Made in Australia: Hills pegs out a new manufacturing plan

Published 28 February 2013 00:08, Updated 28 February 2013 00:12

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Made in Australia: Hills pegs out a new manufacturing plan

“We think reinvesting in manufacturing here makes sense and we are reviewing how that will look in our business right now,” says Hills chief Ted Pretty Photo: David Mariuz

Hills Holdings used to be a manufacturer. In fact, as the maker of the iconic Hills Hoist clothesline, Hills could be considered an iconic Australian manufacturer. It built its business on the back of the booming steel industry in the 1960s and ’70s when it managed to put a rotating clothesline in almost every backyard in the country.

But now, like many Australian manufacturing businesses, Hills has morphed into a company that looks more like an import, holding and distribution business.

It’s a common refrain among local businesses – higher labour costs relative to the rest of the world and greater access to cheaper imports thanks to the technological revolution means the case for manufacturing Down Under is riding on increasingly slim margins. Add to that the recent high dollar and it’s no surprise that “made in Australia” is a high commercial bar many companies are unable to maintain.

Local underinvestment

Companies that want to continue to “make things” in Australia have to reinvent themselves and innovate manufacturing, Hills Holdings chief executive Ted Pretty says.

“Typically what has happened is manufacturing companies here under-invested in their domestic plants and been forced to go offshore where they are exposed to the vagaries of offshore supply,” he says. “We think reinvesting in manufacturing here makes sense and we are reviewing how that will look in our business right now.”

But Pretty’s vision for the future of the sector doesn’t look much like manufacturing in the late 1960s when Hills became a household name.

Pretty is in the process of selling the industrial and steel-linked businesses Hills owns to raise capital to invest in a communications and technology strategy. But that doesn’t mean Hills is selling off the clothesline.

It’s keeping the Hoist and its other utility products such as the Bailey Ladders, which it intends to redesign using different materials and industrial design methods.

To raise cash to support his new direction, Hills will sell what Pretty describes as it’s “heavy lifting” businesses – in February it sold its stake in Korvest, a pipe and galvanising business for $26 million; it has also earmarked Orrcon Steel, a distributor and manufacturer of tubs and pipes, and Fielders, the steel roofing business, for divestment. Combined, these three businesses represent about $600 million of the company’s overall $1.1 billion in revenue.

No room for a middle man

Pretty says there is no room for middle-man manufacturers in the steel industry in Australia, where waning domestic demand and the increased competition in the global marketplace has led to the consolidation of the steel industry into two large suppliers, BlueScope Steel and Arrium.

Recent government-sponsored programs to stimulate the steel industry focused on those two giants and have not trickled down to the broader steel manufacturing industry, Pretty says. As a result, to generate worthwhile margins, he says assets such as Orrcon and Fielders need to be in the hands of the supplier of the raw materials or already in the business of building and construction to be in a better position to leverage the products.

“Anyone like us who is basically dependent on activity in construction and is not one of the car companies or the big two steel manufacturers are caught in a squeeze play,” Pretty says, referring to the government initiatives that have favoured car manufacturers and the large steel companies.

But he agreed to take over the reins of Hills, not for what the company is now but what it could be and potentially what its reinvention may say about the future of manufacturing.

“[Hills] is at the centre of the conundrum of manufacturing and innovation in this country,” he says.

Home-grown smarts

Pretty believes Australia’s future as a manufacturer lies in its ability to take the best products and services from around the world and combine them with home-grown ingenuity.

He speaks in terms you would expect from a man who previously was the leader of a technology innovation and product at Telstra and who spent recent years working for an investment bank and taking stakes in technology and data companies as a private equity investor. Pretty subscribes to the slightly jarring notion the best exports are made up of many imports.

“People are constantly looking at the negative effects of the high Australian dollar but the positive effect is you can buy manufacturing equipment cheaper, you can buy offshore companies with good IP (intellectual property) or leverage into international markets where the dollar goes further,” he says.

In the small Sydney central business district office where he has set up a quasi-headquarters to meet new investors and map out his strategy, Pretty has brought in global design and innovation consulting firm IDEO to help draw up a road map he hopes will allow the company to develop its own IP in the realm of technology linking sound, video, lighting, surveillance and security technology via hubs for homes, business and governments.

Hills generates about one-quarter of its revenue from its home technology and communications business but that’s also where the juiciest margins are, Pretty says. If all goes to plan, in 18 months Hills will have completed its asset sales and will be generating about half of the revenue it does today but on an improved profit base, Pretty says.

New shareholders

New shareholders looking for a turnaround story have begun to buy into the stock, although some investors have already moved on.

The founding Hills-Ling family remains an important shareholder but has reduced its stake from 13 per cent to 7 per cent; funds manager Perpetual has sold down its 12 per cent stake, while other investors such as boutique manager David Paradice of Paradice Investment Management has bought in at just under a 5 per cent stake.

Paradice says his investment is based on the easy goals he believes Pretty can kick by selling the underperforming steel assets but in terms of the overall strategy, Paradice says Hills is very much a “wait and see” story.

The South Australian headquarters where Hills was founded in 1947 and the place the company called home for decades has been turned into what Pretty describes as a back office and administration hub. Meanwhile, Pretty is scouting out locations for a two new “production hubs”, which will form the core of Hills’ new strategic direction.

He’s looking for a location where a state government is interested in stimulating innovation. Victoria is at the top of his list for two “production hubs”, closely followed by NSW.

“Unless there is significantly more encouragement from the South Australian government for what we are trying to do, we’ll be sending more of our capital spending to the eastern states where a lot of our business is already generated,” he says.

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