EDITORIAL:

The message from the last 12 newsletters has been that manufacturing continues to decline with regular reporting of factory closures and moves offshore.  Underpinning this has been the losses in the automotive sector culminating with the 2016 closure of Ford and the continuing rhetoric from Holden that reduced labour costs are essential to any kind of future.  It is uncertain whether the recently announced additional funding is the right action and so this month we ask members for their views through a simple survey on what should happen to the car industry so that we can form a comprehensive Society view.  Another strong theme throughout the last year has been the need for manufacturing to innovate and focus.  Featured in the last edition was the Manufacturing Monthly’s Endeavour Awards that demonstrated how  some companies are rising to this challenge and this month’s companies news continues this success with companies like Joy Global, Leviathan Design and Thales showing innovative ways of fighting for a new manufacturing future.

Often, when economists and academics talk about the challenges of the economy, their words are couched in specialist, obtuse language that is just as confusing, so it was good to hear Warwick McKibbon, Professor of Economics at ANU explain on ABC’s “Lateline” (6^th of August) what is wrong with current policies.  Without taking a political stance, (which VVS also tries to do), he explained academic’s role is to point out poor policies and there has been more of these in the last five years of government.  Speaking primarily on the just announced rate reduction he argued that this shows the economy is weak and the RBA is really trying to correct for wrong policies.  The basic problem is that the country has high ‘input’ costs in energy, labour, regulation and environment controls; in addition the political uncertainty, as well as the adjustment in the resources industry is adding to the slowing economy.  We are simply a too high cost economy.  What rate reductions only do is cause people to save more (the retirees who rely on savings) and cause fixed income people to become poorer.  There is political incoherence with random policies and changing regulations adding to uncertainty and reducing risk taking.  If businesses and therefore people are successful their taxes go up.  McKibbon said there is a real lack of vision for real infrastructure improvement that raises productivity.  While China’s growth is changing; incomes in China are still only 15% of the US and still offers opportunity.   There is too much regulation, not just in IR but in the environment.  There needs to be greater flexibility in the labour market and a reduction in the Federal and State bureaucracy to free up the economy to take advantage of the global market growth.

THIS MONTH’S GENERAL  NEWS

Paul Gollon of Macquarie University writing for the ‘Conversation’ reports that one year on from the ‘Fair Work Act’ review, many of the 53 recommendations have still to be implemented.  The system was said to bring in a more collaborative workplace but has not brought the required results, despite union rhetoric to the contrary.  According to the ABS, in 2007 there were 135 disputes that resulted in a strike and in 49,700 working days being lost.  In March 2013 the number of similar disputes has reached 218 with 289,500 working days being lost.  This is despite union membership being at only 13%.  One blogger responded to suggest that it is almost impossible today to ‘performance manage’ employees out and even if this is achieved, the likelihood is that they will, using the abundance of ‘no win – no fee’ lawyers, tie the company up in expensive litigation.  The blogger suggests this is leading to an increasing reliance on casual labour where the structure is not so punitive to employers.

A recent report by the Grattan Institute (CEO John Daly spoke to the Vernier last year) suggests that the country’s manufacturing sector has performed with resilience through the mining boom, worth $400b in the last decade and will benefit from the reduction in exchange rates that occurs at the end of a resources boom.  The study based on 16 countries whose exchange rates came down at the end of their resources boom and found that “within 3 years, manufacturing exports on average as a share of GDP had risen by more than a third”.  However, the report has been treated with some scepticism in other quarters, suggesting that once a manufacturing sector dips below 5% of GDP it is lost forever.

The ‘West Australian’ reports that the Chairman and MD of Alcoa Australian, Alan Cransberg has said that Australia’s industry has become “fat, lazy and happy about the fact that we are good at digging holes’.  He said that the cost of doing business in Australia was a major concern.  His comments were made as research was released that showed Australia’s unit labour costs had gone from 85% of the USA in 2000 to 241% today.  Alcoa’s Victorian smelters are under review as Port Henry and Portland sites are among the countries most expensive.

A report in the ‘Australian’ suggests that China’s labour costs will overtake US by 215 and Australia’s productivity decline in manufacturing is even more pronounced.  While in 2000 china’s labour costs were 30% of the US this advantage is quickly being eroded with US manufacturers taking the advantage of cheap shale gas to “reshore”.  China’s wage growth is creating an increasingly consumptive Asian middle class predicted to increase from 600m in 2010 to a billion by 2015.  This increase in China will drive the need for low cost manufacturing to other ASEAN countries like Thailand and the Philippines as well as Bangladesh and Pakistan. .

According to an RMIT-MGI survey, the percentage of manufacturers in family business is contracting noticeably.  A decade ago manufacturers made up 40% of all family businesses but there has been a sharp decline to around 20%, according to the latest survey, driven by the GFC. In addition, the Business Spectator is predicting that manufacturing employment will continue to decline but will focus either on high technology products or products that are too hard to bring in from overseas like bricks and beer.

At a recent Leaders Summit in Melbourne, Austrade’s Philip Bourke told the audience that Asia poses both a threat and a significant opportunity to Australian manufacturers.  By 2025 it is estimated there will be 2 billion people living in urban areas (about 50% of the world’s population) and about 50% of these will be living in Asia.  This will transform Asia, increasing their desires for mobility, health, food, leisure, infrastructure and education.  Bourke argued that Australia still has a place in terms of value add technology and the design of higher end goods.  “At Federation, Asian trade with Australia was less than 10 per cent of our total trade; now it’s about 70 per cent and Asian countries make up eight of our top ten major trading partners,” he said.  In line with Labor’s Asian Century Whitepaper in October pointing to innovation in advanced manufacturing, and assisted by a transformation of organisations like Austrade, Australia is in the right place at the right time, moving from the tyranny of distance to the power of proximity.  “Austrade is in 15 countries; have 11 officers in China and 11 in India,” he said.  Recently, Austrade has also opened offices in Mongolia and Western China to support mining, manufacturing and other penetration opportunities into those growth areas.  But he warned that is Asia is not one market; its many markets and all are different.

Reuters reports that the British manufacturing sector recorded its best monthly result since March 2011, and China also registered growth in July.  The July Markit/CIPS PMI survey gave an overall result of 54.6 for July, following June’s 52.9.  Any result above 50 indicates growth, and below it reflects contraction.  While at the same time Australia July index has fallen to 42% falling June’s figures that had risen close to parity.

The British newspaper the Telegraph reports that increasing numbers of British businesses are looking to bring their manufacturing operations back home from overseas. This trend is emerging as labour costs in Asia are rising and the latest consumer tastes require shorter, more flexible supply chains.  This push is supported by local business leaders lobbying for increased government support.  Business leaders are pushing for more local production and suggesting that import substitution is just as important as growing exports.  This view is endorsed by an increasing campaign to “Buy British”.

COMPANY NEWS

Futuris, the Victorian based but global car seat manufacturer and presenter to Vernier earlier in the year has now been sold to California based Clearlake Capital for an estimated $69m.  Clearlake currently manages approximately $1.4 billion of equity capital, and Clearlake’s founding principals have led over 70 investments totalling more than $3 billion of capital in sectors including business services, communication, consumer products/retail, defence/public safety, energy/power, healthcare, automotive, industrials, media, and technology.  Dexter Clarke who presented to VVS has just been promoted to the company’s Chief Financial Officer.

JOY Global, manufacturer of Mining Machinery has just opened its first Australian remote access facility on the University of Wollongong’s innovation campus.  This facility allows the company, through large Video wall screens to track all of the company’s data on their actual equipment at the mining sites and will house all Joy’s sales and service information.  Wollongong was chosen because of their links to major mining corporations.  Joy global see mutual benefit in R&D collaboration with the University and increases their ability to attract graduates to the industry; as well as providing a modern and stimulating environment for their team.

Editor’s note – This proves the value of collaboration and of the merits of proposed Innovation Centres.  

Melbourne Company Leviathan Design has designed manufactured and installed a complex cell of 7 ABB robots to bond metal trim and plastic columns to a glass panel to form a door outer assembly used in free standing household cookers manufactured in Adelaide by Electrolux in 14 seconds.

Editor’s note – another Victorian company I have never heard of before, based in Rowville – have a look at their quite novel website.

Launceston-based car parts manufacturer ACL Bearings will be closed by receivers by next June with 136 workers eventually losing their jobs.  ACL has been operating under receivership since 2009 when 110 workers lost their jobs and since then the workforce has reduced by a further 55 people.  ACL Bearings supplies components such as engine bearings and gaskets to the automotive industry and exports around 75-80 per cent of its products.

Archer Enterprises, a maker of precision stainless and titanium components to fine tolerances have been commissioned by Green energy company Granite Power to produce the front end assembly for their Waste Heat Recovery demonstration model, impulse turbines after Archer assisted Granite Power with the original design.  Archer based in NSW and in business for over three decades are a one-stop provider of fail-safe performance-critical products to global OEM’s and market leaders concerned with safety, asset protection and critical/essential-service applications.

Carbon Revolution, (formally CFusion) who has made “the world’ first one-piece carbon fibre wheel” a leader in this technology, want government assistance to invest in a new facility in Geelong.  The facility would create an extra 300 jobs by 2017 and add to their existing plant at Waurn Ponds.  The more expensive high performance wheels are 40-50% lighter than aluminium and offer according to the Deakin university between 3 and 8% reductions on emissions, were developed using a previous grant of over $1.8m through the Federal governments Green Car Innovation Scheme.  Switzerland’s Ronal Group, who make light alloy wheels and shower enclosures, has a minority stake in the company.

 Military vehicle manufacturer Thales Australia is to offer Victorian manufacturers opportunities to play a role in the manufacturing of the company’s Hawkei protected vehicle.  Around 20 SMEs, many from Victoria, met with Thales representatives to discuss options for the manufacture of the Hawkei’s fabricated sub-frame, vehicle components and assemblies.  Thales is segmenting the Hawkei supply chain work into around 30 major work packages. The company wishes to join with suppliers who can work in partnership with the company to meet specific quality, cost and technical requirements.  The work packages to be offered include work related to HVAC systems, Pneumatic systems, Hydraulic systems, Bonnet assembly, plastic components, and power pack dressing.

And finally, a Shakespearean thought from the Editor on return from the motherland.

What irony, as in my absence as I stood before the Tower’s famous Gate, a colonial Queen was executed; oh how Machiavelli turns in his grave.  The resurrected black Prince is robbed of a bloodstained, vengeful sword as minister’s with unusual integrity, fall on theirs.  A new army is formed from depleted ranks, why even the minstrel Cameron is recalled to the fight.  But surely, the might of the enemy cannot be withstood.  Nae, can this modern day Henry V recreate a political Agincourt as “his few, his happy few, his band of brothers (and now to be politically correct sisters) and ne’er so vile, shed their blood”?  Yet only two days in I cry; “that he which hath no stomach to this fight, let him depart, his passport shall be made”.  Flee, fly, drive, set sail, I say for anywhere; why even PNG by boat seems more appealing than the next month in Australia!

The Australian Automotive Industry

Paper 2

Automotive industry is vital to Australia’s future – but it requires a whole new mindset!

Yet another announcement of job cuts at Holden has lead to ex Ford leaders announcing that further reductions will inevitably create a domino effect on the supply base as it tries to fight the reduction of scale and the increase of costs.  These views support the economists who believe free market pressures should just be allowed to play out and government subsidies could be far better spent in other areas of the economy such as university spending as suggested on Q&A recently..  While SA unionist’s march for manufacturing and construction, Michael Filazzola, Director and GM of Global Purchasing at Holden’s publically attempts to justify, the economic benefits of the continued support for the industry.  Is the money, said to be over $4.5b from 2008 to 2020 really going to save the automotive industry?  Is it time to give up on manufacturing all together and move to a service driven economy?  This paper, on behalf of the Vernier Society, argues that an automotive industry is vital for the whole of the manufacturing sector, but it is not this current industry.  It is an industry with a future, of the future that will lead the manufacturing sector of the future.

The industry is a vital sector in manufacturing

The view that the industry should be left to free market forces is easy to understand.  The industry produces gas guzzling, mediocre quality, dated models in a high cost, low productivity environment and Labor’s justification of jobs at any price just seems another form of union patronage.  The GM Holden’s Chairman’s statement that, “Our current agreement with the Federal Government does not include minimum employment levels. [The assistance] is designed to generate the capacity to build things… and jobs flow from that.” (Manufacturers Monthly 10/4/13) makes job protection just a chimera rather than reasoned and justified economic benefit.  Death seems inevitable so let’s find a better use for the palliative money.

Yet there are strong arguments for, as Shakespeare says, ‘not going easily into this grey dawn’.  First is the market potential.  According the CEO of Renault in 2012, while the current world market is 600m cars he forecasts demand will rise to 3 billion by 2050.  The second is that 75% of the world’s trade is in manufactured goods; innovative products drive the world economy and leading industries like automotive drive innovation.  Then there is the state of the current economy in Australia and the recognition that the industry does employ about 47,000 jobs across the sector.  While the economic rhetoric  on the relativity of Australia’s financial support per capita is confused, the conclusion as Filazzola points out is that virtually all of the 15 countries in the world that produce automotives heavily sponsor their vital industry, including Germany who it could be argued to have the most vitalised and envied car industry of any country.     Our industry without continued financial support will die.  The Vernier Society believe a successful automotive industry is vital to the future prosperity of Australia.  However, the current state and the real challenges facing the current industry must be acknowledged by all the players; the government, the car companies themselves, the unions, the employees and the public.  What has to be accepted for certain is the industry has to dramatically change to sustain.

The argument for subsidies

Holden, Toyota and Ford each face their own particular challenges in the global market, let alone in Australia.  Domestic car sales are dropping and as Filazzola rightly states, over the last couple of years there has been a structural shift in the small car market but this cannot all be blamed on the high dollar.  It has a significant contribution but environmental issues, city congestion and a younger purchasing demography are additional pressures for change.  One only has to look at the car profile in the UK and the US to see the compact has changed the middle market and certainly two of the three makers have been slow to react.  At the same time, reliability has played an increasing role and increased warranties have been a clear market penetration strategy for new entrants.  Quality across the higher end market has also played a significant role and as Filazzola admitted in 2009, Holden’s plans to develop the Middle East export market had been affected by their quality problems.  The domestic market share will inevitably continue to reduce and result in even further job losses.  The writing is on the wall for Ford in 2016 if both anecdotal evidence and lack of visibility in the current debate is an indicator.

What does the loss of 47,000 jobs from the auto industry mean to the economy?  There are those like John Daley from the Grattan institute who says that traditional supporters of manufacturing, like Vernier, should not be concerned because job losses will be replaced by newly created jobs as the economy adapts to a more service based economy.  Curtin University’s labour market economist stated in the AFR recently that 1000’s of jobs are lost and created in the market every week and while the loss of 50,000 jobs may sound a lot, it will be barely noticed as far as the unemployment rate goes.  This sounds rather preposterous; because the beach has ebb and flow tides each day, high storm tides don’t do any damage?  Tell that to the seawall!   What is also not fully appreciated in this argument is existing skill levels.  In the 2008 Bracks Automotive Report it was acknowledged that nearly 50% of the employees had no formal qualification and while government funded training has been utilised, the challenge of transitioning to new skills and industries is severe.  At the same time, automotive companies cannot and should not guarantee employment.  All businesses need to manage their bottom line and their productive cost base and companies must ensure their revenues and cost ratio’s are at least maintained.  The discussions between the government, the unions and the companies were confidential but it is incredulous to believe that the automotive companies did not clearly state that these subsidies in no way guaranteed jobs.  The outcome was not job security.   The makers got continuation of necessary subsidy support, the unions got increases pay rates and the Labor government got silent compliance for a false message that endorsed their political rhetoric.  Bandaging the patient will only prolong the situation; only major surgery and lifestyle change will save life.

The case for change

Manufacturing across a wide range of sectors drives the world economy.   Michael Porter’s ‘Competitive Strategy’ analysis states that companies need to differentiate in one of three areas; cost, service or innovation.  The emerging nations are the leaders in a cost  commodity strategy, as was shown initially by China and SE Asia and now as companies like IKEA are showing production will migrate to new lowest cost economies.  So we have to compete with service and innovation.    The automobile is a relatively high priced necessity of life; nowhere more so that Australia with its huge land mass.  While Australia has a small share of the current sales market, the growth potential is enormous.  By 2050, car sales will grow to 3 billion with much of that growth, right on our doorstep, as part of the Asian century.  The economic share of this capability alone is staggering.  The automotive industry is a major contributor to our economy.  Holden alone put $32b into the Australian economy over the last 12 years.  It provides nearly $5b of added value to the economy, employs around 5% of the total manufacturing workforce and most importantly over 20% of the R&D investment in manufacturing.  Transport is the future.  In every futuristic movie made, innovative transport is ubiquitous, on auto guided highways or flying between skyscrapers.  Spaceships reach for the stars, shuttles make routine visits to neighbouring planets.  The future is an automated world of alternative energy sources.  The climate change debate shows that we need to start moving towards alternative energy sources and so the hybrid, the electric or other forms of power sources are the future differentiators and these require radical and highly innovative thought about the whole industry.  Other countries have already got this message.  Every month a new book preaches the need for high cost countries like America to lead a manufacturing renaissance.  For real innovative success one only has to look at the Swiss achievement in a manufacturing economy driven by leading edge products.   South Australia has already recognised this with the bold recruitment of leading academic on innovation, Goran Roos, to head their new manufacturing initiative.  Australia’s future must include a thriving manufacturing sector with automotive a major component.  However, it will require a much changed industry.  We need to build a new innovative model for our future automotive industry; the current one is atrophied.

How do we change?

Our current situation is like asking someone in the street for directions only to be told “Oh if you want to go there I would not start from here”.   But this is where we are and so to have a futurist leading automotive industry we need to do three things.  First have an honest assessment on the current state of the industry; secondly create a vision of where we want the industry to be in the future and finally develop a plan to get from where we are to this future vision.  Each of these tasks requires radical thinking by experts from all the aspects of the industry and will require time and an in depth evaluation with honest and realistic admissions.  This analysis must take a radical approach, traditional thinking will not take the industry to where it needs to be.  This is the approach we must take to building a new automotive industry.  Sinecures like increasing government purchases of Australian made cars, waiting for the dollar to fall, iterating design rather than innovating it, are not sufficient.  We need to follow the Tom Peters old management maxim- if it not broke, break it.

Effectively, no real decisions on the industry can be made until after the election in September.  One of the first steps would hopefully be to appoint an expert taskforce to set out a ten year roadmap for the industry.   In a year we need to have the blueprint action plan.  This would seem to fit with the current horizons establish under the current regime and so existing support financial plans will need to stay in place even with a resignation to further labour losses.  A new innovative model for the automotive industry needs to be conceived on a number of building bricks.  The leading edge types of product being produced and the research technologies required to support this edge; the radical production processes that can produce cars at relatively competitive prices and support the total productive competitive advantage and a totally new industrial climate with a new paradigm in management and worker collaboration instead of the old adversarial industrial relations division.  All of this has to be underpinned by a government that clearly understands such industries need judicious and targeted government support.

What are some of the broad brush strokes that should be considered in this new age?  The vehicles of the future will not be solely oil powered, so research and development into new forms of power has to be a priority.  It would seem that investing in a dedicated Centre for Automotive Power Innovation in accordance with the Labor Manufacturing plan would be and ideal way to start.  It would also seem that identifying a leading university and TAFE institute to develop knowledge and skills for the future industry should be given impetus with appropriate incentives.  As electronics is already a crucial, competitive differentiator in today’s car and all of this technology is outsourced overseas, there is going to have to be major technology partnerships set up with the world’s leading companies.  While this sounds easy, the issues around intellectual rights will be extremely complex and these types of joint venture will new considerations.  Government has to do more that passively make funds available as with the latest funding  for Innovation Centres; the government has to direct funding to specific organisations and technologies.  It has to force collaboration.  This is an area currently that Australia is not good at.  Government has to have the courage to direct spending in collaborative technologies but this requires a level of courage not seen in governments of either persuasion.

The second major area of change is in the total automotive process.  Currently manufacturing is driven by scale.  But the new industry will not have scale and so will require a new process concept based on some form of cellular production with tiered suppliers much more integrated into the total process, both by Geographics and status.  Tiered suppliers will share in the total process rather than the current methodologies where hierarchical power, forces pricing pressures down the tiers and futures are only proportional to the length of contract.  There will need to be a new level of integration rarely seen in the current processes.  This extends the concept recently put forward by Manufacturing Focus’s Mark Fusco, based on collaboration projects that already exist in other countries with companies sharing facilities and resources.  Productivity is another key driver in manufacturing and while there it is suggested there has been recent improvement in this area; Australia does not have a good record.  Australia’s industrial relations climate is a major deterrent and while management performance must also be improved as leading economist Saul Eslake recently suggested in the AFR, this is a chicken and egg argument as to which came first?  A new management – worker paradigm cannot wait until we have a new industry as further job losses will just enforce traditional divisions.  A new industrial relations climate needs to start now.  One way would be to scrap the current EBA system and introduce management/worker boards on the lines of what happens in Europe.  These boards work together without third party unions to negotiate across a whole range of productivity issues.  With a more enlightened attitude from all sides Industry, Unions and Government could then work together on the bigger strategic issues.  Finally, what role should government pay in this?  The almost ubiquitous cry from businesses is the need to reduce the regulation of industry and the automotive industry must surely benefit from taking positive action in this regard.  Of course, the folly of the carbon tax with its increased costs for no benefits must be addressed.  The Alternative energy fund should be focused on to the industry in recognition that car pollution is a major issue.  Utilising Australia’s natural energy resources to assist the industry as Dow Chemical’s Andrew Liviris’s suggests would again provide further assistance to a new industry.

A brave new world

These are but a few suggestions from a society of passionate manufacturing people who believe that both a manufacturing industry and an automotive industry are crucial to the future prosperity of this country.  One of the Victorian Government’s new principles is collaboration and much of this paper builds on a new regime of collaboration within the industry.  It also relies on a new form of positive and supportive government.  The existing automotive industry is heading to the extinction cliff edge and we will lose much more than an automotive industry, we will lose the bedrock of a manufacturing industry that will never to able to be replaced.  But it requires action not complacency.  As the CEO of the CPA Institution stated at their launch of building a ‘Competitive Australia’ the government’s plan for another innovative and key manufacturing industry, ‘Fast Rail’, took 32 months to produce a plan that will take 65 years to implement while China actually planned and built theirs in just 38 months!  It requires a quantum change of mindset to create this brave new world.

Automotive industry is vital to Australia’s future – but it requires a whole new mindset!

Yet another announcement of job cuts at Holden has lead to ex Ford leaders announcing that further reductions will inevitably create a domino effect on the supply base as it tries to fight the reduction of scale and the increase of costs.  These views support the economists who believe free market pressures should just be allowed to play out and government subsidies could be far better spent in other areas of the economy such as university spending as suggested on Q&A recently..  While SA unionist’s march for manufacturing and construction, Michael Filazzola, Director and GM of Global Purchasing at Holden’s publically attempts to justify, the economic benefits of the continued support for the industry.  Is the money, said to be over $4.5b from 2008 to 2020 really going to save the automotive industry?  Is it time to give up on manufacturing all together and move to a service driven economy?  This paper, on behalf of the Vernier Society, argues that an automotive industry is vital for the whole of the manufacturing sector, but it is not this current industry.  It is an industry with a future, of the future that will lead the manufacturing sector of the future. 

The industry is a vital sector in manufacturing

The view that the industry should be left to free market forces is easy to understand.  The industry produces gas guzzling, mediocre quality, dated models in a high cost, low productivity environment and Labor’s justification of jobs at any price just seems another form of union patronage.  The GM Holden’s Chairman’s statement that, “Our current agreement with the Federal Government does not include minimum employment levels. [The assistance] is designed to generate the capacity to build things… and jobs flow from that.” (Manufacturers Monthly 10/4/13) makes job protection just a chimera rather than reasoned and justified economic benefit.  Death seems inevitable so let’s find a better use for the palliative money. 

Yet there are strong arguments for, as Shakespeare says, ‘not going easily into this grey dawn’.  First is the market potential.  According the CEO of Renault in 2012, while the current world market is 600m cars he forecasts demand will rise to 3 billion by 2050.  The second is that 75% of the world’s trade is in manufactured goods; innovative products drive the world economy and leading industries like automotive drive innovation.  Then there is the state of the current economy in Australia and the recognition that the industry does employ about 47,000 jobs across the sector.  While the economic rhetoric  on the relativity of Australia’s financial support per capita is confused, the conclusion as Filazzola points out is that virtually all of the 15 countries in the world that produce automotives heavily sponsor their vital industry, including Germany who it could be argued to have the most vitalised and envied car industry of any country.     Our industry without continued financial support will die.  The Vernier Society believe a successful automotive industry is vital to the future prosperity of Australia.  However, the current state and the real challenges facing the current industry must be acknowledged by all the players; the government, the car companies themselves, the unions, the employees and the public.  What has to be accepted for certain is the industry has to dramatically change to sustain.

The argument for subsidies

Holden, Toyota and Ford each face their own particular challenges in the global market, let alone in Australia.  Domestic car sales are dropping and as Filazzola rightly states, over the last couple of years there has been a structural shift in the small car market but this cannot all be blamed on the high dollar.  It has a significant contribution but environmental issues, city congestion and a younger purchasing demography are additional pressures for change.  One only has to look at the car profile in the UK and the US to see the compact has changed the middle market and certainly two of the three makers have been slow to react.  At the same time, reliability has played an increasing role and increased warranties have been a clear market penetration strategy for new entrants.  Quality across the higher end market has also played a significant role and as Filazzola admitted in 2009, Holden’s plans to develop the Middle East export market had been affected by their quality problems.  The domestic market share will inevitably continue to reduce and result in even further job losses.  The writing is on the wall for Ford in 2016 if both anecdotal evidence and lack of visibility in the current debate is an indicator.

What does the loss of 47,000 jobs from the auto industry mean to the economy?  There are those like John Daley from the Grattan institute who says that traditional supporters of manufacturing, like Vernier, should not be concerned because job losses will be replaced by newly created jobs as the economy adapts to a more service based economy.  Curtin University’s labour market economist stated in the AFR recently that 1000’s of jobs are lost and created in the market every week and while the loss of 50,000 jobs may sound a lot, it will be barely noticed as far as the unemployment rate goes.  This sounds rather preposterous; because the beach has ebb and flow tides each day, high storm tides don’t do any damage?  Tell that to the seawall!   What is also not fully appreciated in this argument is existing skill levels.  In the 2008 Bracks Automotive Report it was acknowledged that nearly 50% of the employees had no formal qualification and while government funded training has been utilised, the challenge of transitioning to new skills and industries is severe.  At the same time, automotive companies cannot and should not guarantee employment.  All businesses need to manage their bottom line and their productive cost base and companies must ensure their revenues and cost ratio’s are at least maintained.  The discussions between the government, the unions and the companies were confidential but it is incredulous to believe that the automotive companies did not clearly state that these subsidies in no way guaranteed jobs.  The outcome was not job security.   The makers got continuation of necessary subsidy support, the unions got increases pay rates and the Labor government got silent compliance for a false message that endorsed their political rhetoric.  Bandaging the patient will only prolong the situation; only major surgery and lifestyle change will save life.

The case for change

Manufacturing across a wide range of sectors drives the world economy.   Michael Porter’s ‘Competitive Strategy’ analysis states that companies need to differentiate in one of three areas; cost, service or innovation.  The emerging nations are the leaders in a cost  commodity strategy, as was shown initially by China and SE Asia and now as companies like IKEA are showing production will migrate to new lowest cost economies.  So we have to compete with service and innovation.    The automobile is a relatively high priced necessity of life; nowhere more so that Australia with its huge land mass.  While Australia has a small share of the current sales market, the growth potential is enormous.  By 2050, car sales will grow to 3 billion with much of that growth, right on our doorstep, as part of the Asian century.  The economic share of this capability alone is staggering.  The automotive industry is a major contributor to our economy.  Holden alone put $32b into the Australian economy over the last 12 years.  It provides nearly $5b of added value to the economy, employs around 5% of the total manufacturing workforce and most importantly over 20% of the R&D investment in manufacturing.  Transport is the future.  In every futuristic movie made, innovative transport is ubiquitous, on auto guided highways or flying between skyscrapers.  Spaceships reach for the stars, shuttles make routine visits to neighbouring planets.  The future is an automated world of alternative energy sources.  The climate change debate shows that we need to start moving towards alternative energy sources and so the hybrid, the electric or other forms of power sources are the future differentiators and these require radical and highly innovative thought about the whole industry.  Other countries have already got this message.  Every month a new book preaches the need for high cost countries like America to lead a manufacturing renaissance.  For real innovative success one only has to look at the Swiss achievement in a manufacturing economy driven by leading edge products.   South Australia has already recognised this with the bold recruitment of leading academic on innovation, Goran Roos, to head their new manufacturing initiative.  Australia’s future must include a thriving manufacturing sector with automotive a major component.  However, it will require a much changed industry.  We need to build a new innovative model for our future automotive industry; the current one is atrophied.

How do we change?

Our current situation is like asking someone in the street for directions only to be told “Oh if you want to go there I would not start from here”.   But this is where we are and so to have a futurist leading automotive industry we need to do three things.  First have an honest assessment on the current state of the industry; secondly create a vision of where we want the industry to be in the future and finally develop a plan to get from where we are to this future vision.  Each of these tasks requires radical thinking by experts from all the aspects of the industry and will require time and an in depth evaluation with honest and realistic admissions.  This analysis must take a radical approach, traditional thinking will not take the industry to where it needs to be.  This is the approach we must take to building a new automotive industry.  Sinecures like increasing government purchases of Australian made cars, waiting for the dollar to fall, iterating design rather than innovating it, are not sufficient.  We need to follow the Tom Peters old management maxim- if it not broke, break it.  

Effectively, no real decisions on the industry can be made until after the election in September.  One of the first steps would hopefully be to appoint an expert taskforce to set out a ten year roadmap for the industry.   In a year we need to have the blueprint action plan.  This would seem to fit with the current horizons establish under the current regime and so existing support financial plans will need to stay in place even with a resignation to further labour losses.  A new innovative model for the automotive industry needs to be conceived on a number of building bricks.  The leading edge types of product being produced and the research technologies required to support this edge; the radical production processes that can produce cars at relatively competitive prices and support the total productive competitive advantage and a totally new industrial climate with a new paradigm in management and worker collaboration instead of the old adversarial industrial relations division.  All of this has to be underpinned by a government that clearly understands such industries need judicious and targeted government support.

What are some of the broad brush strokes that should be considered in this new age?  The vehicles of the future will not be solely oil powered, so research and development into new forms of power has to be a priority.  It would seem that investing in a dedicated Centre for Automotive Power Innovation in accordance with the Labor Manufacturing plan would be and ideal way to start.  It would also seem that identifying a leading university and TAFE institute to develop knowledge and skills for the future industry should be given impetus with appropriate incentives.  As electronics is already a crucial, competitive differentiator in today’s car and all of this technology is outsourced overseas, there is going to have to be major technology partnerships set up with the world’s leading companies.  While this sounds easy, the issues around intellectual rights will be extremely complex and these types of joint venture will new considerations.  Government has to do more that passively make funds available as with the latest funding  for Innovation Centres; the government has to direct funding to specific organisations and technologies.  It has to force collaboration.  This is an area currently that Australia is not good at.  Government has to have the courage to direct spending in collaborative technologies but this requires a level of courage not seen in governments of either persuasion.

The second major area of change is in the total automotive process.  Currently manufacturing is driven by scale.  But the new industry will not have scale and so will require a new process concept based on some form of cellular production with tiered suppliers much more integrated into the total process, both by Geographics and status.  Tiered suppliers will share in the total process rather than the current methodologies where hierarchical power, forces pricing pressures down the tiers and futures are only proportional to the length of contract.  There will need to be a new level of integration rarely seen in the current processes.  This extends the concept recently put forward by Manufacturing Focus’s Mark Fusco, based on collaboration projects that already exist in other countries with companies sharing facilities and resources.  Productivity is another key driver in manufacturing and while there it is suggested there has been recent improvement in this area; Australia does not have a good record.  Australia’s industrial relations climate is a major deterrent and while management performance must also be improved as leading economist Saul Eslake recently suggested in the AFR, this is a chicken and egg argument as to which came first?  A new management – worker paradigm cannot wait until we have a new industry as further job losses will just enforce traditional divisions.  A new industrial relations climate needs to start now.  One way would be to scrap the current EBA system and introduce management/worker boards on the lines of what happens in Europe.  These boards work together without third party unions to negotiate across a whole range of productivity issues.  With a more enlightened attitude from all sides Industry, Unions and Government could then work together on the bigger strategic issues.  Finally, what role should government pay in this?  The almost ubiquitous cry from businesses is the need to reduce the regulation of industry and the automotive industry must surely benefit from taking positive action in this regard.  Of course, the folly of the carbon tax with its increased costs for no benefits must be addressed.  The Alternative energy fund should be focused on to the industry in recognition that car pollution is a major issue.  Utilising Australia’s natural energy resources to assist the industry as Dow Chemical’s Andrew Liviris’s suggests would again provide further assistance to a new industry.

 

A brave new world

These are but a few suggestions from a society of passionate manufacturing people who believe that both a manufacturing industry and an automotive industry are crucial to the future prosperity of this country.  One of the Victorian Government’s new principles is collaboration and much of this paper builds on a new regime of collaboration within the industry.  It also relies on a new form of positive and supportive government.  The existing automotive industry is heading to the extinction cliff edge and we will lose much more than an automotive industry, we will lose the bedrock of a manufacturing industry that will never to able to be replaced.  But it requires action not complacency.  As the CEO of the CPA Institution stated at their launch of building a ‘Competitive Australia’ the government’s plan for another innovative and key manufacturing industry, ‘Fast Rail’, took 32 months to produce a plan that will take 65 years to implement while China actually planned and built theirs in just 38 months!  It requires a quantum change of mindset to create this brave new world.

The Labour Government’s  “Plan for Australian Jobs”.

The Prime Minister has announced the promised “Plan for Australian Jobs” that follows the report of the Non – Government Taskforce issued in September of last year.  The PM announced the plans at a visit to the Boeing Facility in Melbourne, one of the few successes of component manufacturing still remaining in Australia.  Said to be a $1b investment in the future of manufacturing jobs in Australia, the heavily repetitive document, seemingly more desiring of volume than articulation, has received a rather muted response in the national press and from the opposition.  This paper outlines the major initiatives in the plan and then critically examines whether these actions are going to achieve the rejuvenation in manufacturing that is still essential to Australia’s future prosperity.

Reminder of the Taskforce findings:

•  Meeting current pressures by helping with investment and industry participation, to reduce the risk of loss of jobs and core manufacturing capabilities.
•  Lifting productivity growth and reducing business costs via economy-wide proposals in transport infrastructure, broadband, energy, regulation and taxation reform.
• Improving the benefits flowing to Australian manufacturing from our research investments including through a new platform for systemic collaboration with innovation hubs and stronger networks.
• Building a cohort of medium sized world competitive firms and improving SME competitiveness through a new SME Strategy that targets SME capability.
• Forging of a shared competitiveness culture through a new national partnership for workplaces, focused on the capabilities of managers and workers.

Plan Details

In line with recent rhetoric from the government, the paper outlines that creating and supporting jobs are the central objectives of the government’s economic policy and through this plan $1b will be invested in productivity, prosperity and jobs.

The three main policy frameworks of the plan are:

1. Backing Australian Firms to win more Business at Home
2. Supporting Australian Industry to win new business abroad
3. Helping Australian Industry SME’s to grow and create  new jobs

It is said that these policies will complement the 5 pillars of productivity identified in the ‘Asian Century’ paper of skills and education, innovation, infrastructure, tax reform and regulatory reform.

1.  ‘Winning more work at home’

The main actions are the introduction of a new ‘Australian Industry Participation Authority’ that will be established to help firms seeking work on large domestic projects and in global supply chains.  In addition, they will legislate through a new Australian Jobs Act to extend Australian Industry Participation (AIP) to give fair chances to Australian firms.  All projects with capital expenditure of $500m plus will be required to implement AIP plans as to how Australian firms are to be given opportunities to win appropriate work.  For projects above $2b that applies for concessions, they will be required to embed AIP Opportunity officers within their procurement teams.  It is believed with these actions of enhanced industry participation, productivity and growth through building scale will increase competitive advantage.  According to the costs summary table, this part of the initiative will cost $98.2m although it appears the current expenditure is already $58m and so additional expenditure will be $40.2m.  (Author’s note:  apologies that sum of these allocations may not be totally correct but the report’s figures are not easy to interpret).

Strengthening Australia’s Anti- dumping laws – $27.7m will be invested in a new system for investigating and applying remedies where dumping is injuring local producers.

Improve management and workplace skills with a $12m investment over 4 years to establish the ‘Centre for Workplace Leadership’.  This not for profit entity will demonstrate how effective leadership is critical to workplace productivity.

2.  ‘Supporting Australian Industry to win new business abroad’

The three main initiatives in this framework area are:

‘Industry Innovation Precincts’

Creating up to 10 ‘Industry Innovation Precincts’ to drive collaboration and innovation in areas where Australian firms can globally compete.  The precincts will be business led and focus on areas of scale competitive advantage and emerging opportunities and networked nationally through a new ‘Industry Innovation Network’.

The precincts will be governed by industry led boards with representatives from business, the research sector and others including service providers who can provide advice and assistance in certain areas.  The precincts will have flexibility in the projects and services they deliver.  A competitive ‘Industry Collaboration Fund’ (with funding building to $50m/year) will be administered by a new ‘National Precincts Board’ which will have at its power additional funding options.  Firms located nationally will benefit from the precincts activities through a national technology platform, ‘Industry Innovation Network’ and through ‘innovation Brokers’ who will link industry with researchers and business services.  The first precinct announced is the ‘Australian manufacturing and Materials Precinct’ at Clayton, Victoria (AMMP) which embraces the Synchrotron.  The second one is the private Kraft lead food precinct headquartered in Melbourne.  The total expenditure announced on Precincts is $504.4m with $238.4m allocated to the precincts and $236.3m allocated to ‘Industrial Transformation Research Programs’ (ITRP), which are research grants administered under the Australian Research Council (ARC)

Providing new support for SME’s with high-growth potential in such precincts through ‘Growth and Leadership Development’ (GOLD) initiative where potential high growth firms will be offered advanced integrated services as a ‘one-stop shop’.  The service will be delivered by Enterprise Connect, AusIndustry, Commercialization Australia and other service providers.  GOLD will offer access to a range of capabilities including:  skills and technical expertise through the existing ‘Researchers in Business Scheme; Design through a new Design Solutions initiative, Management Skills Improvement through extending leadership capabilities and marketing through associated government bodies.

Improving efficiency and streamlining costs to position Australia as a world leader in clinical research and the commercialisation of new medical technologies with $9.9m allocated to specific clinical trials.

3.  ‘Helping SME’s to grow and create jobs’

The main initiatives are:

Creation of ‘Venture Australia’ to facilitate the growth of new knowledge based and innovation driven businesses in Australia, to increase industry competitiveness and to attract new investment to Australia based on our areas of strength.  This will have an allocation of $350m.  The government will match $ for $ investment taking only a return on the long term bond rate.

Government will be a customer to innovative firms through their purchasing power for requiring delivery public services.  The ‘Enterprise Solutions Program’ will fund innovation to develop solutions for future government requirements through improved practices, products and services.  The government will spend $27.7m over 5 years on this program.

Enhancing ‘Enterprise Connect’ services to a wider range of SME’s.  Eligibility will be extended to professional services, information & communication technologies and transport & logistics sectors.

R&D tax incentives will be restructured into a new tiered structure with the third tier of very large companies with an annual Australian turnover of $20b under the non-refundable 40% R&D tax offset.

Press Response

Immediately following the announcement, the AFR ran an article that gave the reactions of the major players.  At a speech to the AWU Conference, Prime Minister Gillard defended the R&D cuts to large corporations as financially responsible and in line with “Labour Values” arguing that the big companies have the financial and market incentives to innovate without government support.  The Australian Industry Group welcomed the changes but expressed reservations on the R&D cuts to large businesses.   The Minerals Council of Australia expressed concern on the plans to embed public servants in companies as “unnecessary, unwarranted and inefficient”.  The CEO also expressed concern on the reduction of incentives affecting overseas views of Australian tax arrangements.  The Greens described the changes as toothless and demanded mandated use of Australian goods and services.  The Australian Chamber of Commerce & Industry  CEO appeared to be in general agreement but questioned value for money and whether it would offset damages done to industry by other policies.  The supportive AWU described the package as a “game changer”.

Peter Roberts in a comment column in the AFR described the initiative as a ‘flawed innovation plan’.  He questions the local content rules, quite rightly stating that at the end of the day no one is forced to buy Australian.  He praised the $350m of venture capital to be made available as a market based model where previously the direct investment model through “Commercialization Australia” had bureaucrats picking winners and so moving to a market based approach is more desirable.  Roberts also praises the new industry innovation precincts that are modelled on the successful German ‘Fraunhofer Institutes’.  Again it is a move towards private incentives for the precincts as demonstrated by the first centre set up by Kraft Foods at Ringwood opened earlier this month driven by the private sector rather than government initiative.  Roberts does criticize the removal of the R&D concessions as ‘punishing success’ and also asks the important question of whether there is a need for two more government bodies, an industry innovation Network and an Australian Participation Authority to administer all this?

Vernier Comment

This plan cannot be found wanting in all areas and some moves, particularly the Venture Capital Fund should be applauded but there is much in the structure that feeds the Labour model.  Julia Gillard consistently argues that all their policies are based on ‘labour values’ and are focused on creating jobs.  But yet again the jobs created here in the first instance are bureaucratic, with the two new authorities in an area that is already overburdened with numerous government bodies.  The administrative challenge to avoid duplication must be real with so many similar authorities and support units.  The labour ideology of centralized government is still under writing this plan where as the Liberal principle of the need for smaller government from a cost and an effectiveness perspective has more appeal.  The idea of embedded AIP Opportunity officers is just another level of cost to an organisation.  Companies are only going to buy local content if the value proposition is correct for them and this package does nothing to correct many of the structural costs incurred by business and the economy in Australia.  Ensuring that both the company managing the project and the Australian companies capable of delivering goods are aware of each other’s plans and capabilities is essential but at the end of the day such decisions are quite rightly made on product performance, price and delivery and installing bureaucratic checks does nothing to ensure Australian firms compete against these key criteria.

The innovation Precinct Concept is not new with Silicon Valley of the 1970’s as an early successful example.  In addition, the UK government have just announced a similar program called ‘Catapult’ and the US’s ‘National Network for Manufacturing’ while Victoria’s previous example at Port Melbourne did not succeed.  The idea of focusing innovation into specific areas is certainly a good idea, although what is important is to make sure the industry area is progressive and well niched.  The first Precinct at Clayton, the AMMP, is already up and running but its website would suggest that they are focused on research areas rather than a specific industry.  It is again unfortunate that this initiative creates yet another top heavy bureaucracy with tiers of boards.  In addition, the complexity of ways of obtaining funding through the myriad of options must be very confusing and limiting to start up organisations.  The other question is whether with today’s technology, a cheaper and better solution would be to create ‘virtual precincts’.  The Kraft food precinct in Ringwood is good but to extend the concept to a ‘food’ niche would surely involve companies geographical separated and raises the question of would not using ‘virtual precincts’ utilizing the potential of the NBN not be nearly as effective solution at a much more effective price?  Of course, the infrastructure investment of $200m plus will be more attractive to construction unions support than a virtual solution.

The plan to remove the R&D grants from large companies is a short-sighted and bad idea.  Highly successful British entrepreneur Sir James Dyson said in Sydney recently that “it is just crazy to steal or take money from big companies”.  It seems that the government just wants to penalize large companies, not only with this but with the focus on the mining companies with the MRRT and the ubiquitous Carbon Tax.  There seems to be a belief that big companies are just easy pickings.  It may be that the government is playing ‘Robin Hood’ taking from the large to feed the Small SME’s but there is a danger that this myopia will affect global strategies and turn once large companies in Australia, into large international companies with small companies in Australia .

The consistent message of late that innovation is the key to a resurgent manufacturing sector seems to be partly addressed by these initiatives.  The need for industry and academia based R&D to become more closely linked is laudable but it is difficult to see whether academic organisations have really understood that they need to be strongly commercially focused.  One of the other key messages in this plan is that while creating a better environment for SME’s to flourish, the government believes that new entrepreneurial managers need a new level of training to maximize their potential;  hence the proposal for “Centres for Workplace Leadership”.  Submissions for the provision of this Centre closed at the end of January and is to be in operation by the end of March 2013.  With such a short reaction time I really struggle to understand how and where the visionary thinking has occurred to identify and develop the transferable knowledge and skills the manager of tomorrow needs in his ‘toolbox’.   I cannot help thinking this was a loaded solution just waiting for an engineered question?  The other question is whether organisations like ‘Enterprise Connect’ are going to have the skills to expand to deliver to a wider audience.  Does the organisation have the consultants with the depth of global experience to turn small SME’s into potentially large and successful companies remains to be seen.  My personal experience is they help small inefficient companies become more efficient small companies.

What is not in the plan?  Well for the unions to describe it as a ‘game changer’ would automatically to suggest to this sceptical author that they see no pressure for collaborative change in the plan.  While the Gillard Taskforce proposed a new level of cooperation and collaboration between employers, workers and unions; the recent changes to Fair Work Law just increase the gap between management and unions by increasing the already wide influence of union officers.  The Industrial Relations arena still seems to be so emotively dangerous for the Coalition for potentially losing votes that one can only hope they are just playing safe and will start to make sweeping changes after their expected and almost demanded victory.  The other issue is the reduction in bureaucracy that is required and this plan seems to move in the wrong direction.  Cutting government red tape, a more appealing tax regime and a realization by the unions and the populace that our industries operate in an increasingly challenging world environment and so all ‘enshrined rights’ should be up for review, is sorely missing in any Labour plan.  But let’s see the Coalition plan please.

ISSUE 9 – FEBRUARY 2013

MANUFACTURING IMPORTANCE TO AUSTRALIA

EDITORIAL

This month’s main speaker is Dexter Clarke from Futuris.  The timing is opportune as the company, maker of car seats and trims, has announced recently that it has doubled, over the last 18 months, its output from its plant in the port city of Hemaraj in Thailand.  The plant is located in an industrial estate sometimes known as the “Detroit of the East”.  So this month it will be pleasingly to hear a success story in the Australian Automotive industry.

The ”Initiative” presentation this month will give an overview of the New Gillard “Jobs plan for Australian Manufacturing”, which is said to be a $1b investment in our manufacturing future.  While some of the ideas are interesting, it is hard to believe that this is the panacea to all our issues.  The focus is on jobs – but what jobs and where will the money come from?  This question will become increasingly predictable in this election year as both parties make promises filled with financial funding uncertainties.

The other big issue that has dominated the last week is the push from the PM to “Put foreign workers last”.  Then there was the claim from militant Maritime Union that they are insisting on unprecedented guarantees that companies servicing the offshore oil and gas sector will only employ local workers under new four year workplace agreement (AFR 26/2).  One could not help smile at the coalition’s point that the PM’s major advisor is himself on a 457 visa. Union leader Paul Howes, when probed on their enforcement of this point on ABC TV recently, repeatedly cited incidents of rorting of the visa system by unscrupulous bosses and claimed that the government’s, for want of a phrase “Give us a job” site for people wanting jobs in WA, had over 37,000 names yet new 457’s were being employed.  The ‘Lateline’ reporter pointed out that it was fine to want a job but how many Australians had the skills that were required against the jobs available?  Howes repeatedly ducked the question, with the suggested aplomb of a man who has his own name on a jobs wanted list.  It has been pointed out that many of the 457 jobs are in our hospitals and care service and were well paid roles and skilled roles, necessary to support a system that would otherwise collapse.  While 457 jobs in manufacturing are in a minority, one factor that seems to be overlooked or too explosive to mention is, and I speak from firsthand experience, that the productivity of overseas workers is higher than the Australian worker.   While some workers may not have the level of skills required initially, this is compensated for by industriousness, a willingness to learn and perhaps no sign of the Australian ‘mentality’ that is seen in some local workers.  Of course, these overseas workers will work hard and may not know or get their full entitlements because job security is so vital to them but the nationality of the worker is not and should not be the only choice an employer is mandated to make!

The Jobs Situation

Mining Job losses

Even the mining industry is not immune from job losses with the Queensland mining company CQMS Razer announcing it will cut another 60 jobs next week following the 20 people that were removed at the end of last year. (MM Feb)

Telstra cuts 700 jobs

Telstra confirmed on 21/2 that it was cutting nearly 700 jobs from Sensis as part of a restructuring that aims to accelerate the transition of the faltering directories unit to a fully digital media business which will create another 50 positions.  These losses occur as Telstra posts record half year profits of $1.6b. (AFR 22/2)

Boral further restructure

Following Boral’s 700 employee redundancies announced in January, the company today announced it was amalgamating its construction materials and cement into a single division with the loss of one senior executive (MM Feb)

SA dependent on manufacturing (MM Feb)

A leading economist has stated that the SA economy with 70% of its exports coming from the manufacturing sector is heavily dependent on the allocation of the forthcoming federal defence contracts.

Half defence jobs go overseas via bid process

The AFR reported (25/2) that the federal government was outsourcing defence jobs to overseas manufacturers while imposing new requirements on mining companies to use local content.  The article states that local content has fallen from 80c to 53c and the average contract value was lower in value than contracts awarded to Britain, US and European based companies.  The DMO manages 170 defence projects worth of $100b.  However the Australian Strategic Policy institute said “given the globalisation of defence industry, it’s inevitable that work will increasingly go offshore”.

600 Jobs on line at Electrolux – (AFR 8/2)

One of the two remaining large whitegoods manufacturing plants in Australia is under threat.  Electrolux Home Products with 600 staff at its refrigeration plant at Orange NSW is seeking a $50m plus investment from its Swedish partner .  A request that has sparked a company review .  The CEO said this is not a review based on lack of profitability or productivity but by the Australian board looking for new investment.  The challenge is that Orange will compete for investment with 30 Electrolux plants worldwide including lower cost locations like China.  While the Orange plant is under question, the Adelaide Oven factory cannot cope with the backlog of orders for the new and first 90 cm wide oven.  Electrolux have up to 40% of the Australian market – The CEO said “we should stop apologising for Australian made – if you are doing it today you must be doing a bloody good job”.

Industry No to apprentice wage rises

The ACTU along with manufacturing unions are arguing before Fair Work Australia (FWA) that a first year apprentices wage should rise to 60% of an adult’s wage.  The article did not make clear what the current comparative rate is but the case is being watched by business and unions for wage claims of almost 500,000 trainees and apprentices across the country.  The ACTO argue that the increase would stop the high dropout rate and provide an adequate living wage, while the employer associations argue that it would lead to a substantial decrease in apprenticeships being created and so increase the skills shortage.

Other News this month

Coalition rules out changes to industrial Relations

Joe Hockey announced in Queensland recently that the coalition have ruled out both major industrial relations changes and intervention to lower the dollar.  Hockey said productivity is more important than cutting wages.  “We can compete with higher wages provided our output per work is globally competitive” the AFR reported from his speech. “Australia’s standard of living must not go backwards.  There is no national benefit in cutting wages”.  With regard to the high $ Hockey argued that a forced reduction would create higher prices for consumers at a time with many households are under extreme financial pressure.

Academic offers solution for new global companies and praises ANCA

In a recent interview with “Smart Company, UTS Professor and recent advisor to the government, Roy Green has said there has been a recent growth in what he calls “micro-multinationals” who are well suited to Australia’s current challenges.  Some companies will die off, Green claimed, but others with niche offerings and an international focus could adapt.  Either those who produce very bulky items difficult to import or those that are agile and specialised to producing products that operate in niche markets both locally and internationally.  “Micro-multinationals “are those that have a global mindset and are not limited to the domestic market. Examples of such companies were given as ANCA, fabric maker Textor and electrical accessories brand Clipsal.  Vernier’s recent speaker and ANCA co-founder Pat Boland stated that ANCA’s plant in Thailand is able to sell into China under a free trade agreement between the two countries.  This means that there must not be such an agreement Australia and China (apparently such agreements with China are rare) so machines will be more expensive when shipped from Australia.

Government tells manufacturing the solution to current pressures

Gillard in a radio interview, as reported by Manufacturers Monthly says that manufacturers can still survive even with the high $ by making changes to make their businesses in order to stay profitable.  “The competitive disadvantage of the high Aussie dollar is obvious but we can still manufacture things, provided we’re at the forefront of innovation and quality,” she said.  “We can still be a country that manufactures things. But we’re going to have to do it differently.”  The PM’s comments echo Industry and Innovation Minister Greg Combet as reported in the Australian that while the government was committed to supporting manufacturing jobs, business models have to change to become more competitive.  “Industries and businesses that succeed are going to be those that develop new technologies, new processes, that innovate, that apply technology to their manufacturing processes, for example,” he said.  “the manufacturing sector also need to take a leadership role in finding new technology … Industries and businesses that succeed are going to be those that develop new technologies, new processes, that innovate, that apply technology to their manufacturing processes,” Combet said.

Successful UK Entrepreneur questions Australian tax incentives (MM Feb)

Inventor Sir James Dyson (of vacuum cleaner fame) was in Sydney last week as part of a promotional tour for the company’s new Airblade product stated that Australian tax laws do not encourage entrepreneurship through limiting tax breaks for inventive organisations.  The AFR report Dyson as saying “You have very inventive people and very good universities … but if they [government] think 45% tax relief for start ups in Australia is going to help – it won’t.  It’s too small.  We [Britain] are getting more than double that, the French gives more than that.  It just isn’t enough”. Dyson also questioned funding effectiveness. Having to apply for funding where some civil servant ultimately makes the decision is wrong because they are not equipped for the right decisions.  “You should back people who have ideas and want to do them and the way to do that is through the tax system”.  As reported by the Australian newspaper the Airblade was a result of 3 years research by 125 engineers and through 3,300 plus prototypes.

ISSUE 8 – JANUARY 2013

EDITORIAL

Welcome to the first 2013 edition of the Vernier Newsletter.  In a period when many manufacturers are enjoying their short summer breaks, we have at least had one good piece of news from the government and that of course is the date for the next election.  In the same presentation made to the National Press Club on Wednesday, the PM also announced that the long waited action plan for manufacturing built on the report from her Taskforce, which we reported on back in September, will be issued shortly – a document and more importantly, the actions to be taken to re-boost manufacturing.  A plan that I am sure Vernier members will be interested in and one we will explore in detail in future newsletters.

Job Losses

Of course, not even the summer break could keep further manufacturing job losses out of the news.  The Australian ran a piece on 17th of January that listed the losses over the last two months:

• Boral axe 700 management and office jobs
• Bluescope cuts 170 jobs to downsize in Victoria
• Boral sheds 90 production jobs at cement plant
• Santos cuts 100 jobs in SA

Latest on the car industry

Then following on from our extensive feature on the future of the car industry in Australia we had (AFR 16/1/2013) the headline “Car makers gear up for more cash” suggesting that both Toyota and Holden could seek extra financial assistance  on top of the estimated $1 billion they have each received over the last decade.  Holden sparked the controversy (according to the report) in an interview with their CEO that the Port Melbourne Engine Plant that makes the V6 engine and employs around 320 employees, is under threat as the commodore production starts to wind down.  While there is a commitment to build engines to 2016, it would seem inevitable that in these fuel economy conscious times larger engines are going to decline in sales.  Significant in the article was the fact that Ford did not join the bandwagon, perhaps suggesting as was argued in our analysis, that the plants future is even more uncertain.

American Manufacturing is starting to see the light.

One of the most interesting articles of the month was in last Friday’s AFR Review section entitled “Offshoring Comes Home” written by Charles Fishman.  The article described the encouraging reversal of manufacturing in the US as companies start to bring manufacturing jobs back from overseas.  The main company focused was GE who in 1951 built a huge Industrial Park in Louisville Kentucky which at its peak in 1973 employed 23,000 people produced  60,000 appliances a week across a range of white goods  to feed the explosion of the United States consumer economy.  However, the intervening years saw a gradual reduction in people employed and amidst the height of its labour battles GE’s CEO Jack Welch suggested that the site would be completely closed by 2003.  By 2011 the people who made appliances was down to 1863.

But in 2012 a new assembly line was opened in one of the 6 huge shopping mall sized buildings – the first new assembly line in 55 years!  The line started to produce cutting edge, low energy water heaters – a product that had previously been made in GE’s Chinese contract factory.  Pretty soon afterwards, another line was opened in another building producing French-Door style refrigerators – replacing a model previously made in Mexico.   In 2013 there is a plan to start producing stainless steel dishwashers.  The site also has new plastics manufacturing facilities to make parts for these appliances.  The current CEO Jeff Immlett has stated that outsourcing is “quickly becoming mostly [sic] outdated as a business model for GE”.  To support this GE are putting $800m in this park in the belief that they can make money from the initiative.

In 1979 at its peak, America employed 19.6 million people in manufacturing but the growth of China and globalisation has seen that steadily decline.  None more so than in the first decade of this century where factories lost jobs 7 times faster than before.  But GE is bucking that trend.  At the heart of this change is the Geospring Water heater with a small heat pump that uses 60% less electricity than normal heaters.  One of GE concerns was that producing this in China exposed their innovation to knock off and so this was one of the reasons to consider bringing it home.  Not only that though; oil prices are now 3 times what they were in 2000 increasing shipping costs, The US natural gas boom has made energy prices in US more attractive and Chinese wages are now 5 times more than they were in 2000 and are expected to keep rising by 18% per annum.  In addition US unions are changing their attitudes from the previous fractious dispositions (The park was known in the 80’s as Strike City) and the lowest wage is now $13.50 almost $8 lower than what it used to be.

The other thing that has occurred with the new water heater line is that it has been redesigned by a multi-functional team from across the plant including the actual operators and using the latest lean thinking.  This is so successful that material costs have been cut by 25% and the total assembly time has come down from 10 hours in China to 2 hours in the Louisville facility.  And of course the leadtime has lost the 5 weeks shipping time from China lowering net inventories.  The net result is they have been able to beat the ‘China price’ by nearly 20%.  The China product retailed at $1599 and now the US is $1299. As a GE executive points out in the article; when you outsource the product you lose the link between manufacturing and design, the iterative innovation so in reality your whole business goes with the outsourcing.  Other experts point out it is easy to look initially at just the cost but there are hidden costs that come after the initial outsourcing.  Groups who cannot talk to each other, cultural barriers to limit integration and the cost of management hours travelling to ensure quality standard are met and maintained.

The overall message is that GE are one of the companies in the US starting to appreciate not only does made in the US create jobs but it can also now cut costs and build innovative products and a new mentality in Manufacturing!

This article raises thinking about whether Australia could learn from this reversal and start to bring manufacturing jobs back to Australia.  However, there are many differences that have to be recognised in our situation as opposed to America:

• The consumer market in the US is probably 15 times larger than here and so the economies of scale that apply in most manufacturing plants would need to be ameliorated here somehow.
• Despite our abundance of natural gas, the effects of the carbon tax have made our energy costs significantly more expensive and we have no strategic policy to use our natural resources internally to reduce these costs.
• Australian Corporate tax rates are significantly higher than the US and most other OECD countries and add to this the red tape involved in running businesses in Australia are both burdens on the cost of manufacturing.
• Despite the government spending huge sums of money on training particularly in Lean manufacturing thinking, the adversarial nature of our industrial relations means that there is no common purpose between management and unionised workforce to create a new climate of mutual interest and this fault does not just rest with the unions but more with the system itself.
• Australian labour rates are high now compared to other major manufacturing nations – remember the previous comparison in a past newsletter at $1.61 for Australia compared to a $1 for the States.  Eventually the disparity between wages and productivity output will have to been reconciled in Australia.  Being one of the few countries in the world that did not have a recession may not have been in our best long term interests.

Despite what our December speaker said that manufacturing jobs will just be replaced by other service jobs, I still believe, born of my years in manufacturing that it is special; it is both the driver of research and innovation and also the benefactor.  The net message is that manufacturing needs a completely fresh approach in Australia – but I cannot see the soon to be released Government plan delivering the change required.