Popular opinion is that manufacturing in Australia is under pressure, and our future of making things is limited. That it is under pressure is not accepted by all, however.
For example, when I was presenting at the Productivity Commission hearings into the automotive sector in Adelaide, one of the Commissioners suggested that, while there had certainly been a loss of manufacturing jobs, this did not mean that the sector was under stress – it was part of increasing efficiency; turnover and value added had remained strong.
ABS data on Gross Domestic Product indicates that over the 80’s and 90’s manufacturing’s share of GDP only declined slowly (but it did decline, and steadily).
But since the Global Financial Crisis (GFC) there have been more substantial declines. Unsurprisingly the metals and non-metallic minerals sectors have held up the best, but more surprisingly machinery and equipment did as well. In more recent times, the extent of closures seems to have accelerated, with the automotive sector at the forefront.
What is the root of this pressure on the manufacturing sector?
The exchange rate is most often blamed, and it has been a problem. The price manufacturers have received for their products has increased 1.5% per annum over the period since the GFC (or 1% pa less than inflation) – and much of this would be due to needing to remain competitive, discovering export markets and import competition.
It needs to be recognised that movements in exchange rates are more pronounced against the US dollar than against other currencies.
Labour costs are also talked up, and again while there are some issues in that wage rates have increased at around 0.5% per annum above general inflation, the impact for the sector as a whole has not been extreme, in that labour costs represent only around 15% of production value in manufacturing.
Some of the pressure has certainly been found in more general costs, and specifically energy, water and compliance costs. These are huge issues for doing business, and for example, electricity prices have increased by over 10% per annum over the last 5 years.
One issue that is not often mentioned is the impact of interest rates. Australia has had consistently higher real interest rates than most developed economies over the longer term, which impedes investment.
Even recent declines need to be compared to very low and even negative real interest rates in many other countries. Risk related shifts mean that post GFC higher relative interest costs are borne by smaller businesses.
There is no short term fix to these pressures – it is unlikely they will go away over the remainder of this decade. Nor really do we want them to – as for example higher exchange rates keeps consumer prices for petrol and consumables down.
Other than what is driving the pressures, the other question that is often asked as to whether Australia needs a manufacturing sector. At a regional level, there is in my view no question that some regions will bear the brunt of the restructuring.
Recent work I did with John Spoehr (as presented to the Productivity Commission) suggests that the supply chain linked to automotive manufacturing sees up to 15,000 jobs lost in South Australia from Holden’s closing (from the base as at 2011).
At the national level, while it was written for the previous government, the Prime Minister’s Manufacturing Task Force non-government members report makes a strong case for policy adjustment to maintain a manufacturing base, and presents evidence that other high cost economies have highly effective manufacturing sectors.
They look at the importance of manufacturing in terms of not just its contributions to employment and exports, but also its linkages within the economy, and its role in research and development.
It also points to the need for a diversified economy to ensure that adjustments within one sector have offsets. In South Australia, we have Professor Goran Roos as a strong advocate of the importance of a dynamic manufacturing sector – and I suggest people should take the opportunity to read his insightful work.
What all of these reports have in common, is that while we can have a viable and prosperous manufacturing sector it will be different to that of the past. They suggest that the manufacturing sector will increasingly be based on value added on natural resources (obvious for minerals based, but the new opportunities are seen to be in food products) and on smarter end manufacturing (based on creativity and innovation and higher value products).
As the Asia Pacific continues its strong growth demand for a variety of food products – and Australia has a strong competitive advantage in quality product (including the environmental context), this provides opportunities to add value and therefore create employment and income in manufacturing activities.
It should be remembered that these businesses would in turn require inputs, providing further opportunities.
It seems to me that there are formal and informal processes requiring significant attention to make this work. Given my role in Australia’s newest University (Torrens University Australia), one of my observations is that people cannot really work harder (the statistics show that we as a nation we work as hard, and harder than many other countries). Therefore the solution is surely to work smarter.
The Australian Workplace and Productivity Association recently gave a consistent message to this, highlighting the need for intelligent manufacturing with the ability to export.
To do this, we need to introduce better products and processes on the one hand, better management practices on the other, and improved and innovative education and training has a very important part to play.
[Barry Burgan is Academic Director, Torrens University Australia.]
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