It’s technology, stupid: manufacturing’s crucial role in our economy

Unveiled: from the fanfare of the new Camry model last year, Toyota has axed 350 jobs this week. AAP

A week after Toyota announced redundancies at its Altona plant in Melbourne, Holden confirmed the loss of 100 casual jobs at its manufacturing plant in Adelaide. Holden chief Mike Devereux said the cuts were unavoidable, as the strong Australian dollar had hindered opportunities for growth in exports. He was unequivocal about the need for financial support from the government, telling ABC Radio that the company “will not be able to do business in Australia without the Australian governments [federal and state] investing along with the auto industry”.

Devereux’s comments further fuel the debate around the viability of the manufacturing industry and its role in the Australian economy. But respectable economic opinion, from the Reserve Bank of Australia, Productivity Commission, Treasury and financial market commentators, have observed the continuing decline of manufacturing industry in Australia with cool detachment. It is, they argue, an example of inexorable “structural change”, by which productive inputs are re-allocated to the resource sector to achieve a higher return. Such sanguine attitudes reflect a profound misunderstanding of manufacturing as a producer and user of advanced technologies, and the drastic consequences its decline will have on the Australian economy.

Retaining the technological edge. AAP

Many arguments have been advanced to identify the importance of manufacturing in the economic life of nations. These include defence (especially relevant with the decline of the domestic steel, oil refining and tyre industries); food security (from 2005 to 2010 exports of processed food decreased by 0.6% per annum and imports increased by 10% per annum - if these growth rates are maintained Australia will be a net importer of processed food by 2018); and the “resource curse”, which is marked by large income disparities across regions, regional separatism and boom-bust economic growth. Norway, Canada and Brazil are the exceptions that prove the rule by having policies that both develop their vast natural resources and maintain a diversified industrial base.

Manufacturing and innovation

However, the most important argument is that made by economic historians and historians of science, of the mutual dependence and interaction between manufacturing industry, science and technology. These linkages have become even closer as innovation has become increasingly important in the competitive strategies of manufacturing firms, and this innovation is increasingly based on exploiting the scientific frontier. Australian manufacturing uses and invests in a remarkably wide range of technologies and research such as biotech, nanotech, electronics, composites, metallurgy, industrial chemistry, robotics and advanced computing for its production processes.

The car industry is an excellent case in point. Only 13 countries in the world have an integrated car industry capable of all stages of car production - from design to showroom. Each of these countries financially supports their industry through mechanisms such as tariffs, tax holidays on car industry profits, production subsidies, government procurement policies, investment subsidies and support for R&D. They do this precisely because modern vehicle production underpins a sophisticated and integrated industrial structure, including high specification steel, advanced alloy casting, electronics, chemicals, plastics and advanced computing and machining. It is not just the stimulus to science and engineering; the car industry continues to be at the leading edge in supply chain management and work organisation. (Consider Just-in-Time production and Toyota Quality Assurance systems).

Holden chief Mike Devereux: the industry needs government support to do business in Australia. AAP

For these reasons, there is intense competition from developed and developing nations to attract and retain car industry investment. Australia has long abandoned high tariffs, but continues to support the industry by subsidising investment in car design, new production facilities and R&D. By international standards, this support is minimal. The US government spends $260 per head of population on the automobile industry compared to just $18 per head in Australia.

Incentives for government investment

Without manufacturing, there will be fewer scientific and engineering jobs (and TAFE-trained technicians) and, indirectly, fewer jobs in firms that provide consulting services to manufacturers. Why should the Australian taxpayer support public investment in science, engineering and R&D through CSIRO, Defence Science and Technology Organisation (DSTO) and Cooperative Research Centres when manufacturing - as a major user of this investment - no longer exists? Why would the taxpayer continue to support universities training scientists and engineers and fund university research when the benefits of this research are being reaped increasingly by overseas firms? The Chinese solar panel industry serves as a telling example.

Mining cannot fill the technological gap left by a shrunken manufacturing base. First, almost all of the sophisticated manufactured and design inputs into mining are imported. According to the Australian Bureau of Agricultural and Resource Economics, annual sales of local “innovative” consulting and software services and equipment to the Australian and overseas mining industry is a paltry $9 billion, or just over 2.2% of total annual manufacturing sales. Second, the rapid expansion in mining R&D has been questioned by Lateral Economics CEO Nick Gruen and the Australian Business Foundation, who suggest mining production activity is claimed as research. Supporting this is the fact that despite having similar total expenditure on business R&D, mining R&D employs just 4000 persons in total, compared to over 17000 in manufacturing.

There is something profoundly postmodern about the indifference of orthodox economists to the maintenance of broad-based technological capacity in Australia. There is a cost - indeed, a high cost - in maintaining this capacity, but the cost of letting this capacity wane will surely be higher.