Manufacturing a revival

If the long-term trend of the Australian manufacturing industry could be defined in terms of music, a ‘sad country and western song’ would be pretty much on the mark. This was how Deloitte Access Economics described the industry in a recent report. It’s not wrong either. As a percentage of total GDP, Australian manufacturing over the last 60 years declined from its peak of almost 25 per cent in the 1960s to as low as 6 per cent in 2020.

In explaining the trend, Deloitte said domestic markets remain small while protections and subsidies have gradually been wound back. In addition, Asia has built its capacity to manufacture over the last few decades at a low cost and much of it increasingly of high quality.

But once the COVID-19 pandemic hit, something strange happened. Some areas of manufacturing began showing small signs of growth. During the initial stages of the outbreak in March, there was increased consumer demand in specific commodities, including cleaning and disinfectant products, and hand towels and (perhaps most infamously) toilet paper.

Even though the growth turned out to be a rather brief and small blip, the question of a larger growth trend had already been posed, not least by the Australian government when it established a taskforce with a revival in manufacturing one of its major goals. Instead of Australian manufacturing being a ‘sad country and western song’, could it instead be a ‘gospel revival hymn’?

Finding renewed purpose

On 25 March, Prime Minister Scott Morrison established the National COVID-19 Coordination Commission, to be led by former Fortescue Metals chief executive Nev Power and supported by an executive board of directors, including Greg Combet, Jane Halton, Paul Little, Catherine Tanna, and David Thodey.

Mr Power said the nation’s manufacturing sector could emerge stronger from the crisis by taking advantage of the lower currency and disrupted supply chains but also stated it was also important that the sector was competitive for the long term.

“It needs to be modern, efficient, high-tech and focused on the things we need. A lot of the manufacturing in Australia is very old fashioned, it hasn’t had new investment,” he told The Australian Financial Review.

“The long-term [manufacturing capability] needs investment strategies. It needs to be appealing and attractive for large-scale investment.”

Professor Simon Ringer from the University of Sydney echoed the sentiments of Mr Power. Remarking on the effects of COVID-19 on manufacturing, he says the pandemic has revealed more about Australia’s exposure to complex global supply chains, and is a crisis emphasised by the mismatch between its upstream domestic production and its demand for downstream manufactured products.

As a result, Professor Ringer says Australia needs to grow its downstream capacity and shore up its advanced manufacturing capabilities.

“The essence of opportunity is advanced manufacturing – integrating additive technologies or 3D printing, advances in materials science, automation and ‘industry 4.0’ together with design-led innovation,” Professor Ringer says.

“Australia needs a plan to get this integration right: we have the ideal ‘raw materials’ to achieve this integration and a well-educated and creative workforce. Now is the time for our country to ‘act local – think global’.”

One such initiative has been established by think tank Beyond Zero Emissions, citing manufacturing as one of seven key industry sectors – alongside energy, building, transport, recycling, land use and training – where it believed its Million Jobs plan could create the most impact and create the most jobs.

Launched in June by chairperson Eytan Lenko, the five-year project is aimed at delivering 1 million zero-emission jobs to rebuild the economy following the coronavirus pandemic. The plan was developed by Beyond Zero Emissions researchers, in collaboration with Australian communities as well as an expert advisory committee including former prime minister Malcolm Turnbull and leading economist Ross Garnaut.

“No one thought 2020 would turn out the way it has. We now have a unique opportunity to seize this moment, to re-tool, re-skill and rebuild our battered economy to set us up for future generations,” Mr Lenko says.

The scheme already has the backing of local high-hitters such as Atlassian co-founder Mike Cannon-Brookes, who said at the project’s launch in June that going renewable is the way to go in terms of thinking about Australia’s future.

“Let’s focus on our assets, let’s focus on the resources we have as a country, let’s look at the natural resources we have. We can build a renewable energy superpower with a very low cost of energy generation,” Mr Cannon-Brookes says.

“We can use this as an opportunity to electrify so much of our economy in lots of different ways and we can use it to build a better strategically-positioned economy.”

Weaknesses laid bare

Despite the potential opportunities being presented as a result of the realities of COVID, Deloitte Access Economics says the push to revive domestic manufacturing faces the difficulty that the existing supply chains are rather cheaper and more effective.

“Unless global tensions escalate further still, ‘reshoring’ may be limited to some specifics such as the manufacture of health supplies,” it says.

Even with the small recovery following the immediate COVID impact back in March, Deloitte says the overall effect is that manufacturing is sharing the pain amid the wider recession evident nationally and globally, with a slowdown that appears set to be on par with or worse than that felt during the global financial crisis. Its forecasts that 2020-21 will reveal a 10 per cent decline in manufacturing output from 2019-20 before showing any signs of bouncing back. 

“The demand for manufactured products is weak across the board. And, despite a low Australian dollar, the slowdown in global economic growth has also hit demand for manufacturing exports,” says Deloitte.

The Deloitte report also highlights structural question marks, noting that the past several decades saw Australia becoming more integrated into global supply chains. In particular, the COVID-19 pandemic has laid bare Australia’s dependence on its economic relationship with China, by far its largest trading partner.

“That has increased efficiency and improved the competitiveness of domestic manufacturers,” the report says.

“However, in the face of geopolitical tensions and uncertainty in global supply chains, it also raises questions about how Australian manufacturers will deal with their highly integrated supply chains going forward.”

These questions were clearly on the mind of the National COVID-19 Coordination Commission (NCCC). Upon establishment, at the top of its agenda was ‘onshoring’, or restoring local manufacturing capabilities.

“Australia drank the free-trade juice and decided that offshoring was OK. Well, that era is gone,” former chair and chief executive of the Dow Chemical Company Andrew Liveris told The Australian Financial Review. Appointed as a special adviser to the NCCC, Mr Liveris said Australia must realise that it really needs to examine its onshoring key capabilities.

“I don’t think you tilt as far as we’ve tilted, in which 20 per cent is domestic and 80 per cent imported,” he says of Australia’s reliance on foreign manufacturers.

“You need some balance in there that lessens the reliance [on foreign suppliers], and safeguards your basics and essentials.”

But according to Professor Hans Hendrischke of the University of Sydney, even though it’s worthwhile for Australia to review its links with China, the relationship is so interdependent and mutual that a full ‘decoupling’ will not happen. If Australia hopes to further advance its manufacturing capabilities, Professor Hendrischke says it needs China to make this transition.

“Advanced digital manufacturing requires substantial investment in technological capability and production facilities. China is already manufacturing and exporting advanced production equipment,” he says.

“China will also be a crucial market for any exports, with many opportunities for Australian manufacturers that align with demand in the huge Chinese market. Chinese investment will help develop these export opportunities, as it has with exports like dairy.

“Neither Australia nor China stand to gain from decoupling the two economies. Our economic co-operation will change with onshoring. But mutual dependence will not.”