Lemons or lemonade?

In Thailand, a worker on an auto assembly line makes about $12,500 a year. Doing the job in Australian would pay nearly six times this — about $69,000.

Given this differential, it shouldn’t be surprising that Australians have imported nearly 2 million vehicles from Thailand since 2005, but have exported fewer than 200 (not a typo).

Australia’s automotive industry peaked in the early 1970s. We were then one of the few countries that were capable of both designing and manufacturing automobiles on a large scale. The sector employed about 90,000 workers and produced nearly half a million vehicles a year.

Since then, the story of Australian automotive manufacturing has been one of slow decline. Renault announced that it would no longer manufacture cars in Australia in 1981. Nissan withdrew in 1992, and Mitsubishi in 2008. By the end of this year, there will be no more Australian made cars.

This story is not unique to automotive manufacturing. Manufacturing in general has been in a broad decline for the best part of five decades. Where manufacturing once employed a quarter of the work force, it now employs about eight per cent. Technological developments, globalisation, policy changes and swings in consumer demand have seen our economy increasingly shift towards services.

It is however, a bit too broad a statement to claim that Australian manufacturing isn’t competitive.

Far from it. With the exception of a few sub-industries (beverages and tobacco, wood products, printing, chemicals and non-metallic minerals), Australian manufacturers are now exporting with far greater propensity than they were a decade ago. The shares of Australian food, textiles, paper, petroleum, polymer, metals, transport equipment, machinery, furniture and publishing manufactures that are now destined for foreign markets have all increased — some quite significantly.

The chart below shows how manufacturing’s sub-industries have changed over the last decade, both in terms of their share of total production, and their propensity to export.

·        Compared to where they were in 2007, all sub-industries have moved in a westward direction. This indicates that their respective shares of the economy (measured in terms of IVA) have each decreased over the decade.

·        The majority of sub-industries (which account for about 75 per cent of the sector) are also moving north. This indicates that their propensity to export (exports relative to total output) has also increased.

While manufacturing’s contribution to the economy has diminished overall, the part that remains, has proven to be particularly astute when it comes to selling on a global stage.

 

Change in manufacturing output share and export intensity, 2007-2016

Source: ABS 8155.0 and DFAT.

 

20 years ago, the Industry Commission released a paper on The Changing of Australian Manufacturing. The paper looks at the arguments for and against manufacturing assistance. They concluded that “a vibrant manufacturing sector is more likely to emerge in an environment where firms are encouraged to adapt to changes in their operating environment.”

In response to intense pressures from global competition and disruptive technological change firms have had to innovate and invest, improvements their offerings and reduce production costs. Those firms that cannot compete on value and price ultimately fail. Those that can, succeed. The same drivers that lead to a firm’s demise, also present opportunities for firms and workers to become more competitive, access new markets and discover new ways of conducting their business.

One explanation of the chart above is that we are now indeed seeing the fruits of that encouragement. The economy has shed those parts of the sector that cannot compete on the global stage, and only the competitive remain.