How Australia can remake the manufacturing sector

Yesterday’s capex numbers contained a lot of very positive news for the domestic economy, but they did show one alarming feature: a very clear collapse in manufacturing investment. Declining by 6 per cent in the June quarter alone, manufacturing investment has decreased in 9 of the last 11 quarters -- a fall of about 43 per cent. As a proportion of total investment, investment in manufacturing now sits at 5.5 per cent. It has never been lower.

Manufacturing is in dire straits in this country, and there have been legitimate questions about its outlook. The problem is that there is no agreement on what the nation should do about it. Calls have been frequently made that suggest Australia should move into higher-end manufacturing. 

The Business Council of Australia and the American consultancy McKinsey & Co, on the surface at least, offer some measured support for that notion. Instead they suggest that Australia should focus on the areas where it is competitive and doing well: mining, agriculture, tourism and education. Both the BCA and McKinsy & Co note that Australia is on the whole uncompetitive in manufacturing . The ode we only know too well -- wage costs are too high as is the Australian dollar -- suggests manufacturers can’t compete and as a sector isn’t viable unless something is done. Or so we are led to believe (Why Australia is losing its competitive edge, August 1) .

As many have already observed, the main inconsistency with that view, is that it doesn’t explain how many northern European nations manage to sustain a strong manufacturing base. These are not cheap countries to do business in or export from. Switzerland, for instance, has higher wage rates than Australia and the Swiss Franc is one of the few exchange rates that has actually appreciated against Australian dollar in recent times. Yet manufacturing is 20 per cent of the Swiss economy and still going strong, compared to about 7 per cent for Australia, with manufacturing output at its lowest point since 2001. (Note CSL’s recent decision to build a new $500 million plant in Switzerland instead of Australia.)

Manufacturing may be dying in Australia, but this clearly isn’t due to our high wages or even the exchange rate. It would be far more accurate to view Australia’s higher rates of pay in manufacturing as a comparative advantage instead of a barrier to competitiveness. The fact is, if the country wants to move into higher-tech, export-oriented manufacturing, slashing real wages is the wrong way to go about it.

If we are to attract and retain highly skilled labour, in a global economy where people are increasingly mobile, then the fact is we have to pay them. Compete for them. No-one has ever suggested that there is a glut of highly skilled labour. As it happens, Australia should be very well placed to attract skilled labour. We enjoy the second highest standard of living in the world, high wages, good health and we’re smart (Shifting gears: Is Australia going backwards or forwards?, August 22).

Similarly, it’s not like higher-end manufacturing is alien to Australia. Pharmaceuticals are our third largest manufactured exports. Also up there are air and spacecraft parts, medical instruments and civil engineering equipment. That implies that the task of moving up the value chain may not be as difficult as many think -- we just need to nurture it.

According to the OECD, about 13 per cent of our manufactured exports are in the high-tech category, which compares to about 17 per cent for other high-income countries. Similarly, expenditure on research and development is about 2.2 per cent of GDP, only a little below the OECD average. 

There is plenty of room for improvement. Clearly, these rates are below high income averages and they are well below rates seen in higher-end manufacturing powerhouses like Switzerland. Moreover, on the global innovation stakes Australia performs badly, ranking 17th according to the Global Innovation Index. Switzerland is 1st but other small open economies are also up there: Finland, Sweden, Netherlands and Denmark. 

Australia could and should have a large high-tech manufacturing base. We have what it takes to attract highly skilled labour and we are a very attractive destination for foreign investment. We’ve just got to get over this mindset in Australia that we can’t do anything other than grow food or dig up minerals. Australia has a natural comparative advantage for higher-end manufacturing; we’re just not utilising it.

One of the first hurdles is turning those weak manufacturing investment numbers around. Rather than being symptomatic of economic weakness, figures like that are the cause of it. If you don’t invest, you don’t grow. Business and government need to urgently redirect their priorities and start the growth dialogue.