In his 2013 election campaign, Tony Abbott promised his government would build a world-class “five pillar economy”, encompassing manufacturing, agriculture, services, education and mining. Two years later, as his government prepares its second federal budget, just how are these sectors faring?
Manufacturing has changed the world and is itself changing, more fundamentally than at any time since the industrial revolution. Does this spell the end of manufacturing in Australia, or a new beginning?
Our immediate challenge is that the resources boom has ‘hollowed out’ the sector in a number of ways. First, the high Australian dollar, associated with rising commodity prices, has made traditional low cost manufacturing uncompetitive. This has come to be known as the “Dutch disease”, following the similar impact of North Sea gas discoveries in the 1970s.
Second, under pressure to open new mines, resources companies raided manufacturers for skilled workers instead of training their own, offering wage rates that manufacturing employers could not afford. This might not have been so damaging if the companies had sourced their equipment and infrastructure locally, but much of this was sourced from abroad.
Third, the increased terms of trade resulting from high commodity prices masked a slowdown of Australia’s productivity performance since the end of the 1990s. The complacency induced by the mining boom distracted the attention of policy-makers from other sources of growth, such as manufacturing, which would eventually be needed to “rebalance” the economy.
Still an important pillar
That said, it is important to recognise that manufacturing is still an important pillar of the Australian economy, and despite recent setbacks has infinite opportunities for growth and diversification, particularly in global value chains. Would anyone know from the doomsayers that the total value of manufacturing production is one and a half times higher today than it was in 1979?
Yet the manufacturing share of Australia’s gross domestic product has fallen from 12.9% in 1979 to 6.2%. This is because the economy grew by a factor of three over this period – twice as fast as manufacturing. Manufacturing exports also increased in value but declined as a proportion of total exports from 49.6% in 2006 to 35% today, due to the increased share of commodity exports.
On the face of it, workforce trends tell a dismal story, certainly since 1985 when manufacturing was the largest jobs category in the Australian economy at 16.5% of total employment. Since then, it has dropped to 7.9% of the total, reflecting a decline in the manufacturing workforce of 18.7% to around 920,000. This compares with an increase in total jobs of 43.4% over the same period.
Moreover, it is anticipated that by the end of 2018, manufacturing employment will fall by another 40,000, with the end of car assembly. But we should bear in mind that many jobs that are integral to manufacturing are classified as services. These jobs include engineering, design, marketing and other professional and technical services. Rather than thinking of manufacturing as being in decline, it is more accurately depicted as part of a value chain where value creation is outsourced or acquired elsewhere.
A different composition
Clearly while manufacturing retains a major presence in the Australian economy, it is generating a very different composition of output and employment from the past. It must respond to global competitive pressures, more complex market conditions and rapid technological change, but is it doing so fast enough? The evidence indicates only a partial shift so far from low cost competition to higher value adding sectors and from low skill, routine jobs to high skill, high productivity jobs.
There are more than 80,000 manufacturing businesses in Australia, mostly under 100 employees, with the larger ones accounting for more than a quarter of the economy’s total R&D expenditure. However, we are now seeing a sharp decline in manufacturing investment from a peak of $14.4 billion in 2005/06 to $8.8 billion in 2013/14. This is the lowest level in 12 years, as profit margins fall behind other sectors, at a time when global opportunities are at their greatest.
The rise of ‘micromultinationals’
Around the world, large vertically integrated manufacturing operations are being superseded by smaller, interdependent production units which supply specialised products and services, often intermingled, to global markets and value chains. Sometimes they are outsourced components of the larger operation, but mostly they are clusters or networks of small and medium enterprises (SMEs) that have become known as “micromultinationals”.
These globalised SMEs are characterised by relentless innovation, which includes but goes beyond technology development and adaptation. They also pursue non-technological innovations such as business model transformation, design-led innovation and new manufacturing methods, in turn enabled by digitisation, machine learning and the intersection of the physical and virtual worlds in the “internet of things”.
In Germany, this new approach to manufacturing and its integration with services is called “Industry 4.0”. It is driven by a well-funded “innovation ecosystem” of large and small firms, universities, Fraunhofer Institutes and government, supported by strong workforce and management capability and informed by sophisticated “technology foresights” which mark out areas of future as well as established competitive advantage.
Other countries are also adopting this approach, most recently the UK which has invested heavily in its “Catapult Centres”, as well as the Netherlands with its “top sectors” strategy and the US with a network of National Manufacturing Institutes. Australia has exemplars in its small number of high performing manufacturing micromultinationals, but a lot to learn about building a competitive knowledge-based economy.
This the fourth piece in the series. Read more here.