The annihilation of Australian manufacturing

Just two days ago, Prime Minister Julia Gillard announced that:

“We can still be a country that manufactures things. But we’re going to have to do it differently”

She was spot on, if by differently she means we’ll make things without investing any capital. That will be very different indeed.

The truth is Australian manufacturing is not adapting, it’s being wiped out. It’s not restructuring,  it’s flat out collapsing. Yesterday’s private capex survey was a bloodbath, sending manufacturing investment intentions back to levels last seen in the 2001 global recession, and first seen in 1989. And that’s in nominal dollars. Inflation adjusted is far worse. In the following chart of capex intentions, the arrow points to expected spending levels for the next year:

It was not always thus. It’s easy to forget, especially with a gorked media, that manufacturing’s proportion of capex matched that of mining until 2004:

But now it’s all about the dirt:

That’s fair enough. This post is not about bashing mining. What it is about is imbalances.

Australia’s economic elite – public and private – are engaged in a grand experiment. They have decided, in their wisdom, to delete Australia’s industrial base and replace it with mines.

This is changing us in all sort of ways that are not always obvious. For instance, the rise of the mining share of the economy is matched by a rise in political influence by miners. Mining now pays the rate of tax that it wants to, not what the elected government of the day would like it to. You can argue back on forth on the merits of this but it is fundamentally true. So, we have developed a political imbalance.

That may not bother you if you think free enterprise should be able to do what it likes. But there is a follow-on consequence. With policy neutered, there is no redress for the economic imbalances that also rise as mining dominates growth. It may be that we can keep digging and shipping dirt at such a furious pace and live for as long as we like on the income. So far it’s worked well enough. But a glance at history tells you that’s a long shot:

Each of the spikes in commodity prices in the past 200 years is the result of a global dislocation. Chinese development is just another and, although it is huge, it’s not big enough to outpace capitalism. Supply has already responded to shortages and it is only a matter of time before prices fall much further.

So, if history is brighter than Australia’s elite, that means our current mining-centric growth is also an imbalance in a number of ways. The first and most important is that without manufacturing, you are left with only two drivers of growth. One is mining investment, which is great. The other is services investment, which is also great except for one small problem.

The baby-boomer cohort that runs the show would have you believe we can build an empire from services, but we can’t. Services are not on their own a great creator of national wealth. The reason is pretty straight forward, for the most part they are not tradeable. As such they bring little in the way of earnings to the country. Services represent some 70% of the economy but only 15% of our export income.

That is not to say that you need to be a mercantilist nation to make money. Not at all. But without offsetting export income from other sectors, services don’t generate basic capital formation. Services amplify rather than create fundamental capital and they do that largely through the use of debt, which if overused can create its own imbalance. Australia is an example of this, with a services economy that has grown significantly on the back of leveraging export income from other sectors and in the process caused Australia’s major external imbalance, the current account deficit and the bank debts that fund it.

Manufacturing on the other hand is highly tradeable. Check out this chart from DFAT which measures the respective contributions of various sectors to Australian exports:

As recently as 2006/07, manufacturing contributed (STM & ETM) over 20% of Australian export revenue, virtually the same proportion of export revenue as services from a production base approximately one seventh the size. Ever since, manufacturing has been sent to the knackery and its share of exports is down now to 10% and still falling.

Which brings us to the second dimension of our imbalance: an over-reliance on mining revenues. When the commodity boom ends, manufacturing income will not rebound. Yesterday’s dire capex figure shows that there is increasingly no manufacturing left to do so. I suspect that manufacturers have held on grimly through the past three years of a high dollar but are now capitulating. A lack of manufacturing exports will exacerbate the post commodity boom downturn because the much touted services sector won’t be able to grow its borrowing anymore. This is basically what has happened to the UK economy.

This in itself points to several other imbalances. Manufacturing is a key sector when it comes to productivity growth. I expect we’ll enjoy a few good years of productivity as mining digests its extraordinary capital binge. But in the long term, productivity gains are most concentrated in increasing the output efficiency of  stuff you make. Once established, mining doesn’t improve its efficiency much. Neither does services. Through investment in technology, manufacturing offers out-sized productivity gains for an economy.

That’s why the founding father of US industry, Alexander Hamilton, set about building a manufacturing powerhouse (though I’m not a protectionist). That’s why China has done it in the US’s image. Productivity is dynamic. It can be created through fostering manufacturing.

So this is another imbalance. Without manufacturing, productivity gains become more difficult and so does the capital formation that comes with it.

And there is another argument worth considering. Without a manufacturing base, how does a country defend itself? Sure, production can always be ramped up if needed in a time of strife. But not if you no longer posses the human capital to do it. The death of manufacturing is the permanent loss of the skills and intellectual property that enables such a ramp up to occur. It will be a short meeting when our enemy’s generals sits down to plan which industrial targets to bomb.

The various imbalances created by the annihilation of Australian manufacturing are neither inevitable nor benign. Our elite are pursuing one of the great experiments in national self-sabotage.

Houses and Holes
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Comments

  1. Absobloodyloodle! Spot on!
    Send it to every politician in the land. Make every person in Treasury and RBA write it out long-hand 100 times!

    “Australia’s economic elite – public and private – are engaged in a grand experiment. They have decided, in their wisdom, to delete Australia’s industrial base and replace it with mines.”

    HnH If only it were only that bad!!! The actual mining is the minor part and would be fair enough if we owned any of it.
    They are deleting the industrial base and replacing it with hot money and asset sales!

    You just couldn’t, in your wildest nightmarish imagination, dream up policies that are worse. But it will go on…and on. The service gravy train has left the station about 50 odd years ago and now and most voters are now on it. So it will run until it can’t then they will burn it because it has run out of fuel.

    The answers lie back in time.(Very very sadly)

  2. Another top post, sir. Capitalism has been replaced in our countries with Debtism. I’m tempted to dismiss your writing by countering with ‘We don’t need a manufacturing base at all! Just keep the price of property moving ever upwards, and we’ll all be able to keep that Debtism going, and buy what we need from the real workers of the word”.. But I wont… 🙂

    • ‘We don’t need a manufacturing base at all! Just keep the price of property moving ever upwards, and we’ll all be able to keep that Debtism going, and buy what we need from the real workers of the word”..

      Lucky you didn’t write that so I don’t have to put a +100 on it!

  3. Yes, very good.

    But we can do something. Start turning the dials in the right direction.

    Turn down the mining dial by slowing the speed at which the sector expands. This can be done quite easily by the use of auctioned export volume licenses. Limit the volumes and allow the industry / market to work out by trading who can most efficiently bring that volume to market.

    Result – less of a mining bulge that leaves larges gaps elsewhere in the economy and less upwards pressure on the exchange rate.

    Turn down the dial on capital inflows by limiting the ability of foreigners to participate in transactions that affect the exchange rate. Limit a large proportion of govt securities to sale to locals only and limit funding for residential mortgages to local sources ( no wholesale foreign sources).

    Result – less pressure upwards on currency, more reliance on internal sources of savings, higher interest rates to place downward pressure on credit growth and asset bubbles.

    And this is not a call for economic mayhem.

    Start with the dials on their current settings which are Spinal Tap “11” and move them to 10.5 then slowly move them further with political leadership, fiscal policy therapy and micro economic reform to sooth the transition.

    • But Australia doesn’t need to “wind back” its resource extraction to “help manufacturing”.

      Look at what is happening in the USA:

      “America’s Red State Growth Corridors”
      By Joel Kotkin

      http://online.wsj.com/article/SB10001424127887323549204578315714070017932.html?mod=djemEditorialPage_h

      Manufacturing is relocating from all around the world, TO where the cheap resources are being extracted in parts of the USA.

      WHY?

      Why not Australia? Why do the cheap resources have to be shipped somewhere else to be used in manufacturing?

      Why are not cheap resources always a major ADVANTAGE to “local manufacturing”?

      Look at the local policy settings in the USA’s “Growth Corridors” and you will see why.

      No urban growth containment.
      LOW urban land costs.
      Low local taxes.
      “Right to work” laws.
      Pro-business, “can do”, local government.

      • No argument from me from that perspective.

        The only thing I would note is that we currently don’t have all (any) of those desirable items at the end of your post.

        In that circumstance does uncontrolled mining increase or decrease the likelihood of those items happening.

        I would say decrease because it reduces pressure for change.

        As the dials I propose are turned we are forced to confront the issues ( the absence of the things you describe) and adopt those policies.

        Then we can perhaps relax the mining dial.

        Though I should not that with mining there is the additional argument that high quality non renewable resource deposits are likely to increase in value over time and thus flooding the market with supply for a short period may not be desirable.

      • Stormy Waters

        If we are going to sell our gas/coal at less than opportunity cost to promote domestic manufacturing then wouldn’t that require the current owners of the energy resources sharing in the profits made by the manufacturers.

        How does that work?

        • The gas/coal/iron would not be sold at less than opportunity cost.

          The govt auctions tradeable volume permits, say in values of 10,000 tonnes, for each type of resource.

          The industry can trade them freely so that those can best use them can acquire them as the original bidder in the auction may miscalculate.

          The price of the permit will be set by the market. That price will reflect the cost of production and the current market prices (and of course state revenues, company taxes etc).

          In times of tight margins (ie low prices) the permits would not be worth much as producers would not bid more than they could afford to pay and make a buck on the sale.

          From a macro perspective it allows the government to manage the speed at which mining (all or just parts of it) grows and in most cases volume is a good measure of that.

          If a particular resources is believed not present problems the volume permits could be at a level that everyone who wants one can get one – obviously this would be at minimal cost as there would be no competitive auction.

          Of course all of this depends on whether the impact of mining on the exchange rate is:

          (a) real

          (b) a concern.

          I am not an expert in that field so I am merely making a suggestion on what might be done if it is.

          • The export permits are volume per time period. (eg 10,000 tonnes for 2013)

            They expire if not used in the time period to which they apply.

  4. Well done HnH. A great post. My only concern is that nobody with the power to do anything is going to take any notice of it.

    Those capex figures for manufacturing are hardly a surprise. Over the years Mr/Ms Manufacturer has implemented lean practices, automated production and driven productivity at a pace that puts most service industries to shame. Now, through no fault of their own they are uncompetitive, due to an excessively high AUD.

    Many have hung on, hoping that the dollar will correct, but now all of the signals they are receiving bode ill for the future. Both sides of the political fence seem quite happy with the level of the dollar. Treasury and RBA keep banging on about “structural change” and “making way for the mining boom”. Not much joy out there. Why would you commit to further Capex if your government seems quite happy to let you sink?

    This is a disaster of monumental proportions. We ABSOLUTELY need a manufacturing base or we are toast. I fear we are too late……

    • “Dutch disease” (resource exports) is one reason for the high AUD. Another one that few people realise, is the urban land price bubble. Just one of numerous flow-on effects of urban land rationing by “planning”.

      I have referred on this forum to plenty of academic research in the UK, regarding the effects on the UK economy, of their 60-year experiment with urban growth containment. “Gutting the manufacturing sector” is certainly one of the consequences.

      Consider: what would happen to the rural sector if the cost of their land was forced up by perverse regulations, by a factor of about 20? Not hard to see what this would do? So why is it so hard to see the effect on the urban economy?

      Sure the rural sector is land intensive. But there are a lot of “urban industry” sectors that are not government departments, finance companies, and advertising companies, that actually need “land”, believe it or not.

      Believe it or not, those sectors that are the most land intensive, are the first to die in an urban-growth-contained economy. Think: production lines; storage facilities for raw materials and finished goods; bulky products (like machinery and vehicles).

      Guess what? This is pretty much CORE “TRADABLES SECTOR”.

      It is not just the effect on the immediate business operation itself, either. It is the entire “supply chain” in the urban economy. It is the workforce and its cost of living.

      This is even a reason that Australia’s mined commodities are starting to look uncompetitive internationally. It is hard for any sector to avoid altogether the inflated costs that are strangling the urban economy.

      And I haven’t even started on the anti-competitive effects of urban planning, the loss of agglomeration economies, the loss of productivity, the congestion diseconomies.

      And then there is the capital swallowed up uselessly in urban land “values”. Zero-sum economic “rent”.

      Why is this sooooo hard for the mainstream econ profession to grasp? Shock, horror, unpleasant surprise, the manufacturing sector is dying…..!

      • Absolutely!

        Too often the effect of a dysfunctional land market on small and medium sized businesses is overlooked.

        Not surprising of course as the madness of the residential market has a direct impact on everyone but as you point out the effect on business is insidious and just as damaging.

    • I second that. Even better, get it into the Saturday editions of The Smage, which are much more widely read.

      FWIW, I’m not in manufacturing, but I am in IT exports, and I stopped all investment in R&D two years ago. There was simply no point in continuing. Even if I repeated the success of previous products, I would have to make twice per unit what I did 10 years ago just to stand still.

  5. reusachtigeMEMBER

    But we need lower interest rates so people can also flip houses to each other more easily, as well as dig stuff.

  6. It’s okay, our great RBA governor is paid nearly $1 million a year to precisely work out how to steer out economy out of any misshapes if it was to occur.

  7. Great discussion but i suspect you’re having the discussion at least 10 years too late.

    Today’s global manufacturing typically only supports 3 companies actually making any given component. This is certainly the case in high tech manufacture but is less so the more you move down the food chain.

    Before I’d invest a single penny in Australian manufacture I’d need to be convinced that the venture could attain a number 1 or number 2 spot in global supply of that product. Unfortunately given local component supply costs / constraints it means that only very high added value applications need even be considered.

    Typically the two highest added value high tech sectors are Industrial design and Medical systems. On the Industrial design front, experience drives innovation, so our complete lack of manufacturing means we’ll never develop the industrial base to be able to develop high value added industrial products (mining excepted)

    Medical sounds good BUT it can take 20 years for a medical product to actually achieve volume production. So there is no real value in local Aussie manufacture, as a matter of fact I’d argue specifically that high tech manufacture like Medical should always happen in the highest volume manufacturing plants. May sound illogical, but my experience is that really high volume production lines have the lowest occurrence of manufacturing faults and dramatically lower incidence of “walking wounded” parts (these typically cause whats known as device Infant mortality)

    In medical device manufacture, especially implantables, Knowing that the device you ship is robust and not damaged by the assembly process is probably the most important thing to know. (witness the recent quality problems at Cochlea)

    Bottom line neither Medical device nor Industrial control are sectors where Australia has any competitive advantage to leverage.

    As I started out saying: Great discussion HnH but I suspect it needed to occur at least 10 years ago.

    I did find a lot of opportunities, in Australia, to combine forms of JIT (just in time) direct importing with local device design and assembly. Unfortunately Australia has many local standards that make absolutely no engineering sense. (looking at you SAI global) and these impede the ability to leverage mass produced items as parts for Aussie manufacture / assembly. An indirect effect of these Australian standards is the need for two an three level warehousing / distribution arrangements. These are incredible inefficient arrangements and completely defeat JIT production methods.

    This monopoly standards system masquerading as a safety standard reduces the component availability because SAI licensing is required before any part can be used legally. Interestingly this is not required if the part is completely assembled outside Australia.

    I could go on and on and on but I think you get the picture. Unfortunately Exchange rate is the least of your problems, its just killing the hangers-on, the real long term economic damage is done when new businesses can’t get started.

    • “Unfortunately Australia has many local standards that make absolutely no engineering sense. (looking at you SAI global)”

      Ohhhhhhhh YES!!!!!!!!

    • “……real long term economic damage is done when new businesses can’t get started….”

      And high land costs and sheer lack of availability of land where new agglomerations are forming, is a major factor there.

  8. This argument is a bit ‘simple’ isn’t it? You’re talking about manufacturing for export, yet a large percentage of our biggest local manufacturing industry (autos) is for domestic consumption only.

    Value added manufacturing isn’t only about shipping physical product from out shores. The skills and intellectual property you refer to can still be retained &/or developed in OZ while the capex goes to a nation with lower overheads (look at Apple for an example of a firm that Internationally outsources everything but IP development).

    Australia is a high COST nation, not only a high DOLLAR nation… You have to pick the fights you can win..

    • Fair enough. But the capex figure is not just weak, it’s calamitous. Not sure how that can be spun into anything but calamity, local production or export.

    • Not sure I’d be highlighting the Aussie auto sector as a picked fight that has been won!

      Even a lot of ‘made in Australia’ food is foreign ingredients, packed here.

      • Quite. Corporate welfare and local monopolies are not exactly the best long term route to a competitive economy.

        NZ used to “locally assemble” Sony Walkman radios back in the 1970’s – the only country in the world that did it. Sony had to disassemble them specially, and ship the knocked-down parts at a far higher cost than complete radios. The NZ cost of a new Sony Walkman was about ten times higher than anywhere else in the world. But no other radios were allowed to be sold in NZ, so Sony was happy as well as the local agent.

  9. In accordance with my “rant” in Greg’s morning piece, isn’t US manufacturing doing great, eh?

    And why is Aussie manufacturing going SO badly? How much an artificially strong AUD (artificially weak USD) got to do with it?

    I suggest it has a lot to do with it, Dutch disease aside; our AUD does NOT represent the relative strength of our economy, IMHO.

    Our manufacturing plight is, IMHO, in large part because of the US manipulating the system to take a larger market share of the smaller international pie.

    My 2c

    • Burb

      Re A$ you’re right but a couple of other minor points
      1. A Govt sector fundamentally hostile to private sector economic activity. Every day there are more rules and regulations inhibiting productive enterprises. WHS has just become ridiculous. Similarly many building regulations etc etc.

      2. An industrial relations system that, as a result of the Union campaigns, is now fundamentally, and unnecessarily, antagonistic when applied to enterprises of scale.

      3. Associated Legal liabilities attached to employing anyone.

      4. A fundamental resistance to actual hard diligent work that results from a massive deep-seated psychological shift in the mind-set of the population.

      The list no doubt could go on and on if there were many of us in here who ran busineses.

      So not arguing re the strength of the dollar. However even if the dollar falls radically and ignoring the resultant inflation and increased capital costs associated therewith, we are not suddenly going to sprout factories.
      The risks of trying to establish and run such enterprises is way too high for the return.

      The answers lie back in time.

      • 5. Urban land costs

        See my posts higher up.

        PARTS of the US economy are doing fine. The low US dollar is not exactly turbocharging manufacturing in California, NY or Illinois.

      • Ain’t it the truth! reminds me of the old Irish travel advice:
        “If I wanted to get there I wouldn’t start from here”

        And so it is with Aussie manufacturing, I held onto the dream for 18 months, not long enough I know but definitely long enough to know there was no future in Oz for my kind. I certainly wish you’all (getting a little Texan back in my speech) the very best of luck! enjoy your houses, beaches, and life style unfortunately I can’t because I’ve got work to do….

        • Thumbs up Bob.

          Truth be told this country does not deserve people like you, it’s apathy and ignorance must be demotivating.

          I hope you can still be a beacon of information if we collectively decide to change in your lifetime.

          • Why shucks Rusty I’m going all teary eyed. I’m back doing something I understand amoungst people who value my contribution, which is probably all any of us can hope for.

  10. Remember when Investment Banking used to be called Merchant Banking? That simple name change illustrates the reason for our current dilemma.

  11. How do we fix it ?
    Australia’s previous strenght in manufacturing in the 50’s was a bit of Bradbury, apart from the Yanks and Canada, Australia was about the only place that still had factories.Certainly tariffs helped as well. The other aspect I suspect is the loss of politicians that actually understood and depended on the manufacturing sector for their support.

  12. Very good piece HnH. Thanks for putting it up. I hope that this gets widespread MSM attention, on the weekend especially.

  13. I’ll ignore the more colourful claims in your post 😉 and just make a couple of points.

    The response to the overwhelming demand primarily from China for our resources was appropriate and extraordinarily fortunate in timing. It cannot be ignored that the boom buffered Australia from the widespread economic downturn afflicting many developed nations.

    That throughout this period Australian manufacturing has generally managed to survive albeit perhaps not flourish. Trade liberalisation has transformed the traditional manufacturing markets throughout the world. In addition technological advance and automation have re-worked much activity undertaken in the manufacturing process.

    It can be expected that individual sectors within the manufacturing sector will evolve – it is likely that large scale production of vanilla product more cost effectively produced offshore will continue to decline in percentage share of the Australian market.

    We, like other countries looking to stabilise and ideally expand our manufacturing base will need to perhaps concentrate on value-add in areas we have comparative advantage – but this will not be easy and the excellent points raised by China Bob above point to reasons why.

    Many fine minds have contributed to the discussion on Australian manufacturing’s future and what is desired by those in the sector. Alas all falls on the deaf ears of the politicians.

    One small hope, the ABS Yearbook 2012 shows manufacturing is far from dead.

    http://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/1301.0~2012~Main%20Features~Manufacturing%20industry~147

      • Yes, I’m aware of that – a real concern. But is it a surprise, not really.

        Global conditions are tentative, domestic conditions are tentative, production costs are on the up, energy costs are on the up, R&D incentives changed on whim – so to buckle down, keep expenses contained and don’t embark on big capex in such uncertain conditions would seem an understandable response.

        • Those are all issues — no-one is denying that — but you failed to mention the biggest issue of all, the exchange rate. This omission was, of course, deliberate.

          This is why you have no credibility at this blog.

          • Lorax
            Blinded by your antipathy to mining you fail to come to grips with what is the primary cause of the high dollar and the imbalances in the economy.

            It is NOT mining per se.

          • Whatever the cause of the high dollar, to not mention the exchange rate as a reason for subdued investment in the manufacturing sector is damning.

            That is the only point I am making.

          • I rate the housing bubble as at least as significant a cause of the high dollar, as mining exports.

          • Lorax, exchange rates might explain why existing businesses are not investing more in cap-ex but they do not explain why new businesses are not developing to take over from the old. The complete absence of new blood in the Aussie manufacturing market is what stops it from addressing growth opportunities. Among these lost opportunities there are no doubt several ventures that could withstand the elevated AUD, but as they say nothing ventured nothing gained!

            I’d respectfully suggest that it is the primary job of the political elite to create an environment where private capital willingly accepts these risks, especially when the ventures benefit the economy as a whole.

          • Lorax, exchange rates might explain why existing businesses are not investing more in cap-ex but they do not explain why new businesses are not developing to take over from the old. The complete absence of new blood in the Aussie manufacturing market is what stops it from addressing growth opportunities. Among these lost opportunities there are no doubt several ventures that could withstand the elevated AUD, but as they say nothing ventured nothing gained!

            From my perspective in regards to succession planning, it’s because the natural chronological order of succession has been adjusted because the next generation are tapped out. Obviously this affects product in that new owners tend to bring new ideas and processes that spur innovation.

            I have lamented here before that I am observing guys who are 65-ish and wanting to sell out, can’t really find a enough of critical mass of 40-45 year buyers because they are all indebted with their mega-mortgage

            If you view debt as a way generations pass assets down, then we’ve had a mass distortion.

            I feel for them because the bogan boomer had the gift of levergaing up into property 15 years ago, so between 50-65, they’ve made a killing.

            But at 65, where your retirement is tied up in selling your business, an overdebted market means underwhelming offers for 35 years of goodwill.

            The know nothing bogan boomer ends up with more than the businessperson in retirement.

            I’d respectfully suggest that it is the primary job of the political elite to create an environment where private capital willingly accepts these risks, especially when the ventures benefit the economy as a whole

            Risk is indelibly tied up in the price of cash.

            if the price of cash is mis-priced, then the assessment of risk will be distorted. Government isn’t alone in determing the price of cash.

            I believe that many business lobbies have bettrayed their patrons by not voicing out against a housing bubble when its formation was already evidently risky 10 years ago.

            Where was heather Ridout or Gerry Harvey telling government to cub it to ensure small business and retail can get a fair and sustainable cut of discretionary spending.

            They were happy to get a trail from the equity ATM, and now want to be bailed out by yet again mispricing cash.

            Then need to be held accountable for their (in)action as well.

  14. Great post!

    It goes closest to anything seen in the media anywhere to identifying the sheer scale of the culpability of those making decisions about the Australian economy, the way they are positioning it, and the way they are positioning manufacturing.

    ‘Australia’s economic elite – public and private – are engaged in a grand experiment. They have decided, in their wisdom, to delete Australia’s industrial base and replace it with mines.’

    Agree 100%. Basically there are politicians and RBA types making decisions which effectively amount to trying to euthenase Australian manufacturing while loading Australian society up with the world’s largest private debt load, and leaving Australian society captive to the shifts in demand of commodities and anyone looking at the history of any commodity market will tell you that will be a volatile road, and would also tell you it is likely to be downhill from about here.

    The chart didn’t go that far back, but I suspect the manufacturing Capex chart at the moment bears a more than passing similarity with 1980-81 when another mining investment phase triggered a wages breakout and overvalued (but then directly managed) AUD. Ever since that mid 80s manufacturing downturn Australia’s economy has been more and more about debt. The mining boom has helped conceal that, but when the investment phase of the mining boom winds back that will become painfully obvious.

    Touting services as an economic driver is like touting palliative care. It generates very little economic spinoff, promotes little skills development, is profoundly price sensitive, and is easy to relocate. Services is all too often the soft option at an economic level.

    ‘The baby-boomer cohort that runs the show would have you believe we can build an empire from services, but we can’t. Services are not on their own a great creator of national wealth. The reason is pretty straight forward, for the most part they are not tradeable. As such they bring little in the way of earnings to the country. Services represent some 70% of the economy but only 15% of our export income.’

    Too bloody right! The weird thing is that when I watched Gullard rattle off her words about manufacturing and the high AUD the other day I couldn’t help but think to myself that it was essentially the same as any other blue rinse babyboomer telling younger types to ‘suck it up’ – suck it up on houses, suck it up on fees for about everything, suck it up on lack of political representation about issue which matter to them, but most of all to suck it up on the sort of economy they are going to be left with quite soon.

    As things currently stand what they are being told to suck up is an economy that has feeble global competition capabilities, is small and exposed to currency and trade manipulations from bigger players, is burdened with the world’s largest private debt load, is underpinned by a cost structure incorporating the world’s most insane real estate costs, and will face a headwind from overleveraged babyboomers exiting the workplace while trying to maximise prices for the assets they hold in fief on behalf of the banking system – which in turn is dependent on overseas funding.

    I tend to disagree with HnH on ‘you don’t have to be mercantilist to make money’ – I would accept it on principle, but in the breach I would observe every last major economy going is out there devaluing, printing money, or hedging around trade issues to manage better market share (at home and internationally).

    When the RBA and Australia’s body politic says it will do nothing about the AUD then it is effectively saying that Australian manufacturing (certainly its capacity to export, but also to a large degree its import replacement scope) is expendable. What Australia’s politicians and central bankers are doing right now is sending a clear message to any potential investor in Australian manufacturing not to do so because they will be exposed to a currency regime which is not going to support them, and will sacrifice them to other nations who are actively supporting like functions there. As HnH points out there is a long term productivity implication from coughing up the manufacturing sector.

    ‘The various imbalances created by the annihilation of Australian manufacturing are neither inevitable nor benign. Our elite are pursuing one of the great experiments in national self-sabotage.’

    Our elite – both sides of politics – need a dirk in the chest. They are currently representing Australia’s past, and maybe its present, at the expense of Australia’s future. Manufacturing may not be Australia’s future, but before poisoning the manufacturing sector they should be identifying a clear process to develop skilled and productive employment into the future, and factor into the economic narrative how we make the transition.

    What Australia’s body politic is doing is refusing to take that step because they know that the babyboomers who will presumably determine the election have painted themselves into a corner with inflated asset prices on one side, and humungous debt on the other, with the cash flows of a mining Capex boom currently able to fly relief into their corner. As the flights get fewer and further they will be in the position (like the Germans caught in Stalingrad) of needing to work their way out or capitulate, and manufacturing is a key part of the most viable means of achieving this. Australia’s body politic (and RBA) is currently feeding that capacity to the babyboomers so that they don’t ask questions about the economic direction, and don’t all head for the exit at once.

    And like the Germans in Stalingrad the babyboomers aren’t far off pulling out the revolvers and threatening those on their side to maintain the discipline. Suck it up! Keep the credit and real estate Ponzi going or you are going to have a long and painful recession is their mantra. But for a large and increasing part of Australia it is simply not in their interest to be part of this narrative. Feeding manufacturing to the wolves is part of a bigger story.

    • Nice rant Gunna, and pretty much correct. I try continuously to give them the benefit of the doubt, but you are right. The Boomers in power are sacrificing future generations at the alter of self entitlement, and there is no end in sight. RIP manufacturing.

      • Good piece Gunna!
        I think you fellows are over-simplifying the problems by thinking in terms of boomers vs the rest.
        The argument always was, for us boomers and for you of the next generations, between productive and non-productive sectors.
        The non-productive sectors in this economy have forever out-voted anyone trying to be productive.
        That’s why we have an economy shaped the way it is and even worse, a whole society and education system distorted by our own self-indulgence.

        Though I agree boomers have indeed screwed the country following generations are now implicit in its destruction.
        If you keep thinking in terms of boomers vs the rest you’ll get the wrong, and disastrous, reform recipe.

        • Cheers Flawse, I agree.

          The issue is between productive and non productive, but the politics is (I would argue – although I agree not all baby boomers are to blame, and that many are victims, and that not all of subsequent generations are in anyway ‘innocent’) cast to a surprising degree between boomer interests and the rest.

          What I find most infuriating is that both side of Australian politics are playing the same end of the court – which makes them as guilty as each other.

    • ” Basically there are politicians and RBA types making decisions which effectively amount to trying to euthenase Australian manufacturing while loading Australian society up with the world’s largest private debt load, and leaving Australian society captive to…”

      .. the vested usurers.

      And folks here criticise my use of the word “treason” in describing the actions of those self-styled ‘public servants’ responsible for this. *shakes head ruefully*

    • In my opinion manufacturing is largely a services industry requiring innovation, research, design, good business management, logistics etc. so not so cut and dried?

      In the 1980s Labor govt. enacted various reforms, including the development of value added and service industry exports to lessen our dependence upon primary industries and to dampen current account deficits.

      International education was one (as were tourism, wine etc.) but has been nobbled by (concerted campaign of) xenophobia in mainstream media and politics, and the government inflicted even more damage through panicked policy and legislation on students visas and immigration (in reaction to years of anti population and anti immigration PR by racist lobbies, both LNP and Labor, under the guise of care for the environment, unemployed, house prices etc.).

      Governments in Australia have been characterised as too prevalent (one tier too many), “policy free” “poll driven” zones, short term if any planning, terrified of shallow media and electorate, prefer to follow opinion polls, prepared to indulge in endless and loud “dog whistling”, predominantly white middle aged men…..

      Meanwhile, Australia’s reputation has been harmed in the region through frequent xenophobia, less international students means less domestic places (higher taxes?), lack of STEM graduates (and literate teachers), lack of innovation, research, etc. and cultural/political factors.

      Politicians have become obsessed by the latter, for self image and media consumption, about Australian cultural stereotypes exemplified by AFL/NRL, Ford/GM car manufacturing, hard hats/safety vests, housing industry because it employs many tradies and other flow on effects, “making things”, specific unions’ vested interests, “neo con” media messages short on content but big on noise etc.

  15. In my line of business, the strategy is always to identify then manage what you know you can and put effort and resources to that end. What is out of your control, deal with it within your resource structure as it comes.

    That way you can predict your costs, set targets and measure execution. You can approach the future with some confidence of performance levels.

    The problem we have in Australia is that we are not managing what we can, in this case for our Manufacturing sector. The AUD level is something outwith Govt and business control. However, duplication of myriad regulations with it’s compliance costs, workplace laws and labour laws, Green and other taxation , tarriffs ….. all manner of important and related issues impacting Manufacturing are largely being either neglected or actively constructed to damage our Manufacturing base.

    Manufacturing cannot improve until we turn that tide. And all that IS within our control.

  16. The decline of manufacturing cannot be defended by comparative-advantage theory, because it is not happening on a level playing field. It is the result of a tax system that is biased against producers, especially labour-intensive producers. Our taxes overwhelmingly target the production/origin base; and within that base, labour is the most heavily taxed factor of production.

  17. Perspective is being lost in this debate. Facing the challenge of change in the manufacturing sector is nothing new.

    The Australian Chamber of Commerce and Industry 2006 ‘Australian Manufacturing Sector’ (Inquiry into the state of Australia’s manufactured export and import base now and beyond the resources boom) report to the House of Reps Economic Standing Committee provides a detailed assessment from industry. Most of the issues raised in this paper still exist – little has changed.

    – A low exchange rate, while improving the competitiveness of the Australian manufacturing sector, can introduce a
    number of problems for the economy more broadly. Any policy recommendations to develop manufacturing must be made independent of the present macro-economic
    environment.

    – the overwhelming majority of European multinational companies have been able to realise cost savings from offshoring of between 20 and 40 per cent

    – Australian businesses and consumers stand to gain considerable benefits from the offshoring of the supply of some services. For business, offshoring can mean better cost management and improved competitiveness, while for consumers it can mean lower prices. Fear campaigns
    that equate offshoring to lost jobs are misguided and are often motivated by protectionist agendas that seek to lock
    Australia into the past and impede our capacity to capture the gains from freer world trade

    – In Australia, the energy sector contributes significantly to our economic prosperity and standard of living. The reliable availability of competitively priced energy is fundamental to the international competitiveness of Australian industries, particularly those that are energy intensive

    – Even in the absence of an exchange rate appreciation, the manufacturing sector would have difficulty in maintaining its current hold on the resources of the economy as noted by Ken Henry

    – In fact, the non-resources sector of the Dutch economy recovered reasonably quickly, after suffering from the early to mid sixties from the discovery of oil and gas.

    In addition to the excerpts above there is much an efficient regulation, R&D, skills, suggested longer term impact of ToT and exchange rate etc.

    A rant and a bit of a vent may give some temporary relief however if the very real challenges are to be understood and addressed honest assessment of the issues and realistic proposals for the future need be engaged.

    The report is worth a look (can’t seem to link it).

      • Is this mining industry press release really contributing to the discussion?

        The ban is well overdue IMO.

        • Bloody hell!!! There was a discussion going on here about long-term issues for manufacturing.
          Now strictly speaking that is a bit of a way from discussing one month’s figures and there are indeed very worthwhile contributions from various writers.
          3d1k was addressing the issues as was China Bob, Gunna et al.

          What EXACTLY in what 3d1k said was contrary to anything else here?

          What, in 3d1’s remarks, was supposedly promoting mining at the expense of manufacturing? In fact I thought 3d1’s observation that manufacturing needs to be encouraged in areas where we have advantage, such as downstream processing of raw materials,fairly reasonable. At the moment we are doing exactly the opposite and penalising any proposals for processing.

          • Here is Oliver Hartwich telling NZ manufacturers to “stop whinging and get back to work”; German manufacturers sustained a far higher increase in the value of the German currency running concurrently with Germany becoming one of the world’s biggest manufacturing exporting powerhouses:

            http://nzinitiative.org.nz/site/nzinitiative/files/Opinion%20and%20commentary//02-22-13%20stop%20whinging%20and%20get%20back%20to%20work.pdf

            (In the NZ National Business Review 22 Feb 2013)

          • flawse:

            Everything 3d1k says here should be taken with a bucket of salt. He is here to promote the interests of the mining sector, often very subtly and very cleverly (as above) but never lose sight of why he is here.

            His comment above is essentially a restatement of his regular talking points at MB. It boils down to this: The strong AUD is here to stay, we can’t do anything about it, manufacturing has been in decline for decades, manufacturing can’t be saved, nor should we attempt to save it, and besides any problems manufacturing does have are not the fault of the exchange rate, or the mining boom, and the finger of blame should be pointed at the credit boom.

      • russellsmith55

        Im not big on censorship, but I do kind of agree that 3d1k’s input on this topic is about as appropriate as an intelligent design’s input on the bing bang.

        No offense 3d1k, I do like to read your comments on other topics, but you’re about as ‘Fair and Balanced’ as Fox News on this one.

        • russellsmith55

          Corrections: “as appropriate as intelligent design’s”
          “the big bang”

          Apparently my fingers are drunk today.

          • Which one of us is fair and balanced. We all carry loads of some form on one shoulder or another

          • russellsmith55

            True flawse. Not suggesting anyone is completely free of prejudice, or is above the occasional act of self-interest. Everyon’e view is influenced in one way or another by what they think have in life and what they think they need.

            3d1k’s colors are pretty clear though. Which is a shame, because if they do have a good point to make about this it will be lost through their own credibility self-sabotage.

            You can’t transparently push an agenda like that for so long, then suddenly expect to be taken seriously on the topic. I might actually be in desperate need of a haircut, but its going to be a lot harder to believe the opinion if its coming from a barber.

        • I generally enjoy his avatars and his consistency re his comments.
          We need to be careful that we dont take everything too seriously

  18. Great post HnH.

    The problem with Australian manufacturing is not a new one. Before 2004 the capex investment in manufacturing and resources was basically the same and coupled with a low dollar. But did Australian manufacturing rise to a global standard before 2004? where was the Australian version of Hyundai or Samsung?

    Politicians and the corporate elite dropped the ball way before the mining boom. The only reason they went down the resource root was because it was the easiest and offer the opportunity to make a quick buck.

    Australia lacks the right structure of tax’s and policies for Manufacturing. We had a long time to learn from our Asian neighbours….. But didn’t

    Dont blame the boom, Manufacturing was stuffed before resources boom.

    • It was stuffed perhaps, but now its completely rooted.

      I won’t deny that manufacturing has had problems for decades, but please don’t deny that the exchange rate has accelerated the decline.

      • I wont deny it, the exchange rate has definitely accelerated the decline.

        A low dollar is only a small part of the total solution to building a global manufacturing sector.

  19. It seems to me that the manufacturing problem has been accelerated by falling transportation costs worldwide. This has two impacts, firstly reducing the cost of delivering worldwide and secondly making the manufacturing cost a higher portion of the final delivered cost (and consequently more important).

    Internal transport costs in Australia are still too high by world standards and impacting on business badly. Add high tenancy costs in metropolitan areas and government red tap, there is a lot to do to make us competitive.

    The government paying existing businesses to stay in locations with more than the usual share of problems really does not help – it kicks the can down the road. Surely the GFC has taught the pollies something!

    I work in education services and guess where we are substantially below world class – accommodation/tenancy costs, transport costs! Hate to see the figures for manufacturing.

      • Heh, the more I read what you say, the more I wonder how this isn’t clear.

        As you say when in dimsissing preserving land for agriculture at all costs.

        Farming, at its most efficient and most advantaged, will still only generate what… <$100p.a. per sqm? maximum?

        When a high skilled manufacturing facility takes its place, then peak is much greater than $100p.a. yeah?

        When faced with costs, surrounding that manufacturing facility must be land used to provide the utility of shelter for the workers of the manufacturing facility.

        The higher the cost of this utility (shelter), there can only be a cost transference to the producer as for the workers to acquire the means of shelter.

        The low the cost of shelter, the lower the tendency for this cost to be tranferred to the producer.

        So propose antithesis in a dialectic sense, if shelter was free to consume and costless to bring to market, how much more competitive would a producer be?

        China has made themselves the opposite to the above antithesis, and are no losing production facilities to the south of the U.S.

        • Ex-freakin’-ZACTLY.

          “…..China has made themselves the opposite to the above antithesis, and are now losing production facilities to the south of the U.S……”

          Ex-freakin’-ZACTLY AGAIN.

          This COULD be Australia. Why not?

        • Google Tory Gattis: HOUSTON DOMINATES AMERICA’S GROWTH CORRIDORS AND MAKES THE CASE FOR THE WORLD’S HIGHEST STANDARD OF LIVING.

          I am having trouble bringing up a usable url for some reason.

          Look at the chart there, of discretionary incomes by city. Just because the workforce’s lower housing cost pressures mean they will accept lower incomes, does not mean they can’t still be well ahead as well as their employer……….

  20. Alex Heyworth

    Technically, it would be possible to have a country with no manufacturing whatsoever, which imported all its manufactured goods. However, to achieve this we would have to become a nation of savers and investors, rather than a nation of borrowers and spenders. Then we could let our capital do the manufacturing work for us (or more precisely, let our capital invested overseas generate the income necessary to pay for manufactured imports).

    Somehow I think this is a remote prospect.

  21. jusr read this whole thread and have one comment. With low unemployment why would people want manufacturing jobs? answer is they wouldnt and they dont. they want to earn more. this is a good thing.

    i think an unemployment rate of 10% (not impossible) would fire manufacturing as it has in the US. for now, with low unemployment (i know some her may disgaree with that premise but the absolute number is low and our incomes are higher than ever having boomed in the last 10 years due to mining) why would people even want to work in a plant if someone spent capex on it?

    before you spend you look at labour availability before currency…..

    • But what if the “full employment” is based on a temporary and unusual level of employment in sectors that are sustained by national borrowing rather than export income “balancing the books”?

      Might there come a point where the nation cannot borrow any more, and needs to find something more to sell overseas to balance the books (let alone start paying back the debt)? Can “commodities” expand even more to fill the gap? Aren’t they already running at maximum potential?

      It would be nice to be selling “services” to people overseas – this is what props up the UK economy (more specifically, London’s economy, which has the highest global finance sector fee income of any city in the world).

      This is really what this discussion thread is about.

      I repeat my recommendation to everyone to read “The Flow of Money and Its Impact on Local Economies” by William Fruth. It could be called “Tradables Sector Economics for Dummies”.

      http://www.policom.com/PDFs/FLOW%20OF%20MONEY%202013.pdf

      page:http://www.policom.com/

  22. Yes, we need to keep building Holden Utes in this country so we can fight the Jerries when the time comes.

    Damned Boche!

    (i new this argument would get slipped in there somewhere. LOL.)