Despite the rhetoric that Australian manufacturing is in crisis, is it really time to write it off?
In this Q&A, Professor Sir Mike Gregory, Head of the Manufacturing and Management Division at the University of Cambridge, talks about the changing patterns of global manufacturing, the companies defining this new paradigm and the importance of these trends for Australia.
Professor Gregory was in Australia as a guest of the HC Coombs Policy Forum at the ANU.
In your research, you describe successful manufacturing as focusing more on aspects of its “value chain”. Can you explain this more?
We used to think about manufacturing as all about bending metal and physically changing the shape of materials.
Those core processes remain very important but we believe it is increasingly helpful to see manufacturing as the whole value chain system, from understanding the market, to research and design, production, distribution and service. This approach can identify which parts of the value chain might be the most appropriate, or feasible, for particular countries, and has implications for how you manage a manufacturing business, and indeed, policies towards key industrial sectors.
It is important to think of manufacturing as an activity rather than a sector. Sectors include aerospace, automotive, food and so on. Some manufacturing activities are widely applicable across all sectors while some are applicable to specific sectors.
The kind of picture we are trying to paint is about how we can usefully look at manufacturing these days - how it is distributed around the world and how people do different bits of that value chain in different places. One pressing issue is getting universities and industries to work together, another is understanding how to manage emerging industries.
To some extent how to run an efficient factory is quite well known, although it’s not easy to do.
But how to orchestrate these global networks and manage emerging industries - that is really still very challenging.
How similar is the British experience to Australia?
We (the British) had a big shock with oil in the 1970s - we lost a third of manufacturing industry back then. So what’s left is pretty lean and mean and in reasonably robust shape.
But I guess there is an equivalence here as talking to people here, the big issue is the exchange rate, which follows from having all these valuable natural resources.
There is a view that Australia’s mining boom is crushing manufacturing.
There is clearly a problem, but there is not much one can do about it. I guess it’s a question of being more specific. We tend to talk about manufacturing as if it were all the same, but there are many different manifestations.
Where a country - or indeed and business - has specialist expertise and skills and markets, then it is still possible to flourish in manufacturing, but it is not going to be so easy to do the more ‘commodity’ manufacturing where wage costs and exchange rates are a major disadvantage.
So what we do at home is try to say, “look, there some things we’re not going to be able to compete in, and some things we are”.
There are some things where you really should keep the physical production, because that’s critical to innovation and other bits of your business. But in other cases, you may have to say, well, “I don’t think it’s going to be viable to do the physical production here, but we can still do the R&D and the design and the distribution and the service.
A lot of countries are now trying to revisit how best to deal with manufacturing, whether it’s the US, Europe, Japan, China, Australia - everybody is having a second look and thinking, hold on a minute, how does this really work?
Is it just about labour costs, or is is a bit more complicated? Can we understand what value chains we’re in and where we’ve got an opportunity to capture value?
It does seem Australia is a fantastic position with all these key raw materials, which means you’re essential to the front end of these value chains.
Presumably that gives you an opportunity to see down the value chain what’s happening in different places. That, I guess is a pretty privileged position to be in.
What companies are a good example of this this value chain approach?
Zara is a good example of an unorthodox approach that people don’t expect, because it is generally thought that if you are going to produce textiles and clothes, you do that in a low-cost labour country and then you ship it across the world.
Whereas Zara do a lot of their physical production in Spain and Europe, because they can get the competitive advantage through advanced production techniques and being very flexible. They are able to complete and have been very successful Europe, as you probably know.
Other companies that exemplify this idea of being much more than bending metal are companies like Plastic Logic, which is almost a research company but aims to understand how to print onto plastic substrates, materials that turn it into a flexible display. So that’s part of the manufacturing cycle.
At the other end of the spectrum, B&Q is a DIY shed – maybe to some extent Tesco is a similar example in the food space, which is a major manufacturing industry – those guys are orchestrating global networks.
If you buy the idea that manufacturing is coordinating these activities around the world from R&D through to distribution and sales, then strangely enough, one way of looking at that is not necessarily through the factory, but through the check out of a big retailer, because behind that check-out is this whole network of production and distribution.
Apple‘s great strength has been design on the one hand, and linking that up with their service offering with ITunes on the other end of the spectrum. They don’t much of the physical production themselves but they command the whole system.
What are the major trends that Australia should pay attention to?
Emerging countries are emerging much faster than people expect. I mean China and India, but also Brazil, Mexico, Vietnam.
It’s very difficult to say what the world is going to look like, but we need to continually scan for what’s going on. The things that are sensible for different countries to do change quite quickly.
Both Australia and the UK could benefit by understanding in more detail where and how value can be created and captured and not just talk in broad terms about manufacturing versus services. It’s a joined up story these days.