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28 March 2012

Future of manufacturing in Australia



The Future of Australian Manufacturing Forum, Keynote Speech: Dick Warburton, Executive Chairman, Manufacturing Australia

Opening Remarks


Australian manufacturing is currently fighting multiple fires on multiple fronts. One could say it’s fighting for its life.

The death of Australian manufacturing is forecast day after day, as the media reports on factories closing, jobs being lost or sent offshore.

We hear about challenges like the high Aussie dollar, high input costs, unbalanced competition with international importers, the war for talent and industrial relations, the cost of running and constructing manufacturing plants and excessive or inconsistent regulation.

None of these challenges are insurmountable, but cumulatively, they’re formidable.

Meanwhile, the Australian community has watched as a string of manufacturers – many of them household names with a proud heritage of innovation and iconic products - have been rushed into intensive care to be patched up with taxpayer funded subsidies.

Commentators in the media, in industry, in academia and in politics, have been right to question the wisdom or longevity of this approach. We agree: this is not sustainable.

And yet the silver bullet solution to stop this pattern of decline has eluded us because, simply, there is no silver bullet.

Worse, the perception that the damage to Australian manufacturing is irreparable has given rise to a dangerous line of argument in our national debate.

This argument contends that perhaps Australian manufacturing is beyond saving; that we should accept that Australia’s rich manufacturing heritage does not fit with a modern, globalized world and we should instead pass our manufacturing gauntlet on to other nations and focus our economic and policy efforts on other domestic industries.

Ladies and Gentlemen, Manufacturing Australia has invited you here today because we do not accept this dangerous argument.

Manufacturing is the value-adding lifeblood of a balanced Australian economy.

Until recently this sector directly employed around 10% of the working population in stable and rewarding jobs. These are the kinds of jobs around which communities are built, ancillary businesses established, cities grown and families raised.

Through downstream wealth creation, import replacement and maximising the value of our natural resources, manufacturing delivers a return to the nation that far outweighs the investment it requires.

Put simply, manufacturing is simply too important to the Australian economy, and the nation, to be allowed to continue its decline.

Manufacturing has long been the silent workhorse of the Australian economy. The urgency of these issues has not being sufficiently recognized, in part because we are distracted by the good fortune of part of our economy arising from the resources boom. But now, urgent action is required to revive Australian manufacturing and address the compounding pressures that threaten the industry. That action needs to be bi-partisan, and supported by coordinated efforts of both private and public sectors.

That is why we’re here today.

International Context

This morning, I will outline four key areas requiring immediate action by industry, government, unions and the broader community.

But before I do that, let me first say that our challenges are not unique to Australia, and briefly turn your attention overseas, where there are striking examples and correlations of how manufacturing underpins a nation’s economy.  

One only has to look at some of the fragile economies of Western Europe to see what happens when you no longer have a healthy manufacturing base, but there are also success stories from which we can learn.

Germany, for example, has escaped the worst of the euro crisis because of its strong manufacturing base. Contrast that with Spain and Italy, who relied excessively on tourism and other cyclical industries to maintain economic growth and employment, and the lesson is clear.  

Resources booms can’t last forever, we cannot put all our eggs into a resources led basket. Doing so would be exposing our economy to severe risk.

And while comparisons between thriving and struggling manufacturing nations usually point to the simplistic explanation that developed nations cannot compete with the lower input costs in China, India or other developing nations, one only needs to look at the US manufacturing sector to show us that it’s not as simple as that.

There are currently signs that the United States’ painfully slow recovery from the GFC is gathering pace, and that this recovery is being led by manufacturing, where a quarter of a million jobs were added in manufacturing last year.

President Barack Obama has made domestic manufacturing a national priority, and we’re fortunate to have one of the President’s key advisers, Dow Chemical global CEO, Andrew Liveris, joining us for a panel discussion later today.

When I see the dominant economies in Europe, along with our counterparts in the USA, placing such emphasis on manufacturing as the key to economic prosperity, it gives me confidence that we can do the same in Australia. The fact that we are all together today suggests you believe that too.

So what does Manufacturing Australia intend to do?

The CEOs of each Manufacturing Australia member company have pledged to join forces in order to secure a brighter future for manufacturing. We want to be part of a dialogue that brings together both sides of politics, along with industry, to propose solutions that will address the issues affecting Australia’s manufacturing industry.

Manufacturing Australia has identified four priority areas that require action by government and industry in order to revitalise its manufacturing sector and remain internationally competitive.
 
Industrial Relations

The first of those is industrial relations.

Manufacturing Australia’s guiding principle for workplace relations is that high levels of performance are gained through extensive direct engagement with employees.  This is supported preferably through individual arrangements, and where necessary, collective agreements with employees.

We believe this is the most effective way to build understanding of customer, employee and business needs at the local business unit level.

Presently, the reverse is the case in Australia.

Direct relationships between employees and employers are undermined by third parties having the legislated right to become default bargaining representatives for employees, even when not appointed by employees.

Further, current legislation extends collective bargaining rights beyond matters directly related to the employment relationship and the specific needs of the local enterprise unit. The result is protracted and inefficient bargaining that is often not relevant to employees’ circumstances or those of the business.

In a column in The Australian last week, Mike Beardsell of Boral – a founding Manufacturing Australia member – wrote that job security can only be achieved through flexibility and improvements in productivity that strengthen the competitiveness of the business. Further, he wrote that it is a sad indictment of our industrial relations system that closing a factory is industrially easier to achieve than shedding 10 percent of the workforce or outsourcing non-core activities so the factory can be kept open.

Obviously, neither of those scenarios is a good outcome. Yet, judged dispassionately, one is surely better than the other.

If we are to maximise productivity and competitiveness in Australian manufacturing, employees and employers need to work collaboratively towards outcomes in the best interests of the company and, by definition, its employees.

The disproportionate amount of cost, time and resources spent on administration and compliance with the Fair Work Act could be greatly reduced by removing the legislated default of third party employee representation and instead adopting an emphasis on direct engagement between employees and employers.

Anti-dumping and Trade

Anti-dumping is another issue causing heated Federal debate right now. And so it should.

Australia is a trade oriented economy and has benefitted over the last 30 years by pursuing an open trade agenda. Manufacturing Australia favours open trade, where that occurs fairly.

However, what Australia’s manufacturers cannot continue to withstand is unfair trade that leads directly to the loss of jobs, loss of Australian capability and vulnerability to price increases.

Over 90 countries, including Australia, have anti-dumping mechanisms in place to promote fair trade, but the efficiency and effectiveness of those mechanisms must improve.

Those improvements must address issues associated with the recognition of China as a free market economy. They must overhaul the electronic public register. And they must upgrade the skills and access to subject matter experts for Customs personnel. This is where Australian industry has a partnership role to play with Government.

The Australian Government has rightly recognised the need to promote Australian Industry Participation in both private and public sector projects.

Policies such as the Tariff Concession Scheme, the Enhanced By-law Scheme and the Industry Capability Network are designed to help Australian manufacturing supply products for local projects.

But again, such policies must be appropriately supported and resourced at implementation if they are to be effective. Industry Capability Network databases should be comprehensive and current, but they are not. Notification of projects should occur at the early planning stage to allow for production and project management preparations. Projects should be de-bundled to provide greater opportunity for local products and appeals processes should apply to the Enhanced By-law Scheme.

Sailing the rough seas of global competition has brought Australia unprecedented growth and rise in our standard of living, in part because Bob Hawke and Paul Keating recognised the need for a firm hand at the tiller. Today, we need that firm hand more than ever as the dynamics of global trade, particularly in our Asia Pacific region, shift beneath our feet.

Regulation

Having looked at the impact of regional pressures, I would like to turn attention to the matter of domestic productivity, and specifically, the burden of red tape and regulation that continues to strangle industry and restrict productivity.   

Again, I will borrow from Mike Beardsell, who wrote last week that asking what the Gillard government should do to assist Australia’s manufacturers is the wrong question. Better to ask, what could the government stop doing?

Government regulations are an important part of the Australian manufacturing sector where they can encourage continuous improvement without damaging the economic value, competitiveness or normal functioning of businesses.

But regulations that are applied inefficiently or inconsistently, which change frequently without proper consultation with industry, or which directly contradict other regulations, are smothering Australian manufacturers who should be focused on seizing commercial opportunities, not on regulatory compliance.

The introduction of a carbon tax was designed, in part, to replace the myriad inefficient state and federal schemes that were in existence to reduce our carbon emissions, yet most of those inefficient schemes remain in place and look likely to be expanded alongside the introduction of the carbon tax.

One Manufacturing Australia member, Rheem, has to deal with no less than 40 regulatory bodies to manufacture and market hot water heaters, leading to the absurd scenario where one authority insists that Rheem invest in efficiency improvements to a product that another authority has declared will no longer be eligible for sale in a decade.

We need to roll back the regulations – especially where the regulations add no economic value or competitive advantage.

We need to eliminate duplication and inconsistency between different levels of government or agencies.

And we need to strengthen those regulations that have proven effective in improving the productivity and competitiveness of Australian manufacturers.

Again, this a job for industry and government to tackle in partnership.

Resource Allocation and Pricing

Lastly, to resource allocation and pricing, which is perhaps the most striking example of how Australia is failing to realise one of our key manufacturing advantages, namely our abundant natural resources.  

Australian manufacturers depend upon reliable supplies of energy and resources, priced competitively, in order to manufacture a range of vital commodities. We have those in abundance – the resources boom is evidence of that. And yet, presently, access to domestic sources of energy by Australian manufacturers is made difficult by policy confusion, perverse incentives for international competitors and pricing uncertainty or inconsistency.

Australian manufacturers are currently facing export-level prices for future gas contracts, which are approximately double the production cost, with a further risk that gas is not even available for domestic use at any price.  

To explain what that means to Australian manufacturers, let me paraphrase from a recent speech to the American Chamber of Commerce in Australia by James Fazzino, CEO of Incitec Pivot Limited, founding member of Manufacturing Australia. This may also better illustrate my comments about the US manufacturing-led recovery I mentioned earlier.

James told a tale of two ammonia plants – one proposed for the US, the other for Australia. The development in the US may happen, he said. The plant in Australia won’t happen. Why?

There are a number of reasons but one of the most critical is gas – remembering that natural resources is one of Australia’s competitive advantages. Gas is the raw material for making ammonia. Both the United States and Australia have booming gas industries. But let’s look at the different approaches.

President Obama made energy a major theme in his 2012 State of the Union address. He said: "We have a supply of natural gas that can last America nearly 100 years, and my Administration will take every possible action to safely develop this energy.

Experts believe this will support more than 600,000 jobs by the end of the decade."

In Australia, we too have abundant gas, but our lack of vision means it will be processed through giant refrigerators to send overseas for others to value-add. The export of gas creates a three-time value-add. If we used some of Australia’s gas for high value-added manufacturing we would achieve a return on investment, in the case of Incitec Pivot, of up to 20 times - and that number does not include the further value-add when our products are used in the agriculture and resources industries in Australia.

An argument frequently put by Andrew Liveris, and I hope he can expand on it this afternoon, is that the countries where manufacturing flourishes are those countries which identify and exploit their natural resources, in particular energy.

Australia is squandering one of its key competitive manufacturing advantages through shortsighted energy policy. Importantly, only the Government has sufficient involvement with all points of the energy industry to maximise the entire energy value chain through deliberate, positive policy measures. That’s what is being done in the USA, and it’s a fundamental part of what must be done in Australia.

Conclusion

Ladies and gentlemen, the priorities I have outlined this morning are four areas of policy and industry reform that can make a real difference to the competitiveness and sustainability of Australian manufacturing.

They are in areas that can deliver an impact in the near term, while also positioning the industry for better long term performance.

They are also matters that we believe will be acceptable to both sides of politics, as well as industry. But first, we need to collectively ask ourselves a simple question: do we want manufacturing to be an important part of Australia’s future or not?

If we take that question seriously, and answer it honestly, as other successful manufacturing nations have done, the challenges I’ve outlined this morning become nothing more than obstacles for us to overcome in the interests of the nation.

We are not looking for a bail-out.

We are looking for government engagement and appropriate policy infrastructure, which generates and meets demand for skilled employment, adds value to other domestic industries such as resources and agriculture, identifies and cultivates export markets and showcases Australian innovation.

Manufacturing is not like other industries. It is a highly strategic industry whose importance to society is measured in more than just its economic value.

Investing – and I use the term investing very deliberately - in the sustainability of strategic industries such as manufacturing is about making a considered and deliberate decision to invest in sectors that deliver economic, social and cultural returns to the nation.

Reviving Australian manufacturing requires a strong nationwide cultural reform here and now, to stop the erosion of a once great industry that remains the backbone of Australia’s future competitiveness, trade outlook and prosperity.

Thank you.