What is our economy to become: The future of manufacturing requires us to plan
It is a dilemma that many businesses across Australia in some of our most traditional sectors are grappling with at the moment – and that is the future.
The recent announcement by Bluescope Steel to close its Western Port hot strip mill at Hastings and its No.6 blast furnace at Port Kembla, near Wollongong are not only blows for the more than 1,000 workers and contractors it means a significant loss for the local communities where those plants reside.
But, with increasing competitiveness from a ravenous Chinese steel manufacturing sector and a high Australian dollar it was only a matter of time before the sector had to call into question key elements of local infrastructure. Over the coming days other commentators will argue that the price on carbon either dealt a deathly blow or was the final nail in the coffin.
Over the medium to longer term it could be the case that the overall price on carbon could and will impact the sector, however, the real culprits are those that are familiar to us on an increasingly regular basis.
Fact number one is that Chinese steel production has been increasing steadily and as you look at the inherent cost of manufacturing in Australia versus China you soon reach the conclusion that just on the labour cost factor alone our ability to compete is dissipating.
No, it is not a case that we should use this as an argument for creating more flexible working conditions because even in the highest of wage brackets in China in that sector for primary production, we would not be able to compete with our lowest. Very rarely do we get an insight into what is actually paid to Chinese Steel Workers and it was not until the riots at the Tonghua Iron and Steel Group that we saw some really concerning statistics.
Without going into the blow by blow detail, the state owned company was taken over by the privately held Beijing Jianlong Steel Holdings which was formed ten years earlier. The takeover and the concern that many had about the loss of jobs, saw more than 100 people injured and the death of a corporate executive. At the centre of the concerns of the workers was the impending possibility that more than 30,000 workers could be laid off.
It came to light that some workers were paid as little $30 a month while the majority less than $3-400 per month. While wages may have increased in the interceding years, it is not plausible to believe that they come close to the average award rates in our own sector – therefore, one of the largest consumptive costs on manufacturing in Australia, the labour cost, is simply unable to compete with the Chinese figures.
It is not something unique to the Australian context, it is something that affects manufacturing in North America and Europe. At times of high unemployment in those sectors, the self realisation that competiveness on the labour cost front can be achieved is also fast dissipating.
The second major fact is the high Australian dollar is biting and while some benefit from it, others do not. For the economic novices amongst us, the reality is that as the dollar climbs higher it costs more for people offshore to buy our products.
Even in our own business we have sought ways of mitigating our foreign exchange risks, particularly in North America where if we were to charge a price in a relatively high Australian dollar we would be at risk at running commercially unviable programs. In that sense, with less and less demand for some Australian products based on price, we confront issues around what to do with the product produced and ask ourselves if we store it in order to ride out the price.
If we decide to bring more and more product onto the domestic market do we then run the risk of not only flooding one of the few markets we have left thereby potentially lowering the price beyond the viability mark for the longer term, or do we make the decision to reduce capacity and therefore reduce costs? In many cases it is the latter that is the path to tread. That is also the decision that has been taken by one of our last remaining iconic manufacturing brands, OneSteel.
As I have suggested though, it is not only the steel and manufacturing sector that is being impacted – retail confronts its own challenges because of the ongoing viability of its business model. Do people want to go to a store and spend time shopping? Do retailers push the value add of the customer service experience and the nostalgia of the walk in try before you buy? Well, that is not what consumers are clearly doing with an obvious increase in the number who shop at home, using the internet and getting a better price for the pleasure.
In this case, a higher Australian dollar is benefiting those who purchase using internet sites offshore in places such as the United States. So why wouldn’t you stick with your changing lifestyle demands and the benefits afforded by a high dollar?
The reality is as the manufacturing sector begins a period of decline, skilled workers in what many perceive as a tight labour market are losing their jobs. Some commentators use the argument, as I have done in the past, that with demand in other industries increasing, those skilled workers who come onto the market today will be picked up where the supply and demand curve meets.
The problem with that modelling and those commentaries is that they do not take into account the average age of these workers, the proximity of the individual to family and involvement in community, therefore the ability or desire of the person to move for work. Why, for example, if you are 50 and living in Wollongong surrounded by your family would you move to Western Australia to take what is increasingly fly in and fly out work? Sure, if you are 25 and may be even 30 your ability to be mobile is greater than the vast bulk of workers who fall into the later age categories. The fact is no work has ever been done, comprehensively, to look at the labour migration flows, the inputs and the outputs. If that is the case, and people in already high unemployment areas are laid off, choose not to move then what does that do to the local community and economy?
Does it mean, over a time, that higher long term unemployment rates can be expected unless local economies receive true business investment instead of welfare investment? In the case of Wollongong and the Illawarra, with already high youth unemployment rates, my fear is that unemployment becomes even more entrenched – even for those with the desire to move, affordability then comes into question.
While the Australian economy is doing well in some sectors, in others it is not. This is very much a tale of two economies, a split between those sectors involved in mining and those involved in every other industry. Yes we see high demand for skilled workers in the mining sector but then we are also seeing large scale job layoffs for workers who simply would not or could not transition into the mining sector. In that sense, the stories and case studies about all of these people heading into the mines to drive trucks and being paid $100,000 per annum are yesterdays fish and chip paper. The demand is great and driven by higher and specific skills based categories and not so much the low end and mid tier range.
This calls into question the very debate and discussion that we are either to afraid or nervous to have. What is the long term plan for our economy and what are we to become? We all know that mining will last only so long, we all know that over time some industries rise while other industries fall and we also know that new industries invent themselves as the lifecycle of the world evolves. However, we don’t particularly have an eye on the longer term view because the short term view is one of those strange fixations of announcements and voting cycles.
Let me leave you with this irony – here we have a steel sector based largely on the output produced by our own mining sector. The same sector that exports its product to an economy that people only really see as a client. The fact is, China and others in the primary steel manufacturing sector are also our largest competitors and to lose sight of that fact is a lesson for other industries to learn and build strategies for.
Matthew Tukaki is the CEO of the Sustain Group and Australia’s Representative to the United Nations Global Network, a collaboration between business, industry and the United Nations with a focus on Labour, Human Rights, Anti-corruption and the Environment. Matthew is also the former head of one of Australia’s oldest and largest employment and human resources companies, Drake, where he led the business through the worst of the global financial crisis and restructured it to meet the changing demands of the employment market into the future. A former Chairman of the Workwise Group, the Government Policy Advisory Policy and CIO Council, Matthew is a respected commentator within the employment sector. Matthew has a comprehensive knowledge of the Labour markets across Australia, New Zealand and Asia, the impacts of Government policy and more pressingly, the role of the commercial sector in alignment with employment outcomes and not for profit service providers. Latterly in his role as CEO of Sustain Group, Matthew leads an organisation at the forefront of the climate change and business response narrative.
