Looking ahead for the Australian manufacturing sector
When the former economics advisor to Presidents George W Bush and Barack Obama, Dr Pippa Malmgren, visited Australia recently, she lamented that our continuing fixation with rocks and crops was detrimental to the nation’s long-term future. She couldn’t understand why we continued to focus on the low-value end of the Chinese economy in particular, while ignoring other potential opportunities.
Her point was that Australia has dropped the ball when it comes to promoting local manufacturing. Rather than constantly opining that we can’t compete on price because labour costs are too high, Dr Malmgren suggested we should focus on improving our already strong skillset and human capital.
It’s an easy call but in many ways we could learn from Germany, where the government spends AUD$3.2 billion annually funding a network of research institutes to drive innovation, and their manufacturing sector contributes 22.6 per cent of GDP.
The Australian manufacturing sector has been shrinking
According to KPMG Australia’s Chief Economist, Brendan Rynne, manufacturing represented about 11 per cent of Australia's GDP back in 1990, but that has now nearly halved to 6.5 per cent. The numbers are direr in sectors such as textiles, footwear and clothing as well as wood and paper products which have dropped closer to 70 per cent.
Yet while the sector is challenged, there are some green-shoots. In recent months, we have seen an uptick in food and agricultural manufacturing but according to Rynne, “that comes after a period of decline”.
For Rynne, who was speaking exclusively to Fairfax Media in partnership with the NRMA, the real opportunity for Australia probably now lies in advanced manufacturing which will hopefully prove to be a boon for the nation’s small to medium manufacturers.
He sees no reason why Australia can't take its place in the provision of advanced manufacturing products, but this doesn’t mean we’ll see thousands of jobs return to the sector. “Advanced manufacturing is much more capital dependant than it is labour dependant and so you need many fewer workers to deliver the advanced manufacturing output than you would with traditional manufacturing,” Mr Rynne said.
He suggested Australia’s small to medium manufacturers are “where a lot of this is going to play out”.
Rynne hopes a wave of innovation occurs with local start-ups developing game-changing ideas and products and (hopefully) commercialising those ideas.
“You don't necessarily need to be a multinational to be able to do that. And you're starting to see small boutique businesses around Australia developing these sorts of ideas.” A good example of some Australian companies moving into niche markets are a number of local automotive components manufacturers transitioning parts of their businesses into the aerospace industry, or other high-tech advanced manufacturing industries.
Unfortunately, while these businesses might have been able to parlay their technical skills into other disciplines, the main volume of their business was the automotive sector and the ramifications of its demise in Australia will be felt for many years to come.
Rynne said it’s obvious the closure of the last two automotive manufacturers in Australia will “have a massive effect on the South Australian and Victorian economies.”
He warns both state governments have underestimated the effect the closures will have on their whole economies.
“In research done several years ago, the productivity commission anticipated 90 per cent of those employed within the sector would lose their jobs either within the production facilities themselves, or in the component manufacturing facilities that support that primary production.” He hopes both state governments have learned from the previous closures of Mitsubishi and Ford and they’re able to assist in retraining and redeploying employees who lose their jobs, but he says there is a “high likelihood the compensation they receive will be less than what they received at the car manufacturers.”
“Australia has the capacity to retool its economy, but the question is whether we have the political will to do so – and that's really about leadership and it’s what we're certainly looking for in our political leaders.”