despite the
optimism of the Department of Primary Industries and Energy in seeing noodles as having
export potential the Australian Wheat Board (AWB), after careful examination, decided
against entering the Japanese market. In 1990 the Board examined the production and export
of noodle from Western Australia in conjunction with a local Australian food company. The
project did not proceed when it was discovered that the Australian product would not be
competitive with the Japanese manufactured noodles. The project was not economical due to:
- a 25 per cent duty on Australian noodles imported into Japan;
- freight costs associated with processed and packaged foods; and
- the high cost of purchasing and importing the equipment from Japan
to manufacture the noodles in Australia. [34]
Conclusions and recommendation
7.30 There was conflicting evidence presented during the inquiry
concerning the level of enthusiasm displayed by Australian food related companies
regarding entry into export markets. However, the Committee is of the view that in recent
years there has been a change in attitude by Australian companies, particularly larger
companies, resulting in a greater willingness to export their value-added products. This
development is welcomed by the Committee.
7.31 In chapter 1 of this report the Committee commented that in
principle it is not concerned with foreign ownership of Australia's food and beverage
companies unless such ownership results in a serious lack of competition in the domestic
food market leading to a detrimental affect on consumers or primary producers, or a loss
of access to export markets. However, the Committee would be concerned if multi-national
companies deliberately prevented their Australian subsidiaries from entering export
markets so as to benefit their subsidiaries in other countries or the parent company. Such
a situation would be to the detriment of Australia's value-adding activities and should
not be tolerated by the Australian Government.
7.32 No evidence was provided to the Committee that Australian
subsidiaries of foreign companies are being prevented from entering and operating in
export markets. However, the Committee recommends that the Commonwealth Government
maintain a watching brief to ensure that foreign owned companies involved in value-adding
in Australia are not restricted in their overseas marketing activities by their overseas
owners. The Australian Government must ensure that the activities of foreign owned
companies in Australia benefit Australian interests and not solely the interest of foreign
owners.
Footnotes
[1] Evidence, Professor Nicholas
Samuel, p. 604; see also South Australian Development Council, Value-Added Food
Processing in South Australia, Draft 24 May 1995, p. 11.
[2] Ray Block, Creating Value-added
Industries, AIESEC Forecasting the Australian Economy 1993, p.12.3
[3] Evidence, Professional Resource
Group, p. 208
[4] Evidence, RIRDC, p. 1007.
[5] Denis Gastin, Agribusiness - What Do
We Need To Do To Compete In Asia?, Outlook 96, Vol. 2, Agriculture: collection of
papers delivered at the Outlook 96 Conference held in Canberra 6-8 February 1996,
organised by ABARE, p.153.
[6] Evidence, Professor Nicholas
Samuel, pp. 617, 629; see also Evidence, South Australian Government, p. 565.
[7] Evidence, Professor Nicholas
Samuel, pp. 620-621.
[8] Evidence, Professor Nicholas
Samuel, p. 621.
[9] Evidence, UMT, p. 852.
[10] Evidence, Professor Nicholas
Samuel, pp. 618-619, 626.
[11] Evidence, DPIE, p. 932.
[12] Evidence, Professor Nicholas
Samuel, p. 621.
[13] ABC radio program Business Report,
4 August 1995; see also Evidence, CSR, p. 459.
[14] Evidence, Professor Nicholas
Samuel, p. 622
[15] See Evidence, Professional
Resource Group, p. 212 for comment on the experience of Golden Circle having difficulty
competing on the domestic Australian market when tariff barriers were removed.
[16] Evidence, Professor Nicholas
Samuel, p. 628.
[17] Department of Industry, Technology
and Commerce, Innovations and Competitiveness in the Australian Processed Food
Industry, prepared by the Centre for Technology and Social Change, University of
Wollongong, AGPS, 1990, p. 35
[18] Evidence, DPIE, p. 928.
[19] Evidence, Agri-Food Council,
p. 939.
[20] Evidence, Agri-Food Council,
p. 939.
[21] Evidence, Professor Nicholas
Samuel, p. 619.
[22] Evidence, Ricegrowers
Co-operative, p. 964.
[23] Dr Alistair Watson, Further
Processing of Agricultural Productions in Australia: Some Economic Issues, Research
Paper Number 5, 14 December, 1993, Parliamentary Research Service , Department of the
Parliamentary Library, p. 20. As of 1994 about 30 per cent of Australia's food processors
were foreign owned; Evidence, Professor Nicholas Samuel, pp. 605, 619.
[24] Evidence, Philip Morris Ltd,
pp. 670-672.
[25] Evidence, Ricegrowers
Co-operative, p. 964.
[26] Evidence, Ricegrowers
Co-operative, p. 964.
[27] Evidence, Professor Nicholas
Samuel, p. 616.
[28] ABC radio program Business Report,
4 August 1995.
[29] ABC radio program Business Report,
4 August 1995; see also Evidence, Ricegrowers Co-operative, p. 964.
[30] ABC radio program Business Report,
4 August 1995.
[31] AAP news story dated 16 October 1995.
[32] AAP news story dated 16 October 1995.
[33] Denis Gastin, Agribusiness - What
Do We Need To Do To Compete In Asia?, Outlook 96, Vol. 2, Agriculture: collection of
papers delivered at the Outlook 96 Conference held in Canberra 6-8 February 1996,
organised by ABARE, p.158.
[34] Evidence, AWB, pp. 70, 74; see
also Evidence, GRDC, p. 1060.