Kick-start manufacturing in Australia?

How did the current situation arise?

We have to first understand how manufacturing vanished from the country.

Australia became a member of World Trade Organisation (WTO) on the 1st of January 1995. We have signed Free Trade Agreements (FTA) with many countries. The objectives of FTA has been to improve trade between countries by lowering of trade tariffs and barriers between participating countries.

As a result of FTA, Australia got flooded with cheaper goods produced in third world countries. The consumer did get a spread of cheaper alternatives, but it posed a big challenge for manufacturing in Australia. Higher cost of production in Australia became a big challenge, “Australia made” goods were failing to compete with the imported ones. In order to stay in business, most of them decided to shift their manufacturing bases to third world countries, primarily China. Australian companies became more like trading firms. A Chinese company would manufacturing goods in China and sell them to their Australian partner who would add a mark-up and sell those products in Australia.

This process not only reduced economic contribution to our economy but also eroded technical knowledge and job losses. We need our manufacturing industry back.

How do we start again?

We would require three things to make it happen — Will, Skill and Drill

1. Will — We would need the will of the people supported by political and social will. Success for a society is measured by the collective achievements versus collective goal of a society. Without the will of all (or majority) in the society, no society will succeed. Education is a big component in generating awareness.

2. Skill — All manufacturing / production requires specialised skills and knowledge to be successful. Training is an important component of skill. Skilled migration is another option.

3. Drill — comprises actual production (it is a process of making a hole by rotating cutting tip) and hard work and exercise (in military terms).

There is cost associated with each of these items.

Cost Components

Assuming very little or no tariff on imported good, all Australian producers will have to be price competitive. Lean / efficient manufacturing practices will have to be adopted to compete in the open market. There is some price elasticity tolerance for “Made in Australia”, but then elasticity has its limits (refer to my earlier blog on “price elasticity for demand”). All costs will have to be kept as low as possible, without compromising on the quality of output.

There are two main types of costs associated with manufacturing. Firstly, the cost of setting up the facility (capital cost), which includes building, land, plant and machinery and other set up costs, secondly, the cost of operating the facility (operating cost) which includes manpower, marketing, raw materials, financial costs etc.

Both these cost components have direct impact on the “Profit and Loss” of any business.

Cost advantage

As I discussed in my previous blog how we can raise funds for the social cause ie. To revive the dead manufacturing sector in Australia. Assuming that a business needs $1 million as capital cost, it would save 8% ($80,000) as financing cost annually. In addition the business will not only save cost but also improve cash flow position as there would be no pressure of repaying in the initial years of operations. Similarly, working capital can also be made available.

We could also look for potential support provided by government (need to check) for starting new manufacturing, skills development and employment generation.

Every dollar we save, reduces the cost of the product, making it more competitive in the market.

We are no longer operating in isolation protected by tariffs and trade barrier. We have to compete in the open market and be as good as or as bad as any other business irrespective of its location/ boundary.

Create New Markets — Australian market is very small as compared to other / partner trading nations. What does that mean? For products that require large scale manufacturing to be operationally and financially feasible, Australian market alone will not be sufficient. We would need to create opportunities in new markets for its products. (China has been an easy market for our mineral resources because Australia is lucky to have good quality natural resources and China needed it.)

Innovation and Customer focus — As competition grows, we have to stay ahead of competition by offering technologically superior products at competitive prices. Life cycle of a product has shrunk remarkably. In the 80s and 90s, we owned a phone for 10 years or more and now we change a phone every 2 years with quarterly software updates. The 3 key focus areas are adaptability, change and usability.

Benefit for the economy

Increased manufacturing will :

1. Generate employment

2. Value addition of our resources

3. Support economic growth

4. Build capability and knowledge for future