Future of Australian manufacturing relies on producing high-quality products

In mid-February 2020, Greg Sheridan wrote in The Australian that Holden’s recent shut-down should be considered a “cultural tragedy” for Australia, and reflective of the quality of Australia’s misinformed environmental and free-market economic policies over the past few decades. But are things really that bad?

What about the success stories in Australia? Røde Microphones, for example, has experienced sizable growth since it was founded in 1967, and is now considered a global leader in the microphone manufacturing industry. Peter Freedman, owner of Røde, currently employs over 250 highly skilled workers and when asked about his decision to retain his manufacturing base in Australia, he responded: “I was in China three weeks ago and you see them operating quite old gear with five people on it, earning very little money and I laughed because my gear has got nobody running it”.

The Røde PodMic

Quality products can come at a higher price initially, but their true value will prevail over time. This is why the Australian manufacturing industry outlook may not be as gloomy as people think.

In his article, Greg Sheridan cited a recent Harvard Kennedy School of Government study that ranked Australia’s economy eighth in terms of wealth, but 93rd in terms of the complexity of its exports. Complexity was measured by looking at the mix of exported products and their destinations. The lack of economic complexity, Sheridan explains, is largely due to Australia’s top 10 exports – coal, iron ore, gas, education, tourism, gold, aluminium ores, beef, crude oil and copper – relying too heavily on a thriving Asian market and not enough on uniquely specialised technology (education is the only export considered hi-tech in the study).

A diverse range of product exports allows economies to handle adversity, and there is no doubt that it should be valued. The novel coronavirus, Covid-19, could make Australia’s over-reliance on its Asian counterparts abundantly clear. But to claim that the passing of Holden is a “catastrophic loss of capacity, complexity and competence across our economy, a dumbing down of our society, a needless limitation on our potential and a serious dent in our national security” is excessive.

Current state of things

ABS data shows that the Australian manufacturing industry has contracted over recent years, with gross value added and employment numbers decreasing quite steadily. But the industry still produced $105 billion in gross value added and employed 912,500 people in November 2019.

Source: ABS

Yes, the Australian manufacturing industry has contracted in terms of employment and GVA and is being overshadowed by the resources sector. But this is arguably what we would expect to see based on the economic principle of comparative advantage. As the celebrated Heckscher-Ohlin Theorem states:

A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor.

Dominick Salvatore, International Economics (1995: Prentice-Hall International), 118.

Over-reliance on a limited number of commodities and trading partners may raise eyebrows, but we should not be shying away from where our advantages lie for the sake of complexity.

Challenges for Australian manufacturers

It is true that Australian manufacturers face a particularly harsh set of conditions. According to the Queensland Productivity Commission, conditions which have affected Australia’s manufacturing industry negatively over recent decades include:

  • fluctuating input costs (due largely to a volatile exchange rate),
  • energy costs,
  • labour costs,
  • strong international competition,
  • changing markets and consumer preferences,
  • relative remoteness market, and
  • integration with global value chains.

Even relative to other advanced economies, Australia is considered a high-cost location for manufacturing. This was reflected in the Boston Consulting Group Cost Competitiveness Index, which placed Australia last in terms of location desirability in a study of 25 different economies. BCG attributed this lack of cost competitiveness to the resources and infrastructure boom, which contributed by “driving up wages and the Australian dollar… by drawing away capital”.

Looking forward

To compete internationally, many successful Australian manufacturers are demonstrably differentiating themselves through producing and marketing superior products – the so-called “Australian made” brand. Although certain costs such as intensive R&D and wages for a highly skilled workforce must be shouldered, consumers are willing to pay a premium for quality in many cases. For example, consider Australia’s pharmaceutical industry, which according to IBISWorld senior industry analyst Liam Harrison is expected to perform in the near future due to “[Australia’s] strict medical standards and regulations”.

Additionally, in the 2018 Australia’s Tech Future report published by the Department of Industry, Science, Energy and Resources Report, the growing role of digital technologies – such as robotics, artificial intelligence, advanced modelling software, 3D printing, cloud-based tools, and Internet of Things – is modernising business process operations and monitoring. Already we can see that Australia’s manufacturing industry is becoming something very different to what it once was – i.e. factories full of labourers. 

3D printing in particular has the potential to radically transform the manufacturing industry and global economy. Since the expiration of a patent in 2009, 3D printing has taken off in start-ups and research labs. Aside from printing usable human body parts, entire rockets and even skyscrapers, the new technology has the potential to seriously disrupt international trade. By cutting production times and reducing transport costs, it has been described as the impetus for the fourth industrial revolution. 3D printing is just one of the groundbreaking technologies that will dictate the future of the manufacturing industry. It is here that the debate should be centred: how can we ensure the most optimal adoption of new technologies to ensure a viable and thriving future for the Australian manufacturing industry?

Despite losing around 55,000 jobs since 2012-13, the Australian manufacturing industry is far from dead. That said, it is changing. To keep up with challenging market trends and a competitive environment, Australian manufacturers must understand the value of their products and shout this loud and clear to consumers. A focus on high-quality products and making best use of a highly-skilled workforce will be the future of Australian manufacturing.

This article was prepared by Adept Economics Research Assistant Ben Scott and Director Gene Tunny. If you’re in the manufacturing industry, or sell Australian-made products, you may be interested in the Adept Economics video below. 

 

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