Growing concern about overdependence on easily hindered supply chains has prompted many nations and companies to withdraw their manufacturing facilities from mainland China. Regional diversification provides a tantilising opportunity for Australia to grasp with both hands.
It is a common criticism often on display around the dinner table of any family over the festive period as we all break the cardinal rule, "don't talk about religion, politics or money in polite company", as family often conflict over differing opinions, with the direction of the country and its leaders a favoured punching bag.
One of the frequently cited issues is the lack of foresight that is seemingly prominent within Australia's political leaders and the policies they introduce, with many Australians critical of the 'electoral' cycle focused politicking that has now seemingly left the nation vulnerable to the global and domestic impact of COVID-19.
This is particularly true as mere months ago it looked as if Australia had dodged the bullet of a second wave of COVID-19 and the ensuing impact such an outbreak would have upon the nation’s economy, standards of living and resilience.
However, like many comparable nations, Australia is now in the midst of a second wave, which, while isolated and confined to Victoria, maintains the potential to have a truly devastating impact on the national economy, the Australian public, its standards of living, long-term national resilience and, by extension, national security.
Adding further fuel to the fire is the global and more localised impacts of COVID-19, which range from recognising the impact of vulnerable, global supply chains upon national security as many leading nations, long advocates of “closer collaboration and economic integration”, grasp at the life boats of nation-state to secure their national interest.
Despite the protestations and reassurances made by various Australian political leaders, the nation’s position as a “trading nation” does little to guarantee its economic, political and strategic security during a period of global recession and mounting geopolitical and strategic tension and competition between great powers.
Each of these factors, combined with the disastrous impact of the bushfire season and a decade long drought, have left the nation in a precarious position and its first recession in generations, with many Australians struggling to keep their heads above water and looking to their political leaders for guidance and a plan.
Meanwhile, as nations and companies responding to the rising challenges of contested supply chains and competing national interests, the question of over dependence upon China's position as the "world's factory" has come into question.
Further compounding this is the growing antagonism and attempted economic, political and strategic coercion policies pursued by President Xi Jinping's government has prompted an increasing amount of manufacturing to leave China.
Explaining this increasingly rapid global and regional transition, Prince Ghosh, writing for Forbes, has penned a piece titled, 'The Exodus of Chinese Manufacturing: Shutting Down The World's Factory', states: "It’s not breaking news that manufacturing is leaving China.
"Over the last 20 years, Chinese manufacturing has dominated over the rest of the world. This was driven primarily from optimised shipping lanes and extremely cheap labour rates by way of government subsidies. These two benefits made enough sense financially for brands to withstand quality issues, shipping timelines, communication barriers, and annual production delays during the Lunar New Year timeline."
Overturning decades of manufacturing dominance
COVID-19 has served as a major catalyst for many nations, including Australia, who have recognised the national security, economic and increasingly, political ramifications of diminishing value-add manufacturing capabilities, particularly as many nations continue to protect their interests, not those of the globalised economy and citizens.
This is the culmination of decades of policy shifts and deregulation that saw China leverage the shifting sands of Western policy making to leverage its natural advantages in population and low-cost labour, while also using elements of central planning and capitalist doctrines to maximise the economic shift.
Ghosh explained, "China grew to become the 'world’s factory' over the course of the last 40 years. This started with former president Deng Xiaoping ordering an economic reform in the late 1970s and introducing the concept of a free market to China for the first time.
"All of a sudden, a mixture of loosened state regulations and access to the world’s largest, youngest, workforce in the world made China the perfect place to outsource manufacturing.
"Cheap labour rates and proximal access to quickly growing consumer populations in south-east Asia made China one of the most lucrative business hubs in the world. It quickly overtook the United States in 2011 to become the world’s largest manufacturer driving growth in the nation’s GDP by 40 per cent.
"Over the course of these 40 years, the world around China also underwent an enormous digital transformation. Consumer electronics proliferated homes and workplaces with paper and pens replaced by phones, tablets, and computers for nearly every knowledge worker.
"Through quick planning, China was able to quickly adapt its manufacturing capabilities and develop specialised industries like electronics and PCB manufacturing. Entire cities like Shenzhen were constructed for the sole purpose of enabling more rapid manufacturing of consumer electronics.
"This maturation point in China’s exponential growth curve, however, led to a few unforeseen circumstances.
"The price and speed at which China was able to produce goods started to slow as the country’s population grew and its presence on a global stage drew attention around environmental and wage regulations. Specialisation drove labour rates up, resulting in the average manufacturing hourly labour rate settling at about $6.50 an hour, up almost 20 per cent from previous years."
While the mounting trade war between the US and China continues to serve as a driving force behind the increasing withdrawal of manufacturing from China, Ghosh believes that the current shift in manufacturing facilities is the result of a 'perfect storm' of factors, including:
"A global trade war with the US spurred by the Trump administration also dealt a fatal blow towards Chinese manufacturing. This has resulted in not only decreased export volume to the US, but also to other countries facing American pressures to reduce global dependency on Chinese manufacturing.
"And amidst geopolitical uncertainty, COVID-19 has pushed Chinese manufacturing to the brink of shut downs. The lunar new year, followed by immediate COVID-19 shut downs, created bottlenecks throughout the supply chain. Raw materials weren’t sourced fast enough from upstream suppliers, creating delayed lead times and choked end customer deliveries.
"For modern US companies, both start-ups and giants alike, supply chain risk has been top of mind. Companies are diversifying their supply chains to mitigate risks earlier and earlier in their production cycles, leaving no risk of being caught empty handed for the next global pandemic."
Now, you might be asking, where are these companies shifting their manufacturing operations to? The short answer is south-east Asia, with nations like Vietnam, Thailand, Indonesia and India all net winners, while central and South American nations Mexico and Brazil are also winners. So, what opportunity is there for Australia?
What is manufacturing looking for?
Interestingly, these markets seem to markets of relative convenience for global supply chains, with nations like Australia, the US and many western European nations apparently suffering from labour force skills and wage costs.
However, contradicting these apparent weaknesses, Ghosh, citing a Deloitte-commissioned report titled Footprint 2020: Expansion and optimization approaches for US manufacturers, establishes the key catalysts global brand executives look for when deciding where to expand manufacturing bases, including:
- New market opportunities;
- Proximity to existing accounts;
- Talent availability, educational infrastructure;
- Business disruption risk; and
- State technology advances.
It would seem on that basis, Australia is a stand out opportunity, particularly when combined with the nation's wealth of traditional and 'next-generation' raw resources, like rare earth elements essential to modern, value-add manufacturing capabilities.
In order to capitalise upon this shift in manufacturing hubs, it is clear that Australia must begin to plan for the next 15 to 20 years, not the next term of state, territory or federal government, providing policy consistency and, above all, long-term stability and vision for the public and surety in a period of global and regional turmoil.
This approach requires more than vanity programs, which can be best left to local government or private developers. Rather, it requires a strategic approach to a number of highly visible, big impact public policy areas, including:
- Infrastructure development: Addressing the critical links between hubs of economic prosperity, including regional hubs and metropolitan centres – including improved, faster and more reliable road, rail and air transport links.
- Water security: Australia is a continent of extremes, “droughts and flooding rains”, yet we do little to adequately channel and store the vast quantities of water that falls – now is the opportunity to promote economic stimulus through infrastructure investment while supporting Australia’s agricultural industry and drought-proofing the continent.
- Energy and resource security: Addressing the nation’s lack of strategic resource and energy supplies has come to the fore during COVID-19. Preparing the nation for such challenges, whether natural or man-made, should be of paramount priority – this requires less ideology and more pragmatism.
- Strategic industry development: COVID has stirred many within the Australian public to question why Australia isn’t manufacturing more of the critical – it is clear that Australia requires a concerted policy initiative in the form of a Strategic Industries Act to develop a robust, globally competitive industry 4.0-oriented manufacturing base.
Each of these contribute to the nation’s sovereignty and security at a time when many of the principles that Australia’s post-Second World War public and strategic policy is based upon are coming under threat – serving to make Australia a more reliable economic, political and strategic partner amid a period of great power competition.
Australia is defined by its economic, political and strategic relationships with the Indo-Pacific and the access to the growing economies and to strategic sea lines of communication supporting over 90 per cent of global trade, a result of the cost-effective and reliable nature of sea transport.
Indo-Pacific Asia is at the epicentre of the 21st century’s era of great power competition and global maritime trade, with about US$5 trillion worth of trade flowing through the South China Sea and the strategic waterways and chokepoints of south-east Asia annually.
Enhancing Australia’s capacity to act as an independent power, incorporating great power-style strategic economic, diplomatic and military capability serves as a powerful symbol of Australia’s sovereignty and evolving responsibilities in supporting and enhancing the security and prosperity of Indo-Pacific Asia.
Rear Admiral Kevin Scarce also issued a challenge for Australia's political and strategic policy leaders, saying:
"If we observe that the level of debate among our leaders is characterised by mud-slinging, obfuscation and the deliberate misrepresentation of the views of others, why would the community behave differently ... Our failure to do so will leave a very damaging legacy for future generations."
Further complicating the nation’s calculations is the declining diversity of the national economy, the ever present challenge of climate change impacting droughts, bushfires and floods, Australia’s energy security and the infrastructure needed to ensure national resilience.
Australia is consistently told that as a nation we are torn between our economic relationship with China and the longstanding strategic partnership with the US, placing the country at the epicentre of a great power rivalry – but what if it didn’t have to be that way?
Get involved with the discussion and let us know your thoughts on Australia’s future role and position in the Indo-Pacific and what you would like to see from Australia’s political leaders in terms of shaking up the nation’s economic, political and strategic approach to our regional partners.