Fedderal election 2016: high wage growth helped hollow manufacturing

THE AUSTRALIAN, JUNE 17, 2016

The resources boom contributed to the rapid decline of Australia’s manufacturing industry but so too did aggressive wage increases in the highly unionised sector.

A Reserve Bank analysis shows manufacturing weakening across the advanced world but its fall has been steeper in Australia than elsewhere.

Manufacturing represented 15 per cent of total output at the beginning of the 1990s and was still 10 per cent at the late 2000s onset of the global financial crisis. Now it amounts to less than 5 per cent of output.

The health of manufacturing has become an election issue, with Bill Shorten yesterday declaring Labor as “the party of manufacturing, advanced manufacturing and Australian jobs” and saying Australia should still be a “nation that manufactures products”.

The Reserve Bank study suggests the future for Australian manufacturing lies in conducting research, development and design at home while doing production offshore.

The study also says the appreciation of the Australian dollar between 2000 and 2013 made Australian manufactured goods uncompetitive at a time when cheaper supplies from China were flooding the market.

“The bank’s liaison program suggests that one of the most ­notable responses by manufacturers to increased import competition and the higher value of the dollar was to move some or all of their production offshore.”

The study says some domestic productive capacity would remain, as testing or research and development facilities, to protect sensitive intellectual property or to fill orders more quickly. “Firms that have ‘offshored’ production typically have much less productive capacity remaining in Australia than their overseas operations.”

Although the currency has fallen by 20 per cent on a trade-weighted basis, making Australian manufacturers potentially more competitive, there was little domestic response. Retailers were now locked into contracts with importers, while bringing production back to Australia or opening fresh facilities carries high costs.

The RBA study says wage costs in Australian dollar terms rose 80 per cent over the 15 years to 2012, annual increases averaging 4 per cent. Those rising costs were not offset by improved productivity, with the result that competitiveness was lost. “A common theme of liaison in recent years has been that firms have been looking to find labour productivity gains by automating some production ­processes.”

The study said manufacturing in other advanced nations made greater use of imported components, with integration in global supply chains. But only 4 per cent of Australian manufacturers have foreign supply chain relationships.