What it means to be a mid-market manufacturer

redarc

Getting a commercial idea off the ground takes fiscal brawn as well as a bright spark – but some claim there isn’t enough being done to encourage investment in Australia’s mid-market. Steven Impey investigates.


Spending some time in the company of industry thinkers, you start to gain a wider perspective of the world and where Australia sits in it.

The majority of interviewees in these pages can usually vouch that manufacturing is treading transitional waters – backed up by the reduction in its workforce and the offshoring of Australian businesses.

What isn’t always consistent, however, is the story of how exactly the industry can reverse the fortunes of its manufacturers, who are adapting to a global trade race that will leave them eating dust if they fail to keep pace.

Traditionally, innovation in Australia has been led by the large corporates and has been followed by a flurry of interest in the start-up sector, which represents a big portion of the country’s workforce. According to the Australian Bureau of Statistics (ABS), the nation’s largest companies of more than 200 employees contribute to 43 per cent of the industry added value.

Meanwhile, there is room to improve investment in the mid-market (23 per cent), according to Professor Roy Green, dean of UTS Business School at the University of Technology Sydney, who described it as the “real engine-room for Australian jobs”.

A risk-averse culture

Green argues that Australia has developed a risk-averse culture, strung along by actively unhelpful public policy concocted by governments which have not taken advantage of the  potential for smart specialisation in global markets and value chains.

“There is a sense in economic orthodoxy that ‘collaboration’ somehow equates to ‘collusion’,” he told Manufacturers’ Monthly, “missing the point that  companies starting up, particularly when they are in a position to scale up, simply require interconnections and relationships to build up their capabilities and potential.”

The result, he explained, is   ambitious Australian entrepreneurs over recent years  moving their intellectual property overseas where they might have a fighter’s chance to market their product.

Prof Roy Green
Prof Roy Green

“However, there is now a desire to overcome some of these barriers and an appetite to invest in Australian knowledge based industries,” Green continued. “We will see some changes begin to happen, but it is a very slow process and requires an understanding of where our strengths lie as a nation and where we see ourselves in the future marketplace.”

Commercial opportunity hinges immensely on financial firepower and, as a new player in the game, it is often difficult to keep your place without lucrative backing.

Recognising the power of collaboration is a key first step, Green said – opening up prospects for building industrial clusters and innovation districts, which can offer Australia a footing on the world stage.

Recent research carried out by the Organisation for Economic Co-operation and Development (OECD) has shown that, across developed economies, it is not the large corporate whales nor the start-ups that are accounting for jobs growth – but rather the mid-market particularly where the small and medium enterprises (SMEs) are participating in global value chains.

Rebuilding the mid-market

Nixon Apple, who worked for three decades as an economic advisor and researcher for the Australian Manufacturing Workers Union (AMWU) and the Australian Council of Trade Unions (ACTU), says he has seen first-hand how collaboration can begin to rebuild the mid-market.

“There are two challenges that the Australian manufacturing industry and the other sectors will continue to face a decade or more from now,” said Apple, who is now a member of the Australian Super investment committee.

“In terms of commercialisation, there is the question of why we aren’t doing as much as we would like to do with our inventions, ideas and intellectual property.

“And the second is that we haven’t done very well in building a strong mid-market sector.”

Furthermore, he goes on to explain that there is a very small pipeline of new entrants into the mid-market in Australia and fewer graduating at the other end.

“While there is no holy grail for how you address those problems, one thing that collaboration can do is to throw up some ideas and examples of the things that are working,” Apple said.

“In terms of collaboration beginning to rebuild the mid-market, we are at least seeing some runs on the board.”

Abroad – and particularly in Europe – some clever public policy combines foreign-direct investment in technology companies and the growth of domestic supply chains through collaborative relationships.

The Australian Government assists businesses to overcome potential pitfalls through the Accelerating Commercialisation program, which provides matching grants of up to $1 million and access to expert commercialisation advisers.

Collaborative concepts

“A key barrier limiting the commercialisation of new-to-market innovations is the phenomenon commonly referred to as the ‘Valley-of-Death’,” said David Wilson, general manager of the Department of Industry’s Commercialisation Policy Branch.

“[That is] where a business may have a proof-of-concept or working prototype, but is not yet generating revenue. To successfully traverse this, a business needs significant time, connections and financial outlay.”

New-to-market innovation is linked significantly with export activity, market share and average annual sales and employment.

There are around 1,500 to 2,000 businesses that make up a “very dispersed Mittelstand” of the Australian economy, Green says.

“This is an area that we haven’t done so well with in Australia,” he said, “this notion of industrial clustering, especially in conjunction with our universities.

“Given that this is the case, the question is how do we re-energise and re-focus our interest on the mid-market sector, which seems to operate largely under the radar.”

One example is the Medical Research Commercialisation Fund (MRCF), which encompasses members throughout the Australian medical industry who work closely to see that marketable drugs and medical technology isn’t overlooked.

Unlike mainstream investment, members of the board have an obligation to offer their intellectual property to a nominated venture capital manager.

“This obviously gives an advantage to the manager, who has this great wealth of ideas that they can go through,” Apple explained.

“Members also have great opportunity too, working with a manager who has up to $400 million worth of funds to invest in new ideas.”

This helps by placing intellectual property, which may have previously slipped through the net, on a clinical trial for approval testing, therefore giving it a better chance to reach the consumer.

In turn, while there may be more risk of smaller returns, it is considered a beneficial investment for the financer who has exclusive rights over which products to move forward on.

It also puts some of the best manufacturing minds across  the medical sector in the same room, working side by side for a mutual cause.

“You can already see the benefits for some companies who are graduating out of the commercialisation phase and hopefully, in a few years time, into the mid-market,” Apple said.

In Australia, Green said there are “embryonic clusters to build on” but they desperately need the kind of government support that doesn’t take the shape of handouts – but, instead, an infrastructure that promotes collaboration, skills and knowledge exchange.

redarc2“What characterises Australia’s successful companies is that they are the best in their class,” Green said. “However, being a very specialised company doesn’t necessarily make them a household name.”

To do that, Green encourages businesses to discover their competitive edge – not only in the price of their product, but also in its quality, design and innovation, which requires significant investment in research and development (R&D).

At Adelaide-based Redarc Electronics, owner and managing director Anthony Kittel makes a point of looking after his R&D division, which has gro\wn from the ground up.

“To wind the clock back, we didn’t employ an engineer in the business until around the new millennium,” explained Kittel, who bought the business in 1997.

“We now have 30 full-time engineers at the company working for Redarc Technologies, which is an R&D arm of Redarc Electronics.”

Rallying R&D

On average, R&D equates to 5 – 7 per cent of Australian industry investment, Kittle said. At Redarc, Kittel re-invests up to three times that percentage into its R&D team.

“Effectively, any product that we design today has to be designed with the view of being successful on the global stage,” Kittel said.

“If you asked me the same question 15 years ago, we would have been happy simply to be part of the South Australian market.

“However, in today’s market we cannot think like that anymore – we have to come up with ideas that are going to be the best that we can offer.”

Redarc has changed dramatically over the past two decades – growing from a small fish in a big pond into a global trader.

“We want to provide a close relationship with all of the universities in South Australia and to fund research that will create opportunities for young people we work with to learn how to commercialise their ideas,” Kittel continued.

“By doing this, we are also developing our supply chain. So, by bringing other, smaller businesses – just as we were once upon a time – on our journey, it is good for the industry in Australia.”

The federal government is currently considering a response to consultation over an R&D Tax Incentive Review, which the Turnbull Government launched in September last year.

As part of a broader National Innovation and Science Agenda, the review is said to focus on identifying opportunities to improve the effectiveness and integrity of the program, which provides a tax offset of up to 43.5 per cent for companies undertaking eligible R&D activities.

The latest OECD figures from 2010 show that, while Australia generally has more researchers per 1,000 employed (8.9) than the global average, the nation’s R&D represents a below-par percentage of the world’s total GDP (2.1 per cent).

“I don’t think Australia performs that well in terms of our innovation and R&D,” Kittel said. “As a country, we are way down the food chain.

“However, I have always had the belief that we needed to make R&D part of its culture at Redarc. When you look at the small and mid markets, you have to ask the question whether Australia is really doing that.”