The Demise of Australian Manufacturing & The Impact of COVID-19

Geoff Crittenden | Chief Executive Officer, Weld Australia

Australia has a long, proud history of manufacturing throughout the 20th century.

With the federation of Australia in 1901, customs barriers were eliminated between the states, so they could more easily trade with another. This saw the first wave of manufacturing expansion, particularly in Victoria and New South Wales. By 1913, manufacturing employment totalled at 328,000 and accounted for 13% of GDP.

During World War I, the Australian Government quickly realised that our economy was too reliant on imports; it was near impossible to source many products in wartime. As a result, Australia started to manufacture a range of products on-shore during the war, from aspirin right through to chlorine. Our steel industry also experienced enormous growth. BHP opened a new steelworks in Newcastle in 1915, which generated huge profits due to the unprecedented demand for steel to build ships, ammunition and artillery.

Australia quickly matured from a rural economy into a substantial manufacturing power.

The 1920s marked the beginning of the car manufacturing boom in Australia. Both General Motors and Ford established factories across the nation, in Adelaide, Brisbane, Fremantle and Sydney. At the time, it was more cost effective for these American manufacturing giants to assemble their cars using imported components, rather than import complete vehicles. By 1929, 440,000 people were employed in manufacturing, approximately 18% of the total population.

While car manufacturing took off, Australia also faced challenges in 1920s; the Great Depression impacted several of our industries, particularly heavy industrial manufacturing (such as tools and metal parts). To help industry stave off these challenges, the Australian Government applied tariffs to some imported goods, encouraging Australians to buy local.

As a result, the Australian metalworks and heavy industrial manufacturing sectors expanded in the 1930s. BHP took over the Port Kembla steelworks. General Motors started building all-steel welded car bodies at its new plant in Melbourne. Rheem started manufacturing water heaters. The Commonwealth Aircraft Corporation opened their plant in Melbourne.

When World War II hit in 1939, Australian manufacturing was poised to play an even greater role than it had during World War I. With imports scarce, local demand was high. And, Australian also became an important supplier of manufactured goods to the United Kingdom and the United States.

Australian manufacturing remained strong in the years immediately after World War II. For instance, Toyota opened up shop in the late 1950s. And, in the 1906s, Alcoa opened its first alumina refineries in Kwinana, Pinjarra and Wagerup. Throughout the 1950s and 1960s, Australian manufacturing was responsible for approximately 28% of the GDP, and 28% of all employment.

The Demise of Australian Manufacturing

By the 1970s, Australian manufacturing was in decline. Local manufacturers were unable to compete with imported goods. Imports were much cheaper than goods produced in Australia, which meant businesses and governments alike began to consistently off-shore their contracts for products and projects. Manufacturing saw its share of total employment fall from 25% in 1970 to 19% by 1980.

Fast forward to today and, while manufacturing remains a vital part of the Australian economy, it is responsible for just 5% of the GDP, and only 5.4% of total employment. Arrium collapsed in 2016. Holden and Ford have closed their facilities.

Australian manufacturing is dying.

This slow and painful death is due, in part, to market forces: an extended period of unfavourably high exchange rates; the rapid rise of China as ‘the world’s factory’; increasing wage costs; a lack of skilled workers; and increases in local energy and other input costs.

But it cannot all be blamed on market forces.

Successive state and federal governments continue to off-shore manufacturing work that the local industry is more than equipped to handle. Take, for example, rail industry projects. As recently as 10 years ago, most rail vehicles were designed and manufactured here in Australia. Not anymore.

The $2.43 billion contract for the new Intercity train fleet was sent off-shore by the New South Wales Government. Sydney’s Waratah trains have only 20% local content. Queensland’s new trains were fabricated in India, failed to meet Australian Standards for accessibility, and are now undergoing significant rework. And, while Victoria’s Metro Trains are manufactured locally, all the fabrication work is completed in China.

And let’s not forget about the big corporates. Many, if not all, of the major mining companies off-shore their fabrication work. It was not so long ago that BHP awarded more than 20,000 tonnes of structural steel work for its $4.7 billion South Flank project to an off-shore manufacturer.

The $150 billion investment by the Federal Government in the defence industry has revitalised many small-to-medium enterprises within the Australian manufacturing supply chain, and brought in new investment from overseas. However, this is just a drop in the bucket; we need a much larger proportion of government spending to remain in Australia.

A Global Comparison

Let’s compare Australia to the rest of the world. Manufacturing makes up about 16% of the workforce in Germany, Japan, and Switzerland. Canada, whose economy otherwise is similar to ours, has 1.7 million manufacturing workers, compared to our 47,500. In Israel and Sweden, with far smaller populations, advanced manufacturing is thriving.

South Korea—the 5th largest export economy in the world and the 6th most complex economy according to the Economic Complexity Index (ECI)—had a positive trade balance of $124 billion in 2017.

In comparison, Australia lags behind as the 20th largest export economy in the world and, embarrassingly, the 59th most complex economy. In 2017, Australia had a positive trade balance of just $44 billion—just a third of that of South Korea’s.

It is a matter of national pride to buy South Korean-made goods, from trains to cars to telephones. Imports and sales of products such as German-made cars and iPhones are some of the lowest in the world in South Korea.

Why? Because every element of government and the South Korean people work together to support their local manufacturing industry. There is a real cultural and governmental focus on growing and protecting their local economy and developing their own strengths.

The Impact of COVID-19

In the wake of the COVID-19 pandemic, it is becoming ever more obvious that the complete lack of support from state and federal governments and industry at all levels has had a possibly terminal impact on Australian manufacturing.

This lack of support has weakened our ability to compete internationally and reduced our industry to the lowest common denominator: cost. This economic rationalist way of living, which delivers short-term savings, will not secure the future of our economy or manufacturing industry long-term.

While hundreds of thousands of people are expected to lose their jobs as a result of the economic flow-on effect of COVID-19, the manufacturing industry continues to operate—quietly, under the radar—and to employ approximately 10% of the population.

The Federal Government has pledged $320 billion, representing 16.4% of annual GDP, to economic stimulus packages designed to bolster the economy in the wake of the COVID-19 pandemic.

What if just a fraction of this $320 billion had been invested into the manufacturing industry over the last ten or 20 years? What if the Federal Government had invested in local manufacturing industries, instead of offshoring work—effectively investing in international economies?

Before it collapsed, the car industry wanted just $300 million a year in government assistance—just 0.09% of the COVID-19 stimulus package. This funding would have been shared across 120 tier one manufacturers and suppliers to keep their factories running and to keep thousands of Australians in jobs. In return, each manufacturer would have invested three dollars for every one taxpayer dollar.

If Federal Government had invested in Australian jobs, companies, and the manufacturing industry as a whole, our economy would be much better positioned to weather the impacts of COVID-19.

So Then, What is the Solution?

Clearly, the COVID-19 pandemic is a disaster. But, let’s hope it offers a silver lining for manufacturing. Let’s hope it opens the politicians’ eyes to investing in the local Australian economy.

We need a commitment from state and federal governments to increased levels of local content for all procurement decisions. We need the big corporates, like BHP, to award local contracts to local companies.

The strength of the sovereign capability of Australia depends on Australians investing in Australia. It might be cheaper in the short-term to buy from Thailand, China, or South Korea, but all this does is weaken our economy.

If Australia is ever going to re-pay the $320 billion stimulus package, we need to invest in our economy. We need to bring home the manufacture of goods such as cars, rail infrastructure, and solar power equipment.

If we do this, local companies will then be in a position to invest in their own businesses, and to strengthen our manufacturing industry from within. Business innovation encourages the creation of strong and lasting new businesses and the creation of new and better jobs, which together support a move to higher living standards. Innovation investment by business is crucial to our ongoing prosperity.

To secure the future of Australian manufacturing and re-pay the debt that COVID-19 will leave in its wake, we need determined action from our Governments, industry leaders, and the general public to put Australia first. We need to foster a sense of social responsibility.

We need Australians to support Australia.