In September 2011, the Victorian Competition and Efficiency Commission presented a report to the Victorian Government on the future of Victorian manufacturing. The report, Victorian Manufacturing: Meeting the Challenges, left many questions unanswered and did not provide a clear direction.
First, it did not define manufacturing properly. Prior to 2000, manufacturing was purely about the production of goods. Today, the boundary between manufacturing and services is disappearing. The Institute for Manufacturing at the University of Cambridge in its seminal 2006 paper Defining High Value Manufacturing defined manufacturing as “the full cycle of activities from research and development, through design, production, logistics and services to end of life management.” The report concluded that in today’s globally competitive environment, manufacturers are innovators, global supply chain managers and service providers who are engaged not only in production but in research, design and service provision. In other words, manufacturers are engaged in activities that develop, produce and deliver both goods and services to customers. Today’s global manufacturing system is part of a complex and highly integrated value chain, making it prone to fluctuations in global input costs and the Australian dollar. The value chain includes cutting edge science and technology, innovation, skills, design, systems engineering, supply chain excellence and a wide range of intelligent services. It also includes energy-efficient, sustainable and low-carbon manufacturing. VCEC needs to acknowledge that manufacturers are also service providers.
The AMCRC also offers a more precise definition of innovation. It sees innovation as the creation, development, protection and commercialisation of know-how, new products and processes that pre-empt the market thanks to the application of scientific and technological skills.
While this definition is precise, it is also broad enough to recognise that innovation is a formal process that can be performed by an individual, company or publically funded research organisation and that it can be done collaboratively.
This is critical because it goes to the heart of a key problem policy makers have building an innovative Australia. We have many publically funded research organisations that spend large amounts to create intellectual property that is not translated into wealth creation and business opportunities. Indeed, Australia has a poor record of collaboration between publically funded research agencies and industry. At the same time, the Australian manufacturing market place is characterised by many SMEs that cannot commercialise know-how, products and processes. So while publically funded research agencies are good at creating intellectual property, the agencies and SMEs struggle to commercialise the IP and turn it into a business. They also fail to protect the intellectual property so that they can take it to global markets as a niche.
What’s required here is the development of IP strategies that will protect products and processes and pre-empt the market, carving out valuable and sought-after niches. But to do that, SMEs need to focus on what manufacturing and innovation are all about. They also need to start thinking strategically, and into the long term.
It is worth using overseas examples, like Ontario in Canada and Baden Wurttemberg in Germany, as benchmarks for Victorian manufacturing.
Toronto, the capital of Ontario which is the largest Canadian province with a population of about 12 million, has parallels with Australia and Victoria. About 50 per cent of Canadian manufacturing is located within Ontario which is also the centre for Canada’s auto industry. Like Australia, Canada is rich in energy resources and its exchange rate has appreciated, putting pressure on manufacturers there. And like Australia, Canada has low productivity growth.
The big difference however lies in the role of the state government. The Ontario government seeks to support manufacturing in a number of ways, from attracting investment to supporting innovation, education and training. It has an Advanced Manufacturing Investment Strategy Program with a $500 million repayable loan designed for companies in leading edge technologies. It also has a CME Smart Program that helps small and medium manufacturers invest in improvements. These include lean manufacturing and design, energy efficiency, and more. Funding is available up to 50 per cent of costs and capped at $50,000. Other initiatives include an Emerging Technology program, an Export Guarantee Program and a Medical and Assistive Technology R&D Program.
Similarly in the German state of Baden Wurttemberg, the Federal German government, the state government and local town councils provide support for manufacturers, recognizing the cash-constrained challenges of start-ups and supporting the training of staff.
Victoria can draw insights from these two examples, and Victoria is in a strong position because state governments are closer to local businesses than the Federal government. They are also closer to locally based universities, schools and vocational training institutes. State governments can work more closely with these organizations than the Federal government although Federal government involvement can open doors and serve as a springboard.
It is also worth noting that state governments, particularly Victoria, have become strategic investors in science and technology. Two of the best examples of that are the Synchroton and VCAMM.
Ontario and the German states have a strategy. A strategic approach is always finely targeted, and it means choices have to be made. It means that the Victorian government would have to focus on only a few areas rather than spreading itself too wide and thinly and adopting what can best be described as a watering can approach.
A good strategy is about a rigorous process of choice, it is about relentless focus. Bad strategy accommodates a multitude of conflicting demands. Good strategy by way of contrast focuses energy on one or a handful of pivotal objectives that can be achieved.
Australian manufacturing needs to adopt this strategic approach because of the situation facing the industry: the domestic market is small, the international market is huge and is becoming more structured. Large companies in the aerospace, automotive and defence sectors do not want to deal with companies the size of Australian SMEs. Instead, they want to deal with Tier One suppliers. Australia has no Tier One suppliers. That means Australian SMEs need to start collaborating with other companies to get a foothold in the global supply chain. This means making targeted choices, and focusing on what innovation is all about.
In keeping with the suggestion of finely focused strategies, the AMCRC recommends the Victorian Government focus on medical device manufacturing and the related field of advanced manufacturing. The government has embraced the concept of Victoria being the home of excellent medical research through its world class institutes. These institutes, however, have little experience in advanced manufacturing, product design or international commercialization. They need to connect with advanced manufacturers.
The Victorian government has already given support to the creation of an advanced manufacturing precinct at RMIT but this is just the first step. RMIT’s world-class research into manufacturing technologies is relevant to medical device manufacturers. The government could provide financial incentives, encourage collaboration between publically funded research institutions and medical device companies and ensure there is close work with customers.
Instead of spreading itself too wide, the government would focus on Victoria’s strengths and create an important niche in manufacturing. That will position Victorian industry on the spectrum spanning manufacturing and services and by doing so, take advantage of real global growth opportunities.
