A new deal plan for manufacturing - Support for local innovation is crucial for Australia’s manufacturing future

R&D incentives for ground-breaking ideas exist, but there are other important ways to support clever manufacturers and grow the sector. Phil Hodgson lays out a case for better purchasing decisions in his contribution to @AuManufacturing’s campaign to crowd source a new deal plan for manufacturing post Covid-19

Disruption to global supply chains caused by the COVID-19 pandemic are likely to have significant ramifications on the Australian economy. The risks associated with over-dependence on international supply are becoming increasingly obvious, and this presents both challenges and opportunities for the local manufacturing industry.

Australian manufacturing has suffered in the face of increasing globalisation from the availability of efficiencies of scale and even surplus dumping from overseas manufacturers operating in far larger markets. This makes it hard for local businesses to compete but, on the other hand, has forced many to develop innovative ideas to survive. However, many local ideas then head overseas because the development support, market opportunities, and manufacturing options in other countries far outstrip what’s possible locally.

The Australian government has strong measures in place to encourage innovation, including tax rebates for research and development activities. However, to take this to the next step and prevent Australian innovation moving offshore, as well as strengthen local manufacturing in the face of global supply chain risk, the government will need to rethink its whole economic strategy with respect to the local manufacturing industry.

Calix Limited (ASX:CXL) is a local manufacturer with a patent-protected technology that has benefited from Australian government funding to bring ideas into the light. Without that government support, ground-breaking projects such as Project LEILAC for CO₂ capture in lime and cement (www.project-leilac.eu) wouldn’t exist. However, to turn those ideas into reality and, in turn, commercialise them, Calix has had to look overseas, such as developing Project LEILAC in the European Union. Heavy industry in Australia, such as cement and lime, has declined significantly over the last few decades, and simply doesn’t have the critical mass to do significant research and development, and then commercialisation.

While Calix still currently is domiciled in Australia and owns the intellectual property associated with Project LEILAC, there will be increasing pressure as the technology is de-risked to offshore it. And, there will be many other local companies and ideas that could follow the same path.

Calix is also developing another technology that would be great to keep locally-owned and developed, which is advanced lithium ion batteries as part of its BATMn technology. Again, the development has benefited from R&D funding from the Australian Government, which is great, however if there is no local battery industry that emerges in the next few years, again this innovation will have to head off-shore for commercialisation and result in another critical commodity for which we are reliant on overseas supply.

A hollowed-out manufacturing industry has thus proved a stumbling block and loss of local value for many Australian innovations; supporting the reinvigoration of this industry can be an important starting point for the government. It’s important to note that government support doesn’t have to come purely in the form of grants or tax incentives. There are other key ways the government can support local industry.

Supporting organisations with local, integrated supply chains is one such way. One of the lessons being learned from COVID-19 is that global supply chains can be fragile. Whether it’s a pandemic or geopolitical tension, or some other disaster, it would be naïve to think that there will never be a situation that significantly restricts the supply of goods into this country. This is a worrisome situation for Australia, which imports so much of what citizens need.

Australian manufacturing’s contribution to the economy peaked at just under 30 per cent of GDP in the late 1950s and early 1960s.(1) It currently sits at around 5.8 per cent of GDP.(2) This contraction could be reversed but to do so will take a concerted effort from government and industry alike.

For example, many government purchasing decisions are made on the basis of one simple figure; the bottom-line price. These decisions don’t consider other factors such as whether local jobs will be created, supply chain risks can be mitigated, or local innovation will be supported.

One example of this is caustic soda, a widely-used chemical product and internationally traded commodity. This dangerous chemical is being imported from overseas at quite volatile pricing levels, reflecting Australia’s open markets role as a both a beggar one day and then a dumping ground another day.

However, many applications for caustic soda can be replaced by a much safer, environmentally friendlier, and locally produced magnesium hydroxide solution. If government utilities in wastewater treatment, for example, sourced at least a minimum of such alternative materials from local manufacturers at competitive average prices, rather than jumping on the latest hot price for a dangerous chemical (ultimately from international traders), the government could protect jobs, the supply chain, and help spur and keep innovation local all at once.

Ethical sourcing must include a more nuanced calculation around the overall benefits of choosing a local product over a seemingly cheaper, imported one. Given local manufacturers can better guarantee continuity of supply during a crisis as well as traceability regarding raw materials, government departments and agencies could have a significant positive effect on the Australian manufacturing industry by having a minimum local content of suppliers during public tenders.

The government can take the initiative lead by example on this kind of local sourcing. The private sector would then be more encouraged to follow, based upon proven examples over a longer time frame to supply costs and risks, than simply short-term tenders. For critical industries, such responsible sourcing in the private sector may need to be mandated.

While Australian firms can’t necessarily manufacture everything Australian consumers desire, they can potentially manufacture everything we need. This can reduce the risk Australia faces in a situation where global supply chains are compromised. Australian government policy is the number one lever that must be pulled to make this happen.

Calix has been fortunate to date in being able to control its destiny, and develop and keep its IP, largely through government support. But how many great Australian ideas have withered on the vine through lack of support, or lack of access to local manufacturing? A robust local manufacturing industry can help ensure Australian innovation continues to lead the world. Furthermore, it can help ensure that highly skilled jobs in research, developing, and engineering stay in Australia. And, by keeping manufacturing here, it can deliver a more sustainable development process by reducing emissions created by global transport and logistics requirements.

The Australian R&D tax incentive is relatively generous. Now, it’s time to back it up with policy support for local manufacturing, starting with government and statutory body local procurement practices. Australian innovation is best taken from bold ideas to commercialisation in this country.

(1) https://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/1301.0~2012~Main%20Features~Evolution%20of%20Australian%20Industry~239
(2) https://tradingeconomics.com/australia/manufacturing-value-added-percent-of-gdp-wb-data.html

Phil Hodgson is the CEO of Australian technology company Calix.

@AuManufacturing’s new deal plan for manufacturing is brought to you with the support of Bosch Australia Manufacturing Solutions