The Australian economy has greatly benefitted from the economic rise of Asia as illustrated by strong economic growth, low unemployment, rising purchasing power, etc. but not all sectors are faring equally well. The growing demand for commodities, fuelled by the rapid urbanisation and industrialisation of Asian countries (especially China and India) has pushed up world prices of mining products, resulting in increased terms of trade for Australia. While mining and related activities are expanding, the accompanying appreciation of the Australian dollar has put increased pressure on other traded sectors like manufacturing. The current mining boom negatively impacts on Australian manufacturing’s competitiveness as exports have become more expensive while imports in Australian markets have become cheaper.
The worsening performance of Australian manufacturing in recent years is however not only due to the current mining boom. Just like other OECD economies, the Australian economy is characterised by a long-term trend of deindustrialisation reflected in a falling importance of manufacturing in value added and employment. In addition, globalisation is drastically changing the outlook of global manufacturing with emerging countries gaining market share not only in more traditional manufacturing industries but increasingly also in higher technology industries. The growing domestic demand in these countries as well as lower (labour) costs are important drivers of the ongoing shift in global manufacturing. Nevertheless, manufacturing in OECD countries including in Australia, is not a sector in decline: manufacturing output and value added continued to grow strongly up to the Global Financial Crisis of 2007/2008 which severely impacted manufacturing demand and production across OECD countries.
As the demand for Australian commodities is expected to remain high in the near future, Australian manufacturing will need to adapt to the shifting comparative advantage of Australia. More than 50% of Australia’s exports in 2010 concerned primary goods (agriculture and mining) while manufacturing was a net importer representing 30% of Australian exports and 70% of its imports. The international competitiveness of Australian manufacturing is concentrated in a small number of industries directly dependent on Australia’s natural resources (‘non-ferrous metals’, ‘food, beverages and tobacco’ and ‘wood’); in addition, there are some signs of growing competitiveness in ‘pharmaceuticals’ and ‘scientific instruments’.
But the economic emergence of Asia also creates important opportunities for Australian manufacturing. Australia is well positioned to benefit from the emergence of large consumer markets in Asia not only for Australian commodities but increasingly also for manufactured products from Australia. In addition, Australian manufacturing could benefit more from the relative proximity of large Global Value Chains in Asia. If managed well, Australian manufacturers could greatly benefit from the new growth opportunities that are (relatively) nearby. The observation is however that while fast growing Asian markets have become increasingly important in Australia’s export portfolio, Australian manufacturers miss out on sizeable opportunities. The growth in Australian exports of manufactured goods has not kept up with the market growth in most Asian countries.
The shift of the economic centre eastward will significantly decrease Australia’s traditional disadvantage of remoteness from international markets which, in combination with Australia’s small domestic market, has resulted in important scale disadvantages, relatively low productivity, a low degree of internationalisation and limited integration into GVCs for Australian manufacturing. Manufacturing in Australia has heavily suffered from the ‘tyranny of distance’; high transport and trade costs reduce trade and limit the opportunities for Australia to specialise in the activities where it possesses a comparative advantage. Distance from world markets also limits the country’s exposure to competition and makes international producers less competitive in Australian markets.
While these structural weaknesses have limited the role of manufacturing in the Australian economy as well as in global manufacturing since long, recent developments have triggered a (further) loss of competitiveness of Australian manufacturing. First, the slump in productivity growth since 2001 has widened Australia’s long-standing productivity gap with other manufacturing countries even further. Second, Australian manufacturing increasingly suffers from a cost disadvantage not only with respect to emerging countries, but more and more also with other OECD countries. Only part of this is explained by the negative effects of the current mining boom through the stronger Australian dollar.
Confronted with growing competition in global manufacturing, including from emerging economies, Australian manufacturers need to develop other competitive advantages to compensate for the high-cost environment they operate in. Similar to other OECD manufacturing, the long-term productivity and competitiveness of Australian manufacturing will be increasingly based on innovation, targeted at new products/processes/services for (new) niche markets and based on factors beyond cost efficiency. Investments in intangible assets (brand equity, design, organizational capital, business models, etc.) allow manufacturing firms to compete less on costs alone and more on ‘quality’, for example on specific product characteristics like reliability, sustainability, differentiation, brand image, that motivate customers to pay a higher price.
The development of sustainable firm-level capabilities through investment in human capital (skills development) and collaboration with external partners (research organisations, universities, suppliers, customers, etc.) is crucial for this. Nowadays, Australian manufacturing shows a mixed account on innovation, which seems to be strongly focused on cost efficiency and adaptation of products and process to the domestic market. Another point of attention is the only moderate score of Australian manufacturing on management skills since effective management has become increasingly important for the development of innovation capabilities in firms. Innovation should help Australian manufacturing to broaden the number of international competitive industries; some higher technology industries in ICT and medical technologies are developing but are still limited in size. Adding more advanced activities on top of existing resource-based activities may be one way to develop new competitive strengths while nurturing the resource-based strengths of Australian manufacturing. Notwithstanding large R&D investments in resource based manufacturing in Australia, other resource-intensive countries seem to have been more successful in developing high technology activities to complement their advantage in resource-intensive industries.
As the business sector is the first responsible for firm performance, it has a paramount role to play in addressing the weaknesses, reinforcing existing and developing further strengths of Australian manufacturing. Government should focus on enabling and creating the necessary conditions through a supportive public policy: reducing regulatory barriers, supporting the development of capabilities, investing in infrastructure, etc. Such efforts should not only be targeted at manufacturing but also include services sectors given the strong linkages between manufacturing and services. Manufacturing still has an important role to play in Australia, even if the country does not have the same strong manufacturing tradition than e.g. Germany and the United States. Manufacturing is high on the policy agenda in most OECD economies as it contributes to a balanced economy and is an important source of innovation, productivity and international trade. A broader discussion/consultation on the future of manufacturing in Australia should help to identify the strategic directions that have the greatest chance to bring success for Australia in global manufacturing. The resulting re-balancing of the economy will also be important for Australia in preparation for a time beyond the current mining boom.