The Commonwealth government has launched a comprehensive policy and funding package designed to boost Australia’s manufacturing capacity and national resilience. For Sydney University-based United States Studies Centre (USSC) fellow David Uren, it seems like a case of “too little, too late”.
For many nations, COVID-19 has served as a form of divine intervention, revealing foundations of sand and the frailty of over-dependence on the lowest cost proposition, ailing infrastructure and rapidly declining resilience – Australia, the 'Lucky Country', is no exception.
However, it appears that the Prime Minister has sought to buck that trend in the aftermath of the COVID-19 pandemic and a disastrous bushfire season that have wrought unprecedented economic, political and strategic devastation, not only on Australia's economy, but equally across the globe.
These challenges, compounded by growing levels of economic stagnation and in some cases depression across the West, combined with growing public malaise and the ever mounting pressure of 'great power' competition are all undermining the global balance of power and the post-Second World War paradigm.
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 lifeboats of the nation-state to secure their national interest.
Responding to these challenges has pushed the public policy status quo to the edge, as government grapples with how to stimulate the economy, lower unemployment and prepare the nation for the increasingly disrupted and challenging decades to come.
Answering the challenge, Prime Minister Scott Morrison and Treasurer Josh Frydenberg have used a series of pre-budget announcements and the federal budget to announce the launch of a $1.3 billion 'Modern Manufacturing Initiative' (MMI) plan designed not only to reignite the fires of Australia's long-neglected industrial and manufacturing base, but expanding on areas of natural competitive advantage driven by innovation and open up global markets for Australian export growth.
The Prime Minister's ‘Modern Manufacturing Initiative’ seemingly builds on the priorities identified by the CSIRO as part of a framework report, titled COVID-19: Recovery and resilience - Opportunities for Australia to leverage science and technology to support economic recovery and resilience.
This report highlighted specific areas for government emphasis, including a focus on long-term, value add, smart job creation and investment opportunities to help stimulate the Australian economy in the post-COVID world, namely:
- Agriculture and food;
- Mineral resources;
- Manufacturing; and
- Digital and high technology industry.
The core of the Prime Minister's ‘Modern Manufacturing Initiative’ strategy is shifting not only the public dialogue, but equally the government dialogue on investment versus intervention and subsidy to leverage government 'co-investment' across six key priority areas where Australia is deemed to have 'competitive advantages'.
Prime Minister Morrison said during his National Press Club address, "We make things in Australia. We do it well. We need to keep making things in Australia. And under our plan we will. Manufacturing employs around 860,000 Australians, and prior to the pandemic it generated more than $100 billion in value for our economy each year and over $50 billion in exports.
"The overarching objective of our modern manufacturing strategy is to build scale and capture income in high-value areas of manufacturing where Australia has either established competitive strength or emerging priorities."
Building on these points, the Prime Minister said, "Too often in the past industry policy has ignored these foundational elements in the vain hope that subsidies and work-arounds could make up for broader deficiencies in our economic settings."
However, it appears as though not everyone is buying into the politicking surrounding the Prime Minister and Treasurer's announcements and enthusiasm for what can be best described as an industrial and manufacturing rebirth in Australia. For Sydney University-based United States Studies Centre (USSC) non-resident fellow David Uren, the policies proposed seem to be a little too optimistic.
Rebuilding Australian industry is a Herculean task
At this stage it is well known that rebuilding and transitioning the nation's industrial and manufacturing base is a mammoth task and will require more than a momentary, flash in the pan policy approach – something both the Prime Minister and Treasurer appear to be well aware of.
Pairing the launch of the MMI with an extensive study conducted by the CSIRO that builds on the government's commitment to targeted strategies across the aforementioned industries, combined with an extensive period of consultation to develop achievable industrialisation goals, seems to stress the government's commitment to developing a sustainable, competitive manufacturing base as part of enhancing Australia's economic recovery and post-COVID resilience.
Uren expresses his concerns about the government's proposal, stating: "The federal government sees the revival of Australian manufacturing as a matter of economic sovereignty, yet the annual national accounts highlight the enormity of the task it confronts.
"The government is establishing a $1.3 billion fund to cover up to a third of the cost of expanding a manufacturing plant to achieve economies of scale and up to half of the cost of projects to integrate products into global supply chains or bring new research into production.
"While there have been numerous government subsidy programs for manufacturers over the years, the investment fund concept is new and appears to be modelled on the Clean Energy Finance Corporation, which has supported the expansion of solar and wind energy projects.
"There is déjà vu in the six priority sectors identified by the government that will be eligible for the new funding, which encompass resources, food and beverages, medical products, recycling and clean energy, defence, and space."
Expanding on his concerns, Uren articulates the continuing decline of Australian manufacturing capacity, despite bipartisan attempts to shore up industries, like the highly contentious auto industry, which was heavily subsidised throughout the later years of its life.
"The Rudd government’s first year in office in 2008 marked the peak for manufacturing output, with the sector contributing $119.5 billion to GDP. The annual value of manufacturing production has dropped since then by $14.2 billion (after allowing for inflation)," Uren explains.
"Manufacturing has been falling as a share of the economy for a lot longer than that, having peaked at more than 25 per cent in the 1970s compared to just 5.5 per cent now, but it’s only over the past 12 years that the sector’s actual output has dropped. Manufacturing was 40 per cent larger than the resources industry, measured by its value added, in Rudd’s first year, but is now only two-thirds its size.
"The decline is destined to continue because investment has not even been keeping pace with the depreciation of existing plant and equipment, let alone providing a base for future growth.
"The value of machinery and equipment owned by manufacturing companies has fallen by $20 billion, a drop of 26 per cent, since 2008 (again after allowing for inflation). This includes a 14 per cent fall in IT hardware and a 32 per cent drop in other electronic and electric equipment."
Strides being made, but there is more that needs to be done
Policy consistency has long been identified as a major shortfall hindering Australia's development and implementation of a true industry policy, while strides have been made, particularly with the Defence Sovereign Industry Plan, Naval Shipbuilding Plan and the government's commitment to building Australian Industry Capability, the broader policy has struggled.
Australia isn't alone in this struggle though, as like many former industrial powers, the impact of COVID has seen a growing push for greater domestic economic development, limiting exposure to vulnerable global supply chains and a public support for 'reshoring' of key industry sectors essential for national security and resilience.
This was identified in a timely report commissioned by Deloitte, Footprint 2020: Expansion and optimization approaches for US manufacturers, which while focused on the US industrial base, provides important guidance for Australian consideration, in particular the key catalysts that global brand executives look for when deciding where to expand manufacturing bases, including:
- Proximity to 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.
Despite these key factors, Uren remains pessimistic about the possibility of Australia's reindustrialisation, despite a seemingly concerted effort by the government to reignite the fires of manufacturing and industry in Australia, with Uren stating, "Manufacturing in Australia suffers from inescapable problems of distance from major markets and lack of scale, which mean it cannot overcome the disadvantage of its high labour costs, as do manufacturers in countries like Germany and Japan.
"Australian manufacturers are not hooked into the value chains that have reshaped global industry, with components made or assembled in different countries. The iPhone, for example, draws on components produced by 785 suppliers in 31 countries. As much as half of the value of China’s exports is generated in other countries which sell to China for assembly or further processing. For Australia, the import content of our exports is less than 20 per cent.
"OECD research shows that to the extent Australian manufacturers form part of global value chains, they provide only the first links, exporting processed raw materials. Businesses do not send goods to Australia for further processing.
"The OECD says, ‘Australian manufacturing stands out as overall being less competitive’; it has an edge in only a small number of niches, such as non-ferrous metals, pulp and woodchips, and food and beverages — all low-technology industries.
"Competitive high-technology industries in Australia, such as pharmaceuticals, reflect multinational enterprises establishing local content in part to gain access to government procurement.
"While the outlook for the manufacturing sector is bleak, it is not uniformly so. Australia has numerous highly successful manufacturers including some that are world class. While the government rightly commends the achievements of advanced manufacturers like Cochlear, CSL and Austal, some of the most outstanding successes have been in relatively low-technology areas."
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.
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 approach to our regional partners.