Why does Australia need manufacturing industry? .

Posted by on February 14, 2014 in General, Summer 13-14

WHY DOES AUSTRALIA NEED MANUFACTURING INDUSTRY?

 

Phillip Toner and Frank Stilwell

 

Australian manufacturing is suffering from a deep-seated and long-standing malaise. The high value of the Australian dollar in the last few years has made it difficult for Australian producers to compete in world markets, so exports have been struggling while domestic markets have been eroded by cheaper imports. The dollar’s fall in recent months has reduced these stresses, but much damage to productive capacity has already been done. Job losses are ongoing and are likely to intensify under an Australian government that is disdainful of ‘interventionist’ industry policies. These are circumstances requiring careful consideration of the nature of the manufacturing sector and its significance for the nation’s economic future.

 

The current situation in the vehicle manufacturing industry brings these concerns into sharp focus. In early December 2013, GMH announced that it would cease making Holden cars in 2017. Ford had announced in May its intention to shut down its two plants in 2016. Apart from the direct job losses among vehicle builders, many thousands more jobs are likely to disappear as vehicle component manufactures scale back or close down. From having five major corporations making cars in Australia there will be only one – and if Toyota eventually closes it would be a clean sweep.

 

Of course, in any one industry there are always specific factors that determine resilience or vulnerability. But the crisis in the vehicle manufacturing industry is symptomatic of broader problems. This article seeks to explore what has gone wrong and why it matters.

Why has manufacturing declined?

All economies experience structural change because of changes in technology and consumer demand. In wealthy nations manufacturing industry has, in general, declined as a share of output and jobs for some decades. However, in Australia the decline has been larger than elsewhere, and the nation’s manufacturing now accounts for smaller share of GDP than in most other high income economies: it is currently only around 8-9%.

 

The reasons for long-term decline of manufacturing in Australia are many. Particularly significant is a long-standing policy indifference to the manufacturing sector, bordering on hostility from central economic agencies such as the Treasury, the Reserve Bank and the Productivity Commission. This flows from a colonial cringe, the commitment to a neoliberal ‘free market’ ideology and continued adherence to the orthodox economic doctrine of ‘comparative advantage’ – the belief that a nation should produce only those things for which it has a ‘natural’ or innate advantage over other countries.

 

This blinkered view of economic policy has resulted in Australian governments largely abandoning systematic industry policy, except for the sort of ad hoc interventions that have occurred as a result of the ‘cat and mouse’ games played between multinational companies and State and Federal governments. The central economic agencies seem to see the decline of manufacturing and non-resource export-oriented and import-competing industries as acceptable, even a good thing, because it ‘frees up’ labour and capital which can then ‘flow’ to expanding sectors such as the mining industry. As Gary Banks (2011: 12) the former head of the Productivity Commission argued, ‘while manufacturing is important to our economy...the reality is that... [its] relative decline has been integral to the marked increase in the living standards of Australians over the last decade’. Meanwhile other nations, such as China, have been pursuing mercantilist policies directed at accruing massive trade surpluses by supporting their manufacturing industries and manipulating the value of their currency.

 

Why does the Australian failure to systematically support and promote manufacturing matter? There are two ways to think about this: first, by asking what manufacturing contributes to the economy, particularly in relation to science and technology; and second, by considering the adverse implications of further decline in manufacturing.

Contribution to science and technology

The most important contribution of manufacturing, beyond the direct provision of jobs and incomes, is to the Australian science and technology base. The link has become even closer as innovation is now the key competitive strategy of manufacturing firms, and innovation is increasingly based on exploiting the scientific frontier.

Without a solid manufacturing base Australia will lose scientific and engineering capacity that has taken generations to nurture. Manufacturing directly employs one in every five engineers and many more indirectly as consultants (Institution of Engineers Australia, 2011). Australian manufacturing businesses allocate $4.5 billion each year to research and development expenditure, which is approximately one quarter of total private sector expenditure. This R&D employs scientists, engineers and skilled technicians, directed mostly at developing and adapting technologies to particular local needs. Even more is spent on ‘non-R&D’ innovation, such as new business models, systems integration and high performance work and management practices, all of which have diffusion, or ‘spillover’, effects on other industries. Accelerating deindustrialisation will result in the nation going backwards technologically, resulting in diminished capacity for innovation.

 

Australian manufacturing industry is currently classified by the OECD as being in the ‘medium-low and low technology’ category of nations, based on its R&D spending as a share of total value added. This places Australia in company with Estonia, Mexico and Portugal (OECD Science, Technology and Industry Scoreboard 2011: 68). The low ranking is despite a significant and sustained increase in investment in Australian R&D by manufacturing firms over the last two decades.  It is also despite the nation doing very well internationally in terms of academic research papers in science and technology (DIISR 2011: 3). Where Australia evidently scores poorly is in converting knowledge into commercial products and services.

 

This long-standing problem will worsen as the manufacturing base declines further. This will put even more burden on public sector funding of R&D. But there is doubt about how long taxpayers will be prepared to support billions of dollars being spent on university science and engineering courses and government-funded R&D if industries that can use this high level knowledge and skills have disappeared. Such research areas and industries include metallurgy, industrial chemistry, renewable energy products, aerospace, micro-electronics, advanced materials (such as carbon fibre), advanced casting, machining and robotics, nanotechnology and biotechnology.

 

The Productivity Commission has already questioned why there should be public support for Australian science and engineering when the benefits of the resulting knowledge accrue increasingly to other nations. The transfer of Australian solar panel technology to China, from whom we now mostly source these products, is a case in point. The knowledge and skills required to simply import and use these technologies, such as the installation of solar panels on roofs, are much less than that needed to design and manufacture them.

 

It is often suggested it is possible to keep the high-value, high skilled jobs in design and technology while relocating the routine manufacturing activity to countries with lower production costs. But in the long-run this is a fallacy. Separating conception from execution in production processes is inherently problematic because manufacturing production is an iterative process, involving constant design changes and continuous challenges of problem-solving. Second, there is the loss of intellectual property – a concern which is causing many western nations to reconsider their investments in China.

 

Jobs, living standards and the nation’s future

 

Despite many job losses, the manufacturing sector still employs around 8% of the total Australian workforce. It provides typically middle skill, middle wage, and full-time employment. Retaining these jobs, and seeking areas for potential future growth, therefore plays an important role in offsetting the dominant trend towards greater income inequality in Australia. Conversely, losing more manufacturing jobs would result in yet more ‘hollowing out’ of the income distribution.

 

The skills developed by manufacturing industries are also core skills upon which every modern economy depends. The manufacturing sector trains engineers, technicians, welders, maintenance fitters, CAD designers, and machinists with the skills necessary to install and maintain our telecommunications, power stations, water plants and transport systems. Manufacturing is a net supplier of these skills to other industries, especially in the resources sector. Without it skill shortages would become more intense.

 

Macroeconomic stability is a further consideration. If mining is allowed to continue crowding out manufacturing management of the national economy will be more uncertain and volatile. Mining investment and commodity prices are by nature highly cyclical, causing the economy to swing between boom and bust. With each future mining boom other trade-exposed sectors can be expected to be put under further pressure. In addition, Australia will be locked into a risky carbon-intensive export base, particularly exports of coal and liquid natural gas. These industries could face technological redundancy as alternative energy sources are developed. These fuel exports will threatened as other nations implement policies to limit their carbon emissions.

 

The nation’s trade balance and current account will also tend towards bigger deficits if there are no domestically-produced alternatives to imported manufactures. More money would then need to be borrowed offshore to buy the imported consumer and capital goods. Even with an over-valued Australian dollar, high commodity prices, record mineral export volumes and price deflation in many imported goods, trade surpluses have not been consistently achieved in recent years. Spending on imported manufactures tends to swamp exports revenues – and this imbalance can be expected to intensify. Payments for the imports of motor vehicles and parts - which is currently the nation’s second largest category of imported goods - are already roughly equivalent to the revenue obtained from the export of crude petroleum and liquefied natural gas (DFAT 2011).

 

With the decline of manufacturing, the shift to a dual economy is becoming more pronounced. The economy is splitting into two industry clusters. One relatively small group, mainly comprising the resource extraction and finance sectors, has high productivity (measured in terms of the value of output per hours worked) and above average wages. The other group comprises diverse activities like aged care, child care, retail, cleaning, security guards, transport, mechanical repair and education and training, having generally lower productivity (as conventionally measured) and low wages. It is in the latter industry group that most of the job growth is occurring. Over the years from 2000 to 2011, around 80% of Australian net employment increase (adjusted for hours worked) was in industries that have below average productivity.

 

Food security is looming as a further problem, and here too the decline of manufacturing is a contributory factor. Historically, the food processing sector has supplied domestic food needs and generated significant export revenues. But the overvalued Australian dollar and the large grocery retailers are squeezing prices paid to suppliers and using imported house brands. Based on current trends, in about three years time Australia is likely to be a net importer of processed foods. The economy would then become even more dependent on its export of unprocessed agricultural and mineral commodities.

 

Finally, we need to recognise the connection with environmental stresses. People often think of manufacturing as ‘dirty’ industries, and indeed there is much that has to be done to reduce environmental damage by specific industries that have caused problems of pollution. However, looked at more broadly, a continued decline of the manufacturing sector can be seen as creating other environmental hazards. Meanwhile, the general decline of manufacturing in Australia would tend to lock us out as a producer of the alternative energy products. Increased dependence on unprocessed agricultural and mineral products will increase pressure for further land clearing, opening of national parks to development, and environmental damage to water tables, rivers and oceans.

 

What is to be done?

 

Developing a systematic industry policy is imperative for the nation’s future. Policy makers need to abandon the infantile dichotomy between free trade and protection, recognising that all governments support industries for a variety of economic, social and ideological reasons.

 

Consider, for example, the Australian superannuation industry, the majority of which is based on private retail funds. It benefits hugely from the compulsory nature of contributions and the annual $32bn in tax concessions on fund earnings and contributions. The private health industry benefits from the $1.6bn received each year by health fund members. Finally, the Australian banking sector is effectively government guaranteed – ‘too big to fail’.  The result of the government’s ‘four pillar’ banking policy is that Australian banking is one of the most concentrated and profitable oligopolies in the developed world.

 

If sectors like superannuation, health insurance and banking warrant special support from government, why shouldn’t the case for a comprehensive manufacturing industry policy also be considered legitimate? Even more to the point, if governments  consider ad hoc policies when major manufacturing firms threaten to close or pull out, as they have previously done in the car industry, wouldn’t it be better to have long-term industry plans in place across-the-board? The choice should not be between ad hoc temporary bailouts or letting the market decide the outcome. Indeed, industry policy of some form is ever-present: it can either be intermittent and crisis-driven or it can be ongoing and systematic. The latter is better.

 

Recognising the industry policy imperative, the Hawke government in the 1980’s, with John Button as Industry Minister, did at least try to systematically manage the process of structural change. It developed industry plans for sectors that were major employers, like steelmaking, vehicle manufacturing, heavy engineering, and textiles, clothing and footwear. It set up Manufacturing Industry Councils on which representatives of trade unions and business worked in conjunction with government to meet the challenges faced by those industries. Job losses were not avoided, but planned transitions were managed, so that the nation’s industry structure and employment opportunities would not be left simply to the vagaries of the market.

 

A more vigorous and comprehensive approach for the future could embrace plans for fostering innovation through public-private cooperation in R&D, selective public ownership, local content requirements, labour skilling and retraining, and planning for transitions to sustainable energy use. Given their dominance of global trade and Australian industry, direct negotiations with multinational corporations (MNCs) are critical. Governments around the world typically make access to their local markets contingent on MNCs using a rising share of locally produced products and services; transferring advanced technologies to these local suppliers; and assisting these suppliers enter world markets. China developed its car industry by using these strategies with GM, Ford and VW (Chin 2010).

 

The case for ‘free markets’ and ‘free trade’ trade (like the case for celibacy) has frequently been made, but rarely has rarely proved convincing. In reality governments globally are engaged in increasingly sophisticated industry policies, designed to attract overseas investment, nurture hi-tech ‘strategic’ industries, capture foreign intellectual property by either legal or illegal means, secure long run access to resources, manipulate exchange rates in their country’s favour and use the quid pro quo of diplomacy to enter new markets.  The importance of manufacturing to Australia’s future suggests that to continue to ignore these processes and opportunities would be at our collective peril. There is a public interest, not only private interests, at stake.

 

*Phillip Toner is a Research Fellow in Political Economy at the University of Sydney and Frank Stilwell is Professor Emeritus in Political Economy at the University of Sydney

 

Sources and Further Reading:

 

Australian Bureau of Statistics (2013) Australian Industry 2011-12, Canberra

 

Gregory T. Chin (2010) China's Automotive Modernization: The Party-State and Multinational Corporations, Palgrave Macmillan

 

Department of Foreign Affairs & Trade (2011) Composition of Trade, Australia

 

Department of Industry, Innovation, Science and Research (2011) Australian Innovation System Report 2011, Canberra

 

Gary Banks (2011) Australia’s mining boom: what’s the problem? Address to the Melbourne Institute and the Australian Economic and Social Outlook Conference

Institution of Engineers Australia (2011) The Engineering Profession: A Statistical Overview, Eighth Edition, 2011, Canberra

 

OECD (2011) Science, Technology and Industry Scoreboard

 

Phillip Toner (2000) Manufacturing Industry in the Australian Economy: Its Role and Significance, Journal of Australian Political Economy, No. 45, June, 18-45

 

(2012) Structural Change or ‘Crowding Out’. Why is Manufacturing Important? Federation of Automotive Products Manufacturers

 

(2013) Personal Submission to the Productivity Commission Inquiry into Assistance to the Australian Automotive Manufacturing Industry

 

Roy Green, Phillip Toner and Renu Agarwal (2013) Understanding Productivity: Australia’s Choice, McKell Institute.

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