A new deal plan for manufacturing - seven areas of policy that actually work by Phil Toner

Our campaign to crowd source a new deal plan for manufacturing post Covid-19 has provoked dozens of submissions. Today Phil Toner cautions against re-inventing the wheel – we already know seven areas where manufacturing policy can work. Submissions to [email protected].

Over the past decade or so there has been a global re-assessment of the neoliberal consensus that governs Australia – one founded on free trade, deregulated capital and labour markets, privatisation and large corporate tax cuts.

Both the International Monetary Fund and Organisation for Economic Co-operation and Development argue the current financialised growth model creates large systemic risks to the ‘real economy’, undermines productive investment and creates an asymmetry in rewards to the few.

These leading global economic institutions have identified how financialisation and free trade have contributed to de-industrialisation, a loss of middle-skill jobs and a polarised labour market with simultaneous expansion of low-skill, low pay insecure jobs and high skill jobs.

Most recently the COVID-19 induced break down in global medical supply chains has seen all governments, including Australia’s re-assert ‘national sovereignty’ by committing to grow strategically important industries.

Industry policies seek to alter some or all of the following features of an economy.

First, to increase the share of particular industries and skilled well paid jobs, especially advanced manufacturing and associated knowledge intensive business services like engineering, design and computer consultants.

Second, to change the performance of industry in positive ways, such as to increase R&D, investment in advanced equipment/software or exports. Industry policies use tools that are focussed on specific regions (often depressed regions), specific industries or economy-wide.

Any policies we adopt should address a clearly identified problem, have well defined outcomes which can be regularly evaluated, be efficient and effective and have a realistic duration.

Coherent industry policies work on both the supply-side (increasing productive inputs such as investment by private and public sectors investment in capital goods, innovation and workforce training) and demand side (sales of innovative products and services).

Crucially over the years Australian federal and state governments have enacted a very broad range of highly successful industry policies but in too many instances of new incoming governments summarily abolish highly successful programmes simply for ideological reason.

We already know from experience which policy areas work:

1. Industry advisory and technology diffusion services

Inspired by highly successful agricultural extension services advisory and technology diffusion services have been shown to be equally effective for manufacturing.

These services address barriers to product and process improvements, especially for manufacturing SMEs caused by limits on the knowledge and skills of management and their workforce and cost and uncertainty in identifying reliable information and its assessment for the business.

They provide free or subsidised management and engineering expertise such as diagnostics, mentoring, training for improvements to activities such as equipment investment, plant layouts, employee training, process and quality improvements, cost reductions, and new products and marketing strategies.

2. R&D and R&D Commercialisation

There are multiple and complex designs for government support of private R&D but the rationales for this support are relatively straightforward: the most important being knowledge spillovers from R&D that befit other firms and uncertainty and risk associated with R&D constraining private investment below what is socially desirable.

For SMEs especially the cost of research and converting a product or service into a marketable commodity is a real impediment to innovation. Examples of local current R&D commercialisation support include the Advanced Manufacturing Early Stage Research Fund which is highly successful, even though the budget is only $1m. p.a and funded projects are over-subscribed.

3. Business and university and public research collaboration

Harnessing the advanced knowledge within public research institutions and translating this into new or improved processes, products and services within industry is a key policy tool in Europe and the US.

Unfortunately, in Australia there is a low propensity to collaborate with just two per cent of innovating SMEs engaging with universities or public research institutions compared to an average of 14 per cent across the OECD.

(Just three per cent of large innovating local firms collaborate compared to 37 per cent across the OECD).

The great variety of measures have been employed globally to promote such collaboration ranging from simple meetings and information sessions between parties to discuss needs and capabilities; changing incentives for academics to reward co-operation with business to large scale campus based technology parks.

4. Workforce Skills

Tradespeople and technicians have long been recognised as central to incremental innovation given their fundamental role in installing and adapting existing and new technologies in production and participation in R&D.

This requires skilled adaptable workers with a strong understanding of the theoretical principles underlying new technologies. In turn, this requires a vocational education and training system, of which TAFE is the core, which has the capacity to keep up to date with new technologies.

An excellent example is the highly successful collaboration between TAFE (the dual-sector Swinburne Institute of Technology) and Siemens Australia in an Advanced Apprenticeship in Industrie 4 technologies.

Demand Side Measures

5. Market Opening Opportunities

Local firms can be excluded from participating as sub-contractors in large public and privately funded projects though relatively minor changes can redress this problem.

For example, project leads or tier 1 suppliers are unaware of local capability; contracts can be written that favour long-established suppliers or ‘turnkey’ projects can exclude local component suppliers.

There have been many inquiries into these problems. The Australian Capability Network has operated for around four decades (formerly the Industrial Supplies Office) and has diverted many billions of dollars to local suppliers by addressing these issues.

6. Government procurement

Aside from defence, large government expenditures of relevance to advanced local manufacturers and services include health, infrastructure and the contracting out of many services previously delivered by government.

Excluding defence an excellent example is provided by the Victorian government purchasing locally made trams and trains with a policy for minimum of 50 per cent local content creating thousands of skilled jobs

7. Safety and quality regulations

Adherence to high mandated standards by local industries such as agriculture, food processing, health supplements and medical devices is an important driver of their global success.

Creating high standards for quality and safety in manufacture opens up domestic and export markets for these industries that would otherwise be subject to competition from other suppliers producing lower quality, lower cost products and services.

There are many examples of local industries adversely affected by an absence and/or inadequate enforcement of standards.

For example imported fabricated steel, plumbing supplies, windows, electrical cables, external cladding and particle board all used in the construction industry has been found to be either unsafe, not meet basic performance standards or be manufactured using damaging environmental practices.

Local producers have lost considerable market share because of this ‘unfair’ competition.

The recent inquiry by Shergold and Weir (2018) into the disastrous decline of quality in the Australian construction industry identified systemic regulatory failures covering all aspects of the industry as the principal cause.

A key example related to imported building materials: ‘there is a high incidence of building products in the market that are not compliant with the standards set out in the NCC (National Construction Code), resulting in inferior and sometimes dangerous products being used in the construction of buildings’.

Dr Phillip Toner is a Senior Research Fellow in the Department of Political Economy at the University of Sydney and Adjunct Professor at UTS Business School. He has worked in labour market and economic research for the federal government including an agency of Federal Treasury.

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