See ya and wouldn’t wanna be ya, manufacturing

Listen carefully, can you hear that? I can hear something. But what? It’s a kind of removed buzz, like the sound that thousands of cars and trucks make on a distant highway, blending into a persistent and rather soothing moan.

That’s the sound of Australia’s industrial base dying. Here is the chart:

See ya and wouldn’t want to be ya, export manufacturing.

What makes this death so bizarre, so utterly pointless, is that right next door, a glittering new highway to success is on offer. It was built by Australian mining and Australian banks. It is brand new. There’s plenty more room on it too.

That highway is the way of the vested interest: a united campaign against the mining/government nexus that has decided, in all its wisdom, to wipe out Australian manufacturing.

Yet instead, we have this gentle moan of disunited whining. Manufacturing unions point at capital. Manufacturing capital points at unions. Executives indulge fruitless fantasies. The media ignores the confused schmozzle. The lobby waves its hands. They are divided, leaderless, scattered.

Honestly, the Minerals Council must be enjoying it all immensely.

There are, of course, myriad solutions to manufacturing’s plight without resorting to protectionism, which won’t work in a capacity constrained economy. All of which should be aimed at lowering the dollar:

– we could remove negative gearing and force more of the adjustment onto households, banks and retail, lowering interest rates and the dollar

– we could impose Tobin taxes and/or capital controls on speculative capital to lower the dollar, though that doesn’t solve capacity constraint issues and would need to be accompanied by other measures to contain inflation

– we could tax mining and save the money offshore, also suppressing the dollar and controlling inflation at the margin

– some of the proceeds could be poured into a new commercialisation bank to offset the effects of Rybczynski’s theorem

– we could do some combination of the above and improve our overall welfare

Of course we won’t. But don’t tell me we can’t. It’s not some objective “market” outcome. We are choosing not to. And by doing so we are electing to shove export manufacturing off the cliff ahead of other possible adjustments. You and me. We are also vested interests.

Houses and Holes
Latest posts by Houses and Holes (see all)

Comments

  1. Nice guys,( and in the context of a national economy, they are surely the manufacturing base and the jobs that they produce), finish..where?

  2. We need to do something. Even if you believe its inevitable that Australia will become a quarry for Asia, we can’t replace the 2-3 million jobs provided by manufacturing, retail, tourism and other trade exposed sectors overnight.

    And here’s the thing, the rapid appreciation of the dollar is literally forcing the structural adjustment overnight.

    • There’s the thing that gets me. Mining employs a relatively low amount of people for the capital it takes up in an economy. Mining is forcing out other industries (manufacturing, tourism) which employ a much higher number of people for the same amount of capital.

      Surely Treasury should’ve been expecting a shift to a higher unemployment rate as a part of FutureBoom!?

  3. Well the dollar will drop again the moment interest rates start to go down. Given the train wreck that is our economy the interest rate move will have to be soon. Maybe we’ll still have some manufacturing left by then?

    • Sadly, for Australian manufacturing and other trade-exposed sectors, the dollar will only fall in the context of a global downturn. Our non-mining exporters must either cope with a sky-high currency or a depressed global economy, both extremely difficult.

      The only thing that will change this dynamic is a slowdown in Chinese investment and construction.

  4. I was shocked from the early 70s to see shipbuilding die, then electrical manufacturing, then whitegoods, then most cars, vans trucks and parts, then TCF. No doubt many more I didn’t even notice. The pollies said we have to do this to ourselves. And they, as unrepresentative swill, did it.

    The same thing has been happening in food production wherever Heinz treads. Tomatoes are only their latest victim.

    If free trade is the argument I can always find somewhere in the world who can beat us on either price, quality or timeliness.

    If only we could outsource government.

    • You are correct Rod. The decline has been taking place over decades and in effect is a directly result of the forces of globalisation – we are not meant to be concerned as the boffins have told us for years that this is all part of the shift to natural comparative advantage and developed economies transitioning strongly to the tertiary services sector. Nothing to worry about.

      Yeah, right…

      • On a brighter note, the outsourcing of government – Dalia Marin (Prof International Economic Munich) sees a time in the future where a range of tertiary services (legal, technical, bureaucratic) are themselves offshored to cheaper providers! Vast government departments run at a fraction of the cost from an Indian city, back room bank operations feverishly undertaken in another, engineering and technical design, routine legal work all sourced offshore and cheap as chips!

        Now this scenario may make the ‘experts’ and policymakers wake up.

      • Again, the rapid appreciation of the currency has dramatically accelerated this process and is now damaging all non-mining trade-exposed sectors, not just manufacturing. These sectors employ 2-3 million Australians who will never find jobs in mining or mining-related sectors.

        This is the reality to steadfastly refuse to acknowledge or suggest solutions to.

        • Hmm, bizarre.

          You either tax the miners to support the mechanisms above;

          OR.

          When 2 – 3 million join to dole queue, you tax the miners because they are the only ones with extraordinary wealth left to tax.

          Perhaps that should be the AIG’s line of reason.

          • Rusty Penny, beware extreme views!

            If 2-3 million people were to become unemployed you can be sure that something more calamitous than a resources boom had occurred…

            Take your pick:
            Global depression
            Collapse of retail
            Collapse of housing market
            Collapse of financial sector
            Collapse of China (no boom to speak of here), and so on.

            Two to three million unemployed, displaced from non-mining trade sector? Two to three million in a country of twenty million? A total loss of reality if anyone would consider that an outcome of the resources boom.

            I don’t think so.

          • “Rusty Penny, beware extreme views!”

            Why? I don’t endorse censorship, or quelling of dissent.

            “If 2-3 million people were to become unemployed you can be sure that something more calamitous than a resources boom had occurred…

            Take your pick:
            Global depression
            Collapse of retail
            Collapse of housing market
            Collapse of financial sector
            Collapse of China (no boom to speak of here), and so on.”

            Rubbish. It’s about demand.

            There can be as much goodwill my proprietors as possible, but if people do not want to buy your product, then there isn’t anything you can do about it.

            Now people currently do not demand Australian manufacturing, education or tourism because of it’s price. Simple.

            Now IMO the main cause of this is the once in a millennium mining boom that is occurring right now. Not because of any enterprise Australians, or a certain class of Australians are showing, but because our customers for that are endeared to pay triple, or quadruple the price. They are dead now, they are hanging on in rigour mortis because of the perception of costs of (re)entry are higher than the losses they are suffering now, and when ‘conditions normalise’ things can go back to they way they were.

            But as has been pointed out, competitive, free market and general national interest are not the way the game is played anymore. Political interference and demands for government welfare to cater to self interest is in vogue, and there is no reason to believe the mining industry will not continue to employ this.

            The best way to predict future behaviour is to witness past behaviour.

            No more, no less.

            On the mining front, I do not find the idea of pegging out land, and them claiming all that is contained within the type of enterprise that currently receives it’s current levels of rewards. They are natural resources that we offer to companies like BHP to extract because of their expertise in capital and specialised labour.

            In the overall scheme of things, compared to the gutting of our industrial and intellectual capacity, I do not believe it serves the countries economic or strategic interests to keep the status quo.

            “Two to three million unemployed, displaced from non-mining trade sector? Two to three million in a country of twenty million? A total loss of reality if anyone would consider that an outcome of the resources boom.

            I don’t think so.”

            There is only so much fatty Rinehart, fatty Palmer and fatty Tinkler can demand. The trickle down theory has been conclusively falsified.

            So how can mining possibly absorb massive amounts of labour?

            I agree 2-3 million is an excessive claim, but this is 2-3 million people, whose main source of enterprise is to sell their labour. Their current engagement of labour is involved in the brining of product to market that increasingly no one wants.

            Mining can not, and will never, be able to absorb anything close

          • Firstly, I simply drew attention to the danger of extending responsibility for unemployment in other sectors to the resources boom.

            Secondly, the 2-3 million quoted would indicate economic devastation at a level in no way related and likely precluding an resources boom. The number is apocalyptic and ridiculous in context of the boom.

            Never have a said that mining would nor could absorb vast numbers of unemployed.

            “I don’t endorse censorship, or quelling of dissent.” Unlike many at this site, nod do I, so we have a point of agreement. Nonetheless, a warning is fair: beware extreme views, views like 2-3 million unemployed directly or indirectly as a result of higher currency induced by the boom (which has depreciated 10% in days). A nonsense!

          • responsibility for unemployment in other sectors to the resources boom.
            .
            Then you are in danger of ignoring evidence-based reality, my friend.

    • Just as a note to your comments Rod.
      About industries we have lost and free trade.

      I have a book that was published by SMH in 1938 called “Australian Made” Endorsed by The Associated Chambers of Manufactures of Australia- John Fairfax and Sons PTY Limited Sydney…..
      It lists a lot of things made in Australia and when and how they started.

      The Forward is written by Rt. Hon. J.A. Lyons Prim Minister of The Commonwealth of Australia..

      In the forward the PM talks about how we learnt from the Great War that we in Australia need to be self -dependent. And I Quote “no Nation today can afford to neglect the opportunities of becoming more or less self-contained, however much we may all desire the channels of international trade to flow smoothly.”

      I realise that was 1938 and it was after World War I.
      But it seems there was pressure for fee trade back then

      But I was gob smacked by one paragraph in chapter by The Associated Chamber of Manufactures of Australia titled .
      “SAFEGUARDING OUR PROSPERITY”

      “The principle of buying in the cheapest market (irrespective of the consequences) has been preached from many platforms; if adopted universally, this policy would convert the world’s markets into a gigantic bargain counter. The result would be economic chaos and universal distress.”

      That was said in 1938

      Is the world today in economic chaos and universal distress ??

  5. I keep on and on about a vital un-noticed factor in this. Read the McKinsey Institute 1998 Report: “Driving Productivity and Growth in the UK Economy”

    http://www.mckinsey.com/mgi/reports/pdfs/ukprod/ukprod.pdf

    The same thing is happening to Australia as what happened in the UK: rigid urban “planning”, inflated urban land prices, causing lowered productivity and loss of industry.
    This is SLOWLY entering “mainstream” economic understanding. The recent OECD Report on the Australian economy did a good job of emphasising this factor.

    • I’m pretty well disgusted by the way councils have taken over all planning and approval of what landowners can do with their property. We have seen how beholden they are to commercial interest and unions in recent times but it is now beyond ridiculous.
      A small example is how renovations, over a small amount, have to be approved by councils, at great cost to the homeowner.

      • Planning, engineering, compliance etc has become so onerous people either don’t do the renovation or go ahead without getting approval.

        This is doubly true now that capital appreciation of your home can’t be relied upon.

        • In day-to-day living this is borne out by the folks who can’t afford council tip fees and junk their stuff by the side of the highway. I could pot five neighbours for “undocumented” assistance to their households – mostly because it takes SO LONG to get approval for the car-port/ shed/pergola/ addition – we got our pergola approved via a case of beer and a weekend visit from engineer friend on council who signed the paperwork – corruption is alive and well – and this was seven years ago now, wouldn’t even bother getting engineers approval now, expense way out of our league

  6. The starting assumption that we cannot impose limits on the speed at which we convert mineral resources into $$ seems the major problem.

    Norway has buckets of oil but they dont feel compelled to dig it all up at once.

    The only plausible justification for trying to dig it all up as fast possible is that the demand for iron ore and coal is likely to decline or there are large amounts of alternative suppliers soon to come on stream.

    But even if this was the case that still would not justify turning the economy inside out to capture some short term higher prices.

    The simplest way to limit the distorting effects of the boom is to place some speed limits on how quickly we convert our buried assets into liquid assets.

    Set physical targets on the amount of buried assets that can be converted in a period.

    For example – if the volume of iron ore to be mined is limited to X million tonnes per annum that will place limits on the number of mines, capital investment, labour requirements etc.

    How to set the volume ?

    The fed govt sells rights to the target quantity for the mineral in question. These rights can be traded by the purchasers and will end up in the hands of the producers who believe they can make a profit exporting that volume of mineral.

    No need to interfere with states royalties either.

    No need for a big new tax.

    A simple selling of rights to export quantities of our buried assets in a manner consistent with our national interest.

    • This has merit. There should be no rush to turn what we mine into cash ASAP

      To put the brakes on the miners so Australian manufactures can have a chance to supply the miners with there equipment has to be a good idea as well.
      I do not like extra Taxes just because the industry is doing well.
      Maybe changing depreciation rates on capital equipment that is sourced locally might help.

  7. Hate to be a grammar nazi, but when it reads
    “I can here something. But what? ”
    should be
    “I can hear something. But what? “

      • One consequence of being a ten-finger typist is that whole words get programmed into your fingers. Launch the wrong program and you’ll make a whole-word typo. If the program launchers are phonetic, you’ll make homophone substitutions that you would never have made in the days when you wrote with a pen.

  8. What is needed is an MB manifesto. A petition. By head hurts with all the things that are going wrong in this country, the controlling vested interests, the deluded intervention, the Big Brother mentality, the erosion of quality of life.

    If the MB bloggers can go to the trouble of articulating it, I’d certainly put my signature to it. Get it out there in the media, in Parliament. It’s about time the masses understood how their lives are being increasingly controlled to their own detriment.

  9. manifesto no ..since that is what political parties do..and suffer so badly for it
    book…yes. With a chapter written by the eminent bloggers ( say 15 of them) ..and voted upon by the contributors : ” what is wrong with this country and how to fix it ”

    I would address – if allowed- the depravity in the legal profession..displayed in The Australian newspaper today Friday 7th Oct :
    ” $107m for Centro lawyers”

  10. Interesting to read the comments and responses. Manufacturing has been in decline for almost 30 years. Now it has gone past the point of no reurn. No one showed any interest or wanted to understand the significance of having a manufacturing base…. now it is almost gone and people are mentioning the plight of manufacturing.

    Now that manufacuring is just about gone lets look at the economies that are doing better. China has built its economy on manufacturing ask the USA….. Germany still has a manufacturing base…. who is not doing to well… USA and anyone in the EU except for Germany and possibly France… Ireland in trouble, Italy in trouble, Spain in trouble. They once had a strong manufacturing base. Not now.
    Australia’s economy is ok compared to many in world on the back of the mineral boom boosted by China, a MANUFACTURING power house. Will we learn anything from this? No. It is all about return to the investor on a yearly basis.

    Everyoune in Australia cannot work for the mining sector. This is fact. So what will the others do? You need manufacturing and you need other industries.

    Some people say we are too expensive with our manufacturing compared with low cost countries. Yes we are. Lets compete. Lets make everyones wages at $500 a month the same as China. We would be competitive. Would you like this? Alternately we could protect our manufacturing and non mining industries just like everyone else does. Maybe we would have had a chance. Too late my friends.

    Here is my personal story. I owned a very successful manufacturing company that employed 120 people. I was told that I was too expensive compared to low cost countries. Should I have asked my employees to lower their wages? My customer would have liked that… would my customer accept a lower wage? I competed until I could not compete anymore.
    So I suplemented my manufacturing by sourcing from China and scaling down my Australian company (loss of jobs). The manufacturing exodus was well and truly on its way. Now I cannot manufacture in Australia anymore. Now I have a factory in China. I import my goods and plastic injection tooling from China into Australia and pay a 5% import tax. Plastic injection tooling I used in my Australian manufacturing that was now sent to China for production had incurred an import tax of 24%. A level playing field I think the Australian government calls this.

    There lies the story of the relevance of the importance of manufacturing to the Australian government and the importance that China sees in protecting and nurturing its own manufacturing sector.

    Australia and the western world chased short term gain with the governments and big business maximizing profits at the expense of jobs.

    • maurice-b

      Hi maurice-b
      If you cannot beat them, join them…
      I can see you have no other choice …. I agree…

      As you, point out labour costs are high in Australia But as you said the return on investments by Australian investors are higher.
      Why?
      Australian investors need to pay Australian mortgages that is why.

      Over priced Real estate has crippled many economies. Just look at the manufacturing power house of Japan In the early 90’s overpriced Real Estate crippled them and bankrupted many of it’s Banks and they still have not recovered 20 years down the track .The over priced real estate in the UK and the USA just a few years ago. Bankrupted Banks as well and we have not seen the end of that…
      Australia has survived for now people still have jobs So they can still pay their overpriced mortgages on houses they have not been forced to sell yet…. Heaven help us when that happens.

      Just recently, I have seen a fully automated press production line running in Australia. It was removed and shipped to Asia (less the automation equipment) and the product is now shipped back to Australia… The cost of the products coming off that production line in Australia was lower then the products could be sourced form China and shipped to Sydney.
      So why do they now source from Asia … coz that production line represented only 60% of the factory’s output. The other 40% of the factory product could be sourced from Asia at a much lower cost then hear in Australia. Therefore, the factory was closed and now all products are sourced 100% from Asia. The highly efficient production line could not support the rest of factory and the highly efficient production line could not return enough to support the whole facility .with a margin that would please investors. What margin do investors require I don t think you can put a % figure on it but “more” would be the correct term to use.

      In 1989, I was working at a company involved in Heavy Engineering / manufacturing.
      The company was restructuring (code for going broke for and ASX listed company) and in the words of the MD at the time in his address to the employees who were about to be made redundant said.

      “This facility can no longer support an order intake large enough to justify its existence”

      What he was saying was the value of the land that the factory occupied could not return enough for the amount of capital tired up in the Real Estate…
      Hmmm… some equipment moved to rented premises the rest sold or disposed of. The factory was sold then they went on a spending spree (oops investing spree after all they were listed on the ASX). Where did that take them? Deregistration 10 years later …

      Where do I think the company that shipped their manufacturing production to Asia will be in 10 years from now?
      See above …
      Well it may not be 10 years but 15 for sure…..They have become an importer/distributor there main customers are also importers who are retailers as well …The only hope I would give them if they become a retailer as well and trim margins . The multiple middle men between manufacturing and retail will soon be extinct unless they cut there margins .Large retail outlets will struggle as more and more people buy online …from importers who have slim margins and the real-estate they occupy is low cost. (Not big shopping centres). .

      Protectionism is not a good policy. It does create inefficient local manufactures
      Free trade is good but it should be “I for an I” .at least.
      If China wants access to our markets with 5% tariff.
      We should have access to their market at 5% tariff.
      The “I for an I “system should also consider working conditions and wagers of people making things in other countries and CARBON TAXES but this system will not work coz it’s to hairy fairy to work out.

      After all of that China will still under cut our manufactures coz they expect less margin on the sale of their products and that goes for all the inputs of Chinese manufactures, all the way down the line.
      Why coz the real-estate prices are not over priced…Price or real estate verse wages it is still lower in China then in Australia.

      I could go on and on about over priced real estate but it is one of the biggest costs to our economy that produces very little if anything with the exception of farmland. The cost of real estate is all the way though our economy from what our workers need to live on to the land occupied by our factories… In addition, I do not see a shortage of Land in Australia ….So why is the price so high?

      I do not think there is any going back we are on a slippery slope and where it will end. I have no idea.

      The other thing that our economy seems to need is Growth!
      It seems Growth is required for things to be good.
      This I do not understand ….
      If a country /business / or family’s finances was good or excellent one year and the next year the finances were exactly the same result (no growth).
      Why would the year with no growth be anything but good or excellent just the same as the previous year!
      Growth seems to be something our economies need to cover something up!
      That is another topic I could on about as well…

      Maybe the Growth of importers and the Growth of warehouses is a good thing after all they do seem to have the Growth element!

    • 30 years ago I was in Primary school. 30 years ago there was no internet. 30 years ago if I were a factory worker I’d be talking with other factory workers and the ability to mix with intellectuals would be minimal.

      • Do intellectuals provide jobs? The computer you use was manufactured. Everything you see and physically touch was manufactured. There needs be be a mix in any economy. We cannot all be intellectuals.

        Intellectuals come up with the ideas and theories. Engineers make the ideas become reality. Manufacturers make the it happen. No one needs a single dimesional economy.

        The world does change. Factory workers are becoming smarter and a large proportion have a tertiary education.

        By the way. I am a Honours Mechanical engineer that learnt from the factory floor doing a trade. I also have a Production Engineering degree and I have taught at TAFE colleges.