Sailing into stormy waters: Print 21 magazine article

The printing industry in Australia is currently navigating through challenging times. A number of factors, both internal and external, are impacting on the industry and are likely to become even more critical in shaping the fortunes of the industry during 2008. Hagop Tchamkertenian takes a look at recent trends and future prospects for the coming year.

The macro economic environment in Australia continues to play an important influence on printing industry activity. The Australian economy is currently progressing through an unprecedented period of economic growth but the prolonged period of economic expansion has not stopped the industry from being extremely volatile.

The most recent economic growth data shows that the printing industry is currently in a state of technical recession having registered two consecutive quarters of negative activity despite the strong growth phase that the Australian economy is going through. Because the last two quarters have been negative, the printing industry's annual rate of growth has been slashed to a modest 2.1 percent compared to a growth rate of 4.0 percent for the Australian economy.

Official data on sales and company profits in the printing industry also depict a similar trend with reported deteriorations during the past two quarters (June and September 2007) failing to offset the year-on-year improvement.

One indicator that has started to improve recently is new capital expenditure. After registering five consecutive quarters of decline from March 2006 to March 2007, the printing industry has now reported two consecutive quarters of increased capital expenditure. However, the modest new capital expenditure plans and trends are due largely to the existence of excess capacity in the marketplace and used printing assets coming up for sale in the marketplace as a consequence of industry rationalisation and consolidation.

According to survey results conducted by Printing Industries, the capacity utilisation index trended downwards from December quarter 2006 to September 2007 quarter before improving in the December 2007 quarter due to seasonal factors. Business confidence in the printing industry continues to remain positive despite the seasonal deterioration in the December 2007 quarter.

One area that has consistently trended down is reported selling prices which on a net balance basis declined for the 28th consecutive time during the December 2007 quarter.

The final area worth mentioning is labour availability which continues to deteriorate. With the unemployment rate reduced to a generational low, combined with a booming mining and resources sector, the issue of labour availability is becoming a critical factor for an increasing number of printing companies.

Making an impact
What are some of the factors having an impact on the printing industry?

A new government: The election of a new government gives the printing industry both opportunities and challenges. Foreshadowed changes to labour market laws (WorkChoices) may convince some printing companies to increase their investment in labour displacing technology. The industry also has an opportunity to engage the new government through the proposed Industry Innovation Council and the Manufacturing Networks.

Environmental performance: With the new government quickly moving to ratify the Kyoto treaty, playing a key role in the recently concluded Bali conference on climate change, and being committed to introducing a carbon emissions trading scheme by 2010, the environmental performance of printing companies will become the object of much more intense scrutiny. To their credit the printing industry has been proactive in the environmental area and an increasing number of printing companies are looking at the environmental aspects of their operations having realised that improvements in environmental performance also deliver improvements to the bottom line.

Labour shortages: Unless there is a dramatic slowdown in the Australian economy which would push the unemployment rate up, labour availability will continue to be a major issue for printing companies during and beyond 2008. Wage outcomes are likely to trend upwards and printing companies struggling to attract and keep skilled staff in a tight labour market are likely to face wages pressures.

Industry consolidation: The process of printing industry consolidation through mergers and acquisitions has gathered momentum in recent times with the arrival on the scene of private equity backed funds. While the emphasis of private equity driven acquisitions is on businesses with perceived unrealised earnings potential, the operation of market forces is also helping to drive non-profitable and unsustainable printing businesses out of the marketplace.

Print increasingly seen as a commodity: Faced with clients who are increasingly price driven, printing companies who have been unable or unwilling to adapt their business operations and strategies and move with the times are becoming less and less profitable. Despite the fact that each printed item is not only unique but has value only to the commissioning client, the pricing dilemma faced by an increasing number of printing companies resembles that of a commodity market. Non-homogenous products continue to be priced like a commodity or homogenous product and what is more concerning is that there is evidence emerging that this problem is no longer just confined to the traditional printing processes and markets.

Succession planning: Family owned businesses continue to be an integral part of the printing industry. There are numerous businesses that are four to five generations old. The problem many of these businesses face is that an increasing proportion of the new generation is not interested in running the family printing business which results in critical succession issues.

The need for an orderly and managed succession planning program is vital for the printing industry, otherwise those approaching retirement age will be disappointed if they fail to find a successor to continue the business as they sell their share of the business and retire, or are unable to sell the business at a price that will allow a fulfilling and comfortable retirement.

Based on the national results of an on-line succession planning survey conducted by Printing Industries:

* 78.6 percent of the respondents were aged 50 years plus
* 88.7 percent have been operating the business for five years or more
* 66.3 percent consider the business to be part of their superannuation investment
* 51.7 percent did not know what their business was worth
* Those who knew based the value on either independent advice, value of capital equipment plus goodwill or compared it to another similar business
* 64.0 percent indicated that they do not know what their business should be worth upon exiting the industry
* 52.8 percent of the respondents plan to exit the industry within the next five years
* 91.0 percent plan to exit the industry within the next 10 years
* While 60.7 percent indicated that succession planning was a priority to their business, only 29.2 per cent indicated that they had a business succession plan.

Competition domestic and global: The relatively low cost of market entry for most sectors of the printing industry has ensured that most sectors face intense domestic competition which often results in printing companies lowering their prices to maintain or capture increased market share.

While print clients are the beneficiaries of a competitive environment, the cost to the printing industry is lower margins and returns on investment.

An increasing number of printing companies are also facing competition from overseas printing operations. For decades, competition from overseas sources was limited to a few sectors of the Australian printing industry such as book and stationery printing, sectors that produced printed matter that was deemed to be non-time sensitive.

With advancements and improvements in processes and technology as well as logistic and distribution efforts, more and more printed matter is now considered appropriate to be done overseas and shipped to Australia. Decades ago, non-time sensitive printed matter was measured in terms of months; increasingly it is being measured in terms of weeks and no doubt in the near future it will be measured in terms of days.

Industry prospects: The current drivers of economic activity in Australia are consumption expenditure and business investment. With concerns about underlying inflation being too high in Australia, further monetary policy tightening now looks certain during 2008, with the possibility of an upward adjustment coming as early as February.

The anticipated monetary policy tightening is likely to dampen economic activity in both the Australian economy and the printing industry. Given that more than 70 percent of printing industry sales are made to industries that are highly sensitive to interest rate movements, an environment of increasing interest rates spells bad news for the printing industry.

Printing industry consolidation is a trend that is likely to continue during 2008 but if interest rates rise as expected, it may help to lessen the role that private equity plays in industry consolidation efforts.

Another factor that may dampen economic activity in Australia is the crisis in the United States sub-prime market which has already started to impact on Australian economic activity. Concerns that the United States economy will slide into a recession caused global stock markets to crash during January. If the United States slides into a recession or, in the more likely event, if economic growth moderates significantly, then global economic growth is likely to weaken and booming economies like China will begin to feel the pinch. If China is affected and responds by reducing production, that would impact negatively on the booming Australian resources sector and produce lower economic growth rate in Australia.

Under such a scenario the Australian printing market could also face increased competition from Chinese and other Asian printing companies as they search for alternative markets to a contracting or subdued United States market.

Given the time lags that exist between economic activity and changes in the labour market conditions, even with a possible slowdown of economic activity, the labour market in Australia is likely to remain tight for most of 2008. For printing companies this implies continued difficulties in finding suitable labour and the real risk of higher wages.

A challenging year
It is becoming a cliché but 2008 is shaping up to be another challenging year for the printing industry in Australia. The normal factors that printing companies face year in year out are all present: intense industry competition, excess capacity and yet the need to invest in new technology, falling profit margins and returns on invested funds, industry consolidation, erosion of market share due to developments in multimedia, and difficulties in attracting and holding on to suitable employees.

The list of industry challenges for 2008 has grown to include dealing with a new and potentially reformist Federal Government, operating in a higher inflation and interest rate environment, managing a possible surge in wages, facing the prospects of lower global and domestic economic growth, and starting to think about that inevitable business issue - succession planning.