Does manufacturing have a future in Australia?

This question has now been brought sharply into focus, as industry leaders and unions pressure the Federal Government to consider new measures to safeguard Australia’s struggling manufacturers, and a pessimistic outlook takes hold.

In addition, recent downsizing and closures of major facilities such as BlueScope’s export operations at Port Kembla raise the further question of whether a amanufacturing decline matters to us anymore.

The current squeeze on manufacturing is seen by the Productivity Commission, Reserve Bank and financial market commentators as inevitable “structural change” by which productive inputs are reallocated to the resource sector to achieve a higher return.

However, this misunderstands the role of manufacturing in the economy as a producer and user of advanced technologies, and the long-term consequences of decline.

Manufacturing is certainly becoming more globalised, more knowledge-intensive and more interdependent with value-adding services, such as design, engineering, computing and marketing.

But its future remains important for at least two reasons: first, manufacturing drives innovation and technological change – key elements of our productivity performance – and second it contributes to our external trade balance.

On the first point, Australian manufacturing allocates $4.5 billion each year to research and development, or one quarter of total private sector expenditure.

This is directed to adapting existing technologies and developing new ones, increasingly as part of an advanced services economy. And even more is spent on “non-R&D” innovation, such as new business models, systems integration and high performance work and management practices, with diffusion effects throughout the economy.

Even in the car industry, for every $90 spent on inputs such as parts and steel, a further $10 goes to external engineering, scientific and computing expertise.

And in some other industries, the production process is becoming integrated within a constellation of activities designed to enhance the customer experience, but which are not counted as manufacturing in the national statistics.

Second, without a manufacturing base, Australia would need to import more consumer and capital goods, exacerbating our chronic inability to run a positive trade balance. Even with record highs in our currency, terms of trade and commodity export volumes, our export revenues are barely sufficient to pay for rising volumes of imported manufactures.

In recent years, the trade deficit has represented up to a half of our current account deficit, and simultaneously our productivity performance has stagnated.

In this context, borrowing to import manufactures together with the repatriation of resource profits expose serious vulnerabilities in our external position. Before the global financial crisis, conventional wisdom regarded the current account deficit as irrelevant, a view corresponding with the “efficient markets hypothesis” put forward by Reserve Bank of Australia assistant governor, Guy Debelle.

Since then, however, economic opinion has switched as financial markets have savaged those countries excessively dependent on foreign borrowings.

The evidence suggests that the developed economies emerging most strongly from the downturn are those such as Germany with a dynamic, competitive manufacturing sector.

Accelerating deindustrialisation results in countries going backwards technologically with a diminished capacity for innovation. Other industries cannot substitute for this loss in capacity.

While in Australia the resources sector has recently increased its research and development spending to match that of manufacturing, the Australian Business Foundation and Lateral Economics has shown that this is directed mostly at tax minimisation rather than technology maximisation. Current changes to the research and development tax concessions are intended to reduce these loopholes.

Domestic high tech manufacturing and services supplying the resources sector are also small. According to the Australian Bureau of Agricultural and Resource Economics, annual sales of consulting and software services and equipment to the local and overseas mining industry amount to just 2.2% of total annual manufacturing sales. The resources boom is not going to save or substitute for a robust manufacturing sector.

Looking to the future, manufacturing directly employs one in five engineers, and many more indirectly as consultants.

Without a solid manufacturing base, Australia faces the prospect of losing scientific, engineering and computing expertise that has taken generations to nurture in research and production. These skills, at both university and vocational level, will be critical to new growth industries such as biotechnology and renewable energy.

The skills developed within manufacturing are core infrastructure skills upon which every modern economy depends.

Many people initially trained in manufacturing move to other industries. Where will the engineers, technicians, welders, maintenance fitters and machinists come from to install and maintain our telecommunications, power stations, water plants, transport and defence systems?

Tom Karmel and John Rice from the National Centre for Vocational Education research write that the resources sector does not train for these skills, but rather “buys them in”.

How long will the taxpayer support billions of dollars each year spent by universities and public research agencies into solar energy, aerospace, micro-electronics, advanced materials, nano-technology or biotechnology when the industries that can use these high level skills to innovate and make new products have disappeared?

The Productivity Commission has already questioned public support for science and engineering when the benefits of the resulting knowledge accrue increasingly to other nations?

The transfer of Australian solar panel technology to China, from whom we now source production, is a case in point.

Clearly, the knowledge and skills required to import, install and maintain imported manufactures and technologies are much less than those needed for design and manufacture.

Just consider the scientific, engineering and technical inputs for the production of a solar panel, motor car, jet engine or plasma TV compared with the relatively modest skills required for their installation and maintenance.

Recent experience should be sufficient to dispel the myth that advanced economies can offshore their manufacturing base and retain “high value” design and marketing. Asian firms that started as cheap no-name makers of western-designed and branded products have quickly become global design, brand and innovative manufacturing leaders.

Manufacturing is changing the world and is itself changing as the prime source of transformational products and services.

Australia’s commodity boom is an opportunity to build this transformational capacity, especially in new and emerging industries, not to let it slip away in the name of a “black box” economic model which fails to recognise the significance of innovation and technological change.