A thinking country’s guide to competing on the global stage

The Abbott government is preparing to lay out its plan to support Australian industries to compete globally. Ben Macmahon/AAP

With major employers heading offshore and employment numbers decimated, what will emerge from the ashes of Australia’s manufacturing industry? And what role should manufacturing play in the federal government’s competitiveness agenda? In this Reinventing Manufacturing series, we look at the case for retaining the industry, and how it can transform itself into a high performance, advanced and productive sector.

With its fateful decision not to support car assembly in Australia, we might be forgiven for thinking the federal government has written off manufacturing. But we could be in for a surprise, as options narrow in the wake of the mining boom.

The government’s long awaited National Industry Investment and Competitiveness Agenda is likely to argue that manufacturing has a very significant future, but not as it has been traditionally understood.

There is increasing recognition around the world that the era of low cost mass production is coming to an end, at least in high cost economies like Australia. And it is being superseded by more flexible, specialised and globally interdependent manufacturing value chains, with firms often located in geographically concentrated clusters.

But why should we be interested in manufacturing at all? Surely, as some would argue, we are now making our way successfully in a “post-industrial” services economy, irrespective of what happens in either the manufacturing or mining sectors.

Services economy?

Certainly services account for most of Australia’s employment, but only a small proportion is traded internationally. The fact is knowledge-based manufacturing remains the largest and fastest growing value segment of world trade.

The prospects for manufacturing would not be so important but for the price volatility of raw materials exports. We have just experienced one of the many mining booms in our history, adding 15% to Australia’s national income over six years through the rise in our terms of trade – thanks almost entirely to the expansion in demand from China.

Now the terms of trade have gone into reverse, primarily because of the collapse of iron ore prices. While the volume of raw materials exports may continue to increase, with new mines coming on stream, they are attracting diminishing returns. Added to this, the boom disguised Australia’s sluggish productivity performance, and its ending has left us exposed and vulnerable.

So we must find new sources of growth for the economy, and not just any growth. Our first world lifestyles, based on imported consumer goods, will not be sustained by residential house-building, or even infrastructure spending, let alone selling each other financial derivatives and cafe lattes.

Where we can compete

As the Business Council of Australia (BCA) has recently pointed out, we must identify key areas of existing and potential competitive advantage, where knowledge and ingenuity count as much as natural endowments. The alternative is a third world economic structure based on the export of unprocessed raw materials, with most of the returns going to overseas shareholders, and on services such as tourism which may be worthwhile but are inherently precarious.

Much to the chagrin of the Productivity Commission, the government would seem to have adopted the BCA’s approach, with timely and cogent support from former Treasury head Dr Ken Henry. The competitiveness agenda is expected to identify five “growth centres” for the economy, comprising advanced manufacturing as well as agribusiness, energy, mining technologies and medical technologies.

Smart specialisation and new business models

There are many areas of manufacturing which already generate and capture value for the Australian economy. Most are driven by highly globalised small and medium enterprises, which have become known as “micro-multinationals”. These firms pursue strategies of “smart specialisation” in global markets and value chains, and they are characterised by relentless innovation in their product and service offerings.

Innovation can mean many things to different people. In this context innovation may encompass incremental improvements in products and processes, but it can also signify more “disruptive” transformation, including through digitisation and robotics. With only 2% of the world’s R&D, Australia cannot be excellent in everything, which is why specialisation is crucial when it comes to the development, adaptation and diffusion of new technologies.

However, innovation is not just about research and technology development. According to the Australian Bureau of Statistics, over two thirds of innovation spending is in areas of non-technological innovation, such as new business models, design and systems integration and high performance work and management practices. Here specialisation is less important than a deep understanding of current customers, and even more so of those yet to be created.

The management theorist Peter Drucker depicted the 20th century corporation as a combination of technology and markets, which was an accurate observation for its time. However, competitive success for the 21st century enterprise, particularly the newly emerging class of manufacturing micro-multinationals, will derive from the combination of “design thinking” and business analytics.

New skills required

This will require new skills and capabilities, and new approaches to education in our schools and universities. No longer can we afford to produce graduates for narrowly defined hierarchical professions and careers. In addition to specialised domain knowledge, graduates will need “boundary-crossing” skills in teamwork, communication, problem-solving and creative thinking. These skills are essential for innovative manufacturing.

Yet a global study of management capability in manufacturing firms found Australian managers lagged their counterparts in other high cost economies in the three key areas of operations management, performance management and people management, especially in SMEs. They lagged most behind world best practice in a category titled “instilling a talent mindset”, which may be seen as a proxy for innovation capability.

Any new policy approach to reinvigorating and repositioning Australian manufacturing must address the need to build management and innovation capability at firm level. And it must do so in the context of a comprehensive “national innovation system” which facilitates collaboration among firms and research and education institutions, with a view to enhancing competitive advantage in strategic priority areas.

Investing for results

While the competitiveness agenda may now be moving in the right direction, after the widely criticised budget cuts earlier this year, there is a big question mark over whether it will move far and fast enough.

The new statement is expected to repackage some of Labor’s initiatives in the new Entrepreneurs’ Infrastructure Program, change the tax treatment of employee share schemes, bolster skills training and undertake yet another review of Cooperative Research Centres. But will it offer a compelling vision of our knowledge-based future, with a credible “pathway to impact”?

Some other countries already do this well. They are increasing their investment in research and innovation, not reducing it, as they know this is the best way to create long-term growth and jobs. The US with its new Institutes for Manufacturing Innovation, the UK’s Technology Strategy Board and “Catapult Centres”, and the Netherlands, with its “Top Sectors” strategy, provide examples of clever intervention to encourage high skill, high wage manufacturing.

Contemporary industry and innovation policy has moved beyond the “age of entitlement” and approaches that imply “picking winners”. It is much more about the development of competitive and dynamic innovation “ecosystems”, which deepen engagement between industry and research and education institutions. If there is any benefit in discarding past approaches, it is to create the opportunity for new ones.