Australia: we need to reassess our manufacturing needs

Australia needs to accept the challenges of the Advanced manufacturing future

Australia and the traditional manufacturing states of South Australia, Victoria and New South Wales have struggled in recent years to help their traditional economic drivers transition to a new comparative and competitive advantage. In Australia we are still under the “illusion” that we can compete broadly as a manufacturing centre with the rest of the world. This illusion is unachievable due a variety of factors, and there are some key community expectations which mean maintaining our manufacturing heritage as it was in the 1970’s, 80’s or 1990’s is just not possible. The goal of maintaining this bulk manufacturing base is not compatible with our Australian standards of living and expectations. In Australia we have mortgages, rent payments, spending and consuming expectations which mean that any reduction in our labour costs will come at a substantial societal cost to the broader Australian community. Australia can compete on a global scale if we increase productivity. This would require increased output compared to cost of labour. We can achieve this in a couple of ways in Australia. The first is if we lower the minimum wage to levels like the US – $5 per hour for example, this would allow our productivity to increase to a comparable level to our competitor manufacturers in North and South America, although still putting us at a disadvantage compared with our regional neighbors in Asia. The alternative would be to reduce our workforce numbers through increased investment in automative manufacturing. These two options would neccessarily result in reduction in the manufacturing workforce, and more than likely see adverse reactions from Unions, not to mention the political difficulties associated with these moves. There is also a significant cost expenditure associated with the up-tooling of the manufacturing facilities for bulk manufacturing. Australian manufacturers do however need to address the reduction in productivity on the global platform, and corporate boards, management teams, and state and federal governments should be seeking to help their home grown manufacturers rationalize their investments, operations and manufacturing into areas where we in Australia can maintain our competitive advantage.

Low cost manufacturing from Asia has meant that it is no longer cost effective to manufacture in Australia in bulk products. We must transition to a high technology, advanced manufacturing future.

An alternative option for Australian manufacturers to address the issues of reduced manufacturing productivity and cost effectiveness should be to strategically manufacture in Advanced High technology sectors. Australian state and federal governments should bite the bullet and help our manufacturers rationalize their bulk manufacturing to our Asian neighbors in a manner that allows us to focus on the advanced value adding and R&D components of Manufacturing. Outsourcing and relocating bulk manufacturing will lower our cost burden in Australia, and allow Australian manufacturers to remain competitive on a global scale. It has the added benefit of helping these same manufacturers to rationalize their operations so that they have control over the intellectual property and R&D components of there businesses. This is the realistic path to maintaining a sustainable manufacturing industry in Australia. Our friends in Asia should be seen as our partners not our foes when it comes to our manufacturing future.

The main issue we have across Australia at the moment is that our political leaders at both a state and federal level are risk adverse and in the main lack the leadership and strength of conviction required to help our economies transition to a new advanced manufacturing and sustainable level. The sooner we realise this the sooner our Australian economy, and manufacturing industry will become a strength once more.

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Consider the Risks before developing your future International Manufacturing Strategy

Manufacturing is complicated, make sure all your manufacturing cogs are lined up to maximise the returns

Australian manufacturers are facing high costs of production, and a high A$ beyond parity with the US$, which has resulted in a loss of competitiveness in international markets. If Australian manufacturers are to survive then the need to address these cost of production and regain the international markets. It is not in Australia’s long term Interest to have the manufacturing sector just get up and leave, as companies have developed years of knowledge and expertise, and in many cases have created substantial intellectual property invested in manufacturing in Australia. Manufacturers planning for the future need to consider how to effectively manage the international markets in which they will manufacture, and addressing the cost pressures and protecting intellectual property will be fundamental to developing a sustainable and effective international manufacturing strategy.

 Australia can no longer compete in low cost manufacturing with other countries in our region such as China due to our comparative high costs of production. As a consequence many Australian manufacturers have looked to China as the answer to cost of production issues, and moved manufacturing to China in recent years. This can be a great way to lower production costs, and many Australian companies have managed their Chinese operations successfully, however there are some downside risks to manufacturing in China. It is important to consider that the cost of production in China has been rising consistently over the last few years, with labour costs rising in excess of 10% a year for the past couple of years. To add to these cost pressures is the gradual appreciation of the Chinese RMB, which is making Chinese made products more expensive. These cost pressure, alone, suggest that China may not be the medium to long-term answer for absolute low cost manufacturing. Additionally another risk to manage is a loss of your intellectual property, which could result in either a competitor product entering the market, or a direct replica of your product which may erode brand confidence.  Can you be certain that your product designs won’t reappear around the corner for a fraction of the price? I know of many manufacturers who have been confronted with this very issue. Be careful.

Investing in Advanced manufacturing may allow your company to maintain its competitive advantage

One way of managing this risk is through maintaining the advanced manufacturing phase of production in Australia. In order to make Advanced Manufacturing work it is important to undertake Bulk manufacturing abroad while at the same time protecting your intellectual property. Assembling the bulk components, and installing the high technology components of the product in SA will go a long way towards protecting the most important assets Australian manufacturers possess: Intellectual Property. This can be a complicated task, particularly in relation to Australia’s geographic proximity to the low cost manufacturing centres in Asia. If manufacturing is undertaken in China it is important to consider the logistics time to freight components from China to Australia. It can take up to 5 weeks to get products from manufacturing facilities in China to the warehouse in Australia. Can your business cope with that time delay? In order to make Advanced Manufacturing work for Australian companies it is important to undertake bulk manufacturing of components in geographic locations that do not pose a substantial time disadvantage. 

The growing costs of production in China in recent years, and the need to protect intellectual property mean that manufacturers need to look beyond a reliance on the China solution if they are to find sustainable low cost manufacturing to compliment the advanced manufacturing in Australia.  I would advocate a look at other markets in South East Asia to undertake bulk manufacturing, and reduce the freight time.  The advantage South East Asia possesses is that the freight transport corridor stops in Singapore on the way to and from Australia. The closer the manufacturing centre to Singapore the faster it can be on a ship heading to Australia, where advanced manufacturing can then be undertaken.  Australian companies planning their international manufacturing strategy must plan for an Advanced Manufacturing future if it is to manage the intellectual property risks, while it is important to look north and consider the bulk manufacturing opportunities on Australia’s relatively closer northern doorstep.

Addressing Australia’s Reactive Asian Engagement Strategy

Australian needs to proactively and strategically engage with Asia, not watch passively and reactively.

I had the opportunity last week to attend a business community consultation session with the Department of Foreign Affairs and Trade and the message I delivered to them was that Australia’s foreign policy position is fundamentally wrong. Australian governments in the recent past have adopted a reactive strategic approach to international trade and engagement with Asia, and ‘we’ run the risk of missing the major opportunities that will arise through greater integration and engagement with Asia in the 21st Century. There are a number of examples that I can draw upon to emphasise this reactive policy position, and many of these policy positions are driven by domestic political imperatives, that have little use to an Australian economy that operates in a global trading and information system.

The current challenge posed to the manufacturing sector in Australia has been a long time coming, and we have had ample opportunity to address the productivity, skills and technology gap over many years. Unfortunately, the rising Australian Dollar has created an uncompetitive environment for Australian manufacturers and they will need to adapt quickly to this new environment, or disappear completely.  Politicians on all sides seem to fail to understand this new global paradigm we exist in, and so we still see the usual responses of cash handouts, to maintain the existing jobs in bulk manufacturing. There is no linkage of these grants to high technology and research and development. This must change if Australian manufacturing is to be maintained. Australia’s manufacturing future if we are to have one must be in high technology and advanced manufacturing, and we only have to look to Germany to see the template for success. If we do not engineer political policy to allow for this manufacturing transition to occur quickly many companies will cease to exist and, Australian manufacturing will come to an end.

Another example of the reactive policy thinking is through the constant debate about overseas investment in Australian resources. This is primarily a concern based on future needs, and at the moment Asian investors from China, India and other parts of Asia are placing a pricing premium on Australian resource investments.  The resources and profits generated from these investments are primarily repatriated to the home country markets in Asia, and there is rightly a concern that Australia is selling our resources for too low a price. Australian investors are choosing not to compete, and subsequently they are missing out. However, our International perspective appears to be stuck in a bubble where we see every action in isolation as if we are not operating in a global trading environment.  

Australian governments should be encouraging Australian companies to be increasing their investment exposure in Asia, to compete, and to help hedge against costs that have been affecting the viability of wholly Australian operated ventures.  An approach that seeks to encourage outward trade and investment from Australia will have multiple positive effects for the Australian economy. If we look to the manufacturing sector, there is an opportunity for these businesses to transition their operations to high end and advanced manufacturing in Australia, while offshoring the bulk and low tech component manufacturing to nearby Asian markets. This will allow increased investment in technology rich manufacturing helping to build our advanced manufacturing competitive advantage. Equally we need to remember that just as our political class and media lament the repatriation of profits back to home countries in Asia, we have this same opportunity. Australian owned investments in Asia, will allow for repatriation of profits back to Australia. A case in point would be a company such as BHP Billiton, which is utilising its vast profits collected from around the world into developing the large Olympic dam mine expansion.

So my message to the Australian Government is to take a proactive policy approach to Asia, and create an environment where Australian companies are encouraged to engage, interact and invest in Asia. Our future depends upon this investment.

Protect Your Manufacturing Heritage By Moving To An Advanced Manufacturing Model

Mitsubishi closed their manufacturing plant in South Australia due to the comparative high costs of production, it is time to rethink bulk manufacturing in Australia

The South Australian economy for many years had a strong manufacturing sector, such as the automotive manufacturers GM Holden and component manufacturers in the North of Adelaide and the now closed Mitsubishi and component manufacturers in the South. Automotive manufacturing is not the only manufacturing sector in SA, however the economic and market forces that contributed to Mitsubishi leaving SA, and Holden downsizing production provides a lesson for other smaller manufacturers. Right now SA manufacturers are faced with high costs of production, and a high A$ which is near parity with the US$, which subsequently pushes up the price of Australian Products abroad. For many international markets Australian made products are just too expensive at the current A$ level, and are no longer competitive. If manufacturers are to survive in South Australia then the need to address these cost of production and regain the international markets.

So what can SA manufacturers do to address this potential loss of International markets?

It is not in SA’s Interest to have the manufacturing sector just get up and leave, as we have built up years of knowledge and expertise, and in many cases companies have substantial intellectual property invested in manufacturing in South Australia. The time is upon SA business to look to the future and effectively plan for the next 10 years where an A$ has been forecast to be high. Manufacturers must address these cost pressures through rationalising their manufacturing while at the same time protecting their well invested intellectual property.

But how can manufacturers do this?

The South Australian government has identified this challenge of a loss of competitiveness in recent years and is now encouraging “Advanced Manufacturing” in SA, where cost is not the primary factor, but instead just one of the important factors along with quality, and Research and Development. Australia can no longer compete in low cost manufacturing with other countries in our region such as China due to our comparative high costs of production. Advanced Manufacturing works when Bulk manufacturing is undertaken abroad, to keep costs down, and then the final high technology manufacturing is completed at home. This allows a company to maintain cost advantages through the overseas manufacturing while at the same time protecting your intellectual property. Assembling the bulk components, and installing the high technology components of the product in your home market will go a long way towards protecting the most important assets manufacturers possess: Intellectual Property. This can be a complicated task, particularly with if your home manufacturing base is located well away from the low cost manufacturing centres in East Asia.

Manufacturing in China can be achieved at a fraction of the cost to bulk manufacture in Australia

In order to make Advanced Manufacturing work it is important to undertake bulk manufacturing of components in geographic locations that do not pose a substantial time disadvantage. With the growing costs of production in China in recent years SA manufacturers need to look beyond a reliance on the China solution if they are to find sustainable low cost manufacturing to compliment the advanced manufacturing in Adelaide. I would advocate a look at other markets in South East Asia to undertake bulk manufacturing, and cut the transport time. The Advantage South East Asia possesses is that the freight transport corridor stops in Singapore on the way to and from Australia. The closer the manufacturing centre to Singapore the quicker it can be on a ship heading to Australia, where advanced manufacturing can then be undertaken.  

The ASEAN Free Trade Area means that South Australian companies now have greater access to South East Asian markets such as Indonesia, Malaysia, Thailand and Vietnam. To plan for the Advanced Manufacturing future it is important to look north, but consider the opportunities on Australia’s northern doorstep.

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