What future for Australian manufacturing and why should you care?

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The question of whether manufacturing has a future in Australia has been hotly debated for some time. This year, the debate has reached fever pitch fuelled by the usual Hanrahans spouting their own versions of “We'll all be rooned.”

The media is full of stories of failing Australian manufacturers and government bail outs. The Executive Chairman of Manufacturing Australia recently stated that, “manufacturing is severely threatened unless steps are taken to maintain global competiveness”.

But is Australian manufacturing really on a road of no return or is it merely reshaping itself, albeit not without some pain, for the 21st century and why does it matter?

Firstly, why manufacturing matters.  As Professor Roy Green has commented, Australian manufacturing is important because of the strong connection between manufacturing and developing a knowledge-based economy.   True we may no longer be competitive in textiles, garments and footwear given the competition from low-wage economies. But we can be competitive in fashion and design, as well as in technical textiles and smart fabrics for industrial purposes.

That’s why it is important to preserve and assist our manufacturers.  There is plenty of scope for Australia to lead the world through ingenuity and research.

Manufacturing Australia is advocating a reform agenda focused on lowering regulatory and energy costs for manufacturers and strengthening Australia’s anti-dumping system.

While these are sound reforms and may be beneficial, are they really addressing the core reasons why we need a manufacturing sector?  How do these responses address the trends that are reshaping global manufacturing?

As discussed, many products previously manufactured in Australia are now being manufactured in low-wage economies like China, Thailand, Vietnam and Malaysia.  Typically these are commodity products that attract relatively low margins and rely on volume to generate revenue.

The move to shift manufacturing commodity products to low cost countries is not unique to Australia and has been happening for some time as developing countries expand their industrial base.  Calls for stronger anti-dumping protection will not address the underlying economic reason why these products are manufactured in these countries.

There is a more recent phenomenon occurring globally that could ultimately support more a sustainable manufacturing sector in Australia. That is, the move away from manufacturing products at an end-to-end factory located in a single country and then selling those products.

Rather, what is now occurring, particularly in developed countries, is the “unbundling” of the various manufacturing stages of a particular product across borders. Components and subsystems for a particular product are produced in two or more countries that have a comparative advantage in making those components and subsystems.  They are then shipped to a third country to be assembled into the end product, which is then sold world-wide.

The benefit of “unbundling” is that each stage of the manufacturing process, including final assembly, is conducted in the country that has (theoretically) the best comparative advantage for its particular part in the process.

Large businesses, particularly multinational corporations, are not only “unbundling” and geographically dispersing the manufacture of products to reduce costs and enhance competitiveness; they are also “unbundling” and outsourcing services, such as back office administration. 

What determines which country or countries have the best comparative advantage?  For assembly of a product, it’s primarily access to labour at low cost.  For the production of components and subsystems, it will depend on the intellectual property content in the product.  Countries with strong intellectual property protection will be favoured where components and subsystems contain unique intellectual property.

Australia thus needs to focus not on the low value aspects of the production chain but rather on what Professor Green calls “our capacity to compete in knowledge-based activities worldwide as part of international markets and supply chains”.

An example of “unbundling” is the manufacture of passenger trains.  Components and subsystems are manufactured in a variety of developed countries where intellectual property protection is strong.  Those components and subsystems are then shipped to a developing country, where low cost labour is abundant.  There they are assembled into either the finished passenger train or a partially complete passenger train.  In the latter case, the partially complete train is shipped to a developed country where further high end manufacturing, such as installation of the computer and communication systems, occurs to complete the train.

Other examples using this global production technique are motor vehicles, mobile phones, computers and televisions to name but a few.

This move towards globalised manufacturing has occurred in parallel with another, related trend – the rise of preferential and free trade agreements between countries.  Significantly for manufacturers, these trade agreements address more than the usual border issues such as tariffs and customs procedures. They also encompass “behind the border” issues such as investment, intellectual property and competition.

Why are these issues important?  Breaking apart a manufacturing process and dispersing it across multiple jurisdictions results in a complex web of:-

  • trade in components and subsystems across borders;
  • investment in factories in multiple jurisdictions and associated investment in training, technology, OHS, etc; and
  • infrastructure to manage the logistics involved in both the production of goods at each stage of the manufacturing process and then marketing the final product in export markets.

The threats to such a globalised manufacturing network are clear.  For example, weak intellectual property and foreign investment rules in a jurisdiction will work against establishing manufacturing or assembly operations in that jurisdiction.  The solution?  Enter into preferential trade agreements that address those ‘behind the border’ issues and, thereby, facilitate the establishment of manufacturing operations in those jurisdictions.

In its 2011 World Trade Report the World Trade Organisation found that for cross-border production networks to operate efficiently, certain national policies (e.g. intellectual property, foreign investment, etc.) need to be harmonised and rendered mutually compatible. This generates the need for “deep” preferential agreements either on a bilateral basis or on a regional basis.

Since June 2008, Corrs has been involved in this process through (our CEO) John Denton’s role as government-appointed business representative on the regional trade and investment body, the Asia-Pacific Economic Co-operation forum and APEC's Business Advisory Council. 

Corrs is eager that we shift from an old-style trade debate, where the objective is to crash through to one about economic integration. As John Denton has previously commented: “The world economic crisis has underscored just how connected markets are in an era of globalisation, yet all kinds of unhelpful nuts-and-bolts barriers remain behind borders.  At the macro-level we need to flip the discussion from protection and market access to market integration”.

What does this mean for Australian manufacturing?  The sector continues to be important to our collective wealth.  Much can and has been done by successive governments to improve the competitive position of Australian manufacturing by moving into higher-value activities and identifying new areas of manufacturing, like manufacturing using lasers and 3D, where we have world-class scientists and a proud tradition of innovation through organisations like CSIRO and the world class work done by, amongst others, its Manufacturing, Materials & Minerals Division.  At the same time we need to be vigilant in ensuring our network of trade agreements addresses any behind the border issues that might hold us back.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Andrew Lumsden

Partner. Sydney
+61 2 9210 6385