Article by Avant Group - COVID-19 is manufacturing’s canary (Opinion)

COVID-19 is manufacturing’s canary (Opinion)

Posted: August 13, 2020

By Kate Whitehead, Managing Director of Avant Group

COVID-19 has been the canary in the coal mine for Australia’s manufacturing capability. In the 1960s, manufacturing contributed to 30 per cent of Australia’s GDP. Today it has shrunk to approximately 5.5 per cent of GDP.

Now the coronavirus pandemic has thrust this issue to the forefront, not only for the general public but also the Federal Government. The result has been a nimble and quick response to enhance Personal Protective Equipment (PPE) manufacturing locally. However, whilst this is meeting a current need, without a broader and more strategic plan this is likely to be short lived with no true, long-term future.

If we are serious about reducing our reliance on overseas markets and increasing our manufacturing capability, we need to invest in innovation and value-added products.

Emotional links to Australian Made may not be enough.

When Australia started to increase PPE production, manufacturers ran into a problem – we don’t locally produce polymer beads. Without polymer beads, the materials used for face masks, we can’t manufacture face masks. Australia has historically sourced these raw materials from China, however with a global increase in demand the cost of these beads initially increased by 1000%. This was promptly followed by the Chinese Government banning their exports for a period of time to ensure their own local supply.

We may be willing to pay a premium in the midst of a global pandemic for a particular manufacturing input, but what happens when things go back to our new ‘normal’? Input costs teamed with high in country wages mean that low-value products like face masks or PPE clothing, cannot be manufactured locally at cost-competitive rates. Market supply and demand creates a natural synergy around value and creating an emotional link for consumers to purchase locally manufactured goods will only go so far. The reality with our in-country manufacturing capability is we cannot compete in the long term on cost for these types of products and our manufacturing reduction as a percentage of GDP continues to demonstrate this. Australia cannot ever manufacture polymer beads as an input to fabric manufacture for PPE, and we have no strategic control over our supply chains if confronted with a similar issue again.

The solution is to invest in technology, innovation and automation.

We have been a spectator over the past three decades watching our overseas counterparts move their economies forward via enhanced manufacturing capabilities. China has emerged from being a reverse engineering country into a country that is developing its own IP as it undergoes its industrial revolution. China as a country has managed to do in manufacturing in 30 years what the rest of the world has done in 100. Yet as the country now grapples with industrialisation, worker rights and unionisation, they too can see the writing on the wall – China’s costs structures are increasing and their global competitiveness is decreasing against countries like India, Thailand, Vietnam and Cambodia.

In response China is procuring global assets and investing into infrastructure under its One Belt One Road Initiative, all whilst increasing the value add of their locally manufactured products. China went so far as to ban the import of second-hand machinery to ensure local capability was investing in leading edge technologies. Simply put China doesn’t want to be manufacturing polymer beads in 30 years’ time, but they do want to control the entire supply chain, and overseas investment and ownership is their chosen method to sure up this strategy.

For Australia, as we watch our neighbours grow and invest – and in some instances take – we are at a tipping point for decision making. We are entering a period of major government debt off the back of a crippling pandemic, and with the knowledge that my toddler children will be 52 years old before this debt is repaid, the next move we make is so critically important.

There is a mistaken assumption that if you’re a rich, high-wage, industrialised country you just can’t compete in manufacturing, but this traditional assumption is absolutely false. Ireland, Germany and Luxembourg rank in the top OECD countries globally via the Manufacturing Self-Sufficiency Index. These are not low-cost countries. So what next?

Put simply – Innovate or Die. Peter Drucker famously declared it, though others may have shared in its coinage but the sentiment is now widespread –
Stay ahead of the change around you or you are done.

What we need is to invest in innovation and take our country on the journey of value added and automated manufacturing. So whilst investment in local PPE is a critical step in the short term to deal with a devastating medical issue we are faced with, a low value-added product such as PPE with limited supply chain inputs won’t be a long-term solution.

The Solutions – Diversify and Invest back into R&D.

Arguably Australia is too dependent on China, a country that is essentially our biggest source of raw materials and low-cost manufacturing needs. There is an entire global eco-system of options and we need to start building stronger relationships with other emerging economies such as Thailand, Vietnam, India and Cambodia. This requires favourable trading incentives and offshore investment to sure up future supply chains and can be done in collaboration with our Five Eyes (FVEV) friends, namely Canada, UK, USA and New Zealand.

As a nation we have successfully dug resources out of the ground, exported it, sat back and reaped the profits. It’s easy to do and it’s made us (and a few of us very) rich. However when a crisis happens – a global pandemic, a war – or our biggest trading partner decides to turn off the tap to billions of dollars’ worth of export sales, we’re in trouble. With increased political tensions and pressure on education exports this is now no longer a distant possibility.

We need to become innovation rich in the same way we are resource rich and we can do it. Australia invented wi-fi, the Bionic ear, the black box and the Gardasil 9 vaccine but those innovations are more than 10 years’ old. In the 2019 global OECD R&D Innovations report it was identified that Australia ranks below Mexico and Greece for innovation. Additionally according to the ABS, Australian R&D spend is decreasing for the first time in decades and has fallen to 1.88% of GDP, well below the OECD average of 2.38%.

The slated changes to the R&D tax incentive that include a $4 million cap for smaller companies and an intensity measure for larger firms underpinned by a targeted $1.8 billion in savings, are likely driving this decrease. There have been major criticisms from our country’s leading science and innovation bodies about these proposed changes and as we near August 24th where yet another Senate hearing will be undertaken, businesses are again asking how to deal with a potential retrospective amendment.

As a country, we need to recover our passion for an in-country capability that has in the large part been lost. We need continued investment in robotics, 3D printing, advanced materials technology, cyber security technology and ICT tech all with locally, skilled and educated talent.

Where there is investment, innovation comes alive.