CEDA: How to fix manufacturing (not)

The Committee for Economic Development of Australia (CEDA) has released a new report today on how to fix Australian manufacturing. Here’s the executive summary:

Rumours of the death of manufacturing in Australia are greatly exaggerated. However, today’s successful manufacturers are enjoying a life very different to what has been known in the past. Rather than the mass production and assembly of final products (traditional manufacturing such as steel and automobiles), successful Australian manufacturers typically engage in advanced manufacturing, which is about variability, complexity and extensive customisation with high valueadd.

This usually involves low-volume, high-value manufacturing, with a customer and export focus and nimbleness in manufacturing that allows manufacturers to provide a customised and responsive solution to the market.

There are many successful Australian advanced manufacturers and they typically have similar characteristics of being export-focused, customer-driven, innovative and technologically-cognisant. They are also generally good managers of global value chains (GVCs or the complex and cross-border chain of activities from the conceptual stages to the post-sales stages of production), typically positioning themselves at the pre-production stage (for example research and development services) and engaging in high value-add activities. Further, they tend to be small and medium sized enterprises (SMEs) and also have the distinction of rarely being profiled or discussed in the media.

The perception of manufacturing in Australia is shaped by media reports about struggling manufacturers, who are more often than not subsidiaries of large multinational companies involved in high-volume manufacturing, and often poorly integrated within GVCs. The news continues to be dominated by an ongoing debate about traditional industry assistance, which is typically aimed at luring large multinationals to Australia to engage in traditional manufacturing, an area where Australian manufacturers struggle to compete. This approach essentially tries to pick winners regardless of their economic viability and compensate them for locating in Australia. Recent economic history shows that this is doomed to fail.

Instead, government can and should adopt policies that actively facilitate the emergence and success of competitive, viable and sustainable industries.

This policy perspective recommends the implementation of an Advanced Manufacturing Industry Plan. It contains key elements of what government and industry need to pursue to facilitate the current transition of manufacturing into a new and vibrant sector that reflects Australia’s comparative advantage.

Advanced Manufacturing Industry Plan
Australia’s high-cost economy means that our comparative advantage in GVCs lies in the pre and post stages of the production process (typically services), and low-volume/high-complexity/high-variability/high-value manufacturing. An Advanced Manufacturing Industry Plan involves enhancing the sources of comparative advantage for manufacturers and addressing structural weaknesses.

This means government needs to take responsibility for ensuring the right macroeconomic and industry-specific conditions exist for manufacturers to take advantage of new and emerging opportunities to succeed. Industry must also play a pivotal role in enabling the transition, including sourcing capital for investment, rather than relying on government assistance in the form of subsidies or handouts.

There is much debate around any type of government assistance for manufacturing due to prevailing perceptions around the handout culture. Concern has been expressed around assistance simply being another form of protectionism or being seen as picking winners at random. Incentivising innovation, fostering collaboration and investing in education and technology have positive spill-overs for the entire economy, not just manufacturing. They address the market failure of externalities, thereby justifying a targeted form of government assistance. These issues underpin national prosperity and were detailed in CEDA’s 2013 report Australia Adjusting: Optimising national prosperity.

Incentivising innovation among manufacturing SMEs
Australia lags behind other advanced economies when it comes to innovation, particularly new-to-the-world innovations and collaboration. Innovation and collaboration are crucial for advanced manufacturing, as they underpin areas where manufacturers can add value and compete on a global scale, such as in knowledge- intensive services.

Government’s role
To enable advanced manufacturers to be globally relevant and take advantage of the growing role of knowledge-intensive services for manufacturing, government should:

• Ensure innovation policy includes services innovation and that as part of this, collaboration policy includes service firms operating within a manufacturing context as well as manufacturing firms that provide services. To facilitate value-adding innovative activities, government should foster collaboration by:
• Facilitating closer links between technical training institutions, universities and industry which would help to overcome the cultural and other barriers that keep industry and research institutions from working effectively together. These measures could include tax incentives that foster research and development (R&D) and commercialisation of research; or the creation of research funds dedicated to applied research.

To enable advanced manufacturers to specialise in value adding R&D activities within GVCs and address the market failure in the uptake of innovation, government should:

• Introduce public procurement policies (consistent with our World Trade Organisation obligations) for manufacturing SMEs aimed at innovative new-to-the-world products or solutions that will have the ability to add value.

Industry’s role
Industry should foster value adding innovative activities by improving collaboration:
• Between industry and research institutions, including universities and CSIRO, with a view to increase applied research and innovation that can be commercialised; and
• Among industry participants by introducing a system of restricting the benefits of innovation to those who participate to create, stimulate and grow industry clusters that drive innovation.

Enhancing the capabilities of the manufacturing workforce Advanced manufacturing is a highly complex environment that requires a variety of highly capable staff with a diversity of skills and capabilities. Australia lags behind its global competitors on the human capital criterion.

To support a more complex manufacturing environment and address Australia’s manufacturing skills weaknesses, government should:
• Through its education, immigration and workplace relations policies ensure Australians are equipped with the skills conducive to an advanced manufacturing career, such as science, technology, engineering and mathematics (STEM) skills as well as management and service industry skills.

Addressing market failure in key enabling technologies (KET) uptake
Technology can play a significant role in equipping manufacturers and their workforce with the modern production systems and technology that will enable them to produce flexible, complex and responsive solutions to enhance their international competitiveness. However, despite these benefits, there is an identified market failure in the uptake of productivity-enhancing technology, particularly among SMEs. This is most often due to financial investment impediments and the inability of SMEs to recognise the benefits of applying such technology to their business environment.

To assist in the uptake of technologies that will enable manufacturers to compete globally, government should:

• Ensure innovation and technology policies include incentives to improve technology literacy within the manufacturing sector, particularly for SME employees, with a view to boosting rapid adoption of KET and modern production systems for high-cost economies.

On the supply side, government should:
• Ensure communications infrastructure is affordable and upgraded to provide the quality of service and security required by advanced manufacturers. Enhancing firms’ participation in global value chains. It is vital for Australian manufacturers to successfully integrate in GVCs and take advantage of growing potential of knowledge-intensive services in manufacturing GVCs.

To facilitate this, industry should:
• Develop a roadmap that embraces a high degree of export focus as well as customer responsiveness and service (providing a customised solution), with knowledge-intensive, high-value services (for example R&D) being a core competency either through developing in-house expertise in those services or partnering with professional services firms; and

• Pursue cultural change within organisations through improved leadership of management teams.

Government should:
• Provide a clear indication of its support for new and emerging high-value manufacturing, specifically by prioritising its trade policy negotiations towards services and its export promotion mission away from the sale of finished products to the sale of manufacturing services and solutions.

Rebranding manufacturing
The poor perception of manufacturing in Australia is a hurdle for successful industry participants. Advanced manufacturers struggle to attract and retain talent while potential customers and policymakers continue to sidestep the potential opportunities offered by advanced manufacturing.

Government and industry bodies should improve the perception of manufacturing by re-positioning the debate with the view to:

• Highlight the achievements of successful advanced manufacturers who have capitalised on Australia’s comparative advantage and move the debate towards benchmarking Australia against the rest of the world;
• Promote Australian advanced manufacturers as increasingly successful players in GVCs; and
• Attract and retain workers to a manufacturing career, particularly highly-skilled workers and management.

A fine document and one that has been written in much the same terms over and over since the turn of the millennium when I began reading such things (and probably long before) as manufacturing has slid relentlessly from 11% of output in 2000 to 7% and falling today. Rumours of the death of manufacturing are not at all exaggerated.

I’m sure the authors are well-intentioned but the report offers nothing new, is riddled with management speak and contradictions (for instance why is direct assistance picking winners but government procurement of chosen SME output not?) and, frankly, is the kind of bureaucratic paene one would expect to see as an industry died.

It’s not that the micro-economic suggestions aren’t useful. They are and should be adopted, especially the suggestions around R&D and education. What is missing are the two absolute keys to a manufacturing revival, probably because both are macro.

The first of those is changes in competitiveness, best expressed through the real exchange rate. Existing manufacturing capacity and jobs are being shed daily, including in high tech, because our economic structure has grossly over-inflated wages, asset prices and the currency.

Second, manufacturing can’t raise capital. Any venture capital worth its salt in Australia goes into prospecting for iron ore (and other commodities).

These two effects are a part of Dutch disease. Unless you address that then dreaming about manufacturing really just makes you a bad businessman without favour in the banana republic.

Full report here.