Will the Asian Century be the rebirth or death of Australian manufacturing?

22 January 2013 | By Andrew Lumsden (Partner)

"A fool lets one of his water-buckets fall, and rushes on as if nothing had happened at all"

(Chinese Proverb)

Australian manufacturing can survive and prosper in the Asian century but it won’t be selling cars and washing machines to Asia’s growing middle class. The real opportunities are less obvious and require cracking levels of innovation. Are our manufacturers up to the task?

In a press conference on 20 November 2012 in Phnom Penh, the Prime Minister called attention to Asia’s rising middle class and the opportunities it presents, saying:-

“this region of the world will move from not only being the biggest productive region of the world but to the region of the world doing the most consumption; people buying things and services that they want and those middle class consumers in Asia will want the same kinds of things that Australians want for themselves.”

Much has been made of Asia’s escalating wealth and what this might offer Australia’s manufacturing sector.   According to the Prime Minister, Asia’s middle class want to buy the same goods and services that Australian’s want for themselves.

A look around an Australian home reveals Australians want LED and plasma TVs, computers and laptops, microwaves and ovens, refrigerators, washing machines, mobile phones, iPods, iPads, motorbikes and motor vehicles.

None of these products are produced in Australia except motor vehicles, which ironically would also have disappeared from our factories had it not been for successive government bail outs.

What Australians’ want are products that are  produced overseas and predominantly in Asia.  No doubt Asia’s middle class also want TVs, washing machines, cars and iPads and this will be a boost to those industries supplying those products – in Asia.

To be fair to the Prime Minister, she went on to say:-

“.., so where are these job opportunities for us? Well clearly in agriculture, clearly in food processing, in tourism, in customised manufacturing, in high-end manufacturing, in manufacturing which comes with an imbedded services component, in our services industries, financial services, legal services, a continuation of international education, health services.”

It’s unclear what the Prime Minister had in mind by what she called customised and high-end manufactured products, and products with imbedded services components. What are these products?  Can they be supplied by Australian manufacturers of a quality and at a price that is competitive?

While the likelihood of Australia producing goods for Asia’s middle class seems remote, there is a global phenomenon emerging that could support Australian manufacturing into the future.

It’s the move away from manufacturing products, end-to-end, in a single factory in one country in favour of “unbundling” manufacturing processes across borders.

Components are increasingly produced in whichever country is most competitive in making each ‘bit’.  The various components 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 comparative advantage for its particular part in the process.

An example of this is the production of the Boeing 787 Dreamliner aircraft.  Major components and subsystems of the aircraft are produced in the USA, Japan, the United Kingdom, Korea, Italy, Canada and Sweden by a number of different companies, often in the same country.  In Japan, Kawasaki has produced the fixed trailing edge for the wings, while Mitsubishi produced the wing itself.

Australia is participating in this global supply chain.  Boeing Australia produces the movable trailing edge for the wings of the Dreamliner.  The contract to produce this component is reportedly worth AU$4 billion over 20 years.  The parts include new materials developed in collaboration with the Cooperative Research Centre for Advanced Composite Structures, the Australian Advanced Manufacturing Research Centre at Swinburne University and the CSIRO

Similarly, the double-deck, eight car Waratah passenger train being built for the NSW Government by Downer EDI Rail draws on sub-systems and components from around the world, including Germany, Finland, Japan and Australia, with initial assembly of each train being undertaken in China.  The final stages of manufacture are performed at Downer EDI Rail’s facility at Cardiff, NSW, with the installation, amongst other things, of the train’s operating systems.

Countries in Asia, including China, are expanding their manufacturing capabilities beyond consumer products.  China is manufacturing motor vehicles, passenger trains, including Maglev passenger trains, and aircraft. Delivery of the first passenger jet, the COMAC, is scheduled for 2014.

This expansion of manufacturing capabilities in Asia coupled with the “unbundling” of manufacturing processes globally offers Australian manufacturers the opportunity to become part of global supply chains by supplying technologically advanced, high value products into those supply chains. 

Looking ahead, the opportunity for Australian manufacturing in the Asian century is not about supplying consumer products to Asia’s middle class. The real opportunities are off the pages of catalogues. The opportunities for this country demand innovation, leadership and a global outlook, for which Australians are renowned.  The government must continue to support  R&D expenditure and trade laws that recognise the important role Australia can play in global supply chains. 

An edited version of this article was originally published in The Australian Financial Review on 17 January 2013.

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