Making it in a global economy

By Tony Malkovic

When the Number 6 blast furnace at BlueScope’s Port Kembla steelworks was decommissioned in early October, it took several days for the giant, red-hot structure to cool down. The chances are it will take many, many months for the hundreds of workers who have been laid off to find new jobs and re-organise their lives.

And it might be many years before Australia’s manufacturing sector manages to reinvent itself and come to terms with what we should be making and how we should be doing it as part of the modern global economy. In effect, the Number 6 blast furnace has reignited the debate about the future of the Australian manufacturing sector, a sector of the economy that has been declining for decades. The concern is that manufacturing could be on its last legs, with some debates focusing not just on rescue plans but even whether Australia needs a manufacturing sector at all.

There has been a flurry of activity and headlines. There was a loud outcry from unions and manufacturers for an inquiry into the sector; the Prime Minister’s jobs forum in October resulted in a ‘fair go’ initiative for Australian businesses; and a new manufacturing taskforce was appointed.

Wobbly ways

The manufacturing sector’s wobbly ways are charted each month in the Performance of Manufacturing Index compiled by PwC and the Australian Industry Group.

It’s not cheery reading. The headline summary in July this year was “Manufacturing contracts”. In August, the message was “Manufacturing weakens further”. And in September the headline summary continued the dire message: “Manufacturing weakens again”.

The September index noted that the decline in manufacturing was especially pronounced in the paper, printing and publishing, textiles, miscellaneous manufactures, and the fabricated metals sub-sector. It also pointed out that manufacturing remained weak across most States.

The PwC survey is based on responses from 200 companies from a rotating sample of manufacturers, and the bottom line is that it has been a bad year for manufacturing. So far, the index has only recorded two good months for the manufacturing sector: February and June.

According to the ABS, the manufacturing sector employed 945,600 people in August 2011, and the trend has been downwards over the past three years from 1,072,900 in early 2008. As an example of that, the manufacturing sector shed 49,400 jobs in the six months between February and August 2011. (By contrast, mining jobs were up by 20,900 and the finance and insurance sector grew by 19,000 jobs over the same period.) The Australian Manufacturing Workers Union says manufacturing is now facing the worst crisis since the Depression.

Ross Gittins FCA says there’s a simple reason why manufacturing is in trouble. “A country can’t be good at everything. We’re good at mining because of an almost indefinite endowment of minerals,” says Gittins, the economics editor of the Sydney Morning Herald. “We’re also good at farming – but we’re not good at manufacturing. We went through most of the first three quarters of the 20th century propping up manufacturing behind very high tariff barriers because we were never good at it, but we had this notion that we had to have a decent manufacturing sector.”

Gittins says manufacturing isn’t on its last legs, but we should think twice about rushing in to prop it up. “What I’m saying is we shouldn’t be protecting it, we shouldn’t be giving it special favours, it should stand on its own feet – like all the other industries,” he says. “If we do that, I don’t doubt that we’ll still have a manufacturing sector, but it will be certainly smaller in its share of GDP and total production and smaller in its share of total employment.”

Unlike mining and agriculture, we’re just not internationally competitive when it comes to making things. “We are not efficient. We’ve never had a big domestic market so it’s very hard to get the economies of scale that manufacturers in other countries can get,” he says. “The other thing – although it’s changing a bit with the rise of Asia – is our manufacturers have always suffered from the tyranny of distance. We’ve been a long way from our markets which until recently have been the markets of the developed world.”

Gittins says while the manufacturing sector has shed jobs over the past decades, the services sector has grown to employ more and more people. And that’s the key to them making the most of structural changes taking place in the economy. “The economy has become more ‘weightless’ for the past 30 or 40 years,” he says. “This is not a radical new idea or big shift. It’s a continuation of a trend that’s been running for 30 or 40 years. All of the new jobs have been in the services sector.”

As manufacturing finds its new level, he says more jobs are likely to arise in the services sector – think financial services, health, professional services, even cleaning and driving. “Every time the services sector gets bigger and the shares of mining, farming and manufacturing sectors get smaller, the economy becomes more ‘weightless’,” he says. “The other thing to remember is that the services sector is labour intensive, by definition. It employs lots of people.”

Gittins says the ‘weightless’ services sector has provided more than 4.5 million jobs in the past 25 years, and that the key to our future prosperity is likely to lie more with these ‘weightless’ jobs rather than attempting to preserve uncompetitive factories. More to the point, we should ensure we continue to invest in education and training so that people can capitalise on the highly paid, high value-added, highly sought-after jobs that are part of a knowledge economy, rather than the more menial jobs.

Gittins says Port Kembla might have lost its furnace and hundreds of jobs – but all is not lost. He gives the example of what happened in his hometown of Newcastle in the late 1990s when BHP finally closed its steelworks.

“You could have predicted that Newcastle would turn into a ghost town, but Newcastle is doing fine,” he says. “And it’s a much nicer place now that it doesn’t have all that pollution. What I’m saying is that everyone in Wollongong might be saying ‘Oh no, we lose the steel industry, we’re dead!’ I come from Newcastle, we already lost ours and we’re still alive and kicking.”

He says many of those who lost their jobs at BlueScope could well be suited to working in the mining sector because they have compatible skills such as working in heavy industry or driving trucks. “I think a lot of those people eventually displaced from manufacturing will end up in mining, or they’ll end up with the jobs vacated from people in other industries who went to WA to get a bit of the (mining) action,” he explains.

In effect, the manufacturing sector might change but there are still opportunities out there. “You can’t be good at everything, you can’t have everything, you’ve got to make choices and you’ve got to jiggle it around until you’re doing the stuff that’s most advantageous,” he says. “We’d be absolute mugs not to take advantage of this period – which I think will last for 20 or 30 years – where the world is paying these unbelievable prices for our minerals. I don’t think it’s a flash in the pan – I don’t think prices will stay as high as they are, they’ll come down – but they’ll still be a lot higher than they used to be.”

Gittins says we shouldn’t squander the opportunities. “I think the way to squander it is to say, ‘We must protect manufacturing from having to adjust to this new world’,” he says. “Economists don’t like protection and industry policy because they call it ‘picking winners’. The real risk is not that we pick winners, but that we back losers. That is, we prop up industries for which the tide has turned. If you succeed in doing that, you probably don’t succeed – because if you went on for long enough, what you’d end up with is an industrial museum.”

Deja vu 

Back in 2006, Kevin Rudd said he wanted Australia to continue to be “a country that actually makes things”. Innovation and Industry Minister Kim Carr is still actively promoting that same message, but he must have experienced déjà vu when the October jobs forum came up with the ‘fair go’ initiative to help Australian firms get a foot in the door with regards to securing contracts arising from the resources boom.

After all, five months previously he’d announced the $34 million Buy Australian at Home and Abroad campaign, “to maximise the returns from the mining boom by more effectively linking Australian suppliers to Australian projects”. Carr’s well and truly on the record as saying the government will never abandon the manufacturing sector – but that doesn’t necessarily mean that it will stay the same. His mantra is that innovation is the main game for manufacturers, and that they should adapt to change and take risks, innovate – and export. And he gives the Australian car industry as an example of a manufacturing industry that lost its way but got back on track by investing in R&D and embracing new technology.

But the Westpac-ACCI Survey of Industrial Trends released in September shows the manufacturing sector still has a lot to embrace. The quarterly survey quizzes some 300 manufacturing companies and found yet more evidence the sector was in retreat. It noted that inflation pressures were weak, labour markets were soft, profit expectations had dived, and investment and export plans had weakened. On the back of this, the recent rate drop will be most welcome.

Bill Evans, Westpac’s chief economist, says part of the reason is that manufacturing has to contend with the effects of high commodity prices – and the high Aussie dollar. The rapid rise in the dollar, pushed along by the resources boom, makes it hard for manufacturers to compete. Evans says things are likely to stay that way. “Australia has been given a permanent change in their relative prices and what I mean by that is some of our commodity export prices are likely to remain at elevated levels for a considerable amount of time,” he says.

Which is where the two-speed economy kicks in. “Clearly in the case of manufacturing and mining, those manufacturers who rely on a low-value Aussie dollar for their export business are going to be under permanent stress,” Evans points out. “Offsetting that will be permanent prosperity for the mining sector.” Evans says there are many factors that are making it hard for manufacturing. “One of the disturbing aspects of the rise in the currency is that the manufacturing sector has not been able to get its share of the mining boom that you would have expected,” he says.

“Having said that, another implication of the mining boom is that the authorities believe the mining boom is going to put upward pressure on inflation. If they have that view, it means they are going to hold interest rates at a higher level than I believe is necessary. What that does is put pressure on those domestic parts of the economy, particularly in the construction sector – both residential and non-residential – that have been a critical supporter of domestic manufacturing. My view is that the government has overestimated the impact that the mining boom will have on inflation. And there’s scope to ease up on the impact that higher interest rates are having on the construction cycle. Lower interest rates would certainly help revive construction, particularly residential construction which some manufacturers benefit from directly.”

Evans attended the jobs forum in October which highlighted concerns that local manufacturing firms are not getting a look-in when it comes to big resources projects.

Huge shortage

“The other big message which came out of the jobs summit which is extremely important is that the long-term slowdown in manufacturing means that less attention in manufacturing is being given to training, particularly at the apprentice level,” Evans says.

“What we’re seeing now is this huge shortage of skilled workers to service the mining boom. And the manufacturers who have been the major source of skilled training for the sort of skills the miners require have not been there to provide that this time around. That’s making it more difficult for the mining boom to take off. I think it emphasises the importance of manufacturing as the training ground for Australia.”

Evans says, in effect, the manufacturing sector is reeling from a quadruple whammy: the high Aussie dollar; being shut out of big mining projects; the traditional training cycle being broken; and the RBA keeping interest rates high.

So how do these tough times compare with what the manufacturing sector has had to endure in the past? “The Westpac-ACCI survey started in the 1960s so it’s covered some pretty brutal times for the Australian economy – the recessions of the 70s, the two recessions of the 80s and the recession of the early 90s – all of which were pretty dismal for manufacturing and most people in the economy,” he says. “I think the difference now is that manufacturing is shrinking for these structural, permanent, relative price reasons.

“There’s not a lot we can do about that in terms of the currency, but what we can do about it is to take some pressure off the domestic construction sector, to assist those manufacturers that rightly contribute significantly to that sector.” The other thing we can do, says Evans, is to refocus our manufacturing efforts. Think niche markets, think Asian markets.

“Clearly, the other opportunity for manufacturing is niche export markets where it’s not so much a price-driven, low value-added decision, it’s more to do with high-quality (products) and we are still doing pretty well with that in certain sectors,” he says. “I think the other message for manufacturers is to be mindful of the fact the days of the Aussie dollar in the 70s (that is, 70 US cents to the Aussie dollar) or the 80s are behind us – in the three- or four-year outlook in my opinion – and so they need to structure their business around a fairly high Aussie dollar.

“But we have little doubt that the growth in the Asian region and the quality of our manufacturers will mean there will be significant opportunities for niche marketing.” In other words, innovation and exports. Now, back to Port Kembla. The Number 6 blast furnace was only built in 1996 and was previously described as the jewel in the crown of BlueScope’s operation. Such furnaces typically burn 24 hours a day at up to 1200 degrees Celsius, transforming the iron ore, coke and limestone flux that are fed into them into iron, which is then made into more valuable steel.

In the same way, you could say the heat is definitely being applied to Australia’s manufacturing sector and it, too, is being transformed. Just what it ultimately turns into is the big question everyone is grappling with.

Article last updated 22 December 2011