What we must do to create an internationally competitive manufacturing sector

| July 24, 2012

Australia’s manufacturing sector is facing increasing global competition. Tim Mazzarol explores the vital role it plays in our economy and what needs to be done to enhance our competitiveness.

Australia’s manufacturing sector is not large by global standards but it is important. It encompasses a large and diverse range of areas including low, medium and high technology industries.


The largest by turnover are metal products, food, beverage and tobacco, machinery and equipment and petroleum, coal, chemicals and rubber products.

Manufacturing employs around 1 million people, or 8.5% of the Australian workforce. This is five times larger than the mining sector. Manufacturing also contributes much more to innovation within the economy and has a significantly higher multiplier effect than many other industry sectors.

Despite its importance there have been repeated stories of the demise of Australia’s manufacturing industries. Every time another factory closes or moves its production offshore seems to reinforce the perception that manufacturing cannot survive over the long-term.

Such gloomy predictions may be overblown, yet Australia’s manufacturing sector is facing increasing global competition. For local manufacturers the high Australian dollar is also a negative influence for exports, while making foreign imports more competitive. So what can be done?

In 2009 and 2010 Deloitte, working in conjunction with the US Council on Competitiveness, conducted a global survey of over 400 senior manufacturing executives. What emerged from this research is the Global Manufacturing Competitiveness Index.  According to their report the development of a competitive manufacturing sector requires attention to be given to at least ten key factors.

1.Talent-driven innovation

The first and most important of these is the need for talent-driven innovation. This relates to manufacturing’s ability to attract the best and most skilled managers, scientists, engineers, designers and tradespeople who embrace creativity and innovation. It requires that the nation’s education and training system to be aligned with the needs of high-performance manufacturing systems. There is a global market for such highly skilled human capital and it is important that immigration and international education programs be configured to encourage such people to relocate to where such jobs are needed.

2. Cost of labour and materials

The second factor is the need to control the cost of labour and raw materials. Wage rates and on-costs are clearly one issue that needs to be addressed, however it also relates to the costs associated with logistics and raw materials supply. Conventional approaches such as out-sourcing or off-shoring of work may offer short-run cost savings. Yet historically this can also lead to a loss of core competencies and the erosion of competitiveness. For small to medium sized manufacturers it is important to develop strong and durable strategic partnerships within national or global supply chains that can help to source the necessary skills and resources. Production no longer has to take place wholly within a single country. However, the management of an international production network requires international management skills and the capacity to develop mutually beneficial and value adding relationships built on trust.

3. Energy costs and policies

There is a need for reliable, clean and low-cost energy supply in order to maintain the cost-base of manufacturing. Production systems must be designed to achieve low carbon emissions and high energy efficiencies. Clean technologies are rapidly becoming a core part of manufacturing, but while they may offer benefits to the environment, they can also significantly lower production costs. Carbon emissions reduction programs are likely to be feature of the industrial landscape regardless of who holds political office. There will also be a steady increase in energy costs due to inefficiencies in the power generation and distribution systems. While government needs to act to improve such infrastructure, industry needs to take direct action with cleaner production programs.

4. Economic, trade, financial and tax systems

Regardless of what a business might do at the factory level, the macro-economic settings are very important. Government must ensure that it sets taxation policies to encourage investment in capital equipment and R&D. There should also be financial policies designed to hold down inflation while keeping interest rates at reasonable levels. Of particular importance is the creation of investment funds targeted at venture financing for entrepreneurial companies developing new technologies for global markets. Australia’s banking system is in good shape compared to many other countries. However, there is a lack of venture capital financing for investment in manufacturing.

5.  Quality of physical infrastructure

Manufacturing requires the movement of raw materials and finished goods through a nation’s roads, rail, ports and airports. It is also supported by the power grids, gas and water supply lines and the information and telecommunications (ICT) systems. This national infrastructure must be maintained at world’s best practice if the manufacturing industries are to compete successfully on a global level. Australia’s infrastructure is in need of major investment for the upgrading of our transportation and energy systems. Poor maintenance of electricity transmission grids significantly increases energy costs. Congested roads or sea ports increases costs associated with shipping and makes just-in-time inventory control problematic.

6. Government investments in manufacturing and innovation

There is a role of government in directing research funding into applied science and technology programs. Many countries are seeking to build manufacturing clusters that aim to draw together industry with university and other publicly funded R&D centres. This type of clustering has been a feature of government policy for much of the past thirty years. The construction of science and technology parks adjacent to universities has been an outcome of this. However, these initiatives have not always generated the desired outcomes. Attention must be given to the causal linkages that facilitate the transfer of technology from universities to the private sector. There is a particular gap in the ease with which small to medium enterprises (SMEs) can access such clusters. More attention needs to be given to this. Within Australia the Australian Research Council’s (ARC) Linkage Grants offer one such mechanism. However, they have become overly bureaucratic and can only be accessed once a year instead of the previous twice-yearly cycle of applications.

7. Legal and regulatory system

The national legal and regulatory system also plays a key role in whether or not a country’s manufacturing sector can operate at global best practice. This includes the application of labour laws, intellectual property rights legislation and enforcement, regulatory compliance or “red tape” and environmental laws (e.g. “green tape”). Australia has a relatively complex legal and regulatory system due in part to the nature of our federal system of government. The World Bank’s “Ease of Doing Business” report of 2012 ranks Australia in 15th place out of a total of 183 countries. Major areas for future action are our laws protecting investors, the taxation compliance system, securing of construction permits, connecting electricity supply and ability to move goods through our ports.

8. Supplier network

Manufacturing requires a reliable and efficient supply chain network. All members of these supplier networks must be adding value as the entire network is only as strong as its weakest link. Few large manufacturers operate today with a vertically integrated business model. It is now essential to out-source key components and to forge meaningful partnerships with suppliers. For SMEs the ability to secure close and productive relationships with major customers or key suppliers is essential. The ability to plug into a national or global supply chain is critical to long term success. One of the key benefits from such networks is the transfer of valuable information that can enhance innovation.

9. Local business dynamics

The size of the local market can play a key role in the overall competitiveness of a nation’s manufacturing sector. Where the domestic market is too small it will be impossible for manufacturers to develop sufficient economies of scale and secure the necessary returns to investment. A vibrant local competitive environment also serves to trigger innovation and corporate resilience. On balance an open market is generally better than one that is protected behind tariff walls. However, competition from overseas firms must take place on a level playing field. Australia’s manufacturers must learn how to compete internationally. The bundling of products with services and the added value that can come from this may be a key to gaining a competitive edge. Adapting to global market trends, and the application of smart and flexible production systems are also seen as important.

10. Quality and availability of healthcare

The final item identified as playing a key role in enhancing the global competitiveness of a nation’s manufacturing sector is the availability of affordable, quality healthcare. Employee health is important to maintain productivity. As the workforce ages the level of absenteeism and sick-leave claims will increase. Australia’s health care system is generally better than that found in most other countries. However, it is likely to have increasing pressures placed upon it as the population ages and health care costs rise. Employers need to play an active role in developing industry-wide health care schemes for the manufacturing workforce that can serve as an attraction for human capital.

Conclusions

Manufacturing is an important and necessary part of the national economy. Few countries can sustain innovation and labour productivity growth over the long-term without a manufacturing base. Australia’s manufacturing sector faces some difficult challenges as it faces increasing competition from Asian competitors, and a resurgent United States buoyed by a low-dollar. Innovation is the key and the active engagement of global markets and supply chains. 

Tim Mazzarol is a Winthrop Professor in Entrepreneurship, Innovation, Marketing and Strategy at the University of Western Australia and an affiliate Professor with the Burgundy School of Business, Groupe ESC Dijon, Bourgogne, France. He is also the Director of the Centre for Entrepreneurial Management and Innovation (CEMI), an independent initiative designed to enhance awareness of entrepreneurship, innovation and small business management. He has around 20 years of experience of working with small entrepreneurial firms as well as large corporations and government agencies.
 

SHARE WITH:
Tim Mazzarol

Tim Mazzarol is President of the Small Enterprise Association of Australia and New Zealand (SEAANZ).

SEAANZ is a not-for-profit organisation founded in 1987. It is dedicated to the advancement of research, education, policy and practice in small to medium enterprises.