Australian manufacturing has big challenges ahead looking out to 2021. The sector has already undergone significant transformation over the last 10 years but it’s likely to speed up in the next decade. We are looking at a potential transformation of the sector.
The AMCRC has identified the following major trends over the next 10 years for Australian manufacturing: the favourable terms of trade and resultant impact of the strong Australian dollar, globalisation and the rise the BRIC countries and the implications that holds for manufacturers positioning themselves in global supply chains, urgent need for increased productivity, green growth, technological advances, increasing skills requirements, the need to develop better management skills, ageing, the growing interdependency of manufacturing and associated services, new opportunities arising from Australia’s comparative advantages and government regulation. Just how well Australian manufacturers respond to these challenges will determine the shape and size of the sector.
Certainly, Australian manufacturing is a key part of the economy. In 2010, it employed nearly one million people, contributed approximately $112 billion to the economy or 8.7 per cent of GDP. By comparison one US manufacturing company, GE has a market capitalisation of $163 billion. Or just 6 Global Tier 1 Auto suppliers would equal over $100 billion – namely Johnson Controls, Magna, Denso, Bosch, ThyssenKrupp and NSK.
In 2010 Australian manufacturing earned approximately $83.5 billion from exports, representing 36.5 per cent of total exports. Manufacturing also accounted for one quarter of all business investment in research and development, totalling more than $4 billion. The manufacturing sector has also outpaced the rest of the economy when it comes to productivity growth. With more capital intensive means of production and greater skills, labour productivity in the manufacturing sector grew at 2.2 per cent compared with 1.5 per cent for the rest of the economy.
That said, the relative significance of the industry has declined in the past decade as it has not kept pace with the growth in the overall economy which has expanded in part due to the significance of the services sector. The Reserve Bank sees the resource sector as the future of Australia’s prosperity and warns that manufacturing will shrink. Similarly, former Treasury secretary Ken Henry has forecast an Australia in 40 years with an even larger mining sector and much smaller manufacturing sector.
Because Australia is not sufficiently engaged with global manufacturing we are missing out on trade in high value products and services. Taiwan, for example, which has a population of 23 million in a country smaller than the size of Tasmania, had total exports in 2010 of $274.6 billion compared to Australia with total exports of $210.7 billion.
This means manufacturing will need to tackle several key areas to stay relevant.
The first is the emergence of the BRIC countries, otherwise known as Brazil, Russia, India and China. Accounting for three billion people, they represent just under half the world’s population and are significant markets. With their growing middle class, they offer opportunities for Australian manufacturers to export high value-add products. The BRIC countries will also play an increasing role in global trade, both in terms of volume and sophistication of output. They will play a key role in global supply chains. Building links with those chains, forming partnerships with companies in these countries, particularly with the large manufacturing base in China will be critical for manufacturers seeking to expand their business.
Another challenge is the ongoing demand for productivity growth, something that is essential for the viability and competitiveness of Australia’s manufacturers. While manufacturing has undergone significant growth in productivity, the lack of productivity growth in the broader economy has hampered companies.
The new Treasury secretary Dr Martin Parkinson has warned that a slump in productivity growth this century will affect living standards. In speech in June, he said the 1990s productivity boom generated by the 80s reform agenda has disappeared and there was “little reason to believe it will improve in the immediate term”. ”Indeed the rate of improvement in the living standards of Australians, at least that part measured by incomes, has already begun to deteriorate,” Parkinson said. “So while our central scenario is for the mining boom to continue, for resource prices to stay well above historical norms well into the future, and for the growth and development of Asia to continue unabated in trend terms, we expect growth in living standards to slow over time unless productivity growth improves.” Parkinson was flagging another round of micro-economic reforms.
Whether the government goes with it or not at this stage, it is clearly now on the agenda. The manufacturing sector will need to get ahead of the changes when they come.
There is a significant opportunity for manufacturers in so-called green growth. The Australian government has a commitment to reducing this country’s greenhouse gas emissions by between five and 15 per cent below 2000 levels by 2020. With a price on carbon emissions of $23 a tonne, manufacturers that can adapt their processes will have a competitive advantage. Because a carbon tax will result in higher energy prices, companies that abate these issues will be more competitive. Knowing how to access renewable or business innovation funding, or jobs and competitiveness programs could provide real competitive advantages and business growth opportunities for manufacturers. Potentially, companies could also position themselves globally in the production of “green” products and services which can include low and high-value inputs.
The strong Australian dollar represents a mix of opportunities and challenges. On one hand, it presents difficulties for manufacturers competing on price, whether it is in the domestic or international market. Trade exposed manufacturers will be forced to identify a competitive advantage in order to survive. The most likely way would be through innovation leading to reduced costs, increased productivity, product innovation and improved quality.
A higher Australian dollar could also support manufacturing industries, particularly with links to Australia’s natural resources or that are protected from import competition. At the same time, a strong dollar would have a positive impact on some manufacturers by reducing the costs of imported capital and equipment. Manufacturers that take such steps as shifting costs offshore, targeting premium niches, using more overseas suppliers and buying overseas companies will do well with the strong dollar.
Manufacturers should also be aware of, and exploit, disruptive technologies, technological advances and some of the world’s best innovation practices right here in Australia. Enabling technologies such as nano- and bio-technology and rapid prototyping are expected to support the development of new and improved manufacturing industries and higher value-added products as well as improved production processes.
Manufacturers here should also look to building their skills base, something that is essential for them to innovate, adopt improved technologies and remain globally competitive. Recruiting and training employees with necessary skills to implement technology and continuously innovate will be increasingly important for the success of firms. This will require them to invest in higher education, training and vocational guidance. The extent that industry is involved with tertiary education will help ensure employees have the relevant skills and experience that will give their company a competitive advantage.
Management training is another key issue. A report benchmarking management practices of Australian companies, Management Matters in Australia, found that while Australian businesses did well in managing operations, Australian managers were poor at managing people, innovation and strategic management. Smaller companies performed worse, a concern because Australian industry has a relatively larger proportion of small-sized firms. The report noted that many Australian businesses were being outperformed by competitors in China and India. Clearly, Australian manufacturers need to upgrade management expertise to become globally competitive.
Another critical issue which will reshape manufacturing is demographics. Maintaining a highly skilled workforce will be increasingly difficult with an ageing population. Ageing means a shrinking workforce. What makes it even more problematic is that many new entrants to the workforce are pursuing careers outside the manufacturing sector. Manufacturing is threatened with net decreases in employment. This means manufacturers will need to market the sector as a viable and rewarding career path.
Manufacturers also face the problem of losing formal and tacit knowledge through the retirement of highly skilled and experienced employees. The problem is that boomers will start leaving the workforce faster than generation Y will be entering. According to global KPMG research, the boomer hegemony saw 200,000 enter the workforce each year. This will fall to 100,000 by 2012, creating massive skills shortages. It will continue scaling down, slipping to 50,000 by 2025. To deal with this, manufacturers will need to consider appropriate in house training, succession planning and mentoring so skills are not lost. Creative solutions are now coming up. Several years ago, IBM Belgium set up a separate company that re-employed retirees, in effect contracting back their services but on a reduced salary and keeping them off the books.
Manufacturers here may well follow a similar model.
Manufacturing firms now also have to provide solutions, not just simple items of production. To compete globally, firms will need to provide innovative solutions and services, and exploit revenue streams other than those from simple production. This will see a growing interdependency between manufacturing and associated services.
Australian manufacturers should also look to exploiting Australia’s competitive advantages. They could provide innovative, high value-add products and services to mining and associated firms, both here and abroad. Another potential competitive advantage for Australian manufacturers is the relatively highly educated workforce. Manufacturing firms should market themselves to attract the best and brightest potential employees. That in turn will add to their competitiveness.
Finally, government policy and regulation will be an important driver in the success of domestic manufacturers through to 2020. It will be essential to have policies that provide an effective regulatory environment with minimal imposition on business. Companies’ awareness of laws here, and of international regulations, and their capacity to deal with non-tariff barriers, will be a key component of success in overseas markets and domestically.
Australian manufacturing is at the cross roads. There are opportunities and challenges which could create a more vibrant sector, not only to turn it into an even bigger contributor to the Australian economy but become an area of national competitive advantage.
