But while the decision is clearly a blow for the company’s employees and other associated businesses, it also raises wider questions.
What is the future for manufacturing in Australia? Must it seek out niche areas in order to survive, or is it possible to continue manufacturing products such as cars? And what impact has the recent high exchange rates had on all of this?
“What we define as manufacturing changes all the time,” says Tim Harcourt, J.W. Nevile Fellow in Economics at the Australian School of Business (ASB), and former chief economist for Austrade. “The ‘dark satanic mills’ of the past are not a part of the present set-up.”
Harcourt recalls the head of Hewlett Packard visiting Australia in 2000 and suggesting that the country should get out of mining and farming, and become a software exporter like Taiwan – with dire predictions for the Australian economy if it didn’t. The reality, of course, was quite the opposite.
From the era of the Hawke-Keating governments (1983-96), Australia began a push towards the export of manufactured goods, and indeed Harcourt’s former employer Austrade was set up in 1985 for that very purpose.
Prior to this, agriculture and resources had been Australia’s main exports. But the share of GDP represented by manufacturing has been falling over time and, despite a small gain during the past month, is at about the same level as itwas in the 1950s.
Playing to strengths
Harcourt is a firm believer that any country should “do what they are good at”. So in answer to the question, “what is Australia good at making?”, Harcourt lists, among other things, automotive component design, technical textiles for high-end fashion products, pharmaceuticals and medical technology.
A prime example of the type of product Harcourt is talking about is the cochlear implant – an Australian innovation that has restored the hearing of hundreds of thousands of people with moderate to profound hearing loss across the globe.
Harcourt also notes that one of the interesting findings of the 2008 Bracks Review into the Australian auto sector, was that all the manufacturers said they were in this country primarily because of the high level of design skills available here.
“Places like South Korea and Japan got into manufacturing because they didn’t have natural resources, as Australia does,” says Harcourt. “Even Singapore got into manufacturing in 1960s and 70s, before it got into professional services.”
Tariffs, Resources and Exports
“Representatives for the car industry in Australia have made comments about the high exchange rate being hard on it,” says Alan Woodland, a scientia professor of economics at the ASB . “But as recently as the 1990s, the industry was subject to high tariffs, and heavily protected.”
Woodland points out that increasing exchange rates, and the attendant pressure on other industries, is a natural consequence of the boom in the resources industries during the past 15 years. Indeed, this is not a new phenomenon – in the 1970s in Europe, it was dubbed the “Dutch disease”, when manufacturing in The Netherlands went into relative decline, following a boom in its natural gas industry. In Australia during the resources boom of the 1960s, it was called the “Gregory thesis” (after a similar observation by economist Bob Gregory).
Moreover, the car industry in Australia has been directly subsidised by the government, and, like the textiles industry, another sector with a history of tariffs, has produced mainly for the local market, not for export.
“Exchange rates have played a role, but this is really the end game of [the system of] tariffs, which the domestic automotive industry has not come to grips with satisfactorily,” says Woodland. “Since the 1990s, there has been a gradual reduction in tariffs, from as much as 35% then, to as low as just 5% now for ‘non-luxury’ cars.”
“It’s unlikely that Australia will be a major exporter of manufactured goods in a broad sense in the foreseeable future. But that doesn’t prevent certain industries that have good innovations from becoming exporters.”
Components and niche products
According to Woodland, the fundamental change for manufacturing during the past 50 years is the level of international trade in components. In the 1960s, factories typically produced everything in one place, whereas today, components may be sourced from as many as 30 countries.
“This gives firms that produce niche products a great advantage,” says Woodland. “Much depends on innovation. If you innovate well, you can succeed.”
One recent manufacturing success story, and perhaps a good example of a company with a niche product, is Riviera – Australia’s largest luxury boat building company. Now in its 33rd year of operations, Riviera has built more than 5000 vessels and presently employs 300 people at its state-of-the-art Gold Coast manufacturing facility.
“From a strategic vantage point, Australia needs to decide if it wants to be a manufacturer,” says Stephen Milne, director of brand and communications at Riviera. “Politicians and economists keep saying that we need to grow the Australian population, but what are they all going to do?”
“People overseas like Australian-designed and built products. It’s got a cachet that’s up there with how people view Italian-designed products.”
When the GFC hit in 2008, the market saw a decline in demand of more than 50%, which hit Riviera hard. The company spent 34 months in receivership (from May 2009 until March 2012), resulting in a far-reaching review of the way it did business.
“We had to dial back production, so that boats already made and in the system could be sold,” says Milne. “But we also developed new boats and refined or re-engineered existing models. By introducing new technology to make them easier to drive, we attracted new customers and created new demand from existing customers.” The company also re-evaluated its suppliers and dealer networks.
“We kept all our customers very close ,” says Milne. “It’s their loyalty that kept us going through the GFC, while many of our competitors vanished.”
Best in class
With around half its output selling overseas, the high exchange rate has been an issue for Riviera, and the recent fall in the Australian dollar against other currencies was a cause for celebration at the company. “You can’t just keep putting your prices up,” says Milne. “You have to accept a squeeze on your margins, and wait for the market to turn.”
As Riviera buy a lot of components in US dollars, when a vessel is sold in the US, the money is kept in a US dollar account to make purchases, thus providing a natural hedge against currency movements. The company is presently experiencing growth, at a time when their competitors are saying the market is flat.
“We’re happy to not be a volume producer, but to be the best in our class . We’re aiming to be the BMW of the boat world.”
Milne points out that for all the millions of dollars of government subsidy to the car industry, there has been precisely zero to the boat manufacturing industry.
“We’re not looking for a handout,” says Milne, “but we don’t want to see our skills, ideas and technology going overseas. Australians are an ingenious and innovative group of people – when we put our minds to it – and the government should be encouraging this.”
“I don’t buy this ‘we’re Japan’s beach and China’s quarry’ argument,” says Harcourt. “There’s a lot of ‘new economy’ in ‘old economy’ clothes – like companies who manufacture mining equipment for Russia, or wine-making equipment forArgentina. You do what you’re good at.”
ARTICLE COURTESY: KNOWLEDGE@ASB
