Manufacturing in South Australia has endured a difficult few years with the transition away from a number of traditional sectors. However, Professor Göran Roos believes that exciting opportunities lie ahead for the industry in the state.

The stories that we often hear concerning the death of manufacturing stem from confusion between employment and production. The world produces and consumes more manufactured goods than ever, but it does so with fewer people since productivity improvement has for a long time exceeded underlying market growth, enabling increased production with fewer employees. Hence, manufacturing has declined as an employer in most countries despite output increasing.

This trend will continue and even accelerate with the development and deployment of technology-enabled productivity improvement tools. This change will increase – as opposed to decrease – manufacturing’s importance to an economy, which can be summarised as:

  • It is the biggest spender of applied research and innovation, with spill-over effects throughout the economy.
  • It is the key driver of productivity improvement, with further economic spill-over effects.
  • It comprises the biggest share of world trade and is critical for export earnings that pay for the cost of importing goods.
  • As the largest driver of high-value services, it is critical for the service economy.
  • It generates job growth and economic activity throughout the economy.
  • It is the biggest driver of economic complexity in an economy, which in turn is the biggest driver of national prosperity.

The case of South Australia

When we look at SA, we will define manufacturing as being made up of firms who make things, encompassing everything from food to defence-manufacturing. The SA economy is heavily dominated by small-and-medium enterprises (SMEs). Breaking down the 9,000 or so firms that have a turnover of $2m or more (excluding organisations within public administration), we can statistically conclude the following growth pattern:

  • 50% of manufacturing firms with turnover exceeding $2m also exceed $5m (whereas 42% of non-manufacturing firms exceed $5m).
  • 51% of manufacturing firms with turnover exceeding $10m also exceed $18m (compared with 49% of non-manufacturing firms).
  • 50% of manufacturing firms with turnover exceeding $50m also exceed $169m (compared with 40% of non-manufacturing firms).

From this we can conclude that, in terms of growth propensity, manufacturing outperforms other sectors. This can also be seen if we look at the share of service firms and manufacturing firms across the different turnover categories. A clear pattern emerges in the way the importance of manufacturing increases with firm size in the SA economy.

In 2012 the SA State Government launched its ‘Manufacturing Works’ strategy, based around four  key messages:

  • “Manufacturing has always been a cornerstone of SA’s economy. It remains crucial to securing our place as a major advanced manufacturing capital with a sustainable export capability, and to generating skilled jobs that underpin a high standard of living.”
  • “Given continued global economic instability, the situation in manufacturing is likely to get worse before it gets better.”
  • “Government inaction is not an option.”
  • “Government will work closely over the next decade with all stakeholders to ensure our economy is diverse and resilient, but its success will largely be determined by the actions of the management and workers of individual firms.”

In SA, the future manufacturing opportunities revolve around areas such as:

  • Defence, where the volume of work will be around surface vessel production, and the long-term economic impact will be from spill-over effects, in terms of technology and capability development, from the submarine project. The submarine project will require participating firms to develop physical and virtual deliverables (the ‘digital twin’ concept in action) and the ability to participate in a digital supply chain. This domain builds on and is supported by Defence SA, the Centre for Defence Industry Capability (CDIC), Techport Australia, the Defence Science and Technology Group’s Cyber and Electronic Warfare Division, the Data to Decisions Cooperative Research Centre, and the Defence Teaming Centre. Under this heading we also find the space industry, as supported by Defence SA.
  • Mining Equipment, Technology and Services (METS), specifically around reducing the cost and resource footprint in mining’s different unit operations, process optimisation and automation, increasing ore recovery and reducing waste rock dilution, provision of effective rock reinforcement systems in squeezing and bursting ground conditions, monitoring technology, and more. This will require continued research, development and innovation in METS companies and the willingness of mining companies to engage with METS SME’s in the role of lead customers.
  • Food & Wine, where opportunities flow from growing demand in Asian markets, specifically around high-value-added products in the functional and premium/luxury segments. This will require firms to develop capabilities in science-based product innovation and continuous production processes for the former and luxury product management for the latter. The opportunities in this space are underpinned by the VTT Technical Research Centre of Finland roadmap developed for PIRSA and supported by Food South Australia, SARDI and the Waite Research Precinct, as well as by the SA Government’s South Australian Food Innovation Centre and the Northern Adelaide Food Park initiatives.
  • Cellulose Value Chain.
  • Ageing Well.

All the above are also supported by the main universities in the state – the University of South Australia, Flinders University, and the University of Adelaide – as well as TAFE SA.

A scientific approach to identifying manufacturing opportunities in the state, complementing the above opportunities, would ask the question: If we look at other economies that produce what we produce, what things do they also produce that we do not produce? This gives us a list of areas that SA should, under the correct boundary conditions, be able to move into given what is presently being produced. From a list of around 100 opportunities to pursue, the top seven are:

  • Analogue instruments for physical analysis.
  • Organo-sulphur compounds.
  • Epoxide resins.
  • X-Ray equipment.
  • Miscellaneous metalworking machine-tools.
  • Machinery for specialised industries.
  • Electrical medical equipment.

The above opportunities are linked to advanced manufacturing, photonics, electronics, medical devices, food, biotechnology and speciality chemicals industry, all of which have strong future growth opportunities and which in turn open up further manufacturing opportunities.

Future opportunities and challenges

We can therefore conclude that manufacturing has a great future in SA, but the transition for the economy, firms and individuals is not without challenges. Throughout this journey, we will see periods both of net decline and of growth, and the Government must be active in providing a policy environment conducive to minimising the decline periods while maximising growth periods. Firms and individuals have a responsibility to ensure they are ready to succeed in this continuously changing environment.

The key challenges relate to the industry structure, with a very high share of very small firms, with relatively low R&D investment and relatively low interest in growing, as well as low collaborative behaviour. To address this, various steps are being taken, including various initiatives to encourage firms to grow and facilitate their growth ambitions – such as the Tonsley Innovation Precinct, Northern Adelaide Food Park, and the Centre for Business Growth – and to increase the number of startups in the state – Startup Adelaide provides an overview of the offerings on its website. The State Government’s 2016 Annual Small Business Statement also provides an overview of its activities and direction in support of small business.

There is also a need to broaden and deepen the industrial commons and hence increase the economic complexity of the state. To contribute to this, Investment Attraction South Australia was established as lead agency for all major investment activity in the state.

There is a further need to develop new industries anchored in inputs where SA has a revealed comparative advantage. An example of this can be found in the work of the Economic Development Board of South Australia around Ageing Well and in developing an industry plan for a macroalgae-based industry – an industry estimated at $8bn worldwide. Another example is the work of the State Government through Regional Development Australia Limestone Coast around the Cellulose Value Chain.

There is a need to assist in transforming industries that are unable or unwilling to remain in the state or transform themselves. An example of this is the automotive supply chain with the Automotive Transformation Taskforce and the Automotive Transformation Scheme (ATS).

Further challenges exist around ensuring sufficient capacity and coverage of digital infrastructure to enable innovation, as well as operations in digital supply chains and with digital solutions and the associated new business models. Ensuring a managed transition of the electricity provision in the state is also essential. Both these challenges provide additional opportunities for the manufacturing industry.

To facilitate the growth of tomorrow’s manufacturing industry in SA, government must act as:

  • A civic leader and direction-setter, persuading and advocating in the public interest, not for sectional interests or private benefit.
  • A sophisticated purchaser, using its purchasing and commissioning power to encourage others to innovate, a demanding customer driving innovation in the industry, and a gatekeeper enabling local SMEs to participate in local government-funded projects.
  • A broker of knowledge and relationships, facilitating the sharing of economically useful knowledge and the strengthening of relationships and connections, especially between parties with seemingly different interests. This will probably involve strengthening the presence of international public research organisations with capabilities complementary to those presently in the state.
  • A responsive regulator, ensuring that regulatory regimes operate to help – not hinder – competitive and innovative solutions and opportunities throughout the economy. Sometimes regulation may be used to drive innovation, for example in energy efficiency, construction, and resource footprint minimisation.
  • An infrastructure and information provider, ensuring the prerequisites for enhanced manufacturing productivity and competitiveness are in place and known, as well as making information available to firms that could not afford on their own.
  • A funder of skills and capability development aimed at increasing the absorptive capacity of firms as manufacturing becomes more ICT-intensive.

Firms must continuously change their business model to reap the potential benefits inherent in smart deployment of digital technologies and in being part of ecosystems that also contain platform-based enterprises and individuals capable of product and service provisioning.

On the individual level, there must be substantially increased focus on, and responsibility for, continuous competence development, as well as high flexibility and acceptance of change. The deployment of technology-enabled, productivity-enhancing tools will reduce the need for automation-prone, low- and medium-skill tasks. At the same time it will increase demand for high-skill tasks, and existing or new tasks that cannot presently be automated, including operating and maintaining tools that embody continuously developing technology. In essence, individuals have the responsibility to make themselves attractive to the new and emerging manufacturing industry.

Professor Göran Roos is a member of the Economic Development Board of South Australia.