Political Insights Series | Manufacturing set for a revival

by Steve Lewis, Senior Adviser at Newgate Australia

It was April 1998 and the world’s largest producer of PC chips – Intel – was in Australia for high-level talks with (then) Prime Minister John Howard and Treasurer Peter Costello. The global tech boom was in full swing and Australia wanted a slice of this manufacturing bonanza. The prize? A $6 billion investment by Intel in a state-of-the-art plant. The (taxpayer) price? Unknown. In the end, both sides baulked and Australia missed out.

Fast forward to 2020 and Australia is, again, set to embrace a back-to-the-future policy of picking industry winners. Manufacturing is once again on the agenda. And the Morrison Government is looking to industry to dig the economy out of the biggest hole it’s been in for a century.

When Treasurer Josh Frydenberg delivers the Federal Budget on October 6, we will see the full extent of this anticipated manufacturing revival. This includes creating a Cabinet-level taskforce that will offer financial incentive to lure foreign-based advanced manufacturers to our shores. But this won’t be a ‘come one, come all’ strategy.

Instead the Government will target industry sectors where it believes Australia can become globally competitive. These include Biotech and Pharmaceuticals, Defence and Space, Food Processing and Agriculture, Plastics and Chemicals, and Aquaculture.

And Waste Management which, according to Australian Industry Group CEO Innes Willox, is poised to become a “huge industry” locally. The waste management sector, which employs around 50,000 people in Australia, has been in a tailspin since China announced it would no longer accept our waste two years ago. But Mr Willox believes Australia’s manufacturing revival will benefit industries such as waste-to-energy, with two plants under construction at the moment – and others on the drawing board.

If there is one key takeout from COVID-19, it is that Australia heavily relies on foreign manufacturing. “So, the very first lesson we learned was that we don’t have enough healthcare and pharmaceutical industries in Australia,” says Mr Willox. “We don’t make Ventolin or morphine or needles for injections or Paracetamol and that is the first lesson and that is why we had shortages in those key supplies.”

The second lesson is that we relied heavily on imported goods from China to ensure frontline health workers had adequate PPE (personal protective equipment) to deal with the ravages of the virus. With the bilateral relationship with China deteriorating badly, the Morrison Government is determined to build “sovereign capability”.

This is good news for manufacturing – and industry more generally - which Mr Willox argues were the “standouts” as COVID-19 decimated the national economy. “Manufacturing suffered least, was more resilient, and it was able to rebound quicker - so the big take out is that manufacturing has more than ever become recognised as a key component of our economy,” the AI Group head says.

The debate around manufacturing has changed too, particularly in Canberra where many federal public servants had thought targeted industry policy was dead and buried.

“The conversations have changed from ‘manufacturing is dead and we don’t make anything here’ into a conversation around ‘we don’t make enough and we need to make more’ and ‘we need to make it better and smarter’,” says Mr Willox.

This is all potentially good news for the Private Capital sector with Mr Willox anticipating a greater role for venture capital and private equity in this industry revival.

“(Private capital) must have a bigger role because traditional sources of funding are under stress,” he says. “There is no option but to bring more private capital to bear in the market and part of the task here is to provide greater opportunities that are attractive to private capital.”

Of course, there will be limits on what can be built here. Don’t expect the return of an automotive industry, for example. The Federal Minister for Industry, Karen Andrews, has cautioned against expectations that everything will be on the table. “We need to make sure that we manufacture what we need,” the Minister says. “We cannot be reliant on just one nation, or just one particular product. We need to look at our supply chain in total.”

Mr Willox puts it more bluntly: “What COVID showed us was that we all had too many eggs in a bamboo basket and we need to find some other kinds of baskets to put our eggs in.”

But it is wrong to suggest this is just focused on China. For instance, there is only one global supplier of fire retardant used by planes to try and douse summer bushfires – and they are based in the United States. Clearly it makes sense for an Australian manufacturer to scale up to supply this life-saving resource.

Chris Richardson, one of Australia’s leading economic commentators, backs a more interventionist approach and says there is even a case for “one or two factories to be Government-owned”. The Partner at Deloitte Access Economics mentions areas such as Defence and Health manufacturing but cautions that we can’t lose sight of the economic benefits flowing from trading with the world.

And what about China? Nearly 50 per cent of Australian exports are destined for China. Yet the Morrison Government appears on a collision course with the Chinese Government which has taken retaliatory action against Australian wine, beef and barley.

Mr Richardson calls for cool and pragmatic heads to prevail. “We have traded a lot with China because there are great benefits to both sides. Those benefits are still there. The question is ‘are there security related risks that means we will need to consciously play safe, to not take full commercial advantage of some things?’ Now Government may want some things to change, in which case it has to put taxpayer money in there. Aside from that thought, they should be based on commercial decisions.”