A New Deal for Australian Manufacturing

Geoff Crittenden | Chief Executive Officer, Weld Australia

A rejuvenated Australian manufacturing industry can make a significant contribution to paying off the $320 billion COVID-19 stimulus package debt. It can deliver a sovereign capability that is absolutely vital to Australia’s economy, workforce, and national interest.

Manufacturing has slipped from 28% of Australia’s GDP in the mid 1960s to just 5% today. Whilst it is easy to blame the demise of Australian manufacturing on the rise of Asia as ‘the world’s factory’, there are significant structural deficiencies in our economy and in Government policy that have contributed: Leadership, Investment, Education, and Compliance.

While none of these issues can be solved in the short-term, strategic incremental movements over time will engender confidence, and help reverse the downward slide of Australian manufacturing.

Leadership

Successful industrial nations, like Sweden, South Korea and Germany, regard manufacturing as essential to their economies and social infrastructure. This fosters a degree of bi-partisanship and strategy that is strongly supported by voters.

In Australia, manufacturing has been denigrated as a ‘Rust Industry’, R&D tax concessions come and go with successive budgets, as does critical CSIRO funding. SME development grants are notoriously complex and difficult to access. A successful, Government owned, defence contractor was shabbily compared to canoe builder by a Commonwealth Minister.

Withdrawal of subsidies to a car industry which contributed $37 billion to the economy (2.2% of GDP) was made out to be a political virtue. Political infighting over the environment resulted in a policy vacuum in the power industry which, by forcing energy prices up, is inexorably destroying our heavy industries.

The root of the problem is political ideology and power are placed above national interest. Manufacturing is inherently associated with unionism and one side of politics. Whilst our industrial environment is relatively benign, mistrust remains on both sides.

With manufacturing on life support, this hangover from the industrial revolution needs to be addressed. Politicians, employers and unions must be persuaded to put national interest before self-interest.

Investment

COVID-19 exposed our reliance on overseas manufacturing while demonstrating the innovation and talent within Australian industry. The Federal and State Governments must take advantage of the challenges that a post-COVID-19 world will bring, make manufacturing a priority, and work collaboratively to re-grow our industrial base. The National Cabinet is an initiative that should survive post COVID-19.

In 2019, the Australian venture capital market invested $1.7 billion in local start-ups with the lion’s share going to biotechnology and IT. That converts to US$56 per capita which compares poorly with the UK (US$130); Sweden (US$265); US (US$282); and Israel (US$414). It should be a priority to establish a framework to expand the venture capital industry; it will be critical to growing the economy.

Australian Superannuation Funds have $3 trillion under management. Approximately 25% ($750 billion) of this is invested in Australian shares. Based on a break-up of the top 100 ASX listed companies, on average, $60 billion is invested in industrial shares. Therefore, best case, 2% of the nation’s retirement savings is invested in manufacturing. This is less than half that invested in consumer goods. In the wake of COVID-19, it would not be unreasonable for a set of investment guidelines to be established which better benefit the economy.

Of all manufacturing companies 87% are classified as SME (employing 1-19 staff). It would be reasonable to assume that a negligible number of those businesses are either the recipients of venture capital funds or are publicly listed. The majority are funded from cash flow and an overdraft facility secured by property (normally the family home). Some may have a small group of private investors but they will be in the minority.

Therefore, the risk of investing in plant and equipment to join the Industry 4.0 revolution can only be contemplated if the business owner can see a consistent pipeline ahead to service the debt. In the volatile and highly competitive market in Australia this is rarely the case. For the manufacturing sector to grow, it is essential that SMEs have much greater access to capital for investment and cash flow; for growth.

Education

The latest OECD Program for International Student Assessment (PISA) results show a long-term decline in maths and science skills for Australian students. In 2018, Australian 15 year-olds, performed more than a year below those in 2003 in maths and a year worse in science than those in 2006.

It should therefore be no surprise that in the last OECD study of graduates by subject Australia was placed 36th for Engineering and 14th for Arts; despite there being a demand for the former and a surplus of the latter. The same outcome is reflected in the VET sector, where there has been a long-term decline in registrations and completions of nationally recognised engineering trade courses.

To resolve this Australia has adopted a ‘push’ approach by focussing on school based STEM (Science, Technology, Engineering and Maths) programs. The Australian Council for Education Research (ACER) review published in 2019 notes the challenges for STEM education at school level have not been met; student engagement and performance in STEM have been declining and Australia does not have the supply of qualified teachers to improve learning.

Furthermore, it is widely recognised that careers advice and student exposure to work opportunities is poor, particularly in STEM based industries. In its 2018 review, the (Victorian) Education Department found careers education started too late in government schools, varied in quantity and quality, and did not provide enough meaningful work experience.

There is no question that STEM education and careers advice must be improved. But industry cannot continue to rely on Government to solve the problem. There needs to be ‘pull’ strategy which engages students through close collaboration between schools and companies. Students of all ages need to be excited by the opportunities available in manufacturing. Industry and schools need to work together to develop and deliver programs which engage, excite and attract students.

Compliance

In Europe and North America it is practically impossible to sell anything that is not certified as compliant to a recognised industry standard. Compliance is legislated in Europe, and in the US it is upheld through a litigious legal system.

In Australia, it is easy to find non-compliant products, from critical steel infrastructure through to the family caravan. There is neither legislation nor litigation to uphold standards. Compliance is seen as an unnecessary cost by procurement professionals who, even if they specify the appropriate standards, rarely enforce compliance through the contract.

Consumers, on the other hand, expect products to comply and are often shaken when they find out that the goods they buy are not manufactured to a recognised standard.

Because Australia has no enforceable compliance system, it has allowed overseas manufacturers to take full advantage of high volumes and low labour costs to sell non-compliant product into Australia and make price the overriding purchasing criteria. Overheads in Australia mean our companies cannot compete on price alone which has been a key factor in the demise of manufacturing.

However, bringing quality into the mix and enforcing standards drives competitiveness in the domestic and overseas markets. This has been borne out by European defence and rail infrastructure primes enforcing ISO standards on companies wishing to join their supply chains. The result has been SMEs winning export contracts to supply goods into global supply chains.

If Australia is to re-grow its manufacturing base, it must legislate to ensure all good sold in Australia comply to Australian or recognised international standards.

The Solution

Australia Governments must transform Australia into a world-class manufacturing hub—it must be a national goal. Governments must mandate that every item sold in Australia complies to an Australian or internationally recognised Standard. Governments must invest in the manufacturing industry, incentivise investment by superannuation funds and venture capitalists, and improve access to capital for SMEs. Governments must also invest in the sectors that support manufacturing, from energy through to education.

Only then will our manufacturing industry be globally competitive, and in a position to help bolster the Australian economy, and repay the $320 billion COVID-19 stimulus package debt.