Carpet Institute of Australia
Review of Post 2005 TCF Assistance

Presentation to Productivity Commission
 Hearings – June 2003

The Carpet Institute of Australia
The CIAL is a national industry association, representing the collective interests of the Australian carpet industry

•	The Institute has 45 members, which account for 95% of Australian output
•	Members include:
-	Carpet manufacturers
-	Manufacturers of intermediate product (ie yarn, latex, etc)
-	Manufacturers of associated product such as underlay
•	Associate Members include:
-	Suppliers of goods and services to the broader carpet industry
•	Membership covers the full supply chain
-	From yarn spinning/extrusion through manufacturing and distribution to retail and cleaning
Economic Significance of the Industry
•	$750 million annual manufacturing turnover
•	At retail point of sale, equates to over $1.5 billion
•	$75 million exports, and growing – 10% of turnover
•	Import replacement - carpet and yarn
•	3,300 direct employees
•	Extensive value chain –from wool fibre and polymer, through spinning/extrusion to tufting & weaving 
•	Regional economic significance
•	Largest processor of raw wool in Australia

Carpet Industry has Responded Positively
•	The industry has continued to undertake fundamental structural change
•	Industry consolidation continues with increased focus on vertical integration 
•	More than $150m invested since 1997 in yarn spinning and extrusion facilities and latest technology
-	SIP has provided a significant impetus for the industry 
•	Employment up 14%
•	Significant productivity gains 
-	sales revenue per employee up by 20%
•	Import share of the Australian market has almost doubled to 20% of the market
•	Export share of total output has more than doubled (to 9%)
-	annual export sales have increased by 32% (to $75m)

But Many Challenges still to be Confronted
•	Small domestic market
•	Scale/scope disadvantages with overseas competitors
•	Erosion of domestic base / loss of critical mass
•	Relatively high cost structures 
-	Increasing import competition and dumping
•	Restricted access to overseas markets
-	Due to high trade barriers
•	Emergence of China as a carpet manufacturer
-	Significant investment occurring in carpet facilities throughout Asia, and China in particular
Key Drivers for the Industry in the Future
•	Development of new, and expansion of existing, export markets
•	Uptake of latest technology, to ensure
-	Continuing productivity and efficiency improvements
-	World’s best practice manufacturing
-	Cost containment
•	Integration into global supply chains
-	For both efficient sourcing of materials and effective penetration of new markets
•	Highly skilled and capable workforce
•	Effective research and development
-	New product designs, process improvements, environmental management, etc

CIAL Initial Recommendations
Tariffs 
•	To be held at 2005 levels until 2010
•	Any further reductions to be conditional upon an  industry review and and reciprocal trade liberalisation globally

SIP 
•	Extend for 10 years at current annual funding levels
•	Changes to further enhance the program’s effectiveness
-	Increasing type 1 payments to 30% of eligible expenditure
-	Amending the value added calculation
-	Including eligibility for offshore demand driven activities, such as warehousing and distribution of Australian TCF exports.

       
Carpet Tariff Anomaly

Carpet tariffs are at the same rate as other textile intermediate products (ie fabrics) ie 15% coming down to 10% on 1/1/05

•	Yet, other textile consumer products (bed linen, towels) are now at 25%, coming down to 17½% on 1/1/05
•	Stems from 1991 Industry Statement decision which accelerated tariff reductions for the industry
-	Carpet was inadvertently linked in with intermediate products
•	Anomaly needs to be remedied:
-	Not asking for carpet tariff to be increased
-	But, further reductions in carpet tariffs (after 2005) should be deferred until other finished consumer textile products come down to carpet level

Market Access Considerations
The PC suggests that trade liberalisation by other countries is irrelevant to Australia’s action on tariffs

But this is not true
•	As Australia’s market opens and import share escalates, it is vital Australian exports grow commensurately to maintain volume throughput
•	 If Australia’s access to other countries is hindered, we will lose critical mass and relative competitiveness as our local market share erodes
•	At the moment, our target markets (especially in Asia) have much higher trade barriers than we have
Positive Assistance - Delivery
PC suggested 3 alternatives to budgetary assistance
•	SIP with modifications
•	Bounty based on incremental value added
•	Competitive Entry

CIAL agrees with PC that further budgetary assistance is warranted to assist with the adjustment process

Favour continuation of SIP
•	Well known and understood and least disruptive approach
•	Value added option creates definitional problems and generates uncertainty
•	Competitive entry is workable, but tantamount to picking winners
-	Means more targeted assistance, although carpet industry certainly has proven credentials to meet criteria for strong growth potential

Positive Assistance – Funding
CIAL is firmly of the view that budgetary assistance should be implemented for a further 10 years at current annual levels

•	Note and agree with PC position that “it is best to err on the side of caution”
•	Budgetary assistance is needed in the 2005 – 2015 environment to help firms position for the future
•	Any further tariff cuts after 2010 will undoubtedly place significant import pressure on the domestic market
-	Consequent market disruption will mean further restructuring by the industry
-	The magnitude of the adjustment task ahead should not be underestimated
•	Imperative that adequate funds are allocated to cover both adjustment assistance and industry development programs
Positive Assistance – Other Issues
Redefining Innovation
•	Ausindustry’s definition of innovation (for SIP) is well understood and is now working well
-	As reflected in the reduced number of appeals in the 2nd program year
-	There is no reason to extend the definition

Reducing the expenditure threshold
•	The $200,000 threshold is not unreasonable

Including early stage processing
•	Budgetary assistance is being provided to help ease the adjustment process for industry as tariffs are further reduced
•	We see no reason for providing such assistance where the pressure being confronted has not been induced by changes in government policy
-	No reason to allocate the funding out of SIP, as the needs are different

Conclusion
CIAL recommends a further 10 year program to facilitate the necessary restructuring of the carpet industry, with
•	Carpet tariff held at 10% until 2010, and no further unilateral tariff cuts
•	Continuation of a SIP type program until 2015 at current annual funding levels with modifications ie
-	Increase type 1 payments to 30% of eligible expenditure
-	Increase the value added cap to 10%
-	Include eligibility for offshore demand driven activities such as warehousing and distribution of Australian TCF exports
•	Government actively supporting improved market access
•	Consideration be given to introducing alternative assistance measures for specific regions where TCF is a major employer
•	Appropriate changes to payroll tax and workers’ compensation arrangements