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Australia’s manufacturing industry is now at the cross roads. It faces four big challenges: the high exchange rate, the planned introduction of a carbon price, the impact of new science and technology developments and global competition for high value manufacturing jobs.
Manufacturing has also changed. Prior to 2000, it was just about the production of goods. Today, it is about ideas, products, processes and services with a complex and highly integrated value chain underpinned by ground breaking science and technology breakthroughs, innovation, skills, design , system engineering, supply chain excellence, intelligent services as well as energy efficient, sustainable and low carbon developments.
Policymakers say Australia’s relative affluence no longer rides on the sheep’s back – it’s in a consignment of iron ore headed for China. For them, it’s an either-or scenario – they believe such good fortune must come at the expense of manufacturing. Someone should remind them that reducing a country’s economic base is dangerous. In the 1990s, England embraced financial services while its manufacturing sector declined. Look at it now.
A change in policy and focus is essential if the manufacturing sector is to meet the new challenges and reclaim its role in the Australian economy.
The figures indicate that manufacturing has been declining in importance for the economy. According to the Australian Bureau of Statistics, the manufacturing industry employs over 972,000 Australians and contributed $100.9 billion or 8.4% of GDP. However, manufacturing has grown only by 0.7% since 1999 when the Australian economy averaged growth of 3.1%. In Victoria, manufacturing’s share of the gross state product has declined in the nine years to 2009-10 from 13.7% to 11.3%. Total Australian manufacturing exports were worth $29.6 billion in 2009-10, representing 15% of Australia’s total exports.
Over the past decade, this represents a decline of 5%. Since December 2008, bank lending to the manufacturing sector declined by 21% from $48.9 billion to $38.6 billion. At the same time, bank lending to the balance of the economy has remained static. Manufacturing is also employing fewer Australians. In 2004-05, employment in manufacturing was 1,051,000. By 2009, this had slumped to 1,006,000. In the year through to May 2010, manufacturing employment fell by 21,400 persons.
However, there are some bright spots indicating that Australian manufacturing does have a future, if policy makers take the opportunities. There has been no decline in substantially and minimally transformed food exports from 2004-05 to 2009-10. Unlike other parts of the manufacturing sector, they have at least held their ground. But more significantly elaborately transformed food exports have grown from $341 million in 2004-05 to $362 million in 2009-10.
Food is only one area where Australia might be able to carve out a niche.
Two sectors of the Australian manufacturing economy showing growth in value added are the medical technology and aerospace sectors. Value added in aerospace has grown from $1.3 billion to $1.6 billion and for medical technology, from $1 billion to $1.4 billion over the period from 2006-07 to 2008-09.
In Victoria, the focus should go on food manufacturing and manufacturing supporting Victoria’s internationally competitive agricultural sector. Examples include Gason at Ararat, Murray Goulburn Co-operative Co. Ltd, Jindi Cheese Pty Ltd. These businesses could provide mentoring to other fast growing SMEs, particularly in rural areas.
Victoria’s other great advantages include a reasonable trade enhancing infrastructure, proximity to the fastest growing markets in the world and a highly liveable capital city, ranked in the top five in the world.
Victoria also has world’s best research institutes, particularly in medical research, world class education institutions, clusters in medical technology, and an excellent legal community with a solid understanding of international intellectual property law. With a world class agricultural industry, the state also has the potential to reinvigorate food manufacturing. And it enjoys excellent trade relations with Japan, China and South Korea. The somewhat dormant automotive and aerospace sectors in Victoria are capable of reinvigoration. The state also produces excellent entrepreneurs.
Australia’s manufacturing industry has distinctive characteristics that can, potentially, carve out niches in the global economy.
Australia’s manufacturing sector is characterised by many SMEs. Looking at the top 500 companies in the world by market capitalisation, there is not one Australian manufacturer – South Korea and Switzerland have five each, Canada and Sweden have four each, Turkey, Ireland and Spain have one each. Australia does however have eight companies in the top 500 – four banks, two retailers plus Telstra and BHP Billiton.
SMEs have one advantage over large companies – they are small and nimble. They can easily slip under the radar.
The key for governments is to develop the SME sector and its intellectual property. A handful of Australian companies that focus on intellectual property have slipped under the radar and have carved out global positions. They include Cochlear, ResMed, Memtec, Vision Bio Systems, ANCA, Pacifica and Bishop to name just a few.
Australia and Victoria also have distinct strategic advantages. Australia and Victoria in particular have world class publicly funded research capabilities. Victoria is also developing as a focused medical technology hub. It has an internationally competitive agricultural sector as well as excellent tertiary education institutions.
For Australia and Victoria to build the manufacturing sector, focus needs to be placed on existing SME businesses. This can be done in providing them with training in how to innovate.
A comparison should be made with Germany. Despite a higher cost structure than Australia, particularly with energy and taxes, Germany is the second largest exporter of manufactured products in the world. How do they do it? The answer lies with 500 strong SMEs focusing on intellectual property creation, offshoring to China or former eastern bloc countries the labour intensive components of their manufacture. The increasing percentage of imports destined for re-export from Germany bear this out.
Victoria can follow this model by maintaining and growing the high skilled components of manufacturing and their supporting activities such as R&D, design, rapid prototyping, software creation, capital intensive tooling, and component manufacture as well as business creation, planning and development. As with Germany, developing and owning the IP allows the businesses to outsource the labour intensive manufacturing to other locations.
By supporting programs that provide innovation training to SMEs and by providing encouragement to leverage world class research happening at the various publicly funded institutions, and by ensuring better access to growth capital, governments can get meaningful results. Governments, such as the Victorian government, should consider reinvigorating their role as a facilitator and convenor of industry research collaboration, creating connections and encouraging large and small businesses to sit together with research and development institutions to identify common goals and strategies for their sector.
Most importantly this would require a change in focus for governments. They should focus on the small number of companies with high growth potential rather than broadly based business support programs for new start ups and SMEs. Backing excellence and innovation is not an elitist policy. Rather, it is the best way of generating employment and opportunity.
There are several sectors and approaches.
With the impact of science and technology, global manufacturing is changing. There is more potential now for clusters and a distributed manufacturing model which allows products to be designed in one place and then transferred for production in several different locations. Business and governments need to identify high-value niches and then build collaborative frameworks, bringing in not only the companies but financiers as well. Aerospace would be a prime example. A proactive industry policy would have a national cluster program connecting the key players in Sydney, Melbourne, Adelaide and Brisbane, and tying in the outriders in other cities and towns.
A local aerospace cluster, for example, would connect the dots with the CSIRO, the relevant CRCs, training providers, venture-capital providers, banks. It would determine who wants to collaborate and those who simply want to go it alone. A distributed model would make that possible.
This could extend to other sector including medical devices, biotechnology, and pharmaceuticals, intellectual property and the energy transition which might see new battery technologies, wind turbines, clean coal plants, the renaissance of nuclear power, the large scale use of hydrogen as a fuel, carbon capture and storage. There could be greater focus on SMEs developing more efficient solar cells, batteries and fuel cells and other low carbon technologies, smart infrastructure around electricity grids and sensor networks and a new internet revolution with the development of the National Broadband Network.
With the right policies in places, manufacturing will be an essential path for attracting investment, generating innovation, and creating high value jobs. We are seeing a transformational shift that will reshape the drivers of economic growth, wealth creation, national prosperity and national security.
