26 July 2012

“It was all started by a mouse” – remaking Australia’s manufacturing: an Incitec Pivot Limited perspective

American Chamber of Commerce: James Fazzino, Managing Director & CEO, Incitec Pivot

“It was all started by a mouse”. I bet you think this quote is about computers! No! It’s from Walt Disney. To me, it makes the point that greatness can come from simple ideas. And as we all know in business, simple is hard.

Walt went on to say this about the impact of his most famous creation: “Mickey Mouse popped out of my mind onto a drawing pad on a train ride from Manhattan to Hollywood at a time when the business fortunes of my brother Roy and me were at the lowest ebb and disaster seemed right around the corner.”

“ the lowest ebb and disaster right around the corner”. It sounds a little like the current challenge for Australian manufacturing, doesn’t it?

I’m musing about Walt Disney because my family and I have just spent a week at Disney World. While my son, Stefan, and daughter, Sienna, were being hurtled in various directions at warp-speed, me - being the incurable fun-loving individual that I am - well, I was looking at how the place was’s hard to stop working even on holidays, isn’t it?

What I saw impressed me immensely. For example, the system for moving enormous crowds of people onto and off of rides safely, quickly and efficiently; even the way they manage their trash by eliminating double handling.

The productivity lessons were everywhere and directly applicable to our fertiliser and explosives manufacturing plants – but more about that later.

I am not just talking about Disney World because I’m speaking at the American Chamber of Commerce. I strongly contend that for Australian manufacturing to have a future, all of the players- Government, industry and workers- need to learn from the United States.

I’m here today as the head of a large Australian company that operates around the world. I am proud to be the head of a team involved in manufacturing. We make things. We make fertilisers and explosives for two great global industries – agriculture and resources.

But manufacturing is a sector under substantial pressure in Australia and at the centre of public debate. It is the national “BBQ stopper” and productivity is the logical sub-text. To paraphrase, our colourful former Prime Minister, Paul Keating, even the pet shop’s resident galah is talking about manufacturing these days.

But why should we care about manufacturing? In short, manufacturing is the sector of the economy which can grow full-time employment, create exports, replace imports, underpin technology and skills development, stimulate regional development and in general, significantly contribute to the economic activity of the nation, and the prosperity of all Australians.

However, we read in the media each day the tragic loss of jobs, including recently at Ford and today at Caltex, and the stormy seas for Australian manufacturing such as the high Aussie dollar, high input costs, the war for talent and the cost of running and of constructing manufacturing plants.

In the Australian Financial Review, I read that while manufacturing still employs a million people, our share of total employment has halved in the past 30 years and our share of GDP has fallen by nearly a quarter over the past decade. Put simply, the manufacturing sector in Australia is in decline.

So what should we do? In the two key areas of challenge, it is appropriate to compare Australia and the US. They are: productivity and Government vision as it relates to access to energy at a price to make manufacturing viable.

Let me begin with productivity.

Australia is falling behind in manufacturing labour productivity – or simply output per hour. Recent PwC analysis indicated that manufacturing productivity grew by an average of less than 2% each year during the first decade of this century1.  When you consider wage rises and associated employee costs increased at about 4% pa, this has clear implications for the viability of manufacturing.

Let’s compare that with productivity in the US. A recent report by the Business Council of Australia found that Australian resources projects are 40% more expensive to deliver than projects in the US Gulf Coast. Australian labour near cities is typically 35% less productive than in the US and in remote locations this grows to over 60% less productive.

Regrettably the productivity debate in Australia is mired in a false view that it involves cutting workers’ wages and conditions. In reality, there is a new workplace paradigm.

The workplace of the future will focus on the people in the business who actually drive the commercial value.

As Reserve Bank Governor, Glenn Stevens, said last month:

“Boosting productivity is the only way Australians will improve their standard of living. For businesses and their workforces and their management – that’s where the productivity comes from. It’s those people everyday doing a thousand different things better than yesterday. And for governments, it’s mainly about making sure there are no impediments in the way to that process.”

Productivity is, indeed, the dual responsibility of industry and Government.

So how are we, as Australia’s biggest chemical manufacturer, facing the productivity challenge? At IPL, we have the concept of “my 50%”. In other words, what is our contribution to solving the problem?  Our 50% is to focus on the controllables. The two big controllables for companies like us are strategy and execution. No surprises there.

While I don’t want to dwell on strategy, the right strategy is critical for every company and for Incitec Pivot Limited, it is about leveraging the industrialisation of Asia, in particular China. We were ahead of the game in adopting this strategy half a decade ago and now it’s where many of our peers want to be.

We execute on the strategy through our manufacturing expertise and by aligning ourselves with world class customers who are global in scale.

Let’s move to execution. That’s where the rubber hits the road. For a start, the greatest value for shareholders is delivered from the businesses you already own.

The first step in creating a truly great company is to ensure it is run safely. Our goal at IPL is Zero Harm because it is the basic right of our workers to return home to their families safe at the end of each day. Furthermore, look at any great company globally. They all have great safety records.

The next step is about our people. People provide the only sustainable competitive advantage in any business; a competitive advantage that cannot be copied or replicated. Our competitors may copy our manufacturing plants and our logistics but they cannot match the knowledge and skills of our people. It is said that: “Battles are sometimes won by generals; wars are nearly always won by sergeants and privates.”

For the past three years, we have been investing millions of dollars in developing our leaders at all levels of the organisation; not only managers and supervisors but anyone who demonstrates energy, drive, initiative. More than 20% of our 5000 employees have participated in leadership development programs, including me.

The rationale for this is based upon research over many years that shows a clear link between leadership and outstanding companies. Outstanding companies are those with a fully engaged workforce - that is, employees who put in discretionary effort. This is not about asking people to work harder but to engage them in the day-to-day decisions which impact upon the results of their work.  In our case, it’s through a program, being implemented globally, called BEx or Business Excellence.

Our BEx journey began with a visit to smalltown USA … a place called Simsbury, Connecticut, where we have a factory producing detonators.  I have visited Simsbury many times and I am continually inspired by the people at the plant and their individual commitment to continuous improvement. They are constantly challenging the status quo in ways that are both large and small.

Not surprisingly, the plant is a winner of the prestigious Shingo Prize for Operational Excellence in Lean manufacturing.  I’m sure that many of you have heard about Lean. The Manufacturing is that every employee, whatever their nominal role, is empowered to question every process, identify every aspect of waste or inefficiency, and to standardise new procedures.

I asked myself the question: “How can we harness the same collective commitment of all of the 5000 people in the IPL Group?” After all, they are the people who know where to make improvements in product quality, in logistics, in operational efficiency.

We’ve taken the Simsbury example, refined it into BEx and we are using it to generate the next wave of productivity improvements within the organisation.

BEx is about moving to a new way of doing business. BEx is transforming IPL and creating a long-term, year-on-year productivity lever in the business – something that many Australian companies are struggling to do.

BEx is turning Incitec Pivot Limited on its head where the shop floor, farm field and mine bench are recognised as the places where value is created in the business and as a result, the role of leadership -  including my role as CEO - changes from managing people to supporting those who add the value. That’s why leadership development at all levels of the organisation is so important.

A major transformation like this is not easy. It needs financial resources as well as organisational commitment.  This year, we will devote some $35 million to BEx with a significant portion of the spend on employing around 170 people – or about 4% of our global workforce - to focus on continuous improvement.

Even at this early stage, we are seeing examples where BEx is being adopted to produce results. Plants on opposite sides of the world are prime examples. Our Gibson Island fertiliser plant in Brisbane created a benefit of about $2 million during a maintenance shut late last year. At our ammonium nitrate plant at Cheyenne, Wyoming, the teams running the nitric acid plants created a production increase providing a US$1 million year-on-year benefit.

While productivity is a foundation of success, the basic inputs into manufacturing are also critically important and this leads me to the next challenge, and another fundamental contrast between Australia and the US: Government vision as it relates to the affordability and accessibility of energy– and in particular gas.

It is illogical and short-sighted that Australia is not leveraging our abundant gas resources for the greater national interest. The US sees its gas reserves as an enabler for value added manufacturing – and this is revitalising its economy. Australia, in contrast, has naively allowed the unfettered export of this resource without regard to the immense opportunity lost in not retaining gas onshore for value adding.

Compare the two Government positions between the US and Australia on the best use of energy resources. President Obama, in his 2012 State of the Union address, 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." The US Energy Agency through the Natural Gas Act restricts LNG exports, ensuring supply and local affordability.

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 – and as an aside in doing so, I believe that we’re in danger of exporting our so-called “Clean Energy Future” to Asia.

Australia is one of the very few countries that has an unregulated gas market and allows for the unrestricted export of its gas. For example, Australia is poised to overtake Qatar as the world’s biggest LNG exporter by the end of the decade. However, Qatar retains a portion of its gas for domestic consumers and accordingly also has vibrant downstream industries that create significant value.

In May, our Prime Minister told the heads of Australia’s resources companies that Australia’s minerals are not owned by the Government or mining companies but rather held in trust for the Australian people. This is an admirable philosophy and therefore it follows that there is a role for downstream value-adding.

The value proposition for Australia is compelling. The export of gas creates a four-time value-add. Using IPL’s Australian manufacturing operations by way of comparison, we can value add up to 20 times - and that number does not include the further benefits when our products are used by our mining and farming customers in Australia.

And of course when we value add in Australia everyone wins:

•    Local communities benefit from employment in manufacturing both inside and outside the gate;

•   Shareholders benefit from dividends; and

•    Government taxes the value add. A further example from the US; I met last week with Governor Jindal of the US State of Louisiana. His comment about his approach to addressing the fiscal challenge was not to increase taxes but to increase the number of taxpayers.

The practical outcome of the contrasting US and Australian Government positions is that the price of gas in the US is currently around $2 to $3 per gigajoule compared with an estimated forward contract price of up to $12 per gigajoule in Australia, as estimated in the recent 2012 Queensland Gas Market Review.

A further concern for everyday Australians is that the lack of gas supply will impact energy prices not only for manufacturers, but all energy users including households. Research that I saw yesterday from Port Jackson Partners showed that higher energy costs, based on rising oil backed gas prices, would push Australian households’ energy costs from around the middle of global prices to a position where only Denmark is higher.

This is an issue also for Governments. Research released this week by the DomGas Alliance predicted that serious gas shortages and sharply rising gas prices in Queensland could cost the State an extra $420M to $1.8B in higher energy bills. This would make Queensland’s task of bringing its budget back into balance even more challenging.

It is estimated that by 2016, exports of gas through Gladstone will reach 20 million tonnes per annum. To use some of this gas to value add through the manufacture of fertilisers and explosives in Queensland, we need a tiny 1% of that total.

After 18 months of seeking a contract with gas companies, we have only this week received an indicative offer of supply from one gas company with at a price of $10 a gigajoule. This is three times the previous contracted price and five times the US price. At the same time, we received the verbal warning from the gas company that we needed to be quick because there is not enough gas for everyone.

And yet we have Federal and State Government Ministers regularly advising that there is, infact, enough gas for everyone. Didn’t they hear the colourful words of one gas company chief in April: “Gladstone is likely to be like a giant vacuum cleaner for the East Coast gas market, hoovering up all the gas it can get its hands on.”

In addition, the 2012 Queensland Gas Market Review identified that there is market failure.

The potential impact on our fertiliser operations is extreme. IPL operates Australia’s only ammonium phosphate and urea plants. Both use gas as a feedstock. Without gas,
these plants close.

Only last week, the Federal Government announced its National Food Plan for Australia. It followed comments by our Prime Minister in May that Australia could become “a great provider of reliable, high quality food to meet Asia’s growing needs”. This too is an admirable vision but without access to gas, it will be an Australian food industry without the security of local fertiliser production.

Don’t get me wrong – I am highly supportive of thriving gas exports.  IPL is very much the beneficiary of global trade.  Yet a balance needs to be struck. We can have our cake and eat it too – a vibrant LNG industry, value adding local manufacturing and affordable clean energy for households.

Like the productivity challenge, this issue requires both industry and Government to work together to find a solution for the benefit of the nation. Australian companies, like IPL, are making choices now about on-going operations and future investments. Unless we move quickly, it will be too late; plants will close never to re-open; production will be moved off-shore.

Let me tell you a tale of two plants – one proposed for Australia and the other, the US. We are currently running feasibility studies on an ammonium nitrate plant in Newcastle, New South Wales, and an ammonia plant in Louisiana, US. Normally an ammonium nitrate plant would include an ammonia plant. That’s what we have built at our Moranbah ammonium nitrate plant in Queensland’s Bowen Basin which started production earlier this month.

To make ammonia, you need gas as feedstock. Construction of an ammonia plant costs around $700 million and employs hundreds in construction and about one hundred in operation -- and as a rule of thumb, a flow-on employment of five or more people outside the plant. So why is an Australian company looking to build an ammonia plant in Louisiana and not in Newcastle? The difference is the vision of Government in the US which has committed to a local, competitively priced gas regime.

In Australia, we should be promoting the availability of energy as our natural competitive advantage. Compare Australia to China. China has the advantage of cheap labour, but suffers from expensive energy.

Let me close with a challenge. Cast your minds forward to 2025 – only 13 years. What does the Australian economy look like? Are we still riding on the backs of the miners or is our resources industry challenged by Africa, Latin America and Canada? Based upon a Deloitte Access Economics report released this week, mining and resources investment is close to peaking in Australia.

In 2025, what has become of manufacturing? Has it been allowed to wither or is it still making its contribution to employment and a balanced economy. In the words of Professor Tim Mazzarol of the University of Western Australia: “It is important that Australia prepare itself for the inevitable slow down in our mining and energy sector’s growth. A more diversified economy is essential for the longer term, and manufacturing has an important role to play.”

The choice is in our hands but we must act immediately.

I’m reminded of the Chinese proverb which begins by asking: When is the best time to plant a tree? The answer: 10 years ago. When is the second best time to plant a tree? The answer: now!

I want Stefan and Sienna to grow up in a vibrant and prosperous Australia – one that has a value adding manufacturing industry. I will be working very hard to achieve this outcome and I’ll look forward to working with those who share that same vision.

Thank you.