If Australian advanced manufacturing is to compete on a global scale, there needs to be a quantum increase in funding and government contracts, a report by national professional services firm RSM Australia says. The $15 billion National Reconstruction Fund is significant but not enough to achieve this, the report said.
Looking at the strengths and weaknesses in Australian manufacturing, RSM’s Innovate, Transform & Thrive: Securing Australia’s Manufacturing Industry report then offers four recommendations to help position Australia as a global leader in high-tech, high-margin manufacturing.
RSM Australia’s national leader manufacturing services, Jessica Olivier, said, “We believe targeted government investment and incentives to reinstate asset write-offs, raise investment in specific advanced manufacturing niches, overall tax reform, and research and development are needed for our nation to keep up and thrive in the developing net zero global economy.
“Like our global competitors, we also need to develop and implement green energy technologies at scale to capitalise on our natural resources and existing skills in mining and related services. The coming decade will herald a great transition for manufacturing and other industries. With industry and government working together, we have the smarts and the ability to lead the way.”
Recommendations
Increase the quantum of funding and number of government contracts for advanced manufacturing to allow Australia to compete on a global level. The $15billion National Reconstruction Fund will be significant, but pales in comparison to US and EU allocations. With grant allocations, provide substantially larger amounts to a smaller number of companies to make a meaningful impact.
Appropriately target the National Reconstruction Fund to critical industries where Australia has a competitive advantage. Maintain transparency about funding and sector priorities to overcome the current lack of visibility over where this funding will be allocated.
Continue international agreements to embed Australian manufacturing in global supply chains. Consider Australia-first supply chain requirements for major projects and mandates for majority-owned Australian companies to support local business. This is already in place with some of our trading partners, including the US and EU, which support their local manufacturers first, creating an uneven playing field.
Reinstate the instant asset tax write-off to provide a greater incentive and ability to purchase capital equipment and machinery. The modernisation of production processes and equipment can also support decarbonisation, productivity, and advanced manufacturing processes.
In The Australia Institute’s Centre for Future Work A Fair Share for Australian Manufacturing report, it found Australia ranked last in manufacturing self-sufficiency among all OECD countries, producing only 68 per cent of what we use.
The latest Harvard Economic Complexity Index ranks Australia 93rd out of 133 countries, the lowest of any OECD nation by 50 places. The index systematically ranks 133 countries by their ability to manufacture and export diverse and complex items and services. It has been a global benchmark of a nation’s global impact since 1995, when Australia ranked 55 on the index.
The report highlighted how significantly the sector has changed since the 1990s. At that time, there was more production of metal products, textiles, clothing and footwear, and the machinery and equipment sectors, but less non-metallic mineral products, wood and paper products, and food, beverages, and tobacco.
Today the sector is dominated by food, beverages and tobacco, machinery and equipment, petroleum, coal and chemicals, and metal products. According to the Reserve Bank, they make up around 80 per cent of the country’s manufacturing.
Covid also impacted the sector, accelerating a focus on industrial manufacturing in high-value areas of health, defence, and energy.
Regardless, manufacturing remains the domain of small business, with almost 95 per cent of firms employing 20 or fewer people.
How best to invest
In the first half of 2023, the House of Representatives Standing Committee on Industry, Science and Resources held an inquiry into developing advanced manufacturing in Australia. The committee hasn’t delivered its response yet.
Olivier said the backdrop to the hearings was a broader debate about the best way to fund and support the manufacturing sector, and who within the sector funding should target.
“More government investment into manufacturing must be made if we are to truly embrace local manufacturing capability and boost the number of Australian-made goods.
“Australia needs to model the US which is investing heavily in local manufacturing and pushing green technologies to grow its manufacturing capability.
“More clean-energy manufacturing facilities have been announced in the last year in the US than in the previous seven years. This translates to well paid jobs and a massive boost to climate change initiatives that can reshape a nation,” Olivier said.
(* Meanwhile, in 2021/22, the Senate Standing Committee on Economics held its own inquiry into the Australian manufacturing industry, delivering its report just months before the federal election. It made 19 recommendations including calls to establish a Manufacturing Industry Fund for co-investment incentives, significantly increase R&D and commercialisation support and fast track reform to the VET sector.)
Olivier contends that while the detail of the NRF funding is still unknown it should be significant for manufacturing, especially in its target sectors of critical technologies, renewables, and advanced manufacturing.
“A note of caution is that NRF funds pale in comparison to US and EU allocations for manufacturing, even considering size differences,” she said.
“It’s notable the US ‘Bidenomics’ flagship initiative, the Inflation Reduction Act focusing on climate, clean energy, and manufacturing, is a US$740 billion investment, contrasted against the NRF’s AUD$15 billion budget.
“With initial NRF announcements expected soon, we would hope to see funding targeted to those with the best chance of success in critical industries where Australia has a competitive advantage, such as medtech, defence, aerospace, clean energy and food and agriculture.”
With the NRF board announced recently, Olivier is calling on the members to be bold.
“The finer details of their first tranche of funding will reveal a lot about whether Australia can take up the challenge to be a world player in advanced manufacturing. Given the intention to unlock funding for strategic projects in Australia’s interest, I’m hopeful the NRF board will accept moderately higher risks than their commercial and private counterparts, in exchange for broader economic benefits that other funders would not normally consider,” she said.
She agreed with the Business Council of Australia’s suggested strategy for the Federal Government to pick and back compelling ‘winners’, rather than giving many companies relatively smaller $1-2 million tranches.
“I’d support more government contracts, as this would improve the sector’s competitiveness and capability - but grant funding and other government incentives still play an important role,” Ms Olivier said.
Case study: Gelista premium food manufacturer
The innovation in production of South Australian-based boutique ice creamery Gelista is anything but vanilla. The premium food manufacturer recently opened its high-tech, integrated factory and warehouse that features digitally interconnected refrigeration systems.
Managing director and founder Peter Cox said Gelista developed its own smart refrigeration system to be significantly more energy efficient and eliminate water coolant use.
“Our new factory utilises a central refrigeration system, which will supply refrigerant on demand as assets require it. As different assets switch on and off, the central refrigeration system varies capacity to supply refrigerant services to whichever part of the plant is being used,” Cox said.
Gelista was founded by the fourth-generation dairy farmer 14 years ago, when he saw a gap in the market for an artisan product at wholesale scale. They are now exploring the international market.
He acknowledges there is a range of government support, but says costs remain challenging.
“The most beneficial thing governments could do is to try and reduce our costs in manufacturing. One thing that is helpful is R&D concessions,” he said.
As the National Reconstruction Fund takes shape, Cox said Australia has significant capacity to develop advanced manufacturing and add value to resources.
“We have some great people and an enormous amount of energy resources; however soaring energy prices are a major barrier for manufacturing.”
A decade of transition
The report said food and beverage, machinery and equipment, defence and resources and increasingly advanced manufacturing are transforming Australia’s manufacturing industry. Post-Covid, manufacturing businesses globally have innovated at unprecedented speed to stay relevant, which has made government support for R&D more crucial than ever for innovation, particularly considering the dip in the level of innovation across the Australian economy.
“GDP percentage spending on innovation in Australia has dropped from more than 2 per cent to around 1.8 per cent – an anaemic level that gives lie to Australia’s much talked about ‘world leadership’ in areas of technology.The US has passed legislation outlining 3 per cent spending on R&D, and nations such as Israel and Sweden spend more than 4 per cent,” Olivier said.
The RSM report also highlighted the need to continue international agreements to embed Australian manufacturing within global supply chains.
“Some trading partners, including the US and EU, support their local manufacturers first, creating an uneven playing field. The federal government should consider Australia-first supply chain requirements for its major projects, along with mandates for majority-owned Australian companies to support local business,” she said.
Olivier said the other major initiative that was important to be competitive with other OECD countries was tax reform.
“Targeted government investment and incentives such as reinstating the instant asset write-off, raising investment in specific advanced manufacturing niches, continued R&D benefits and overall tax reform are needed for Australia to thrive in the developing net zero global economy.
“The previously proposed Patent Box regime was also a very attractive proposition for large Australian manufacturers, which sadly seems to have been abandoned by the current government. Developing and implementing green energy technologies at scale to capitalise on our natural resources and existing skills in mining is also crucial in the next decade for manufacturing.”
