More and more international trade is being made up of intermediate goods and services. Brent Balinski reports on some of the efforts to get Australian manufacturers better involved in this.
The big unbundling
The most recent phone from the world’s most valuable brand is an extreme example of how truly global manufacturing can be nowadays.
According to an analysis by CompareCamp.com, 785 businesses in 31 countries had a role in the extreme logistics feat that was bringing the iPhone 6 to market.
The sale of intermediate goods and services and capital goods within the global value chains of multinational companies, such as Apple, makes up more than 70 per cent of all world trade, according to OECD research.
“I think what we’re seeing is a big shift away from large, vertically integrated organisations, towards smaller, more interdependent units of production,” Professor Roy Green, Dean the UTS Business School, told Manufacturers’ Monthly.
Also referred to as global supply chains, global value chains as a term takes in more than material inputs along the line, including design, research, innovation, branding and marketing.
“Global value chains have emerged as a predominant form of activity in both manufacturing and in services, and the two are becoming increasingly blurred,” said Green.
Income from trade flows within these chains has doubled between 1995 and 2009, with the increase much sharper still in some developing economies.
The “unbundling of manufacturing functions” will continue, predict Austrade and others, and combined with the convergence of ICT and business processes it presents opportunities for the right businesses.
The Australian Trade Commission’s Global Value Chain Access Strategy, aims to assist in identifying GVC opportunities, international markets and opportunities to transition into new sectors.
Initial efforts have focussed on the automotive, commercial aerospace, transport, as well as resources sectors.
“We have several programmes underway but we are at the start of what is a long term process, and we are engaged with customers both in the commercial aerospace and the resources and energy sectors as well as, now, on the infrastructure side and also some of the marine sector focused MNCs,” explained Matthew Morgan, Assistant General Manager, Trade, at Austrade.
Austrade also identifies food, beverage and agribusiness, and health and medical technologies as other areas of opportunity.
Within aerospace, there are examples of successes – such as Ferra Engineering (a previous Supplier of The Year to Boeing), and Joint Strike Fighter suppliers such as Marand Precision Engineering, Lovitt Technologies and Quickstep.
The new paradigm
For JSF work, a prerequisite is Siemens’ Product Lifecycle Management (PLM) platform, Teamcenter. Though far from the only PLM solution available (competitors include Dassault Systemes’ 3DEXPERIENCE Platform, Autodesk PLM 360 and Infor PLM Discrete) Teamcenter is the standard for supply chain collaboration on US defence projects, said Jeff Connolly, CEO of Siemens Pacific.
“US Defense for example has some $US700 billion of projects under construction using a single engineering collaboration software tool,” he told Manufacturers’ Monthly.
The above JSF suppliers supply a highly specialised, unfinished product. They are an example of what Connolly calls a “new paradigm” in manufacturing.
In this fashion, it’s possible for Australia to have automotive manufacturers past the exit of Ford, Holden and Toyota.
There’s currently only a “varied appreciation” of this new definition of manufacturing locally, according to Connolly.
“It’s still a challenge that many people associate manufacturing with fixed
production lines and what goes on within the four walls are manufacturing: static, old views,” he explained.
“[But] there are a number who have visualised that, because the world is become ever more connected, digitally, that there are additional opportunities.”
There are examples of local auto components businesses that have adjusted to this new paradigm, such as Tomcar maker MTM, which also exports door checks and gearshifts to a growing number of international markets. Their clients include Ford and Cadillac.
Global supply/value chains are a huge issue for the components industry as it looks to a local market without passenger car assembly.
Recent research by UTS for the Auto CRC estimates about 50 per cent or more of companies will simply cease to exist.
“A handful – 10 to 15 per cent – that are repositioning and diversifying in global value chains and will survive and do well, and another percentage – maybe 20 per cent – could make it if only they were given that additional assistance to develop their capability and access to global value chains,” explained Professor Green.
“So we have some good performers and some very good prospects if we seize them.”
Outside of transport, medical technology is an area where growth prospects exist.
“Three examplars are CSL, Cochlear and Anatomics,” said John Pollaers, the chairman of the Australian Advanced Manufacturing Council, when asked where potential lay.
Andrew Stevens, chair of the federal government’s Advanced Manufacturing Growth Centre, added Mining Equipment and Oil, Gas and Energy Resources to areas that should and would be targeted.
“We already have a comparative advantage in these sectors and have strong positions in their supply chains upon which to build,” he told Manufacturers’ Monthly.
An era of disruption
Of great importance are the connections both through relationships and various ICT platforms.
Globalisation needs digitalisation, and there are differing opinions on how ready Australian manufacturing is for the enormously connected, Industry 4.0 world.
Connolly suggested that record-low levels of capital investment in Australian industry augured poorly. However, Stevens said that consultations for the AMGC had shown that the country’s advanced manufacturers were highly digitally engaged with the MNCs that they served.
“In an era of disruption, opportunity presents for the successful adapters and threat presents for the slow to change,” offered Stevens.
“In the Advanced Manufacturing Growth Centre we have a ‘disrupter/rapid change’ mindset.”
Pollaers saw the willingness to invest as something distinguishing advanced manufacturers from the rest.
“Business has to do it to remain relevant and competitive,” he told Manufacturers’ Monthly.
Elsewhere, there have been questions raised about the willingness to invest in innovation among Australian manufacturers generally – acknowledged as crucial to relevance as an advanced manufacturer – and the poor overall record in collaboration with researchers.
However, there are many examples of niche excellence – perhaps 1500, by Green’s estimate – among the country’s industry.
The new AMGC, which is scheduled to begin its work this year, includes brokering engagement with global supply chains as one of its key success measures.
Its strategy involves working with Austrade to identify where the opportunities are, facilitating links between SMEs and multinationals, and determining where shifts in GSCs might appear due to digital design and manufacture.
There are planned development projects to “facilitate engagement based on trust”.
Austrade has mapped areas of potential, listed above, as well as identified major multinationals operating within these to determine where Australian manufacturers can fill possible gaps.
Siemens, which approaches the issue from the German Industry 4.0 perspective, advises investment in software and automation as essential to serving these multinationals.
Industry 4.0 – the connection of the cyber and physical worlds – will completely change value/supply chains. Staying up to date with ICT will be essential to competitiveness.
“There will be world prices, there will be world efficiencies for certain types of activities,” said Connolly.
“So global supply chains will be super-competitive, but super transparent.”
Stevens also agreed that supply chains would continue to change with new technologies, with early adapters of these best positioned for success.
“Traditional supply chain thinking will become irrelevant but the importance of engaging with GSCs will not,” he said.
Besides the unwillingness by some to invest in enabling technologies, other challenges include the country’s broadband coverage, placed outside the top 40 globally for connection speeds last month.
For one of the above examples, Marand, its success in the JSF supply chain was in spite of, rather than because of, the broadband connectivity it had available.
“They were not actually able to join with the collaboration tools, because they didn’t have the speed, the band, to be able to implement it,” explained Connolly.
“So they had to batch it across, and it put them at a disadvantage. Notwithstanding, they did participate in that case.”
Regardless, global value chains remain important. They are an integral to global trade, and will increase in importance.
There’s room for improvement, locally; Pollaers pointed out that Australia’s participation rate is lower than 22 of the 25 biggest exporters, according to UNCTAD figures.
Lessons from local successes include persistence, an emphasis on technology and focus on doing a particular thing extraordinarily well. The increase in globalisation in supply chains also comes with a focus on specialisation at each point.
And “niche” doesn’t have to mean “tiny”. As management expert Hermann Simon puts it in his axiom on “Hidden Champion” companies: “Specialisation and focus make a market small. Globalisation makes it big.”
According to Professor Green it is, first and foremost, necessary to imagine what the future could look like.
Secondly: “A relentless commitment to quality and innovation – relentless and uncompromising – not ‘near enough is good enough’.
“This is smart specialisation. And they also need to understand how to collaborate and how to get the best from relationships here and internationally.”
There are challenges from an open market and increased globalisation, as Australian manufacturers well know. There are also great opportunities.
Pollaers summed up: “Globalisation represents a significant opportunity for Australian industry at all levels – but we need to understand the rules of the game and what the benchmark is so that we can compete.”
Images (in order)
Justin Guariglia/National Geographic