The Electrical Industry in Australia and the Challenges it Faces
A problem that is occurring all over mature markets
This article will look at the electrical industry and how changes and pressures being brought to bear are having wide-ranging effects. This is not to say that other industries are not undergoing similar changes that mirror those of the electrical industry. Change is coming at a rapid rate and it is evident that many organizations, and those that run them, are poorly equipped to deal with the uncertainties that exist. The industry exists as part of a far larger market and consists of many elements. These include end-users, specifiers, contractors, manufacturers, switchboard builders, wholesalers, and distributors. To add to this list, there are a plethora of other organizations that play a part; such as accounting firms, legal firms, labor hire, transport and courier services. I will explore the main parts of the electrical industry only as many of the allied firms' service multiple other industries. I will also look at how government and peak bodies may play a part in the changes.
End users
End users are many and varied. They can be large multinational organizations through to individual homeowners. Because of this, their wants and needs are very different. The one overarching similarity that has become more common now is that they are all far more astute and have access to multiple choices of products and services. There was a time that remotely located mine sites looked forward to visits from manufacturers and suppliers to see those latest product offerings. Companies performed regularly visits to clients with new products and technologies. These were expensive exercises, but it was possible to track and monitor an ROI as orders for new products could be tracked. Remote location sites are extreme, however, the ability to research new products, read reviews or join forums to solve problems has resulted in end users far more savvy on products. Add to this the ability to source pricing directly online as well and we see a shift in dynamics from many end users not knowing what they want or need to now be very informed.
Products have also become far more accessible to end-users. If we just look at the changing way our homes are being wired with all manner of smart devices, there are all sorts of products now available at large hardware and electronics retailers. A recent trip to an Aldi store showed that I could now buy Bluetooth controlled lighting from a major trade brand from a retailer. There is a requirement to have products installed by licensed electrical contractors in Australia, but these new Smart devices will walk you through the installation instructions. Should governments step in and stop these products being sold to homeowners? I believe yes. Simply asking to view and electrical workers license would be one way. It’s not a foolproof method but could put some doubt in a consumer’s mind about purchasing these products. After all, spray paint is ok being locked up and liquor can only be sold to those over 18. I don’t believe such moves will limit selling opportunities as the Genie is out of the bottle with Smart homes and demand will continue to increase.
For large end-users, particularly in the mining states of Western Australia and Queensland, the last major mining boom saw wage and labor costs escalate out of control. Engineering firms filled floors of city buildings with staff that were being charged to end-users on major products that resulted in huge construction costs on many projects. The viability of this model was shown following the mining slowdown as many large end-users started talking price again for products that were often locked in through rigorous specifications. Many products now are very similar in terms of specification, quality, and reliability. So, it can make sense to explore more cost-effective options if it is economically viable to change.
Specifiers and Consultants
Specifiers remain important in the industry but their influence beyond that of niche LED lighting has diminished in recent years. The huge variety of lighting and control systems that are available have resulted in a growth in providers of LED options, particularly for architectural type applications. However, beyond the specification of the lighting itself, the margins on these projects are severely diminished for electrical wholesalers, even though the overall total value is significant. Contractors prefer to purchase through wholesalers as they can utilize their trading terms to delay payments. Specifiers and consultants do not understand how the industry's liquidity is affected by their actions and the downstream effect it has on the industry.
This is also the case for other products besides LED lighting. This sector does tend to include some level of risk mitigation in their considerations and will look at the major brands from serviceability and stock obsolescence perspective. The loop needs to be closed more though between the specifier, contractor, manufacturer and the channel to market. It is in the interest of all parties that the viability and realities of delivering on projects occur.
Contractors
Australia has approximately 45,000 active electrical contractors. It is a highly fragmented industry with the largest contracting company in Australia having only 3–4% of the overall market. The sector is made up of many small hard-working individuals that are able to enjoy a work-life balance as being a self-employed electrician. This fragmentation though leads to strong price competition amongst those in it. Labor costs are relatively constant for all so the only other factors that can be used to reduce price is purchases and overheads. Purchases make up 39% of the total cost associated with electrical contracting and are, therefore, an area of focus when it comes to trying to reduce prices. Younger tech-savvy contractors are exposed to online stores via social media or acquaintances and can easily compare buy prices with traditional vendors. With the more of us getting home deliveries for food, groceries, clothes, and books, these consumers are accustomed to how to shop online. With technology assisting SME’s do their accounting, invoicing and estimating, it seems a natural progression that purchasing migrates that way.
What is lacking in the contractor space across all business sizes, is an improvement in business skills and financial management. It may be a business practice to get a 30/60/90-day account from multiple suppliers but this is more done out of supplier side competition than good business management. The fact is, a 60-day account at current unsecured loan rates in the order of 15% equals 3% interest on your money if you can collect and pay your bills in a timely manner. More often than not, the culture within the sector views these trading accounts as a right and not a privilege. Granted, a small one-man operated business will often have some cash flow issues that require managing. However, once you move up from a single person operation and you have superannuation obligations, insurance, and other costs, there is a need to make sure that a business has enough funds to cover the liability periods. This is easier said than done when part of the time you can also be chasing up unpaid monies for work done. Lower profitability means that cash flow is extremely important as the next project you quote may have even less margin than those of 12 months ago. The average profit margin for electrical contractors is 8%. This is behind the industry average for other contractors of 11.8%. With smaller margins than those of other trades you may be working alongside, it seems that the electrician will need to be more conscious of their costs and margins than his counterparts.
Switchboard Builders
This sector of the industry is made up of a large cross-section of different business types also. From large specialist industrial switchroom manufacturers through to small niche builders that specialize in assembling products for specific markets. Like other sectors, switchboard builders have also faced some recent changes with upgrading to the standards and the adoption of the new AS/NZS 61439. This meant that many builders needed to look for a product that met these new standards and could no longer build or use their own design unless it was type tested to meet the requirements. Australia has had a strong switchboard building industry for many years as the high standards required by my industry meant that local products far exceeded those of imported products. Local manufacture was also competitive and scalable as projects increased workloads.
The main threat for this sector is the growth in electrical switchgear manufacturers own product offerings. With the increase in automation, safety and the prevalence of large drives, many large multinationals have developed products that integrate these features and add complete package offering to customers. There will exist opportunities for the medium to smaller switchboard builders to operate as these large manufacturers may determine this market too fragmented to be viable in a relatively small market like Australia.
The key for the larger firms in this space is their knowledge of their markets and the relationships they have that enable them to be agile enough to meet the demands of the mining and industrial sector.
Manufacturers
Manufacturers look for a margin return on a product to cover their research and development, manufacturing and supply costs. Competition amongst electrical equipment manufacturers has been steadily increasing year on year as new products, such as LED lighting, accelerate in their development and applications. Also accelerating is the number of new manufacturers of products from China. LED lighting, circuit protection, and wiring accessory manufacturers number in the thousands with products that are often a copy of existing products. As is the case in many markets, these products find their way into the Australian electrical market mainly through online stores that do not have access to trading terms with the major incumbent brands. With competition amongst smaller contractors becoming greater in recent times, many are now supporting these products without understanding whether or not they are manufactured to the standards required. Unfortunately, it is not only the low technology products facing the problem of cheap imports. Even sophisticated automation product is now being copied and supplied into the local market. Major European, Asian and American manufacturers can only sit by and watch a market that is being driven on the lowest price basis. They have done their work on product specification and features and benefits of their offerings only to see it sourced via alternative supply channels with little being done to show the provenance of the product. The distance that can exist between end-user and manufacturers may be significant from a transactional point of view that the manufacturer may be unaware it is even happening.
One of the biggest cases in recent times in Australia is that of the Infinity Cables. This product was directly supplied from overseas to various distributors of electrical products and ultimately sold to electricians. The cable ranges sold were the types predominantly used in housing and small commercial projects. According to the ACCC website, there were approximately 4,500 km’s of this product. This is usually sold in lots of 100m rolls. Therefore, there is a staggering amount of product in the market. It has been shown that this cable can fail as the insulation quality does not meet the Australian Standards. This is a major issue as it is now installed in new homes with owners and tenants unaware of the risk. There are organizations such as the Electrical Equipment Safety Scheme, Electrical Regulatory Authorities Council, ACCC and Energy Safety all attempting to ensure compliance. However, price driving a market to seek cheaper products can result in this result.
Wholesalers
The electrical industry is supplied, in most parts, via electrical wholesalers. The largest in the country are Australian operations of multinationals from Europe and the United States. Some large independent locally owned wholesalers do exist, but the majority are smaller independent operations. The large multinationals dominate the wholesale sector and service local small to large contractors plus period contracts with large end-users.
There has been a rise in the presence of online independent wholesalers over the last few years. Many of these source products from Asia due to their inability to source local products. Although not restricted trade by definition, incumbent large brand suppliers will avoid opening accounts with these alternative wholesalers. This demonstrates the market power that resides in the major players in this space.
An increase in the number of branches across the country has seen the level of experience in this sector diluted significantly. Many of these individual branches have a turnover in the tens of millions of dollars but are driven from a pricing mentality and fear of losing accounts who shop elsewhere. The lack of business knowledge at many branches has seen an increase of risk in the industry as they seek to get cheaper products and extend trading terms with clients. This is not the case in all situations but is certainly one that affects the long-term viability of many branches.
As many traditional bricks and mortar branches face their customers reducing their spending as they adopt online or use online prices to seek a better deal, so too are wholesalers seeking to source branded products via alternate channels, mainly through grey market importers. These importers utilize overseas networks to source branded product from countries have the same products but at a cheaper price. This practice is known as price discrimination as manufacturers will set the highest price they can get for a product in a certain market. The problem with this practice within the wholesaler sector is that managers do not like their customers buying online yet they will divert sales to traditional manufacturers in a market to the grey market.
A major challenge facing traditional shop front wholesale stores, and it needs to be remembered that this is sector in Australia turn over billions of dollars, is how to best meld the online and shopfront experience for customers. Buying habits are changing for consumers and B2B and the risk to retail businesses is being felt worldwide as many city main streets have vacant shops as they struggle to get foot traffic. A recent trip to Germany and England to look at how independent wholesalers adapt to compete against multinationals highlighted the need to better utilize online and augment their current offering. One business in Germany had even commenced using the term ‘online’ in their name and invested in a purpose-built distribution center. Even with these significant investments, online trading had only grown to 33% of their overall business. They were confident this would grow as customers saw the benefits over time.
Distributors
Distributors tend to be agents for overseas brands that lack their own representation in a country and operate differently to traditional wholesaling in that they stock limited ranges. This group will sell either direct to clients or through wholesalers. Distributors therefore operate at higher margins than wholesaling but less than manufacturers. The challenge that many face is the convergence of products from traditional suppliers that can dilute their offering. This also can be seen as an opportunity for many distributors to enter new markets or grow business within existing customers. If parent brands are happy to supply to a market via distributors, their long-term viability is good. I believe that this segment within the electrical industry is a good target for growth through consolidation and acquisitions.
Peak Bodies and Government
I have put these two together even though their influence and perceived power in the market are quite different. Government plays a role in ensuring that those working as electricians are licensed and act as an auditor of workmanship through agencies in each state. They also involved in establishing the broad standards that exist to ensure safe and consistent work and product quality. Every industry can have so called ‘cowboys’ and these agencies will hand out fines or withdraw licenses, depending on the breach. When it comes to ensuring that product entering the country meets the required standards though, it can be a different story. The import border is porous and there are always products entering that will require some scrutiny. Unfortunately, as has happened in the cladding and Infinity Cable cases, it is picked up after considerable product has already entered the market and been used. Government regulation is quite tight and to further strengthen would only end up levying further costs on an industry that is already suffering from reduced revenues and margin erosion.
The electrical contractors have two peak bodies operating in Australia. How effective are they as bodies designed to assist small business though? This is difficult to assess as often, those represented at peak body functions tend to be the medium to larger contractors. They have implemented some good initiatives in pooling and training apprentices plus educating the contractors on rule changes as they occur. Where they do lack is in closing the gap on what products their members use and whether they meet local standards. They do work with some of the larger manufacturers in Australia, but a cynical view is that his is to assist in sponsorship as there is little evidence that they instruct members to support brands that are part of the Australian business landscape.
The missing peak body in Australia is that of one for the wholesaling industry. One did exist but folded during an investigation by the Australian Competition and Consumer Commission (ACCC). Even though the investigation deemed that nothing wrong was done, a complete market sector lost a representative body. Given some of the points highlighted in the section on wholesaling, vis-a-vis training and knowledge, it would appear that a peak body could assist in training members, auditing non-compliant imports and advocating for its members. Whether an appetite exists in the market place for this group or not has yet gone unnoticed.
Conclusion
I have tried to highlight a few key points that the electrical industry faces in Australia by looking at the different segments that make up this group. Although facing headwinds from many places, the industry is significant in the Australian business landscape and consists, overall, of some very capable and well-trained people. It is also important to acknowledge that there may be omission in this article that I have tried to cover the broader topics being faced. Like many other industries, it is facing internal and external challenges that it is yet to fully come to terms with. Nobody likes to see an electrical contractor close their doors and 400 staff lose their jobs, as has just occurred in Western Australia with ECM. I do believe that there needs to be more discussion by all segments more often to address ongoing problems.
