15 April 2024

Four ways Australia can lift investment in manufacturing

As featured in The Australian Financial Review 15th April 2024

Manufacturing Australia has released a research report entitled Driving Investments in Australian Manufacturing: Recommendations to Policy Makers.

The federal government is right to recognise that careful interventions and targeted incentives are needed to expand Australia’s manufacturing capabilities. The world is awash with competition for manufacturing investment, and Australia must do better to attract its share.

But boosting manufacturing incentives and public expenditure is only half of the equation. The other half involves improving Australia’s attractiveness for capital investment. Commentators on different sides of this debate will suggest we can do one without the other. However, to succeed in increasing manufacturing, we need to do both.

Australian manufacturers spent $21.8 billion in 2022 on widening their global footprint. They built, bought and expanded plants in developed economies such as the US and the European Union, and in rapidly growing ones such as India and South-East Asia.

That’s almost twice the $12 billion of private capital invested in manufacturing in Australia in 2022, reminding us that the country lags other nations in attracting manufacturing capital.

In Manufacturing Australia’s latest report, companies cite four key hurdles to investing in Australia, and the federal government’s Future Made in Australia initiative must seek to overcome these.

First, project approvals take too long and are more complex than in other jurisdictions.

Federal Treasurer Jim Chalmers knows this and his recent comments in support of a “single front door” for major capital investments are welcome. Streamlining and expediting approvals is a tool used worldwide to attract manufacturing investment. We need to be more competitive in Australia.

Second, regulatory regimes in Australia often encourage import substitution at the expense of domestic production.

Australian manufacturers now pay, on average, 50 per cent more for electricity and 200 per cent more for gas than US rivals.

We subsidise, for example, imported heat pumps that put local manufacturers at risk. We typically have low, or no, local content requirements on big projects. And while we rightly impose emissions reductions on our major manufacturers through the Safeguard Mechanism, we don’t do the same to imports in the way the European Union does through its Carbon Border Adjustment Mechanism.

If manufacturers are to commit to multi-decade investments in Australia, it’s reasonable for them to expect a level playing field with imports, and for our government regulations to discourage, rather than encourage, import substitution.

Third, input costs in Australia are increasingly uncompetitive with other jurisdictions. This applies to transport, construction and regulatory costs, but is most stark in energy costs, where Australian manufacturers now pay, on average, 50 per cent more for electricity and 200 per cent more for gas than their competitors in the US.

Reducing key input costs through competition, innovation and red-tape reduction must be part of an effective strategy to boost manufacturing investment. We cannot wish away cost disadvantages or be overly reliant on attracting premium prices.

This, of course, will take time. But in the short term, we should seek to mitigate some of these disadvantages through tax incentives that allow for faster depreciation of manufacturing investments.

Tax incentives

Finally, we should invest to build the skills, R&D, technology and heavy engineering capabilities that will underpin the manufacturing ecosystem into the future.

We need more funding for applied research and skills development in Australia. Our R&D tax incentives need to be globally competitive and include premium rates for manufacturing-linked R&D, and we should seek to establish a heavy engineering sector capable of taking the lead on nationally significant projects, for which we are largely reliant on international companies today.

The federal government is to be commended for facing up to fierce global competition for manufacturing investment and putting manufacturing at the centre of its policy agenda.

Market interventions that have emerged around the world post-COVID-19 have tilted the global manufacturing investment landscape. The Inflation Reduction Act in the US, the CBAM in Europe and aggressive tax incentives in Singapore are tools in a global race to “onshore” manufacturing capabilities. It is naïve to suggest Australia shouldn’t respond with policy measures of its own.

But to be successful, we need to balance incentives with fundamentals. If we work to ensure that Australia is a reliable and competitive place to invest, that projects can be approved and built on time, that our input costs are competitive, that we have a skilled workforce and that our regulations encourage domestic production, good manufacturers will invest in Australia.

A fundamentally competitive investment case will offer Australia the best platform for our incentives and industry policy to move the dial and attract more of the global manufacturing pie to our shores.


To read the full report click here.