Every crisis provides an opportunity and COVID-19 is no exception. Not only has it exposed the gaps in Australia’s manufacturing supply chains, but it has also more broadly demonstrated the vulnerability of a commodity-based economy to external shocks and the need to reverse the now all too apparent hollowing out of manufacturing capability.
Prime Minister Scott Morrison said as much in referring to the battle against COVID-19 as a battle for the nation’s “economic sovereignty”. To this end, he has established a new taskforce, led by former Dow Chemical chief executive Andrew Liveris with both union and industry leaders, to explore ways to rebuild manufacturing in Australia – not necessarily like it was but as it could and should be.
In capitalising on this opportunity, no one could claim that past experience has been an unalloyed success. While we have enjoyed almost 30 years of continuous economic growth, this record has been marred in more recent times by a productivity slowdown, wage stagnation and the “financialisation” of large corporates as they preference share buybacks and executive bonuses over investment in research and innovation.
Moreover, we have had to endure a paralysing decade-long debate over climate change where evidence mattered less than ideology. As a result, we have become disempowered bystanders to the existential impact of global warming and environmental degradation, including the recent catastrophic bushfires, species extinction and coral bleaching on the Great Barrier Reef.
If there is a single factor linking the constituent parts of this experience, it is Australia’s overwhelming reliance in recent years on the export of unprocessed raw materials to drive our growth and prosperity. However sophisticated the method of resource extraction, the truth is we sustain our first world lifestyle with a third world industrial structure.
This was the message of the Harvard Atlas of Economic Complexity which ranked Australia poorly for the “complexity” of its economy, measured by the diversity and research intensity of its exports.
It is also the logical endpoint of the theory of “comparative advantage” which asserts that we maximise gains from international trade by exploiting our abundant natural endowments in return for imported consumer goods from places that produce them more cheaply.
Even if this theory was true in the past, it no longer holds in a world where manufacturing is undergoing massive transformation in a fourth industrial revolution. This is sometimes titled “Industry 4.0” – encompassing robotics and automation, artificial intelligence, machine learning and data analytics. This transformation will only be accelerated by the Covid-19 crisis.
As Andrew Liveris put it, “we’ve spent many decades being a resource commodity exporter and more lately a service industry based on tourism, education and some digital”.
But the model of Australia being “willing to export commodities and import finished goods is old and broken… Support for R&D has basically gone whereas other countries have massive credits to encourage innovation and scalability”.
For economies like Germany, Switzerland, Japan and Korea, manufacturing and related services underpin high productivity, high skill jobs. Competitive advantage is achieved no longer through low cost mass production but through “smart specialisation” in global markets and value chains, with an unrelenting focus on quality, design and innovation.
By contrast, Australia has allowed its manufacturing capability to decline to dangerous levels, now 6 per cent of GDP from 30 per cent in the 1960s and 1970s. Even many of the companies that survived the removal of tariff protection in the 1980s and 90s eventually succumbed to the high dollar associated with the mining boom, and have not bounced back.
Post-mining boom transition
Despite expectations of a post-mining boom transition to a more diverse, knowledge-based economy, current examples of manufacturers with a global presence are few and far between. While some are the best at what they do, they also tend to be small players in their specialised markets.
It is clear from both theory and experience that Australia’s problem lies not in any lack of talent but in the absence of a coherent and effective national industrial strategy.
While the COVID-19 crisis has exposed and accentuated this problem, it also provides the opportunity for a fundamental reassessment and redesign of our outdated industrial structure. During the “hibernation” phase of the crisis, the Government will rightly do what it can to support jobs, strengthen the social safety net and ensure production of urgently required medical equipment
However, in planning for the longer term, the Prime Minister has also made reference to the bridge that must be constructed to a “better, stronger economy”.
According to Industry Minister Karen Andrews, “What we’ve learned out of this is that there are some things that we have to be self-sufficient in. So let’s not look to what’s going to give us the cheapest price”.
Australia is a relatively small, interdependent economy and would reject globalisation at its peril. But that doesn’t mean we can’t take steps to rebuild and reinvent our manufacturing capability, with an eye to new global opportunities as well as domestic supply chain gaps.
Treasurer Josh Frydenberg has already raised the prospect of industry support that is “niche, targeted and purposeful”.
US economist Richard Baldwin recently made the point that, “governments will have to undertake detailed thinking on production networks not undertaken since the 1940s. The containment policies will need to be intelligently crafted. And the longer the containment policies last, the more important it will be for them to be intelligent, flexible and well-informed.
Some may recall that the last Labor Government also established a manufacturing taskforce in 2011, at that time in response to the huge loss of manufacturing jobs during the mining boom.
This taskforce made some compelling recommendations, but faced pushback from the neoliberal orthodoxy ascendant in the central agencies, explicitly ruling out, for example, gas reservation and a sovereign wealth fund.
The truism that timing is everything in politics now gives the Coalition its best chance to shape Australia’s economic and industrial future, possibly for generations to come, provided they measure up to the scale of the task. While Labor has yet to play its hand in this area beyond negotiating agreement on the rescue package, we can expect that they will make a constructive contribution to the public discussion of longer term strategy in due course.
National industrial strategy
The framework for a national industrial strategy can draw with great benefit from the experience of other countries, but it is important to recognise that such a strategy should also be adapted to the specific conditions and prospects of the Australian economy. There is no one-size-fits-all model for industrial transformation.
The following are five basic and by no means exhaustive building blocks for success.
First, we must overcome the fragmentation and under-resourcing of institutional policy-making in Australia.
Funding for research and innovation, for example, is spread haphazardly over 13 portfolio areas and 150 budget line items.
A new National Industrial Strategy Commission should be established to develop national priorities in consultation with industry sectors, aimed at growing “industries of the future” with new technologies and business models.
The initial task of this Commission would be to undertake a “knowledge foresight” to identify areas of current and future competitive advantage for Australia, as well as gaps and opportunities in domestic supply chains. This means addressing not just areas of market failure but “system failure”, where coordination, targeting and evaluation of publicly funded programs is lacking, more often than not due to path dependency.
Second, there has been a longstanding, widely acknowledged need to deepen collaboration between industry and research organisations, possibly around designated “national missions”.
This will require an immediate reversal of the decline in both government and business expenditure on research and innovation, now far below the OECD average at 1.79 per cent of GDP, and still falling against the trend elsewhere.
It will also require funding agencies to address the research mismatch between industry and universities. Recent data indicate that while funding is relatively abundant for health and medical research, enabling Australia to grow a world competitive “medtech” and pharmaceutical sector, it is hopelessly inadequate for engineering and information technology, which is essential for more broadly based manufacturing.
Moreover, other advanced economies make use of semi-autonomous agencies to coordinate and mobilise innovation and industry support, such as Tekes in Finland and Enterprise Ireland.
But Innovation and Science Australia, which could have been the industry-facing agency to do so, was fatally compromised from the start by a bureaucratic circling of the wagons, particularly as political interest also waned. A major rethink is overdue.
Third, we should not overlook the contribution of entrepreneurial startups to economic recovery and renewal, including integration of the digital and physical dimensions of manufacturing, which is a key feature of Industry 4.0. Governments everywhere facilitate startup activity, as well as scaling up new ventures for global opportunities, through support for innovation precincts in cities and regions.
This is where the division of responsibilities between Commonwealth and States becomes relevant, currently a microcosm of system failure. While the Commonwealth’s role is to establish a robust, properly funded national policy framework, the States should carry much of the responsibility for delivering business services and infrastructure, particularly for industry clustering and place-making initiatives.
Fourth, the Government can also make a big difference for small and medium enterprises with public procurement policy. Too often we see local tenders overlooked in favour of large international companies on a narrow “value for money” basis, when these large companies themselves might owe their existence to another country’s more imaginative procurement policy.
Measures like the US Small Business Innovation Research (SBIR) program are a powerful instrument for enterprise capability-building and the development of critical mass in local supply chains.
They can also supplement foreign direct investment attraction programs, when these are designed, as they should be, to enhance research intensive manufacturing at home.
While infrastructure is a topic for another time, we should not overlook the importance of an efficient freight and ports system in facilitating increasingly data-driven operations in manufacturing logistics and supply chains. As Infrastructure Australia has recently noted, our trading connectivity would be enhanced by a new East Coast deep-water container port able to accommodate the global shift to ultra-large container vessels.
Fifth and finally, industrial transformation in Australia will depend ultimately on the adequacy of our workforce and management skills. The international evidence suggests that these skills are lagging other comparable countries, and that if anything they are atrophying further with the decline of manufacturing and the myriad of related services which contribute to economic complexity.
Hence, education and training must be a key element of industrial strategy, along with provision to draw on workers’ talent and creativity at the enterprise level. Again it is clear from the evidence that involving workforces in the range of decisions that affect them contributes to superior productivity performance, so why wouldn’t we encourage this practice, or even mandate it?
Most immediately, substantial public funding will be needed to repair the damage to the TAFE system from market contestability, and to place vocational education and training at the heart of the strategy to rebuild manufacturing capability. This applies as well to the Covid-19 hit to university revenues. Unfortunately, the Government’s otherwise welcome announcement to maintain funding for domestic students will not compensate for this loss of international student revenues.
It is still not well understood that Commonwealth funding for higher education does not cover the real cost of domestic teaching, let alone research. Uniquely in Australia, international student income not only cross-subsidises teaching, but also makes up a significant proportion of research funding as well. The loss of this income will seriously damage the capacity of Australia’s university sector to contribute to long-term growth and jobs.
Repositioning for the future
To sum up, while the Government’s dramatic intervention to safeguard people’s lives and livelihoods in the current crisis is clearly justified, it is also increasingly evident that the time has come for a thorough-going reassessment and rebalancing of Australia’s industrial structure.
This will require the design and implementation of a comprehensive national industrial strategy.
Understandable concern has already been expressed that the emergency rescue package entails an unprecedented level of public debt. So how can the Government commit to even greater expenditure on such an ambitious new policy direction? Historically, this problem has always accompanied the recovery from wars and crises, but it is a problem which has always had a straightforward solution – a return to economic growth and productivity.
The challenge of this crisis is to devise a growth path which doesn’t simply replicate what came before, but also addresses the broader issues of climate change and social inequality in conjunction with the imperative of technological change and innovation.
The case being made here is that to succeed in this challenge means creating a more dynamic, sustainable and inclusive knowledge-based economy, with a major role for advanced manufacturing.
There will be those who claim that Australia cannot afford to undertake such a radical and untried repositioning of its conventional policy approach. The response must be that we cannot afford not to do so, particularly at this critical turning point for the world’s production systems and supply chains. We may not be able to rewrite our history, but wouldn’t we want to be ready to shape the future before it shapes us?
Professor Roy Green Roy is Emeritus Professor and former Dean of Business at the University of Technology Sydney and Conjoint Professor at the University of Newcastle. He is currently Chair of the Advanced Robotics for Manufacturing Hub and member of the Board of the Innovative Manufacturing CRC and Research Committee of the Centre for Policy Development. He is also Chair of the Port of Newcastle and a member of the editorial advisory board of @AuManufacturing news.
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