Australia needs some German drive

It's obvious that neither the government nor Coalition has a long-term strategy for Australian manufacturing, and they would do well to cast an eye over Germany's policies.

All the noise over the government giving $34 million to Ford, and GM Holden seeking $200 million from taxpayers to maintain its operations in Adelaide, is a microcosm of the disaster that passes for Australian industry policy and strategic planning. Bailouts do not create a sustainable manufacturing industry, they just delay the inevitable.

Having spent some time in Germany this month I discovered that with the help of government industrial policies, German companies have set up a successful manufacturing base making parts for complex systems. It’s all about strategy – something Australia can learn from.

As Alan Kohler noted last week (Carr’s chance to rev the EV engine, January 12), any handout to GM should require the company to build an EV in Australia. This would be a strategic masterstroke. It would help revitalise the car industry and open a potentially lucrative niche in the global car market. But don’t hold your breath – that requires long-term thinking and making hard choices.

True, Europe is behind the eight ball in dealing with the debt crisis but the Australian government is moving at the same pace when it comes to creating a globally competitive manufacturing base. Instead of developing policies that would allow manufacturers to operate when a strong dollar makes our exports too expensive and imports too cheap to compete against, the government is sitting on its hands. You can’t even say it has the wrong strategy – there’s none at all from either side of the political fence.

Instead of focusing on the longer term to turn Australia into a global industrial player, manufacturing policies here seem to be driven by political agendas. With the strong Australian dollar crimping investment in the auto industry, the government helped freeze it by abolishing the green car innovation fund in response to the Queensland floods. The Coalition is dithering over whether to retain a policy to slash $500 million from car industry subsidies. Australia’s political leaders are hopeless.

Meanwhile, manufacturers are going to the wall. Heinz this month ended its Australian tomato processing operations after 70 years. It happened just a few days before Norwegian company Norsk Hydro decided to close down one third of its production at the Kurri Kurri smelter, in the Hunter Valley, with the loss of an estimated 150 jobs. That’s just this month. With a strong Australian dollar and no clear industry policy here to counter that, the list is likely to get longer.

But Germany is another story. The big German companies like Siemens, BASF and Volkswagen (which aims to be the world’s biggest car manufacturer by 2018 – drive past the Wolfsburg plant which stretches for kilometres and employs 50,000 people) are spearheading much of the growth. But the important part is that they carry a long supply chain of smaller companies in the much-lauded Mittelstand, the term for the SMEs that are typically family-owned and highly specialised in unglamorous niches, working with the larger companies like BMW and Daimler and doing everything from printing passports to recycling grit in roads.

While there is no coordinated approach from state and federal governments in Australia to attract industry support and investment, German governments work together. In the German state of Baden-Wurttemberg which covers towns like Heidelberg, Mannheim, Karlsruhe and Stuttgart, for example, Berlin works with the local and state governments there to financially support manufacturers. Baden Wurttemberg is one of Europe’s leading research centres, with expenditure and gross domestic product at 4.4 per cent, ahead of Sweden, Finland and Berlin. Most of the R&D there takes place in the vehicle and mechanical engineering and electrical engineering sectors. At the same time, German company researchers there work hand in glove with universities – something few Australian companies do.

The German government supports industries it believes will drive growth. Germany is now the world’s biggest market for solar power installations and many of the world’s leading solar companies, like Solarworld, Bosch and Q-Cells are located there. The German renewable energy industry, praised around the world, is the creature of strategically targeted government subsidies.

Like the Germans, Australia could develop strategies to work on its unique strengths, for example manufacturing inputs for mining and agriculture. Medical device manufacturing is another potential niche, as would be the geographical features that are perfect for stress testing products. There would be many more.

But, most importantly, it will require a change in mindset.

Australian manufacturing – which in 2010 employed nearly one million people, contributed approximately $112 billion to the economy or 8.7 per cent of GDP and earned approximately $83.5 billion from exports – is not about to disappear. While the Productivity Commission, Reserve Bank and financial market commentators talk about 'structural change', they are behind the times. Manufacturing is no longer about the production of goods. It’s now about ideas, products and services. The best manufacturers today are innovators, service providers and global supply chain managers. They drive services and the rest of the economy.

Goran Roos, author of 100 books, chairman of VTT International which is part of Finland’s Technical Research Centre and honorary professor of Warwick Business School in the UK, says revitalising manufacturing here might also require reassessing Australia’s supply side tools for manufacturing, like handing out money and providing R&D tax credits. Instead, he says, we can move towards demand-side tools like procurement and creating clusters which produce results. "The distinction is that the demand-side tools drive outcomes while the supply-side tools drive activity,’’ Roos says.

He also says manufacturers should invest more in research and development, education and training and other intangibles such as brand equity, organisational structures and design.

More work also needs to be done on management. Despite Australia’s many successful manufacturers, a report by University of Technology Sydney professor Roy Green three years ago found that many Australian manufacturing managers were mediocre and particularly bad when it came to managing people, strategic planning and innovation. They lagged behind the US, Japan, Germany, Canada and Sweden. Chinese and Indian factory managers were a lot better.

Smaller companies performed worse. This is a problem because Australian industry is comprised mainly of SMEs. We have yet to produce a GE or an Apple and we’re unlikely to ever do that when governments throw taxpayers’ money at manufacturers to pretend they are doing something, and fail to take a long-term strategic approach. Other countries have shown it can be done.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles