Maintaining the luck through Asian value chains

Australia has enjoyed a comfortable spot in Asia's value chain but as the continent becomes the driver of world growth, competition is set to intensify.

Australia is facing increasingly stiff competition from developed economies all vying for a share of the growth pie in the East and South Asian region, where Australia has integrated its value chain activities. Such external pressure is further compounded by increasing internal competition among the Asian countries, and by an ageing labour force in Australia – which means potentially lesser number of people to do the heavy lifting.

We are well placed to compete in this race, but we must act fast. There is a pressing need to develop an Australian workforce that can think differently, innovate and rapidly identify avenues by which the country can move up the value chain. Governments and businesses have a particular role to play by identifying avenues by which Australian small and medium enterprises can be integrated into global value chains.

Labour force

Today, Australia’s labour force stands at 11.5 million, with an unemployment rate of 5.5 per cent. Compare this with India’s labour force of 472 million (unemployment 9 per cent), Indonesia’s labour force of 117 million (unemployment 6 per cent), Germany’s labour force of 42 million (unemployment 5.4 per cent) or France’s labour force of 29 million (unemployment 11 per cent). What’s common to all of these countries is that they are all vying for higher living standards and growth. What differs is the scale.

Where India and Indonesia have massive challenges lifting people out of poverty, up-skilling a massive youth population and creating jobs for them, the West’s developed economies are better placed – but not for too long.

Just as no sporting team ever rose to the top by being complacent and sitting idle, the state of national economies is the same. They have to keep competing fiercely to arrive at the top and stay there.

If we look at this challenge from a scale perspective, Australia is best placed to compete in this race. The challenge is how fast we act. We have to go beyond traditional thinking of preparing our workforce for the so called jobs of the future towards becoming the creators of new jobs. With a small labour force, we can be nimble and flexible in adapting to changing externalities.

Brains and brawn

Australia is still predominantly an economy of 'goods' – things we make by virtue of process. We only need to compare the labour force proportions with the Industry Value Added from the mining ($126 billion) and manufacturing sectors ($102 billion) to make this point (see Table 1 below).

Table 1: State of the Industrial Sectors in Australia and Germany (Destatis.de 2013); Author’s calculations adapted from ABS data & Parham, D. 2012;

For instance, with 8.4 per cent of the labour force in manufacturing the sector’s production is worth $102 billion. Let’s call this the product of our 'hands'.

On the other end, sectors such as information, media and telecommunications, and financial and insurance services contribute $35 billion and $20 billion respectively, taking up relatively smaller shares of the labour force. Let’s call this the product of our 'brains'. The difference, measured by the IVA, between the products of our hands and brains is stark.

Compare these figures to that of Germany – a country Australia often likes to benchmark itself against, especially when making the case that Australia can sustain itself as a high-cost country.

There is clear message here. As a crude comparison between the two economies, the IVA generated from the proportion of Australia’s workforce in specific industry sectors seems comparable. In some sectors, such as the professional, scientific and technical sector, Australia even fares better than Germany.

The challenge over the next decade will be to maintain or increase this IVA in the face of an ageing population and projected slow-down in Western economies. What becomes important is the advancement of economies through their integration into global value chains and especially with countries in the growth regions of the world – Asia, predominantly.

Cluster collaboration

For the soon-to-be-established 10 industry innovation clusters, such global integration is important. These clusters must go beyond geographical co-location and collaborate with other clusters in the region to take advantage of new markets. The internationalisation of clusters is paramount specifically in the context of integrating small and medium enterprises in global value chains.

The recently released OECD-WTO Trade in Value Added data shows how well Australia has integrated into the value chains of international economies.

The table below illustrates that Australia’s 'sweet spot' is in the value chain integration of four countries – China, India, Japan and Korea. Australia has a significant competitive advantage in these countries, with five or less competitors and with trading value that exceeds $8 billion. For instance, in the case of China this integration is valued at almost $30 billion. Australia shares a similar value-based trading relationship with the US, but finds itself among a pack of 16-20 other international economies competing for the attention of the US consumer.

Table 2: Australia’s Competitive Positioning in Key Markets Data adapted by the author from the OECD-WTO TiVA Database

Australia’s relationship with Chinese Taipei, Indonesia, Thailand and New Zealand also indicate similar competitive advantages, facing five or less competitors and with trading value ranging from $1.5 billion to $8 billion. The value chain integration in these countries is strong but more needs to be done to grow alongside these partners.

It is clear that Australia enjoys a privileged relationship with most economies in the Asian region by virtue of the integrated global value chain. However, this position may soon come under pressure, with other international economies wanting to take advantage of the burgeoning Asian economies. This is already evident in countries like Malaysia and Singapore, where Australia has integrated well (trade value between $1.5 billion and $8 billion) but is now starting to face stiff competition from a higher number of countries.

The eurozone is clearly where Australia has the least competitive advantage, with a playing field of over 20 competitors. Despite such competition, Australia has generated significant trade value that is quite similar to that of its partners in Indonesia and Thailand.

The message is clear. Australia has started to face competition from other developed economies looking to the East and South Asian region, as well as the Asian countries themselves. As countries in this region develop, they will identify their own ways of adding value to the goods and services produced. We have already seen this in the example of India and the Tata Nano Car, which has 34 design patents to its name and is priced at $US2500.

What does all this mean? It means we need to think smart, match rhetoric with action and act fast to move up the value chain.

Christopher Vas is program leader in Productivity & Competitiveness at Australian National University.

Christopher Vas does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The ConversationThis article was originally published at The Conversation. Read the original article here.