Referral and conduct of the inquiry
1.1
On 12 August 2021, the Senate referred an inquiry into Australia's manufacturing industry to the Senate Economics References Committee (the committee) for inquiry and report by 24 November 2021.
1.2
On 24 November 2021, the Senate granted the committee an extension to report by 17 December 2021. On 10 December 2021 the committee presented a progress report to the Senate out of sitting, requesting an extension to the reporting date until 27 January 2022, with a further progress report made on 27 January 2022, extending the tabling date further to 4 February 2022.
Terms of reference
1.3
Under its terms of reference, the committee was tasked to inquire into Australia's manufacturing industry, with specific regard to:
(a)
what manufacturing capacities Australia requires for economic growth, national resilience, rising living standards for all Australians and security in our region;
(b)
the role that the Australian manufacturing industry has played, is playing and will play in the future;
(c)
the drivers of growth in manufacturing in Australia and around the world;
(d)
the strengths of Australia's existing manufacturing industry and opportunities for its development and expansion;
(e)
the sectors in which Australian manufacturers enjoy a natural advantage in energy, access to primary resources and skilled workers over international competitors, and how to capitalise on those advantages;
(f)
identifying new areas in which the Australian manufacturing industry can establish itself as a global leader;
(g)
the role that government can play in assisting our domestic manufacturing industry, with specific regard to:
(i)
research and development;
(ii)
attracting investment;
(iii)
supply chain support;
(iv)
government procurement;
(vi)
skills and training; and
(h)
the opportunity for reliable, cheap, renewable energy to keep Australia's manufactured exports competitive in a carbon-constrained global economy and the role that our manufacturing industry can play in delivering the reliable, cheap, renewable energy that is needed.
Conduct of the inquiry
1.4
The committee advertised the inquiry on its website and in September 2021 it wrote to stakeholders and interested parties inviting submissions. Submissions closed on 17 September 2021. The committee received 130 submissions to the inquiry. A list of submissions received is at Appendix 1.
1.5
Public hearings were held on:
11 November 2021 – Canberra by videoconference and teleconference;
6 December 2021 - Canberra by videoconference and teleconference; and
8 December 2021 - Canberra by videoconference and teleconference.
1.6
The names of witnesses who appeared at the hearings are listed at Appendix 2.
1.7
The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearings.
Scope of the inquiry
1.8
Evidence received by the committee permitted it to investigate the following issues, as they relate to manufacturing in Australia:
the role of manufacturing and a variety of structural arrangements;
the need for a strategic and sovereign manufacturing capability;
manufacturing research and development (R&D) and commercialisation;
skills, training and employment;
taxation and incentives, including for investment;
energy and critical minerals; and
1.9
While 130 submissions is a reasonably large number for an inquiry, approximately two thirds of those submissions were made by members or supporters of the Australian Citizens Party (ACP)—formerly the Citizens Electoral Council (CEC).
1.10
The ACP frequently conducts mass campaigns on economic issues such as banking, currency regulations and manufacturing. They are disposed to focus on policies that were implemented in the 1950s and 1960s and they tend to advocate, regardless of the specific issue, for the same suit of measures including:
the establishment of a national development or postal bank;
instituting 'Glass-Steagall' banking regulations;
building the 'Bradfield Scheme' to pump water from Queensland to New South Wales and Victoria; and
a return to tariff protection.
1.11
The ACP itself also provided a submission which mirrored those themes but also included additional modern themes such as thorium nuclear reactors and nanotechnology.
Structure of the report
1.12
The first chapter of the report outlines the administrative details of the committee's inquiry and work and sets the scene with an overview of manufacturing in Australia, including its role and recent trends, Australia's manufacturing capability from its weaknesses and threats to its strengths and opportunities.
1.13
The remainder of the report is structured as follows:
Chapter 2 Why manufacturing—manufacturing's contribution to the economy and national security, the importance of baseline and sovereign capability, and resilient supply chains;
Chapter 3 Elements of manufacturing—key elements required to enable manufacturing including R&D, commercialisation, skills and training, employment, and taxation and incentives;
Chapter 4 Transformation of manufacturing—Industry 4.0 (the fourth industrial revolution) which focusses on rapid changes to technology, industries and societal patterns as a result of interconnectivity, smart automation, data and artificial intelligence;
Chapter 5 Opportunities for government—areas in which government can shape and influence manufacturing through policy and strategy, the promotion of Australian manufacturing, government procurement, harmonisation of standards and regulation, provision of key capabilities and access to energy; and
Chapter 6 Committee view—the views of the committee, including recommendations.
Role of manufacturing
1.14
'Manufacturing is not just "another" sector of the economy. For several concrete reasons, manufacturing carries strategic importance to broader national prosperity and security'. The Centre for Future Work noted that:
Australians purchase and use more manufactured goods over time; and manufacturing output is growing around the world. Allowing domestic manufacturing to decline, while our use of manufactured products grows, undermines national economic performance.
1.15
Manufacturing plays an essential role, adding value and providing input back into primary industries and enabling and requiring the provision of services to ensure usable products. The Centre's 2020 report made a number of key findings, including that:
manufacturing is the most innovation-intensive sector in the whole economy. No country can be an innovation leader without a strong manufacturing base;
manufactured goods account for over two-thirds of world merchandise trade. A country that cannot successfully export manufactured products will be shut out of most trade;
manufacturing anchors hundreds of thousands of other jobs throughout the economy, thanks to its long and complex supply chain. Billions of dollars' worth of supplies and inputs are purchased by manufacturing facilities, supporting many other sectors of the economy; and
manufacturing offers high-quality jobs, full-time hours, and above-average incomes. And thanks to strong productivity growth and the capacity to apply modern technology, manufacturing offers the prospect of rising incomes in the future.
Overview of Australian manufacturing
Australia's manufacturing performance
1.16
Australia is last amongst all Organisation for Economic Co-operation and Development (OECD) countries for manufacturing self-sufficiency, at 72 per cent, reflecting a thirty-year downward trend of Australian manufacturing output and employment. Decline has been more pronounced since the Global Financial Crisis (GFC) and recent resources booms, as shown in Figure 1.1.
1.17
Australia now produces about two-thirds as much manufactured output as it consumes, creating a sizeable trade deficit in manufactures, as illustrated by Figure 1.2. The Australian Industrial Transformation Institute (AITI) characterises Australia as having 'an industrial structure more akin to a developing country than that of a high-income advanced economy'.
1.18
As a proportion of gross domestic product (GDP) manufacturing has fallen from almost 30 per cent in the 1950s and 1960s to below 6 per cent in 2019—considerably lower than other OECD countries and the OECD average.
Domestic manufacturing capability
1.19
Australia has a diverse manufacturing industry, comprised of several key sectors including food, beverage and tobacco, machinery and equipment, petroleum, coal and chemicals, and metal products. Together these four sectors account for around 80 per cent of the manufacturing output and employment.
1.20
Since the mid-1990s the mix of these sectors has changed significantly, with falls in the metal products, textiles, clothing and footwear, and the machinery and equipment sectors, and growths in non-metallic mineral products grew, wood and paper products and food, beverages, and tobacco.
1.21
AITI recently concluded that Australia's manufacturing sectors are relatively immature with variable operational and largely underdeveloped industrial capability levels as Figure 1.3 shows.
Weaknesses and threats
Factors in manufacturing's decline
1.22
A number of sources point to the sharp increases in the terms of trade, the appreciation of the Australian dollar, and imports from lower-cost economies as factors in Australia's manufacturing decline.
1.23
Problems with global supply chains and gaps in Australia's manufacturing capability have also contributed to the decline in manufacturing, with AITI observing the weakening of integrated value chain manufacturing, particularly with the departure of primary automotive producers. Australia also faces the challenge of geographic isolation, with costs of trading—largely transport related—in the order of 20–25 per cent higher than the global average.
1.24
While Australia's remoteness and higher trade costs may protect some local manufacturers from import competition, the Reserve Bank of Australia (RBA) found that domestic producers face disadvantages caused by a relatively small domestic market, lack of ability to scale, and lower rates of collaboration with firms in other advanced economies.
1.25
A 2015 OECD study into Australian manufacturing in a global context also noted Australia's small-scale disadvantages, high-cost operating environment, and the long-term trend of deindustrialisation in Australia (in line with other OECD countries). However, the study also pointed to opportunities for manufacturing in traditional and higher technology industries, through innovation and a focus on quality, reliability, sustainability, and differentiation, rather than low cost.
Enterprise size
1.26
Declines in the numbers of manufacturing businesses exposes some of Australia's structural and capacity weaknesses—particularly given medium and large sized enterprises make up just eight per cent of manufacturing firms. Australia needs these larger manufacturing businesses to provide the scale, innovation and finance which are necessary to developing self-sustaining ecosystems.
1.27
Medium and large sized companies also provide the greatest employment opportunities. In contrast, small businesses have limited capacity to scale up, innovate, accumulate capital, and reinvest, and grow exports.
Labour challenges
1.28
Australia is last amongst OECD countries for national employment in manufacturing, comprising around eight per cent of Australia's total employment—significantly less than the 16 per cent of the 1980s.
1.29
Australian manufacturing industry employs over one million people directly or indirectly—inclusive of indirect employment this rises to around 1.5 million. Approximately 31 per cent of direct manufacturing employment is in regional areas of Australia.
1.30
However, over the last 10 years the total workforce has shrunk in absolute terms, with over 100,000 positions lost. Figure 1.4 illustrates manufacturing job losses over the last 20 years.
1.31
While Australian labour costs have increased significantly, the Centre for the Future of Work found that wage and non-wage labour costs are comparable to or even slightly less than those of other industrial countries.
Contracting R&D investment and participation
1.32
Australian investment in R&D has declined over the last 20 years and is well below the OECD average. Relative to Australia's GDP, R&D expenditure is around 1.8 per cent––its lowest levels since 1995.
1.33
In 2019–20 the Australian Government spent around $10.2 billion on private and public sector R&D, with around $772 million—or 20 per cent— of this going to manufacturing. Key measures include the Research and Development Tax Incentive (RDTI) ($2.4 billion, CSIRO ($616 million) and cooperative research centres (CRCs) ($145 million).
1.34
Private investment in R&D has also declined since the mid-2000s with manufacturing firms spending $4.6 billion on R&D in 2017–18.
1.35
Australia has relatively low rates of collaboration between business and industry and low rates of innovation, impacting on its global competitiveness.
Declining manufacturing productivity
1.36
Over productivity has dropped from its peak in the 1960s and continues to decline, as shown in Figure 1.5, also impacting on competitiveness. In 2005 the then Chairman of the Productivity Commission (PC) summarised the reasons for Australia's declining performance as follows:
a fragmented, high-cost manufacturing sector, focussed on the domestic market;
indulgent, inflexible work practices, powerful unions and lack-lustre management;
outmoded technologies, low rates of innovation and skill development; and
high-cost infrastructure services like power, transport and communications, which effectively taxed business users, while
cross-subsidising households.
1.37
Australian manufacturers are looking to improve labour productivity through automation, business efficiencies, systems, and processes, however Grant Thornton warned that 'with the high cost of production in Australia, it's just not economically feasible to invest in technology and automation on a level that brings real efficiencies'.
Overreliance on resources and low complexity
1.38
Historically, Australia has relied on primary product export, with little or no processing, foregoing opportunities for added income, innovation and economic complexity associated with value-added industry.
1.39
The Centre for Future Work noted the effects of 'extreme' resource dependence and currency fluctuations which have significantly reduced competitiveness:
When times are good in resource industries, the resulting upward pressure on the national currency … causes enormous challenges for other export industries: including manufacturing … Prices for their output do not skyrocket along with global commodity prices—but the competitiveness of Australian production on cost grounds is dramatically harmed by resource-driven surges in the value of the currency.
1.40
Dr Jens Goennemann, the Chief Executive Officer of the Advanced Manufacturing Growth Centre (AMGC) summed up Australia's situation:
'The lucky country needs to become the smart country, because we are running out of luck,' says Dr Jens Goennemann … Australia has long relied on digging up commodities, particularly coal, and sending it to global markets. There is an urgent need for us to expand from an economy that extracts and farms to one that adds value and manufactures complex things in a sustainable way. 'The simple truth is that if you want to play a relevant role on the international stage, and you cannot make complex things, you will wake up empty-handed,' says Goennemann. And, if you cannot make complex things, you cannot respond effectively to a crisis, be it a pandemic, a military incursion or global warming. His argument is not an ideological one but a practical one: if the mining sector collapses, or there's a trade war and China stops taking our agricultural products, then what?
COVID-19 and China
1.41
As part of creating a resilient and sustainable manufacturing sector, Australia needs to address the issue that has contributed to undermining Australia's economic security—the lack of critical domestic supply chains.
1.42
The widespread shutdown of global supply chains caused by the COVID-19 pandemic (the pandemic) has exposed the world's heavy reliance on the Chinese industrial complex. The extent of this hold, and just how far China will go to defend its share has also been clearly exposed through the pandemic.
1.43
While many western nations had pre-exiting issues with China's compliance with international law particularly around intellectual property rights and concerns on state-sponsored cyber espionage, the effects of the pandemic and China's handling of the crisis has compounded these issues.
1.44
China's refusal to co-operate with world health officials, in regard to investigating the origins of the pandemic, has exacerbated the situation
world-wide and arguably prolonged the pandemic. China's resort to churlish retaliatory action against any foreign nation seeming to question its authority is reprehensible.
1.45
Any nation that legitimately seeks to raise social or economic issues will find themselves ostracised and punished economically. In contravention of World Trade Organisation (WTO) rules, China has weaponised trade as part of its retaliation. Australia, like other countries which have spoken out, has had a range of its exports to China curtailed for requesting a World Health Organisation inquiry into the origins of COVID-19.
1.46
Most recently, the European Union filed a case with the WTO against over what it calls "discriminatory trade practices" against Lithuania for strengthening ties with Taiwan. China imposed an import ban, an export ban and restriction of services against Lithuania, according to the EU stating that:
These measures predominantly concern goods or services from or destined for Lithuania or linked in various ways to Lithuania, but also have an effect on supply chains throughout the EU.
1.47
Throughout the pandemic, China has continued to impose trade restrictions on a range of Australian exports such as coal, rock lobster, beef, cotton and timber, general citing either dumping or contamination claims as a supporting reason. Tariffs of up to 212 per cent were placed on Australian wine and 80 per cent tariffs were placed on barley, in addition to blocked coal and copper exports.
Post-COVID-19 world
1.48
For many countries the pandemic has highlighted their over-reliance on 'Made in China' as a strategy for dealing with the tough decisions to support domestic manufacturing. Certainly, sudden shortages of core supplies such as pharmaceuticals, personal protective equipment, and other critical supplies has helped highlight the risk of Australia’s dependency on China.
1.49
The main competitive advantage that China has relied on to date has been cheap and probable slave labour and its flagrant violation of international intellectual property law through forced technology transfers by China (as a price for its market access). At the height of China's growth, many western pundits espoused the virtues of relocating companies' manufacturing operations to China with enticing articles in business publications suggesting 'Manufacturing In China Can Give Your Business The Competitive Advantage'. Such outsourcing has led to a huge 'hollowing out' of a basic western manufacturing capability.
Made in China 2025
1.50
The pandemic has allowed nations to reflect and reassess how they have neglected their domestic and strategic manufacturing capabilities. Meanwhile, in December 2021, China released an update to its Made in China 2025 (MIC 2025) plan largely modelled on the German 'Plattform Industrie 4.0' initiative:
Made in China 2025 is the government's ten-year plan to update China's manufacturing base by rapidly developing ten high-tech industries. Chief among these are electric cars and other new energy vehicles, next-generation information technology (IT) and telecommunications, and advanced robotics and artificial intelligence.
1.51
China is fully aware that to stay at the forefront it will need to move up the value chain in manufacturing and invest heavily in technology-intensive industries to compete with the US:
Among its various goals, the MIC 2025 sought to raise the domestic content of core components and materials to 40 per cent by 2020 and 70 per cent by 2025. The plan explicitly referred to how much of China's technology market could be controlled by Chinese companies and how many component parts in different products needed to be 'Made in China'.
…
The end goal of the MIC 2025 being self-sufficiency for domestic companies would then enable Chinese companies to compete for a greater foothold in global markets.
1.52
The fundamental aspect of the MIC 2025 is to position China in a dominate position in all global supply chains:
China has sought 'self-sufficiency' in core technologies across a range of prioritized industries. Implicitly and often quite explicitly, China's objective to become a manufacturing superpower implies the ambition not merely to catch up with other advanced economies but to surpass and displace them to achieve a dominant position in these industries worldwide.
1.53
While this is confronting, it also presents an opportunity for advance economies to harness their skills, R&D, and training to compete better.
Strengths and opportunities
Manufacturing potential
1.54
Despite its weaknesses, Australian manufacturing also has strengths to draw on. Dr Stanford pointed to the opportunities for manufacturing in Australia:
I think there is a mistaken assumption that if you're a rich, high-wage, industrial country you just can't do manufacturing. After all, it's much cheaper to do things in China or Thailand or some other low-wage country.
We found that traditional assumption is absolutely false.
1.55
The Centre for Future Work explained the benefits of increased manufacturing to the Australian economy:
… enormous potential benefits that would be generated by rebuilding manufacturing back to a size proportional to our national needs: including $180 billion in new sales, $50 billion in additional GDP, and over 400,000 new [direct] jobs.
Stability and high regulatory standards
1.56
Australia has a stable political, economic, and social environment and a reputation for high regulatory standards (for example: in relation to employment, safety, raw ingredients, food standards, environmental standards). This makes Australia a suitable location for investment and its high quality and safety compliant products sought after in the market.
Research capability and skilled workforce
1.57
Australia's manufacturing sector has the advantage of a highly skilled workforce, including a strong research capability. This positions local businesses well for a transition towards high value add products and advanced manufacturing and participation in enabling services including R&D, design, logistics, sales and services.
Ready access to renewable energy
1.58
Several sources pointed to the potential for renewable energy to reinvigorate manufacturing—as a consumable energy source, in relation to renewables products and components, and energy export. Australia's plentiful sun, wind, spaces, and critical minerals offer a competitive advantage through cheaper energy, the ability to manufacture sustainable products with 'green' manufacturing credentials, and the production of renewable energy components for domestic use or export.
Access to Asian markets
1.59
The OECD pointed to the opportunities arising from large emerging consumer markets in Asia which Australia is well positioned to benefit from. More recently this advice has been tempered, with the OECD warning that Australia's concentration of exports to China—over 25 per cent of its exports—makes Australia vulnerable to future shocks in the Chinese economy or to the imposition of trade restrictions.
Reserves of primary inputs
1.60
Australia has strengths in its local reserves of strategic minerals, timber, energy products, and high-quality agricultural products, providing a comparative advantage for domestic manufacturing. Supply and processing of critical resources is an area that Australia needs to be moving out into the lead.
1.61
China has recently looked to limit supply of many rare minerals that are critical in the development of advanced manufacturing. For example, the export of rare earth minerals used in production of a range of advanced products:
…[P]roposed guidelines would require rare earth producers to follow export control laws that regulate shipments of materials that 'help safeguard state security'. China's State Council and Central Military Commission will have the final say on whether the list should include rare earths.
Rare earth minerals are also central to the manufacture of products including smartphones, electric vehicles and wind turbines.
1.62
Australia has established the Critical Minerals Facilitation Office in the Department of Industry, Science, Energy and Resources (DISER). The Office is the Australian Government's central coordination point to:
help grow Australia’s critical minerals sector; and
position Australia globally as a secure, reliable, and ethical supplier of critical minerals.
1.63
Two main aspects of this strategy are to facilitate strategically important critical minerals projects and partner with other countries (mainly the US) to build global supply chains.
High-technology manufacturing
1.64
While Australia has been ranked as the eighth richest country in the world, it is ranked 86 in its complexity, down from rank 55 in 1995. There remains considerable potential for Australia to develop its high-tech manufacturing sector further, as shown in Figure 1.6.
1.65
Figures show that Australia's high-technology exports—those with high innovation and R&D intensity such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery—have effectively doubled over the last 20 years, as illustrated by Figure 1.7.
Manufacturing resilience in the face of COVID-19
1.66
The pandemic exposed the flaws in allowing traditional manufacturing to decline, with production and supply chain issues impacting vital commodities such as medicines, protective equipment, building materials, food and groceries—displaying how fragile domestic economies have become. There have been calls for greater focus on domestic manufacturing capability and given its strategic importance, economic self-sufficiency, and national security.
1.67
However, for some domestic manufacturers it provided an opportunity to display flexibility and resilience, with firms increasing capacity, creating new networks, pivoting to new products, or seeing boosts in local demand. For example, in 2019 the total capacity for surgical mask manufacture in Australia was estimated at 37 million per year, however in 2020 over 200 million masks were produced in Australia.