Introduction
5.1
This chapter will examine what opportunities are available for government to facilitate to create a future looking, sustainable and efficient manufacturing sector in Australia.
5.2
The opportunity exists for Government to establish a framework for manufacturing without running the risk of favouring specific sectors or business models. This can be achieved through:
Government procurement and local content targets
Harmonisation of standards and procedures
Provision of key capabilities
5.3
The observations made in this chapter will feed into the committee's comments and recommendations in the following chapter.
Policy
Developing a resilience domestic manufacturing sector
5.4
As part of creating a resilient and sustainable manufacturing sector, Australia needs to address the single biggest issue that has arisen out of the covid crisis—the impact of a limited domestic manufacturing capability.
5.5
As outlined in chapter 1, the widespread shutdown of global supply chains caused by the Covid-19 pandemic (the pandemic) has exposed the heavy reliance on China and the extent to which they will retaliate to any questioning of its actions.
China and the post-Covid world
5.6
The pandemic has created a unique opportunity to refocus domestic security of supply. The pandemic has assisted in lifting the fog for many countries, highlighting their over-reliance on ‘Made in China’ as a strategy for dealing with tough decisions to support domestic manufacturing.
Broad policy and strategy
5.7
The Commonwealth Government has at its disposal several levels through which it can strengthen and promote Australian manufacturing. The following section will address some of those areas.
5.8
The Productivity Commission (PC) argued that the role for government in the development of Australia's manufacturing industry is specific, and:
…focuses on tailoring government intervention to the circumstances: where markets can function well, a key role of government is to foster efficient and dynamic markets; where markets cannot function well, it can be appropriate to fund, supply or regulate in ways that enhance the living standards of the community as a whole.
5.9
Dr Jens Goennemann, of the Advanced Manufacturing Growth Centre (AMGC), explained to the committee that there are four pillars for manufacturing: government, industry, public service, and research. While he believes that industry should lead the way to reform, he sees government as playing a vital support role:
First of all, I believe that industry needs to lead the charge. Government needs to support. The first thing government needs to do in support is to be consistent: have a plan and stick to it for 20 years. The plan doesn't need to be perfect but needs to be good enough to be successful—and stick to it.
5.10
Dr Mark Dean, Carmichael Distinguished Research Fellow, Centre for Future Work, notes that the policy decision to end automotive manufacturing lacked strategic insight to the extent of role it played in the broader economy
Political decisions to end automotive manufacturing in Australia were short-sighted and bucked the trend of strategic, long-term industry policy and planning adopted by the world’s leading economies including the United States, Germany, Japan, China, and other advanced industrial nations. The renewed global interest in active industry policy demonstrates an implicit understanding that manufacturing carries a unique strategic importance to economic growth and development.
5.11
Thus, there is space for government to implement well-informed and
pro-active policies.
Performance of existing policies
5.12
The committee has, through submissions and hearing testimony, received evidence that suggests that Australia’s current policy is failing to sustain and support the growth of manufacturing in Australia.
5.13
Former South Australian Member of Parliament, and current Director of the Australian Sovereign Capability Alliance (ASCA), the Hon. Mr Martin Hamilton-Smith, remarked:
If we keep doing things the way we have in recent decades, we're at risk of seeing an ongoing decline in manufacturing.
5.14
Dr Mark Dean argued that there is no overarching strategic policy direction:
In one phrase: the lack of industry policy. I think that's strategic. There needs to be a federally coordinating industry policy strategy in place to actually shape the direction of our industrial capabilities. As I mentioned, we have a history in Australia of manufacturing in the automotive sector particularly, and that has actually set us on a particular pathway which means that, as we let more of that automotive supply chain go, we actually lose a lot of the capabilities and skills related to that. So the first step is obviously coordinating that and overcoming that barrier of simply having no strategy for such an important industry within the manufacturing sector.
5.15
Ms Natalie Currey, General Manager Supply Chains, Australasian Railway Association, also lamented the fragmented nature of policy that had impacted the rail sector:
The current unprecedented level of investment in rail provides huge opportunities for the Australian rail manufacturing sector. However, due to the fragmented nature of rail and the numerous legacy issues in Australia, the full benefits for local manufacturers are significantly constrained.
5.16
The new manufacturing of digital programming and games is one that also has, according to one submitter at least, been neglected. Interactive Games and Entertainment Association (IGEA) commented:
If we have one request in this letter for the Committee to consider, it is for any recommendations that it eventually makes to also reflect on opportunities to boost digital manufacturing sectors like game development. Historically, federal policies focused on keeping and strengthening manufacturing industries, such as support measures, grants, red tape reduction, and hiring and investment incentives, have focused on traditional sectors that make physical ‘things’ like cars or textiles. By design or unintentionally, these policies have tended to exclude or be unsuitable for digital industries. We believe a broader and more strategic view of ‘manufacturing’ in policymaking will lead to stronger economic outcomes for Australia over the coming decades.
Modern Manufacturing Initiative
5.17
As discussed earlier in this report, on 1 October 2020 the Commonwealth Government introduced its Modern Manufacturing Initiative (MMI). A number of submitters expressed their disappointment with the MMI itself and its implementation.
5.18
The Australian Automotive Aftermarket Association (AAAA) commented:
It is therefore very disappointing that a majority of Australia’s manufacturing industry – including the 4WD aftermarket sector – is shut out of access to the MMI’s programs, as it does not fit into the MMI’s six priority categories. Our industry, and many other industries are deprioritised and unable to access the funding and support required to operate and grow in a difficult global environment.
By failing to recognise the opportunity this industry presents, this confusing exclusion could mean the forfeiting of Australia’s competitive advantage in this sector.
The narrow focus of the MMI’s priorities exclude many industries that could be worthy of funding. Not every worthy industry is included in the six priority categories – and not every activity in the priority sectors is automatically worthy of funding.
5.19
When asked on how the MMI is playing out in their sector, the Australian Food and Grocery Council, commented:
I would say that the sector has been disappointed. The pace at getting the dollars rolled out has been slower than anticipated, and the level of funding coming forward has been lower than anticipated. The big call out is a big centre point for manufacturing policy, and for a sector that—currently we have capital investment of around $3 billion per annum; we need to grow that to about $7½ billion per annum. Recently we saw $33 million granted through one element of the Modern Manufacturing Strategy. I know many companies are very disappointed about that as they had put a lot of effort into grant applications. Had they known such a small amount was forthcoming, they may not have bothered. There has been disappointment around that.
Research and Development
5.20
A theme that did present itself in the evidence received was the greater emphasis that research and development (R&D) should have in a modern manufacturing economy.
5.21
For example, the Australian Academy of Science recommended:
The Australian Government and universities should nurture strategic and patient investment across the entire innovation pipeline. In particular, they should ensure that the investment in fundamental research does not fall below current levels (22 per cent of overall R&D investment).
Introduce a program to transition early and midcareer researchers (EMCRs) who have lost positions during the pandemic into roles in the manufacturing ecosystem that will allow their STEM [science, technology, engineering, and mathematics] skills to be of use.
Pursue existing opportunities to utilise the R&D tax incentive to encourage investment in priority research areas, including those that support manufacturing, and boost the employment of PhD qualified Australians in manufacturing…
Develop schemes to build capacity in entrepreneurial and translation expertise, including facilitating greater mobility between research and industry.
5.22
Similarly, Science & Technology Australia commented:
We think a research translation fund is going to help to provide that direct pipeline of funding into those products to get them across that valley of death in commercialisation and into our manufacturing system so that ultimately we build that sovereign capability.
5.23
There were also observations that the current R&D tax system could also be improved in terms of helping Australian companies to scale up and turn commercialising of concepts into Australian jobs.
5.24
Mr Ben Eade of Manufacturing Australia, commented on the need to commercialise innovation:
Australia does outstanding R&D in a range of fields. I would contend that the key challenge for us is how we make sure that the business case is there not just to undertake R&D in Australia but to commercialise that R&D.
Promotion of Australian manufacturing
5.25
The committee received little evidence as to how Australian manufacturing was or is being promoted by government in Australia and overseas. Although the 'Australian Made' organisation exists, it is not a government body:
The Australian Made, Australian Grown logo is administered by Australian Made Campaign Limited (AMCL), a not-for-profit public company established in 1999 by the Australian Chamber of Commerce & Industry (ACCI) and the network of state and territory chambers of commerce, with the cooperation of the Federal Government.
AMCL is not a government body and does not receive government funding for its core operations, which are licensing companies to use the logo and promoting Australian products both in Australia and overseas.
The World Trade Organisation and Australia's international commitments
5.26
A frequently cited reason as to why Australia cannot do more for its manufacturing sector in terms of Australian Government pursuing local procurement policies is the requirement to conform to international trade agreements – particularly the obligation of the World Trade Organisation (WTO).
5.27
For example, the Department of Industry, Science, Energy and Resources commented:
What we would say is that mandating Australian content for some of the Commonwealth government projects needs to be in line with those international government procurement obligations, particularly the national treatment obligation, which prohibits discrimination between Australian suppliers and foreign suppliers.
5.28
However, some submitters and witnesses argued that Australia can improve its procurement and local content policies while maintaining our WTO obligations.
5.29
Mr Mark Cain, CEO, Australia Steel Institute, argued that:
If a project is strategic in nature, I believe governments can prosecute an argument to have local content…
There are allowances within the WTO rules to give favour to local SMEs. So I think very often it's a convenient excuse not to engage locally using the argument of free trade.
5.30
The Australian Council of Trade Unions (ACTU) also argued that a more pro-active policy could be pursued while still conforming with WTO requirements:
There are mechanisms. Australia has lagged behind the rest of the world in doing this. You can see multiple examples in the US. A key one is that, within trade agreements, it's possible to support small and medium-sized enterprises and to be completely consistent by preferencing small and medium-sized enterprises and not breaching any of those WTO commitments.
Government procurement and local content targets
5.31
Submitters did provide evidence that a lack of clear, consistent national procurement policies was undermining Australian manufacturers.
5.32
The Department of Industry, Science, Energy and Resources acknowledged that there is no local mandate in terms of procurement:
As was mentioned, in the specific circumstances that I've raised, there is a possibility that approaches can be made at different thresholds and in different ways, but, still, we don't have a local content mandate. Again, that goes back to what I've spoken about, in terms of ensuring that the Australian government is getting value from these contracts.
5.33
Making the point that the pandemic had really emphasised the need for local production, Mr Barrie Finnin, CEO, Amaero International Limited commented:
I'm a taxpayer. I'd like to see Australian taxpayer money spent on Australian activity. There are some strong economic reasons for having the local capacity and capability to supply these things, and COVID really brought that down to earth.
5.34
Speaking in terms of renewable energy projects and the importance of having local content policies and the effects of not having them, Dr Jim Stanford, Economist and Director, Centre for Future Work, observed:
Without direct targets and tools to achieve those targets in domestic content in the renewable energy projects themselves and the industrial spin-offs upstream and downstream of those products, there is no guarantee that Australia will get that work.
5.35
Ms Michele O’Neil, President of the ACTU, defended the idea of local procurement as part of a reasonable use of public funds for the public good:
It's a reasonable and sensible proposition that that is tied to clear requirements that public money be used for public good and that it not just lead to profit by a few. Public money for public good requires local commitment to local jobs. It's critical to any assistance given for this transition.
5.36
Finally, the AMWU observed:
As the manufacturing gets more high-tech and more specific, the job creation downstream becomes higher and higher, which means you're creating more local jobs. The shift to not requiring local procurement is simply shaping a race to the bottom, where you go for the cheapest possible option.
We're asking for a fair chance for Australian manufacturers and Australian workers to get a foothold in the industries that are important, particularly when there are large government spends.
State local content policies support industry
5.37
Evidence was presented to the committee that state government do, in fact, provide a degree of support for their local industries through procurement policies.
5.38
Mr Steve Murphy, National Secretary, Australian Manufacturing Workers Union (AMWU), commented:
If you look around the country we've got examples in Victoria where they're able to successfully have procurement policies, whether they be about renewable energy, rail manufacture or government purchasing, that allow for a really strong foothold for local industry; they are doing those things effectively.
An approach of the Victorian government previously was their VRET system, the Victorian Renewable Energy Target, where they did include local content. Keppel Prince went from 50 workers up to 170, and then they grew after the VRET was kicking along for a period of time. That approach delivered high-skilled, high-wage renewable manufacturing jobs in regional Victoria. Now they are placed at risk because it's highly likely the wind farms that are going to be built around the country for the federal government will not have wind towers built in Australia but brought in from overseas.
… in New South Wales we've seen no end of trouble for at least the last 10 years—procurement levels went from having 75 per cent local content, when we made some of the best trains in the whole world, down to no local content now, where we're seeing imported trains that don't fit on the tracks, don't get through tunnels and don't line up with the platforms. We're seeing ferries that are full of asbestos and don't fit under bridges, and light rail with cracks that will delay it for 18 months. This short-term idealism around the cheapest cost will cost us more in the long run. Those costs are hidden, but they are borne by public money, and if we're going to have an honest look at it then we should look at whole-of-life costs. We should look at what the return is back to government from those workers paying their taxes and spending money in their communities, creating more jobs down the line.
Harmonisation of standards and procedures
5.40
The committee also received evidence that the harmonisation of standards and procedures would be of benefit to the manufacturing sector.
5.41
The Australian Automotive Aftermarket Association (AAAA) commented in both their submission and hearing evidence that harmonisation would be of great benefit to their industry.
5.42
In their submission they stated: "33 per cent of businesses in the industry are impeded by the lack of harmonisation between Federal and State regulations." When asked to explain further the AAAA commented:
Australian design rules are indeed federal, and all of the importation of vehicles is subject to Australian design rules. But, after the vehicle is registered in the state, it is subject to state government in-service vehicle standards. Those standards regulate how much you can do things such as lift the vehicle. So, we're responsible for suspension lift, particularly for vehicles that are going over rough terrain. We do that for a lot of emergency vehicles. That's subject to state government regulations, and how far you can lift a vehicle and when you need specific engineering certification varies on a state-by-state basis… Many of our members are, of course, working across all states and territories in Australia and they've got to comply with different regulations, and that makes a difference in terms of designing the product and how you fit the product. So a great deal of what we do—because we're aftermarket: we're after the vehicle, often, is registered—is subject to state-by-state regulations, and they can vary. They can vary by a small level and they can vary enormously.
5.43
Such harmonisation is particularly important when it comes to medicines. Medicines Australia explained:
The overarching recommendation is for national coordination regarding things of significance. As we've seen with the mRNA manufacturing, we think it's critical that there is a nationally coordinated approach for that... When we talk about clinical trials, in particular, harmonisation of systems at a national level will make us much more competitive to move ahead of other countries that are moving ahead of us.
In the clinical trial environment, for example, we lead the world and punch above our weight in our scientific endeavour, in our research institutions and in our healthcare provision. However, each state and territory has a competitive advantage to have different regulatory systems and different ethics approval systems. In Australia that creates a delay and a barrier to actually setting up, initiating and starting to recruit patients into clinical trials, before you even get to how you are manufacturing and supplying those clinical trials with product. National coordination and national harmonisation across the entire clinical trial environment to enable a single measure or a single approach to ethics approval, regulation and initiation of clinical trials would be the first step. It is something that the industry and both sides of government have agreed on for a long time, but actually translating that into agreement across the states and territories has been more difficult.
5.44
The Australian Academy of Science also observed:
There are ways we can simplify our system. I know that at the moment there are efforts being made to have a bit of a one-stop shop or one-front-door approach to clinical trials. There is a fair bit of fragmentation across the federal versus state and territory trials that are done, even in trying to identify some, let alone in establishing them. So there are some harmonisation and efficiency gains, and, of course, that would lead to a more competitive position for Australia and a more attractive destination for those perhaps looking to initiate clinical trials here.
Provision of key capabilities
5.45
This inquiry has also highlighted the need for Australia to possess its own testing facilities for key industrial capabilities.
Lane Cove testing facility
5.46
The specific case of the Lane Cove testing facility was brought to the committee's attention through a joint submission by Ai Group and Engineers Australia. They explained:
The Lane Cove Test Station (LCTS) is an electrical equipment testing facility in Sydney. It has supported Australia’s electricity networks and electrical manufacturing sector for more than 50 years. It is an integral part of Australia’s manufacturing infrastructure.
The LCTS provides a critical and unique service to electrical manufacturers, allowing them to demonstrate compliance of electrical equipment, as it is the only test facility in the southern hemisphere that has the capability to carry out standards compliance testing at the 100kA level. This testing capability is a requirement for innovation and development of electrical equipment, and as such plays a critical indirect role across many sectors which rely on electrical equipment, including energy, manufacturing, transport, health, mining, heavy industries, defence, building and construction, process industries, and water.
PLUS ES, an affiliate of Ausgrid and the owner of the LCTS since 2017, has announced that it intends to close the LCTS by the end of October 2021 for commercial reasons.
Without a domestic testing facility with this capability, Australia’s electrical manufacturing industry would be severely challenged by the higher costs and lead-times of testing abroad. Many, particularly smaller businesses, would not be able to compete with imported equipment and our exporters will be significantly disadvantaged. The local capability for research and development of new electrical equipment will be significantly diminished as industry is reliant on proof-testing at the LCTS. There is a clear threat of a hollowing-out of the domestic electrical manufacturing industry.
5.47
The closure of Lane Cove testing facility would deprive Australia of a critical piece of infrastructure used by Australian electrical equipment manufacturers, hurting small and medium sized manufacturers who will, without Lane Cove, need to access international facilities.
5.48
Offshoring testing also adds expense and increases the time to perform testing from four weeks to 16 weeks, which means it is often cheaper and quicker to simply import equipment from overseas instead of source it from an Australian manufacturer when type testing is required.
Energy
5.49
The Australian manufacturing industry accounts for nearly 20 per cent of Australia's energy consumption, with gas providing an important energy source, supplying around 41 per cent of the industry's energy and feedstock needs. As a result of efficiencies and a move away from energy-intensive manufacturing, the industry’s energy source has been declining over the course of the last decade. Even so, Australian manufacturing is among the most energy intensive in the Organisation for Economic Co-operation and Development (OECD), in part reflecting the high percentage of basic metals and chemical manufacturing.
5.50
A number of witnesses emphasised the importance of access to secure, reliable and cheap energy to manufacturing in Australia and the impact of rising energy prices on the competitiveness of Australian products. The Australian Council of Trade Unions (ACTU) submitted:
For those manufacturers who use large amounts of electricity Australia’s largely unplanned and disorderly energy transition has seen significant price fluctuations over the past decade in a period in which 12 coal-fired power stations have closed and dozens of solar and wind farms have entered the market.
…
Gas-reliant manufacturers in the NEM [national energy market] states have had a particularly wild ride over the past decade, falling victim to massive increases in the wholesale (and in turn contract) price of gas that resulted from Australia’s east coast gas market being linked to global gas markets via LNG [liquified natural gas] shipments from Queensland.
5.51
However, the Ai Group notes that Australia's previous low-cost coal and gas energy was partially the result of cross-subsidies for some manufacturers, and partially the result of shifting the costs of greenhouse gas emissions until future generations. It told the committee that most manufacturers are not energy-intensive and that other input costs such as labour productivity are much more important to competitiveness. This contrasts with evidence provided by the South East Melbourne Manufacturers Alliance (SEMMA), who advised the committee that one of their members reported energy costs which rose from $4 million in 2017 to $11 million in 2020, resulting in the closure of one of their production facilities.
5.52
A number of submitters drew the committee's attention to the opportunities for Australia to maximise its natural competitive advantage for reliable, cheap renewable energy and the role that Australian manufacturing can play in its delivery through the manufacture of supporting technology and products, (such as solar photo-voltaic cells, batteries, electric vehicles, bioenergy, and green hydrogen)—particularly given its reserves of critical minerals, rare earths and base metals—and the export of renewable energy. For example, Science and Technology Australia estimates that the production and export of hydrogen fuel could be worth $26 billion to the Australian economy by 2050 and the ACTU told the committee:
… hydrogen, green steel, critical minerals, battery manufacturing, education and training as well as other services. Together, that has got the potential to generate $89 billion of gross value and create nearly 400,000 jobs in Australia up to 2040—and that's good jobs, especially in those regions that have been the basis of powering both Australia and many of our manufacturing centres.
But these opportunities are not going to fall in our lap. We need rapid and ambitious action to coordinate this change, and government leadership to help everyone play their part. This is definitely a race, and we still seem to be at the starting line.
5.53
Witnesses were concerned that not enough is being done to secure the potential jobs of the future. Mr Steve Murphy, National Secretary, AMWU, commented:
Government has an important role to play. That's in three parts. The first is a plan for jobs for the future. There's a race on around the world to secure the rights to these jobs and to get good at them, and Australia still has a chance to secure these jobs and to be the world leader when it comes to them. The second is that the government's got an absolute obligation to provide a framework that delivers secure jobs. We've seen with the solar panel boom, on how we've imported those and had insecure work in installing them on people's roofs and even in the big solar plants around Australia, that the jobs aren't secure or well paid. The third is the right for workers to organise, join a union and collectively bargain.
5.54
Dr Jim Stanford, Economist and Director, Centre for Future Work, commented:
There's certainly huge potential in renewable energy technologies themselves but also in the industries that are connected to those technologies for future investment, exports and employment. The jobs associated with the rollout of renewable energy itself can be, and should be, quite significant.
5.55
Australia's plentiful supply of solar, wind, and hydro energy, the societal push to de-carbonise, and the reducing costs of renewable energy are seen to be advantages for the manufacturing sector. It is also welcome that some sections previously hesitant to commit to zero emissions by 2050 have now done so.
Committee comment
5.56
This chapter has reviewed the potential for the Australian Government to implement policies that are supportive of manufacturing.
5.57
Notwithstanding certain constraints–such as WTO commitments–submitters and witnesses have identified areas where the Commonwealth can proactively support and promote Australian industry.
5.58
State, territory and federal governments are purchasers of a significant amount of manufactured goods, there is scope for supporting Australian manufacturing through coordinated procurement policies without compromising on value for money or undermining the operations of the free market. The committee would encourage such initiatives.
5.59
Bureaucratic obstacles, such as lack of regulatory harmonisation, also seem to be a simple way of increasing business efficiency and supporting Australian manufacturing.
5.60
The committee notes the disappointment expressed by some submitters regarding the MMI and other initiatives, as well as calls for further support for R&D initiatives.
5.61
The committee also notes the significant potential in supporting renewable energy innovation. Not only will this spur manufacturing itself but will contribute to cheaper and more sustainable energy prices through which outer industries in the manufacturing sector can benefit.
Lane Cove
5.62
The committee feels compelled to make a special mention on the status of this facility. It is the only one of its kind in Australia and is used by many electrical equipment manufacturers in Australia. Its closure will mean that when electrical products are required to be changed in response to new standards or regulations, manufacturers will be faced with the difficult option of sending equipment overseas to be tested or choosing to either import products or product designs, which will disadvantage them compared to overseas competitors.
5.63
The closure of the Lane Cove Testing Facility increases the probability that Australia will simply have to rely on imported designs, undermining the Australian Government’s innovation goals and imperilling the likelihood that a strong local industry will be developed.