Supply chain woes force Blackmagic to ‘grey market’ for parts as profits take a tumble

Grant Petty’s firm has been an Australian manufacturing success story but last year took a hit from rapidly increasing costs, inventory issues and ongoing ATO scrutiny.

One of Australia’s most cutting-edge and successful smart manufacturing companies has suffered a large fall in profits after being hit by big cost increases and supply chain issues that forced it to buy parts from the “grey market”.

Financial accounts for Blackmagic Design, the maker of equipment and software for Hollywood filmmakers and television headed by entrepreneur Grant Petty, a member of The List – Australia’s Richest 250, reveal how Covid lockdowns, shipping costs and inventory issues, as well as an arduous battle with the Australian Taxation Office, took their toll.

Blackmagic’s annual report for its 2022 financial year, lodged with the corporate regulator late on Friday, shows net profit after tax falling to $44.7m, from $153.1m in the previous 12 months. Revenue also took a tumble, dropping from $769m in 2021 to $615m.

A series of detailed notes in the accounts attributed much of the falling revenue due to the end of Covid lockdowns, which had previously kept many TV presenters working at home with freshly purchased Blackmagic equipment, and also the difficulty the firm had sourcing parts to manufacture equipment to keep up with demand.

“Serious supply chain issues … started in 2021 which caused difficulty in keeping a constant supply of parts into [our] factories. Over 400 of our key electronic components now have lead times of over 12 months,” Blackmagic says in its report.

The company said it was able to buy parts “off market wherever we could get them” and then “instantly recommence building products” once the parts turned up.

“However, it did cause a large increase in parts inventory and additional costs as we paid extra to source parts from ‘grey market’ suppliers when our traditional suppliers could not provide the parts we needed in time.”

Like many other manufacturers moving goods around the world, Blackmagic also faced crippling shipping costs in late 2021 and early 2022, as consumers unleashed pent-up spending demand but industries were still hit by rolling stoppages caused by Covid.

Blackmagic said its shipping cost rises were “dramatic” and the amount of back orders meant it could not ship using containers and instead had to use more expensive airfreight.

“We expect a reduction in parts inventory over the following year or two however with such long lead times it could take some time for inventory levels to stabilise,” Blackmagic said.

“We have also dramatically increased our factory capacity to give us additional capacity to handle the general increase in sales, plus expected surges in production caused by unreliable parts supply.

“This means we have more than enough manufacturing capacity that we fully own, as the equipment was purchased without leases, so we won’t need to invest in any new manufacturing capacity for several years.”

Petty told The Australian last year that Blackmagic, which is based in Melbourne but has offices in California, Britain, Singapore, Beijing, Tokyo and Osaka, had generated $4bn over the past 20 years for the Australian economy.

He debuted on The List in 2022, with his 36 per cent stake in Blackmagic valued at $615m. His fellow director and co-founder Douglas Clarke is also on The List, with an estimated $609m paper fortune.

While Petty said placing among the Richest 250 people in Australia had given his firm invaluable publicity, he described his fellow tech entrepreneurs on The List as a group of “nerds, weirdos and creatives who have done something different”.

Increased scrutiny for the company also resulted in what Blackmagic called a “frustrating increase in government regulation” that began in early 2021 when it was placed in the ATO’s “justified trust” auditing process that requires showing evidence to justify its tax position in return for what is hoped for a reduction in workload in future ATO reviews.

“This … is heading into its third year … (and) has really increased our workload and distractions for our accounting team, and we have no idea when this auditing process will end,” Blackmagic said.