YOUR MEMBER-ONLY ENGINEERING BRIEFING - MAY 2016

WHATS INSIDE: The Current Performance The Outlook Opportunities

ENGINEERING

Respect, recognition and reward

INFORMER

1 ANET, Realising an innovation economy: A practical roadmap to ease the Australian engineering skills shortage, 2012

Engineers design, build and maintain infrastructure routinely used by the community roads, railways, ports, water, electricity, gas and communications. They perform key roles in feasibility scoping, structural and system design, damage control and maintenance monitoring and addressing safety and quality throughout systems. Engineers develop and test practical solutions to everyday and extraordinary problems. Engineers conceive, design and manufacture innovative products, processes and systems that contribute to the nations prosperity, security, health, culture and environment. 1

The wide scope of engineering in Australia underlines the reality that few industries and businesses would operate without the current or past contribution of engineers. Engineers are key drivers of economic prosperity, both in Australia and globally. A large share of our national wealth hinges on the contribution of the engineering profession, and its ability to derive new ideas, products and solutions to economic challenges. The contribution made by engineering is becoming increasingly pervasive, with engineers working in a wide array of sectors including construction, manufacturing, mining, electricity and gas, information and communications technology, consulting and defence.

Australias economic progress relies fundamentally on engineering. Engineering today is about the practical application of technology, science and research-based solutions to the major challenges and opportunities presented by the 21st century. Engineering is one of Australias most in demand professions, with these skilled professionals highly valued across a wide range of industries for their technical skills. While engineers are most prominently renowned for driving major infrastructure or building projects, they are also key enablers of innovation, research and development, and form a major part of the workforce in industries ranging from construction and consulting, to manufacturing and even defence.

According to Australias most recent census data2, there were 254,151 engineers employed across Australia in 2011, up from 194,570 in 2006. While more recent data is not available, the annualised growth rate of 5.5% indicates that the current number of engineers in 2016 is likely to be around 333,000. Similarly, the number of qualified engineers throughout Australia totalled 322,523 in 2011, and based on historical growth has likely increased to around 423,000 in 2016.

2 Australian Bureau of Statistics, 2006 & 2011 Census

Overview 2

The job market for engineers across Australia remains strong, with industries and businesses placing a high value on technical skills. The wide range of potential applications for engineering skills and the diverse range of engineering disciplines and specialisations have ensured that engineers have dispersed throughout the economy.

Businesses in the professional, scientific and technical services sector are the highest employers of engineers, accounting for 35.8% of employed engineers3. Major consulting firms operate within this sector, and the engineers they employ effectively provide engineering services to businesses throughout the rest of the economy. As a result, the demand for engineers within this sector is a reasonably strong barometer for engineering demand across Australia.

The manufacturing sector employs the second largest share of Australias engineers, at 18.7% of the market. Engineering is regularly employed in

the development stages in businesses, and as a result, the high level of engineering employment in manufacturing is a major driver of innovation and product development. It is becoming increasingly difficult for Australian businesses to compete against foreign manufacturers in low-cost segments. This is driving many manufacturers to invest in skills and technology to develop and manufacture higher-quality, precision products in order to build on an area of competitive advantage.

Construction, mining, public administration and safety, and electricity, gas water and waste services sectors are all significant employers of engineers. The complexity of technology and processes within these sectors drives an ongoing need for engineering skill. As a result, opportunities will always be present in these industries in order to guide investment, manage projects, and deliver necessary maintenance.

Job market

3 Australian Bureau of Statistics, 2006 & 2011 Census

Figure 1: Number of employed and qualified engineers in Australia

Source: ABS Census data (2011, 2006), *2016 estimate based on historical growth rates

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Engineering population

Employed engineers

Figure 2: Australian Census 2011 professional engineers by industry

Source: Australian Census 2011

Figure 3: Internet Vacancy Index engineering job vacancies

Source: Internet Vacancy Index

While the profession exhibited skills shortages in several areas throughout the mining boom, the slowdown of capital investment and construction in mining and the shift towards a mining output boom has eased the pressure on the profession. The internet vacancy index has displayed a marked decline in the number of job advertisements since peaks in 2008 and 2012, with the overall level of new advertisements dropping into line with the historical average. While this data shows that there are fewer new engineering positions being established than in recent years, the data is heavily influenced by the recent boom, and the current level still indicates a steady flow of new opportunities for engineers in the job market.

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Every year, Professionals Australia conducts a survey of past and present members in order to gain a comprehensive body of information regarding professional engineers remuneration. Overall, the growth in salaries for engineers has been strongly linked to the performance and strength of each individual industry in which engineers are employed. Strong-performing industries with a rising revenue base have delivered solid salary growth for their engineering employees, while the weaker performance of other industries can be seen reflected in relatively modest wage increases.

The reasonably strong growth in engineering salaries overall has been primarily driven by the strong performance of wages in transport and storage, communications and public administration. Engineering salaries in transport and storage have been supported by strong revenue growth in the wider logistics sector. The sector has rapidly implemented new technology over the past five years, responding to market demand for faster, automated logistics to cater for increasingly lean inventory practices. The communications industry has exhibited a similar trend, with consumers demanding quality and reliability, forcing operators to employ skilled engineers and invest in new technology in order to deliver better services. The upward trend within these industries is expected to continue over the coming years, as logistics players seek to improve their efficiency through mix of better technology and expertise.

While some industries outperformed in terms of salary increases, the rise in remuneration across other industries was more modest. Mining and quarrying, manufacturing, and electricity and gas exhibited the weakest growth, with salaries restrained by softer revenue growth in their respective industries. The end of the resource price boom and the shift towards mining higher volumes placed downward pressure on demand for engineers in the sector, with this pressure limiting wage growth for engineers who are in highest demand during the construction phase. A similar trend has been present in manufacturing, with the decline of some manufacturing industries, such as automotive manufacturing, limiting wage growth for engineers. Growth in engineering salaries in electricity and gas was not limited by weak demand, but rather by the regulators, as governments intervened to reduce electricity prices. However, a strong base of technical expertise will be important as utilities seek to deliver cheaper, more efficient networks, and this is likely to provide support for engineering wages over the coming years.

Further details regarding engineer remuneration, including details concerning industry, sector, responsibility level, experience and job characteristics can be found in Professionals Australias Professional Engineer Remuneration Survey Report, while more specific individual information is available using our Engineer Salary Calculator.

Salaries and remuneration

Professionals Australia, Professional Engineer Remuneration Survey Report, January 2016

Figure 4: Average annual percentage increase in salary by industry

Source: Professionals Australia, Professional Engineer Remuneration Survey Report, January 2016

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The construction sector remains a major driver of engineering activity in Australia, with 11.1% of professional engineers employed in the sector according to the most recent census data. Australias construction sector has expanded over the past year, providing some support for engineering demand. The overall value of work done rose by 5.5% over the year to September 2015, with this figure supported largely by strong growth in new residential building, and residential alterations and additions. Non-residential building weakened over the past year, easing by 2.3%.

Residential property is taking on more characteristics of an investment vehicle, rather than simply a dwelling. Record low interest rates were the major driver of solid construction activity over the past year, providing cheap finance for investors and homeowners alike. Rising housing prices have also supported growth, driving new investment into property and encouraging existing investors to bring forward their investments to take advantage of price growth. Negative gearing is also particularly appealing to high earners, wanting to invest their savings in tax efficient assets. While both sides of politics are currently reassessing their policies on negative gearing, any changes are unlikely to affect new construction, and capital gains discounts and property price growth will ensure property remains an attractive investment in spite of any changes.

Issues surrounding housing supply have also affected the level of residential building, supporting growth to some degree. Housing scarcity issues and ongoing property speculation are contributing to declining affordability of housing in major cities. Housing shortages and rising prices will both support increased construction activity over the coming years, with investors relatively confident of their ability to sell new housing at a profitable price point. Higher density dwellings are likely to form a large portion of new additions to housing supply around major capitals, particularly as inner-city living continues to grow in popularity. This trend is particularly pronounced in the apartment markets in the two largest cities of Sydney and Melbourne.

Consulting groups and industry experts predict diverse growth patterns in residential construction across the Commonwealth, with continued strong growth across the eastern seaboard. Opportunities for engineers are likely to be strongest in these states, supported by rising populations and strong demand for inner-city dwellings. Other states, where the supply of existing property is stronger, will have muted growth, with some support to come from housing improvements. Additional supply in some jurisdictions will soften price growth to a degree, however much of this new supply will come in the form of smaller apartments, limiting the impact on larger housing. These trends will continue to provide opportunities for engineers, despite relatively stagnant non-residential construction growth.

Construction

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Australian Bureau of Statistics, 2006 & 2011 Census ABS Catalogue 8752.0 - Building Activity, Australia, Sep 2015

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Infrastructure investment will continue to provide opportunities for engineers over the coming years. The size and complexity of major infrastructure projects necessitates a high-level of engineering involvement in every stage of development, from early scoping to project management and post-completion reviews. Infrastructure investment remains strong by historical standards, however in recent years the level of investment in infrastructure has slowed. The slowdown in spending is not a result of demand, as project backlogs remain at all-time highs across the nation. The reduction in spending on infrastructure has been largely due to budget constraints and political decision making, which have both caused delays and cancellations of projects. Australias peak infrastructure body Infrastructure Australia has called for governments to remove politics from their decision making processes, and has composed its Australian Infrastructure Plan in order to arrive at a firm list of priority projects.

This process is likely to benefit the engineering profession, as an independent prioritisation process is likely to both limit political involvement in decision making and ensure that the need for greater infrastructure investment is well publicised.

However, while Infrastructure Australia provides impartial research and advice to governments at State and Federal levels, they do not manage infrastructure investment directly. The process of funding infrastructure, selecting projects, and designing and scoping works remains primarily with State Governments.

If Australias infrastructure backlog is to be adequately addressed, and if the downturn in infrastructure investment is to be corrected, politics must be separated from infrastructure management. There is a wide consensus that Australia requires major investment to address the infrastructure backlog, and if processes cannot be improved further delays and political jostling will likely continue to restrain economic output.

Infrastructure

Figure 6: Value of major infrastructure work done in Australia

Source: BITRE Australian Infrastructure Statistics 2015

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Bureau of Infrastructure, Transport and Regional Economics, Australian Infrastructure Statistics, 2015

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Manufacturing

Manufacturing plays an integral role in driving the Australian economy. The sector is one the nations largest employers, with over 879,000 personnel employed in the sector in 2013-14, or 7.6% of the total labour force. Manufacturers also employ the second largest share of the nations engineers, accounting for 18.7% of engineering employment as at the most recent census. However, despite the sectors importance to the economy, Australian manufacturing has struggled to maintain growth over the past decade. The rising prominence of imports has placed significant pressure on the industry, with imports often attracting much lower prices than domestic products.

In an effort to capitalise on an area of competitive advantage, the manufacturing sector has renewed its focus on providing high-quality, precision products. In recent years, manufacturing industries have dominated business research and development expenditure, focussing on the development of more advanced products and processes10. Manufacturers are also the second largest sector employing staff in research and development roles, as it is ultimately the skill and technical capacity of the workforce that drives productivity, product development and improves competitiveness. Engineers have provided a strong foundation for this process, and are likely to receive more opportunities over the coming years as the process of premiumisation becomes more pervasive among Australian manufacturers.

As a result of this shift towards higher quality products, imports from the manufacturing sector have bucked the longer-term trend, growing slightly through 2013-14. The easing Australian dollar has provided some support for the industry, making Australian products cheaper for foreign buyers. The growing middle class in China is responsible for much of this growth, as these consumers are increasingly demanding quality Australian products. The competitive advantage in quality held by Australian manufacturers is likely to be maintained, as many local companies invest heavily in technology and highly skilled employees.

While exports have shown some signs of growth, the manufacturing sector still faces significant challenges locally. Manufacturers shed approximately 17,000 jobs in 2013-14. However, with the Australian dollar weakening, highly skilled employees will become increasingly important to local businesses, as they look to take advantage of export markets and rising local demand. The falling Australian dollar makes Australian products more affordable abroad, while also making imported products more expensive in Australia, providing a boost for the local industry. This is likely to drive a range of opportunities for engineers in manufacturing, as businesses make an effort to improve their products and manufacturing processes.

ABS Catalogue 6291.0 Labour Force, Quarterly, Feb 2016 Australian Bureau of Statistics, 2006 & 2011 Census10ABS Catalogue 8104.0 Research and Experimental Development, Businesses, Australia, 2013-14

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Figure 5: Expenditure on research and development by sector

Source: ABS Catalogue 8104.0 Research and Experimental Development, Businesses

Manufacturing25.7%

Professional, scientific,

technical services19.%

Financial and Insurance Services

16.4%

Mining 15% Wholesale Trade5.1%

Construction4.6%

Other10.5%

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11 IBISWorld, Industry Report C2462 Mining and Construction Machinery Manufacturing in Australia, Jan 2016

4Mining

The mining boom powered Australia through the global financial crisis, providing rapid growth in demand for engineers at a time when many industries were struggling to stay afloat. During the boom, record numbers of mines were constructed, with new investment driven into the industry by a boom in commodity prices. The construction phase of the mining boom created a surge in jobs for engineers. However the decline in commodity prices since 2012 has seen the construction of new mines come to a halt, with miners instead focussing

on volumes, productivity and efficiency. While engineers remain integral to the operation of mining across Australia, the number of jobs and opportunities present in the industry has declined in recent years.

However, opportunities remain for engineers in the development of mining equipment and technology. As miners shift their focus to productivity, the availability of enabling technologies will be a key factor in driving profitability, particularly as commodity prices remain low.

Mining firms undertake some of this innovation, technology and process development in-house, however many firms operating in this area are also classified under manufacturing. The value of these new technologies is not limited to the domestic market, with significant opportunities present for exports. While revenue in this area has declined from the dramatic highs reached at the peak of the boom11, demand remains strong and opportunities remain present for skilled engineers.

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Defence

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A key piece of future defence planning is ensuring the ongoing technical skills and capability of the defence force. The defence budget has the capacity to provide unparalleled support for the engineering profession, boosting development and technical skills. The capability of the defence force and the technical professionals that enable it is one of most reliable indicators of the nations scientific and technical skills. Collaboration between defence and Australian businesses will be vital if new technologies are to reach the defence force and if national skill levels are to be strengthened.Defence spending encourages job creation, innovation and improved skill across Australia by driving the creation and growth of high-skilled industries.

Specifically, government procurement of major assets including ships, aircraft and especially submarines will directly determine the level of job creation in engineering that will ultimately occur across Australia, as these are some of the most complex products in the world to manufacture and require a high level of technical skill. The knowledge and skill required to build such products is not easily developed, and is unlikely to occur without government procurement driving the need and providing ongoing support. However, with the Federal Government making a firm commitment to the creation of local industries in shipbuilding and submarine building, businesses, universities, and individual professionals are likely to respond by building their skill levels, investing in education, learning from current experts and developing the enabling knowledge base to drive complex manufacturing.

The government has already committed to developing submarine and shipbuilding locally, which is likely to ensure an ongoing supply of opportunities for engineering professionals in producing some of the worlds most technically complex products. Support for local submarine manufacturing will the most significant effect on Australias skill level, and has the potential to deliver much greater economic returns for the nation as high-level science and manufacturing skills disperse across the economy. The creation of jobs will provide a major boost for engineers in Australia. However, the benefit that the nation is likely to derive by developing and strengthening domestic engineering capability would be much greater, as engineers will be able to take their skills to other industries, assist in the development of more advanced products in other industries, and lift the global competitiveness of Australian manufacturing more broadly.

The centrepieces of the Federal Governments Defence White Paper are the $50 billion future submarine program and the $30 billion future frigate program, with a continuous build of 12 submarines and 9 frigates to be rolled out over the coming decades12. This major investment comes alongside similarly significant spending on other vessels, aircraft and technology. Overall, the Paper announced planned spending on 12 submarines, 9 frigates, 12 patrol vessels and over 100 aircraft of various types. This investment in the defence assets is the largest in the history of Australias defence program, and will undoubtedly provide an array of opportunities for local engineering and boost the development of Australias engineering skill level.

12 Commonwealth of Australia, Department of Defence, Defence White Paper, February 2016 Use of this image does not imply association or endorsement by the Department of Defence Copyright Commonwealth of Australia

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Figure 7: Defence Funding

Source: Defence Annual Reports, Defence White Paper

25%Maritime

and anti-submarine

warfare

25%Key enablers

17%Strike and

air combat

9%ISR, EW,space

and cyber

6%Air

and sea lift

18%Land combat

and amphibious

warfare

Figure 8: Major areas of investment 2016-17 to 2025-26

Source: Defence White Paper

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Innovation remains a high priority, with the Federal Governments National Innovation and Science Agenda hoping to deliver an ideas boom. The Federal Government has announced a $1.1 billion13 package to support innovation over the next four years in an effort to improve Australias competitiveness in the global marketplace. The policy aims to build the national capacity to innovate by both incentivising risk taking and investment in research and development, and by building up the skills required to successfully innovate. Engineers will form a major part of this process, with their skills being vital to the development of new products and services.

Government support for innovation will include the establishment of Industry Growth Centres in a range of areas including advanced manufacturing, food and agribusiness, medical technologies and pharmaceuticals, mining equipment, technology and services and oil, gas and energy resources. Businesses with operations in these areas tend to employ a diverse array for STEM professionals, including professional engineers. The Federal Governments program also includes a $5 billion small business and jobs package, cutting tax rates for small businesses earing under $2 million per annum and providing immediate tax deductions on capital investment, which is vital to innovation1.

Overall, current policies around innovation are likely to encourage businesses to invest in more innovative practices. However, while policies will support business profitability and encourage capital investment, little innovation will be possible without a parallel investment in qualified technical staff, capable to guiding and driving complex innovation programs. Attracting and developing skilled engineers will form a big part of this process for many companies as they seek to boost their innovative capacity.

Innovation

Advanced manufacturing: Over the longer-term, local manufacturers are unlikely to effectively compete with cheap commodity products from Asia. However, opportunities are present in the production of higher-quality, precision or customised products.

Interest rates: Interest rates remain at record low levels, providing cheap capital to investors. This is likely to provide opportunities for engineers by encouraging investment in construction, innovation and capital expenditure on manufactured goods.

Innovation: The Federal Government has announced a $1.1 billion package to support innovation over the next four years in an effort to improve Australias competitiveness in the global marketplace. Engineers will form a major part of this process, with their skills being vital to the development of new products and services.

Defence: Defence procurement is a major driver of economic activity. The development of major manufacturing operations in Australia in order to manufacture ships and submarines has the potential to drive the development of engineering skill and knowledge in Australia.

Infrastructure: The development of impartial infrastructure plans has the capacity to reduce the level of political involvement in infrastructure decision making. This could significantly strengthen Australias level of infrastructure investment, providing opportunities for engineers. However, State Governments across Australia will need to make a commitment to improving infrastructure rather than political point scoring.

Opportunities

13 Commonwealth of Australia, Department of the Prime Minister and Cabinet, National Innovation and Science Agenda, December 20151 Commonwealth of Australia, Department of the Prime Minister and Cabinet, Budget Strategy and Outlook Budget Paper No.1, May 2015

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Professionals Australia Engineering Informer Level 1, 163 Eastern Road SOUTH MELBOURNE VIC 3205 marketing-team@professionalsaustralia.org.au 1300 273 762

Respect, recognition and reward