Australian Economy — an insight
The Reality
A fallout from the recent pandemic is that nations have started to rethink their policies and regulations about trade partnerships. Situation has worsened because of the highhanded approach by the Chinese government after countries demanded enquiry into the corona virus pandemic and have threatened with economic consequences if they continued to do so.
A big question that everybody is asking is “why is China opposing an investigation, if it has nothing to hide”? The biggest victim of this trade spat is the common people who are now waiting to know what’s next. Every time there is a trade friction between countries, the first thing to get affected are demand / supply and import tariffs which increase price of traded items, creating inconvenience and cost rise .
Opinions matter
As per a global survey conducted on businesses by QIMA — 51% of the respondents believe that there will be significant changes in how their business manages their supply chain and 74% think there will be long term impact on their business due to the coronavirus pandemic.
This is due to operational difficulties such as closure of supplier factory, delays in production due to labour shortages, transportation issues etc.
In Australia and NZ — 73% responded positively with regards to question “Plans to switch suppliers in other regions due to Covid-19 epidemic” is closely followed by Asia outside China which is 53%. It has become clear now why China is so aggressive with Australia.
Australia is not the problem, the problem is, if Australia with its aggressive approach is able to set an example then it is going to start a chain reaction which might be difficult to stop and China may lose its economic and social status.
Economic Indicators — Australia vs China
To ensure economic stability and long term success, we have to ensure two things:
1. Ensure that the revenue (export) streams and reliable, diverse and collaborative
2. Have a diversified portfolio of value added production / manufacturing.
Let’s take China / Australia as an example.
- Revenue
1.1. Revenue (Export) Source — Australia’s export to China and Japan constitutes more than 51% of the total export meaning our revenue (export) is overly dependent on these two countries (source — wits.worldbank.org). If our relations were to go bad with any of these countries, we would be in a bit of trouble. It is a big revenue risk.
On the other hand China has been successful in having a balanced portfolio. Its top 5 export partners share is 45%. We have to keep in mind that Hong Kong comprises 12% of the exports, a fair percentage of which is re-exported. China has also been very successful in developing markets in more countries thus spreading its risk.
1.2. Revenue (Export) composition — Australia’s main exports are natural minerals and fuel (Iron Ore, coal etc.), agriculture products (wheat, barley etc.). The only drawback as I see with exporting Primary products is that it doesn’t involve any value added manufacturing or any employment generation in the country. For e.g. China imports all the Iron Ore and convert them into steel / products in their steel factories. They employ thousands in these steel mills.
On the other hand Chinese export comprise secondary products that have gone through value addition and manufacturing. China over the past couple of decades, have created a niche for itself in producing low technology — lost cost products for consumption, sometimes at a compromise to quality though. For e.g. computers and electronic parts, telecom equipment, knitted garments, plastic products etc. China also exports some high tech electronic equipment and heavy machinery.
2. Production / Manufacturing
2.1. Manufacturing trends
As per data published by World Bank (data.worldbank.org), Australian manufacturing output has remained steady during 2004–2018 at around US$70–100 billion, whereas manufacturing output as a percentage of GDP has almost halved from 10.9% to 5.8% during that period. Comparing that with China, manufacturing production has increased more than 6 times from US$ 625 billion to over US$4 trillion and manufacturing as a percentage of GDP has remained around 30% during the same period.
2.2. Manufacturing composition
Manufacturing in Australia mainly comprise Food and beverage products. It includes — meat and meat products, dairy products, drinks, fruit and vegetable processing, sugar and confectionary, bakery products etc. There is practically very little diversification. Automobile manufacturing ceased in the past decade and there is practically very little or no contribution by any electrical / electronics or mechanical manufacturers.
On the other hand China has a great diversified manufacturing portfolio, it practically manufactures everything — starting from food processing and electronics to automobiles manufacturing and robotics.
Analysis
The data presented above means two things.
1. We are dependent on China / Japan for a major chunk of our exports revenue. And our confidence on China has been shattered and it is reflected in the QIMA survey. (China’s threat to us with economic consequences….)
2. Over the years we have killed all our industry and our only manufacturing activity is focussed on Food and Beverage products. (That’s the reason we have to import most of the products for our consumption)
What can we do to improve the situation?
I have touched upon the actions in my previous blog also…..
1. We need to identify new growing markets and promote Australian products globally.
2. Look out for new manufacturing industries that we can diversify and grow.
3. Invest in skills development.
In my next blog I will be discussing “How” we can follow up on these 3 action point. Stay in touch.
Note — QIMA is a leading supplier of supply chain compliance solutions. The survey report was generated after input from 200+ businesses with global supply chains working in a variety of consumer product segments.
Written by Partha Mazumdar, Founder of Vertical Bricks — a company that facilitates investment based migration.
