It’s time to manufacture in Australia 

Australian manufacturing

Post COVID-19, the new “normal” is making Australia, and most of the world, look at ways to reduce reliance on overseas manufacturing.

Imagine you are taking a long trip on a relatively straight country road.  The road has a few ups and downs, and you only need to make minor adjustments to the steering wheel to keep on track.  All is smooth, and you will be on time.

You come to a large rise in the road, a bit of a hill actually, and you can hear the automatic gearbox change down a cog or two.

Just over the rise you anticipate the downhill cruise, and the gear will settle back into a quiet cruise when without warning, the road does a sudden sharp turn to the right. Instinctively, you slam on the brakes, throwing the car into the right turn that feels more like 180 degrees than 90.  As you turn, slightly terrified, you barely have time to notice the smashed trees and litter of car trim that tell the tale of cars that didn’t see the corner in time. 

This is where Australian business finds itself today. The road has turned.  Will you make the corner or end up as scrap?

For a generation, we have been riding the straight road of the free market. For all that time economists including yours truly, have been saying that by opening trade, by lowering tariffs through free trade agreements is better for everyone.  We were not very efficient at textile clothing and footwear manufacturing, and so slowly companies like Bonds closed one clothing factory after another, shifting production mostly to China or anywhere else where workers would work twice as long to a tenth of the wages.

Founded in Sydney in 1915, Bonds (later Pacific Brands) was still manufacturing 40 per cent of its products in Australia in 2006.  It wasn’t until 2010 when the last three Bonds factories in Australia were closed.  Symbolically at least, that was the end of manufacturing in Australia. 

Sad as that was for manufacturing jobs, free trade brought a glittering chest of benefits. All sorts of goods suddenly became available and cheap.

My mum just moved into aged care, and I ended up with the task of cleaning out my late father’s garage. It really was a time capsule. There was a single Stanley knife – the classic retractable blade utility knife. Invented in 1936, but not widely available in Australia until around 1950 (after WWII) the Stanley knife was a fantastic invention and worth the $30 price tag – a week’s wage for a factory worker at the time. 

Next to his vintage knife were a dozen, maybe more, bright plastic cutters with snap-off blades.  Dad must have been excited by free trade and the ability to buy these disposable knives for less than a dollar.

And so, it was for thousands of other items. Almost everything we buy (except cars).

Free trade is not only good for gadgets. The story we economists have been selling is that free trade also brings world peace. After all, why would we ever go to war with a country who buys all our iron ore and sells us lots of cheap garden tools?

Free trade averted WWIII and the US did not fight a war with the USSR. Well not directly, but certainly remotely, with the US supporting the Afghanistan guerrilla fighters when Russia invaded. China vs USA was played out In Korea with round two in Vietnam.  In a rematch, the USSR supported the Afghan rebels when the US invaded. 

All these wars were terrible for those involved but low level on a world scale compared to the anticipated WWIII. I suggest that the economists got it right, sort of, which is about as good as we ever get.

Back to our straight road and avoiding a crash.

The straight road represents the economy, the way of doing business since the 1970s. As free trade opened, manufacturing moved to low-cost countries and we became a nation of exporters of raw materials and an importer of finished goods.  

The steep rise, where we changed down gears was during COVID-19 (2020 – 2022).

In 2023, we are just over the rise, and can you see the road ahead is not straight but takes an unexpected sharp turn to the right?

Deep down we are all saying in our hearts, ‘Soon it will all be back to the way it was. Soon it will all be normal again’. After the steep rise and the gears dropping down and slowing down for the COVID-19 hill, things will get easier on the other side. We will get back to smooth cruising in top gear and the world will be good. 

Surely the lack of supply with factories under lockdown, and the shortage of shipping containers driving up costs of imports will soon be over, and all will be good in the garden.

But it won’t. There is a new “normal”, and if you plan on going straight ahead you will crash. 

The new normal forces Australia (and most of the world) to stop focussing exclusively on products and services where the country has an absolute advantage (e.g. iron ore) and start to reduce reliance on overseas manufacturing.

This is the sudden right turn. Businesses less reliant on overseas production, business that can increase the local production percentage of their products will handle this sudden turn in the road – the survivors.

What has brought this about? COVID-19 was one of the catalysts, but it is the seeming inevitability of major wars involving Russia, and China that have the world turned to the right.

Russia (Putin) want to take back the old empire. It started with Crimea and as we all know Ukraine. This current conflict was not a surprise.  It really started in 2014, and Russia vs Ukraine even appeared in an episode of the TV series ‘Madam Secretary’ that aired in December 2015.

Similarly, the Chinese leadership has vowed to take back Formosa (Taiwan) and has been steadily ramping up its military to be able to do so soon. To the Chinese mind they are just completing the 1949 Chinese Revolution.

In that revolt, Chairman Mao Zedong led the communists to take over China, forcing the existing national government led by Chiang Kai-shek to flee to Taiwan with his forces to regroup and plan for their efforts to retake the mainland. Of course, that never happened and now China wants to take Taiwan back.

The problem is that the US (and Australia) can’t live with that. We all have experienced the chip shortage, and how it has affected the car industry for example. But were you aware that Taiwan accounts for 60 per cent of world chip production?  They also make the clean rooms and machinery needed to build a chip factory, so allowing China to disrupt that production with a war, and possibly takeover, would be disastrous for the West.

Semiconductor contract manufacturers by market share. 2020

Driven by the fear of war, and the bitter experience of shortages, there is a race by governments to become more self-sufficient and less reliant on imports. A sudden sharp turn to the right and away from free trade.

How will that affect your business? 

What is the government doing?

There are only two crude tools available to governments to drive the economy to local manufacturing.

The first is trade barriers. That can be in the form of import tariffs or non-tariff barriers such as imposing unique product requirements to meet Australian standards. These would take a decade to take effect and mean dismantling the free trade agreements we have in place, inviting retaliation and a trade war.

The Australian government has chosen to take the other option – to subsidise, promote and reward local production. The carrot, instead of the stick. How can you cash in on this and what are the options to help you not miss the sharp turn in the road?

The Federal Government’s Modern Manufacturing Strategy was announced in August 2020, with a total of $1.5bn over four years – the biggest splash of $587m this financial year and $389m in the next and final year of the program.

So far, we have seen big grants for big companies, like the $15million in 2020–21 to support an upgrade of steel processing and galvanising capability in Whyalla, South Australia.

For smaller businesses, the opportunities are:

  • A simplification of the Export Market Development Grant program including a change from reimbursement after expenditure, to an upfront grant agreement.
  • Supply Chain Resilience Initiative – a total of $107m allocated.
  • Manufacturing Modernisation Fund, which offers grants of $100,000 to $1million to help businesses take on new employees and upskill workers, and co-funding for capital investment technology upgrades (Round 4 will soon open)

In parallel, the Federal government has a five-year $74bn JobMaker Plan including:

  • Research and Development Tax Incentive that gives you 43.5 per cent of your R&D costs back. It’s not competitive; is open to all but make sure you understand what the ATO defines as R&D and follow the guidelines.

The states are also handing out grants, mostly to grow jobs and import substitution (local manufacturing) matches up with Job creation.

  • NSW: It will have programs, but with the recent change in government, new programs are not all in place.
  • Vic: It has several small business grants, the most interesting being the Made in Victoria – Manufacturing Growth Program.
  • Qld:  It won’t be left out and recently closer the fifth round of the Made in Queensland program. That will be repeated in 2023 , and in the meantime, there are six other funding areas to support local manufacturing.

Every state and territory have a plethora of job creation/manufacturing grants, so if I haven’t covered your state, let Google be your friend.

Any government grant will be expensive in time and paperwork. That’s good because a lot of your competitors won’t bother.   The trick is to set aside the time and use your accountant. There are also consultants who will help you draw up an application. Personally, I would DIY, but you may find a good one. 

Start your search with business.gov.au and look for the grants and programs finder. 

All this discussion about Grants is putting the cart before the horse. You need to start by asking – what will we manufacture?

You may have no ideas, or you may have just one idea that feels like its magical. Either way, you need to do some serious thinking and planning before you invest one dollar. 

Start with a SWOT Analysis but remember the idea of SWOT is not to create an exhaustive list of 100 items under each category – Strengths, Weaknesses, Opportunities and Threats.   In fact, it’s the opposite. Try to distil all the factors into two or three succinct and plausible concepts for each heading.

The next step is to match up key factors. Matching up a strength with an opportunity is one way to be creative. 

There are other approaches.

Perhaps your product needs a waterproof component, as do all your competitors and a few similar products in the market. The quantity you need is small, not enough to start manufacturing but the unreliable overseas supply is killing your production schedules. Maybe this it is time for some coopetition. Cooperate with your competitor and set up a joint manufacturing operation for the waterproof component. The legal issues are much simpler than many think and the benefits can be tangible.

There are a lot more ways to skin a cat. Please let us know what novel ideas you have created, or if you are stuck, invite us to take a fresh look at the issues over Teams Chat.   Happy hunting!

If you need to know more? Email the Editor and I will try to help, or at least set you in the right direction.

Gary Fooks is chair of the Blue-Sky Alliance. Gary has been working on small engine emissions standards since 2005 and was announced as the Environment Minister’s Clean Air Champion in 2015.