The public has heard quite a lot about manufacturing over these past few months. Convincingly, manufacturing remains a touchstone in the electorate with parties of all persuasions pointing to our industry as a key sector that must continue to receive attention. By Dr Jens Goennemann.
Complementary to this, the Australian Industry Group announced that the manufacturing sector recorded its longest period of growth since 2006. And over a 10-year period, our exports have grown by 40% despite long cycles of currency fluctuations.
Our defence industry is gearing up to build the next fleet of submarines, offshore patrol vessels and frigates. This in itself presents enormous opportunities to showcase and nurture our world-class, yet way too thin layer of advanced manufacturing capabilities.
While we can cheer and welcome this current focus and opportunity, we should keep a steady eye on our future. Our achievements to date show what we can do, but do not necessarily show what we must do tomorrow and how. Fortunately, the political debate has moved on from the question of whether we should have manufacturing in the first place. However, what is not being sufficiently debated is what type of manufacturing we need in order to be and to remain competitive – globally competitive.
When we speak about manufacturing competitiveness we tend to overemphasise something tangible: cost. However, Australia’s strong point is usually not cost-competitiveness, and betting our manufacturing future on an unpredictable currency exchange rate would be ill-advised. It is evident that Australia cannot compete by offering the lowest price, even when our low dollar may help us at this present time.
The feedback the Advanced Manufacturing Growth Centre (AMGC) consistently receives from large multinational firms emphasises other sources of less tangible value than price-only purchasing. Key drivers of procurement decisions are often motivated by differentiated value, for instance, technology leadership, reputation and reliability of the offerings. Here is where Australia has a lot to show and where our sustainable manufacturing future begins. In short: give customers something that excites them, and they will pay.
We believe Australian manufacturing can distinguish itself by increasing the level of complexity of our outputs. Today, we find ourselves at an interesting crossroad. We are still one of the richest developed countries in terms of GDP per capita, but we are placed only mid-range in our ‘economic complexity’ – an indicator of society’s productive knowledge. Plus, our trajectory is unclear as our income per capita continues to move away from productivity gains justifying that level of income. Only an economy that has and sustains its ability to manufacture complex things is an economy that is well positioned to resiliently preserve its wellbeing. Otherwise we are just lucky, and luck can change, as can commodity prices and exchange rates.
If we attempt the short-sighted view of maintaining the status-quo approach rather than focusing on mastering higher complexity that makes us globally competitive, then we greatly risk sliding further down the rankings. In a globalised economy it is simply not good enough to be domestically competitive and protective since we cannot immunise ourselves against global competition.
Focusing on complexity, not on cost-competitiveness, is the key to our future prosperity. This means re-evaluating our entire value chains of manufacturing, transforming our sector from relatively low-value production that is less skill-intense to higher-skill activities. Let’s start with research, development and design, where a manufacturer incorporates a customer’s needs from the beginning as a way of design-led thinking, deliberately targeting valuable R&D funding for specific customer-centric commercial outcomes. We have evidence that leading manufacturing countries guide up to 100% of their government R&D business investment directly into commercial opportunities. Australia is an outlier in this category, we only spend around 10% of our R&D in this way.
Complexity in our manufacturing sector means greater export success. Almost half of global trade is in intermediate goods, not in commodities, not in finished products. This presents Australian manufacturing firms both a challenge and a chance to become part of a much bigger global supply chain contributor. Providing complex niche solutions to globally operating system integrators, which usually source globally as well, offers access into valuable supply chains. Australian manufacturers have proven to be effective problem-solvers – adding complexity into this mix is essential in order to retain our innovative edge.
It is by no coincidence that shipbuilding, policy intention and digital disruption seem to converge almost simultaneously on our manufacturing sector. That we are seeing a buoyant outlook from manufacturers and our national accounts reflects this optimism. There is a sense that change is afoot in ways that may leave some in our sector uneasy, but many more excited.
Having a plan on how to successfully steer through this period of adjustment requires confronting global realities and taking bold steps. To become and remain a nation of advanced manufacturers is a prerequisite for the promises of Industry 4.0. We must look beyond today’s achievements and guide our industry on a globally, hence sustainable competitive path. Insights from our Sector Competitiveness Plan show what our industry can do to offer differentiated value in the international marketplace, and complexity is key.
Dr Jens Goennemann is Managing Director of the Advanced Manufacturing Growth Centre.