Manufacturing in Australia: It’s the culture stupid!

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The current surge of energy to address a lack of manufacturing capacity is encouraging and long overdue. What is tragic is it has taken an event – THE COVID – to be a catalyst. My earliest recollection of a national conversation about manufacturing at a national level was in the period of microeconomic reform in the late 80s and early 90s. The was much talk and even excitement about globalisation and Australia’s need to be globally competitive. Steps were in train for Australia to enter the globally competitive world.

In 1991 I wrote a paper highlighting that the Australian culture had a significant impact on our business environment. How does the Australian culture impact on your business?

How does the Australian culture impact on your business

Then I postulated that our culture was devoted to recreation and lifestyle. So, what’s changed? Only last week the Federal Court granted casuals “leave provisions” on top of their allowance for being casuals. While I am not arguing the merits of that case here – it highlights the issue. Recreation is a dominant theme in our culture.

Multiple documents were produced addressing the need for Australia’s system to change:

  • (1987) Australia Reconstructed by the ACTU
  • (1989) Enterprise Bargaining Units – A Better Way of Working, by the Business Council of Australia
  • (1991) Innovation in Australia – Pappas Evans Carter and Koop (now Boston Consulting)
  • (1995) Enterprising Nation -by Industry Task Force on Leadership and Management Skills

There were many more reports.  Australia was preparing for a new world of globalisation. The goal was to be globally competitive. Benchmarking was a term used commonly, and some groups toured the world studying “best practice”. These were all buzz words of the day added to the management lexicon.

One of those reports Innovation in Australia was a catalyst for my interest in blogging about Innovation.  Written in 1991 and prepared by PCEK for the Industry Research and Development Board, I happened to have it in my files.

There were two conclusions in the report:

  1. An increase in manufactured goods and services is the key to improving Australia’s wealth creation.
  2. The establishment of corporations of significant size is a prerequisite for the sharp growth in manufacturing exports.

Arguably it was a call to action.

Helen Hughes, a prominent economist of the day, said in the report:

Australia is the only industrialised country that has not increased its proportion of merchandise exports to GDP in the last thirty years. (dating back to 1961!)

It is now 2020 – what has happened? Can I suggest – NOT MUCH.

The AIG report Australian Manufacturing 2019 – Local and Global highlights that:

Manufacturing is a vital part of the Australian economy. It is Australia’s seventh-largest industry for employment and sixth largest for output. It accounts for 11% of annual export earnings and has the highest business expenditure on Research & Development (BERD) of any industry. It employs close to one million people across 47,530 employing companies. P2.

The report is positive and upbeat about the manufacturing industry in Australia BUT:

The graph below highlights a stunning decline in manufacturing for over 30 years. (and the prior 30 years?) – 60 years of decline! What business do you know can tolerate a level of “decline” at that level?

There is no doubt about the sentiment in the above statement BUT look at the chart below.

It is clear, and it looks like a steep downhill ski run from 1960 onwards. In any business, a graph like this is a doomsday scenario. It raises many questions. So why did this happen? Is it possible to reverse a decline of that magnitude?

Andrew Liveris (now on Australia’s COVID response commission) suggested six years ago that most global Innovation comes from the manufacturing sector. Was anyone listening?

“Innovation is most successful when it goes hand in hand with production, particularly in the advanced manufacturing sector. In fact, a recent McKinsey study found that manufacturing accounts for up to 90 per cent of private-sector R&D in major manufacturing economies.

This is one of the reasons I have championed advanced manufacturing in every corner of the world for many years. Because the solutions we seek… the solutions that will drive sustainable growth and human progress… will be found at the intersection of Innovation and production.

Australia, to be frank, is behind in this area. As you know, we have allowed our manufacturing sector to shrivel in recent years… settling for an economy defined by exporting natural resources.

Do not get me wrong – this approach has produced incredible growth in the short term. However, overemphasising extraction and export – at the expense of other priorities – has clear downsides.”

“Australia, to be frank, is behind in this area. As you know, we have allowed our manufacturing sector to shrivel in recent years… settling for an economy defined by exporting natural resources.”

While there has been much talk and even more written Australia’s transition to a service economy. It is fair to say that decisions about that transition were made at least 20 -30 years ago when we were talking about being globally competitive. (in manufacturing?) What decisions have been made in the last 20 years to make us globally competitive? It appears we have outsourced much of our competence in the pursuit of efficiency and lowest cost.

The 1991 report and its recommendations made no difference – a little like “an ice cube in hell”. I suspect there have been other reports on manufacturing all suggesting we do more of it! And that we should be globally competitive. What has happened?

In my recent work researching my book Innovation in Australia, I discovered there had been about 60 reports on Innovation and related areas with little outcome.

My conclusion – We are very good at reports – Action -not so much!

The source of this decline is complex, and it is a phenomenon across western economies. Simplistically globalisation has driven the pursuit of efficiency at any price. For multiple reasons in Australia, globalisation means:

  • cheaper products from offshore and
  • outsourcing manufacturing to low-cost labour countries.

The pursuit of efficiencies and lower costs are an end in themselves. Who cares about the impact on Australia as a nation or a community? We have chosen the “self-interested option” at multiple levels.

  • Consumers want the cheapest products (from China) – Kmart, Bunnings, Target!
  • Business needs the cheapest inputs (outsource labour intensive work to China (because our labour costs are too high) – source the cheapest cost products from anywhere?)
  • Boards expect maximum returns for investors (shareholder value the dominant paradigm)
  • Business needs the “largest” profits (Shareholder value the dominant objective)
  • Management expects ‘bonuses” for creating value! a short-term risk-averse mindset emerges
  • The Workforce expects high salaries/wages – it is only just and fair
  • and the greying population demands stable, reliable returns.

Who thinks about or even cares about national sovereignty – none of the players above – WTF – no one cares about anyone! These are some of the major issues – there are many more.

In recent months we saw headlines like:

  • 164-year story: How a beloved Aussie brand turned to dust.
  • Joshua Dowling The Conversation 17th Feb 2020
  • Vale Holden: how America’s General Motors sold us the Australian Dream Jack Fahey – The Conversation – 19th Feb 2020

Based on these simplistic analytics, we have no hope of recreating manufacturing industry in Australia unless there are radical changes? Playing at the edges is not an option

My research in Innovation area highlighted multiple systemic, cultural issues which contribute to our inability to commercialise our Research &Development. One of which is the low level of manufacturing competence.

The link between Innovation and the manufacturing sector (only 6.3% of the economy), is critical.

Some facts:

  • Australian manufacturing is only 6.3% of Australian Gross Value Added and 7.7% of employment.
  • Our Global Rank of 126 Manufacturing as a % of GDP: This is LOW given we are the 14th largest economy in the world. We rank between Ethiopia and Panama.

See website -The Global economy Business and economic data for 200 countries.

  • Our Ranking on the Economic Complexity Index is 93 between Pakistan and Senegal. This index measured by Harvard and MIT is a measure of future prosperity. When I started following it, Australia was 53 performing better. We have dropped in recent years. The recent closure of GMH will not help. Economic Complexity Index – Harvard -MIT

Some of the headlines on Economic Complexity include:

  • Australia is rich dumb and getting dumber. Aaron Patrick Fin Rev 7th Oct 2019

It is not a message we want to hear. As it happens, no one seems to care? A couple of journalists write articles, and there is a storm for a day or so! Who cares?

After the GM closure, there was national mourning for a day or so a few articles, and then we move on. It appears that culturally manufacturing it is not a priority. One piece in the Australian headlined:

  • We lack the will to have a manufacturing industry – Greg Sheridan Australian

There are many cultural issues at the core of our business system which limit our capacity and capability.

If they are not named and challenged this latest surge of energy in manufacturing (and the potential for Australia to be an “innovation hub” or any sort of “hub” will go the way of all Industry development initiatives. Lots of reports and lots more reports – Action – not so much!

In any conversation I have had in the last few months when rebuilding manufacturing in Australia is mentioned there is a generic – that will never happen – labour costs and energy costs are too high! I guess then we might as well close it all down! It will NEVER happen!

The recent new deal for manufacturing document published in June 2020 outlines a number of proposals all of which have merit, but it begs the question – where are going and what are we trying to achieve?

Can you imagine if industry leaders established some genuine Moonshots which galvanised multiple industries?

What if they created these Moonshots in Industry learning forums and leading-edge “social processes” instead of structured conferences sessions where talking heads present answers?

Can you imagine if the Government committed to them?

Right now, we are heading down a path which looks the same as all other paths – we are wanting the government to announce the answer!

We now have a National Cabinet – a glimmer of hope –maybe it will be the opportunity to create a radical view of our future nationally – there was a time when Australia was considered as a social experiment – we led the world? And NOW?

Its fanciful naive stuff but as they say:

If you always do what you have always done, you will always get what you always got?

 

 

 

 

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