Whither manufacturing? Or ‘Wither manufacturing’ is not just whimsical. It is a bad fact. In the recent two decades, manufacturing has declined to a 4% contribution to GDP from 13% and from double that historically. Manufacturing has actually declined, e.g. steel and autos, while other sectors have grown e.g. tourism, transport, and finance. Their growth has increased the percentage (or apparent) decline of manufacturing in GDP.
Fifty years ago, it became clear to the writer that the Government had begun to hugely promote tourism at the expense of manufacturing. There were two main reservations: Australia was a fine place to live without foreign tourists flooding it; and servicing tourists was early pay for the young and a low skilled, easy substitute for training for high skilled manufacturing jobs, which were higher paid later. Subsequently, the apprenticeship scheme fell apart as the young voted with their pockets.
First, it must be recognised that there may be another virus pandemic in the next 10 years. China has had three virus crises so far this century. The second apparently did not leave China. This coronavirus is the worst to date. China is a remarkably technically sophisticated country, but its food culture is primitive and dangerous. There is a possibility of a further pandemic if the situation does not change. It is a so deeply ingrained culture that it will be difficult to rectify completely with any certainty of no future regression in a population of over a billion. It behoves Australia to take precautions, including rebuilding much of manufacturing before it happens in maybe 10 years.
Decline of manufacturing
One of the main reasons for the decline of manufacturing was high Australian wages compared to overseas. It could not compete with high volume/low cost industries e.g. automotive and steel. Car manufacture eventually closed down and steelmaking was dismembered.
Steelmaking is fundamental to manufacturing. BHP Steel was once the lowest cost steelmaker in the world. It underwrote the development of Australian manufacturing industry during the war and to the 1980s. Eventually, under long-term high wages growth it became less profitable and was divided into two suboptimum parts in the name of competition and sold off. One half failed and was acquired by a foreign steelmaker (against Essington Lewis’s BHP strategy). The new owner promised to build a modern, low cost 10 million tonne pa steelwork at Whyalla. When he does, the other half at Port Kembla will be unable to compete and will close. This is not a strong base on which to rebuild a manufacturing industry. There is, however, still hope.
There are a number of reasons why manufacturing has not grown vigorously and exported besides high growth of wages. Australia is a relatively small market, so companies tend to be small, without the resources for marketing overseas. Australia’s four major banks are relatively small and risk averse. They prefer the low risk mortgage market over the higher risk business loan market. Financing manufacturing investment is difficult.
Japanese trading companies were long established here and actively sought prime Australian technology which they bought and then sold overseas. Australia has no such trading company with wide overseas links.
Back in the 1970s an old friend of the writer had a theory that in general large Australian companies had “Collins Street Cockies” on their Boards. Their main influence was the weather which they could do nothing about so their philosophy was to wait and see. This was reactive, not proactive. He compared it with American business philosophy which was proactive “make it happen”. European philosophy was to study the problem well then act, but do not make a mistake or your career was in danger. In America it is more “fail your way to success”. Failures are admired as relentless endeavour.
A BHP colleague was a steel manager who visited a Japanese steel company. His host invited him to dinner with his associates. At the end of dinner, one member was praised, cheered and backslapped. Next morning the Australian asked his host what happened. He said, “Glorious failure”. This was similar to American attitudes.
The “Collins Street Cocky” and European syndromes are fading here, especially as senior managers and directors with overseas experience rise to the top and outside senior managers with overseas experience are appointed. There is more “make it happen” or “have a go “.
There is no doubt that Australian business can be innovative. Japanese trading companies have been successful in identifying it. There are many start-ups and some “unicorns”, though not enough. The Australian wine industry has developed an international reputation and large-scale exports. The Australian meat industry is not as expert as New Zealand. In the huge French Carrefour supermarket in Dubai, NZ lamb is displayed next to Australian lamb, but the NZ display is three times the size of the Australian and presumably has three times the sales. NZ kiwi fruit is an international standard in marketing that Australia could emulate.
DGNC
While Australia has no strength in markets for high volume/low cost products, except in their raw materials, it has success in many low volume/high cost niche markets where wages are not a concern. Australia has many dominant global niche companies (DGNC), the largest are CSL and ResMed. They are internationally competitive and successful despite high Australian wages.
A good example of such companies is a UK firm with revenue of +$1b pa. It has five different products each of which has 50-60% of the world market. One product is smoke detectors. Parts are manufactured cheaply in other countries but cannot be identified with the final product which is assembled in the UK. It is a high-quality product required by law in many countries for new buildings. Detectors are a small cost in the total cost of the building. Builders want reliable high-quality smoke detectors and are willing to pay a high price for the best. The firm dominates and sets high prices in the industries for all its products. It spends 18% of its revenue each year on R&D to improve its products quality. It has enough stable and growing dividends to keep its shareholders satisfied.
Existing Australian DGNCs are good examples of what can be done by Australian manufacturers despite high wages. They are very internationally competitive and should be encouraged. They should be used as a base to build upon.
Australian DGNCs are usually singe product companies in small niche markets in much larger overall markets overseas. Australia needs more of them and to expand their size. Banks and the ATO need to understand their financial requirements. The Government should promote them. An industry association should be formed to represent them to government. Large DGNCs should mentor small developing ones in other products. The Dept of Trade would be an important source of intelligence.
DGNCs grow organically and by acquisition. When a company has grown to about 10% of its world market it can merge with a like company of say 10%, forming a company with 20% of the market. It can continue to grow and can acquire a company of 10% market share to become a company of 30%. It is within striking distance of a 50% share and dominance of the whole niche market. Some companies may wish to become multi-product this way. DGNCs products should not grow above 60% share because governments of local companies with small shares tend to begin protecting and supporting them. Since DGNCs can compete well on price and quality, they yet may be vulnerable to non-tariff barriers. The Australian Dept of Trade may advise on ways to avoid undue foreign protection and perhaps explore where appropriate Australian countervailing regulations.
DGNCs already substitute for imports and they export. They need expanding in size and number. Some need support to grow and reach dominance. Beyond DGNCs, Australia needs to become more competitive to replace more imports without necessarily increasing uncompetitive exports. Supply chains have been disrupted by the coronavirus for some time in the future. This is a great opportunity for domestic businesses. Some links are weak and can be replaced more easily by Australian products. DGNC businesses are already strong and should be built upon.
Manufacturing policy
The Government may subsidise limited manufacture of national security and vulnerable strategic products and those where temporarily critical e.g. PPE and medical equipment. In some cases, it may have to compete with foreign non-tariff barriers. It should not subsidise viable products, nor exports where it is sustainably cheaper and secure enough to import. Fortunately, iron ore and coal continue to earn high incomes from exports, but income from tourism and education may be long in reviving. Australia needs local, competitive manufacturing to replace more imports and make secure supply chains, especially before the next virus.
It is commonly accepted that government should not pick winners since they often turn out losers. However, they can facilitate ventures that are already winners, like the medical R&D industry. It should support building HSR, which is demonstrably a winner in many other countries. This is particularly desirable when the HSR project is designed to pay off its capital cost before it starts operating. It is highly profitable when it does start operating and is a robust, low risk business. HSR has many associated manufacturing businesses like (quarrying), cement, concrete, wire fencing, steel for rails, bridges, and buildings, (and IT).
Productivity improvement
Australia’s poor productivity performance since the GFC must be rectified. Manufacturing can play an important role. Productivity is increased output for the same input and/or the same output for less input.
The sources of productivity are new ventures/projects/products/services; removal of obstructions; investment in new, replacement machinery; and innovation arising from R&D and workers’ ideas.
Unfortunately, unions and workers tend to see “productivity” and “innovation” as job loss and so are generally unhelpful. A better term is “job security”. The outstanding example of this is Toyota’s Japanese car plants. In the 1980s it was reported that they had 70,000 suggestions a year from their workers. Each was assessed and those accepted were rewarded. Toyota has become one of the biggest and most robust car companies in the world with value for money cars. Conversely, in Australia Toyota offered the unions a deal. They wanted to negotiate but the Federal Court forbade it and so the car plants were closed. In hindsight, this could be argued was a mistake. Manufacturing declined. Government should not have cut subsidies. It should have persuaded the unions to change and engage workers in ideas for job security with Toyota.
Japan is beginning to experiencing serious population decline. Companies fear shortage of skilled factory workers. The situation tightens each year as more elderly skilled workers retire, and fewer young ones become available. Australia is experiencing much the opposite situation as its population grows rapidly. There is an opportunity to arrange agreements with Japanese manufacturers for their experts to train Australian workers in their technology and renowned quality control to manufacture parts for Japanese products, like the wings made here for Boeing aircraft produced in the US. For example, Australia could manufacture parts for Japanese made HSR trainsets that it imports for its interstate HSR project. Australia could readily revitalise its whole manufacturing industry and reduce its excessive reliance on one major trading partner and become more self-reliant.
It would be wise to review the relationship with Toyota as part of broader relations with Japan. With the agreement of the unions, Toyota could be invited back to manufacture cars here using its suggestion scheme. It would demonstrate cooperation as the way forwards for renewal of Australian manufacturing. It would fit in with the cooperation and collaboration shown by the National Cabinet. This is needed for the success of the proposed east coast mega-region.
Hydroelectricity
One of the biggest single productivity improving projects available to Australia is PNG hydroelectricity to secure variable renewable electricity when coal-fired generators are closed. Associated with this is manufacture of High Voltage Direct Current cables to link Australia to PNG hydro supply and to South East Asian export markets for secure electricity. Australia would develop a major new world comparative advantage in lowest cost electricity. It would be a strong base for expanding manufacturing. Low cost electricity would also underwrite production and large, growing export of hydrogen to Japan. (Please see “Australian Energy and Prosperity: Profit and Jobs from Zero Emissions” on web site www.veryfasttrail.com.au )
Hydrogen steelmaking
The Government should promote R&D by BlueScope Steel into hydrogen to replace coking coal in reducing iron ore to liquid iron. This would be probably mean the end of BOS furnaces for making steel, as the liquid iron would contain no carbon from coal to be extracted. BlueScope could form a joint venture with a steelmaker advanced in this R&D, possibly a Japanese company. Success would ensure BlueScope’s survival. Low cost Australian iron ore would be used locally for developing a bigger competitive steelmaking industry resting on the lowest cost electricity in the world, sufficiently competitive for large scale export and as a base for manufacturing exports.
Obstructions to productivity
The biggest single obstruction to productivity improvement in Australia is transport. What should be carried by sea is carried by rail. What should be carried by rail is carried by road, (primarily along the east coast). The consequence is much higher freight costs than they should be. Fast Freight Rail (FFR) designed and built as a dedicated part of the total HSR project would halve the freight rate. Action on HSR and FFR would increase Australia’s productivity enormously. This would enhance international competitiveness of manufactured exports markedly. Other serious distortions are uncompetitive business tax rates and under-performing education.
New comparative advantages
One of the challenges to expanding Australian manufacturing is that the large quantity of manufactured imports demonstrates much of Australian manufacturing (or lack of it) is uncompetitive. The problem is so large that serious new thinking is needed as discussed here. Wages cannot be cut. Productivity can and must be improved. Electricity can become lowest cost in the world. Electricity and hydrogen can be exported. This would form a new strong base for manufactured exports. It would be a new major comparative advantage for Australia. DGNCs each have a small individual comparative advantage, the revenues of which when aggregated would grow into another major comparative advantage for Australia of say $100b pa or more.
The steel industry may return to an Australian comparative advantage.
Popular reaction may well up against foreign manufactured products, which would help Australian made. People may even be willing to pay 5 to 10 percent more for Australian made, given strong promotion.
Creating growth and jobs
Australia has another issue. AI, robotics, and advanced manufacturing increase manufacturing productivity, but would lessen jobs at a time when tourism loses many jobs. Manufacturing alone may not absorb enough unemployment. However, construction of HSR and FFR would create many major city and regional jobs as would building large new cities on the HSR line. Training more tradespeople for construction and more scientists for the R&D expansion of 2-3 times even 4 times the present expenditure, saved from building lower cost regional cities rather than expanding higher cost major cities for population growth would take up much of the slack.
It would be prudent to ensure the PM’s and the Government’s leadership that has established cooperation and collaboration of the National Cabinet spills over to the parties, the crossbench, the States, local governments, the people, the workers, and business. Australia needs the cooperation and collaboration established by the National Cabinet to continue long-term. It does not want the extreme negativity of Oppositions over the period since the GFC to reoccur. It causes pessimism, loss of trust in politicians and lack of cooperation. Leadership, cooperation and a ”make it happen” attitude is necessary to resuscitate manufacturing, to build HSR and new cities and to develop the east coast mega-region which would ensure rapid growth, and prosperity continues, not declines.
See “Settlement Strategy” and “An Australian Mega-region”
The philosophy of France’s King Henry IV, who was famous and successful, applies today: “a chicken in every pot”. There have not been too many chickens in pots since the GFC. There is the opportunity to make it happen now.
PJK©27.4.20
