Financial Review – April 1, 1985

THE present debate on the future of Australian manufacturing seems to miss several important points. In particular, it overlooks the chance to get foreign, particularly Japanese, firms to invest in manufacturing on terms very favourable to Australia.

The main thrust of the debate to date has been that Australia should emerge as a producer of internationally competitive manufactured goods. Like Sweden and Switzerland, we should try to export goods to the rest of the world.

But seen from outside, these hopes seem far too ambitious. Quite apart from the problems of wage levels, strikes, finding overseas markets and the over-valued dollar, they ignore the extent to which Australia has already eroded its industrial base.

One of the lessons from Japan is that manufacturing per se has become a highly complex affair, requiring a full range of skills in robots, computerised automation, CAD/CAM techniques…

Australia simply lacks the skilled workers, training centres, parts and materials suppliers, small contractors, and repair shops needed to sustain a modern manufacturing sector.

Even with the cheaper $A we are in trouble. Too many engineering and metal working factories have been allowed to go bankrupt over the past 15 years. Too many manufacturers have found it easier to switch to imports as the going gets tougher.

We are locked firmly into the British pattern of de-industrialisation. As each factory, or industry, goes to the wall, the industrial base suffers another blow. The importcompeting survivors find it even harder to survive.

True, we could try to move out of large-scale manufacturing and rely more on Australian inventiveness to create small, new-tech industries exporting specialty items to the rest of the world. Some now urge this move strongly.

But how are we going to keep the inventions to ourselves once we get off the ground. We lack the manufacturing base. As soon as we came up with worthwhile products, which had to be manufactured in any volume, the foreigners would rip off the technology and manufacture the same items themselves.

Australia invented the wet-paper copier. The Japanese quickly took it over. All we got were some royalties for a few years.

Besides, how much employment are these new industries supposed to create? Even if everything went well they would only scrape the surface of the 20-25 per cent who seek employment in the manufacturing sector.

The rest would have to remain forever in the inefficient, highly protected or non-import competing industries that already do so much harm to Australia’s manufacturing future.

Nor can Australia afford simply to abandon manufacturing. Our service sector, while efficient (at least by comparison with Japan), could not absorb the people who would be left jobless. Our trade balance would become even more precarious.

Commonsense says we need some manufacturing. And we need it quickly, before the industrial base erodes even further.

How do we get it? For some reason, the simplest solution seems to have been the most ignored. It is for us to use tariffs (or quotas) to force selected foreign firms to invest in the manufacture of middle-technology goods not produced locally -bicycles, motorcycles, typewriters, and even VCRs.

We would choose the goods we want to manufacture in Australia. We would then induce foreign firms now exporting to Australia to bid against themselves for the right to undertake such manufacturing.

On this basis, we may quickly gain quite large investments – Japanese investments especially in a wide range of quite useful new industries, without doing any harm to existing Australian manufacturers.

Handled properly, the foreign bidding could also be pushed in directions very favourable to Australian interests.

The mistake in the past has been simply to raise tariffs on imported manufactured goods, and then wait for foreigners to invest on a laissez faire basis. The result was a number of smallscale, inefficient, assembly type operations providing little tecnology and low employment.

This was inevitable, given the lack of firm guarantees, and the presence of many over-eager competitors.

But if we restricted the numbers of firms allowed to enter Australia for the manufacture of any one item, the situation could change drastically.

We would offer a guaranteed position in the Australian market. But in exchange we could demand large-scale and reasonably efficient production offering technology and employment.

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IMAGINE for example that the Government had decided it wanted to see the manufacture of tape recorders in Australia. It would invite the foreign firms now exporting tape recorders to Australia to state in advance how much protection they would need, and for how long, to produce locally for say 60 per cent of the Australian market.

The foreigners would also have to state what technology they would provide, how much local procurement and, where possible, how much local equity they would provide.

The Government would then have to do no more than select the firm (or firms) that offered the best terms.

It would conclude a formal agreement with that firm (or firms), with a clause saying that if the foreign investor did not abide by the agreement his protection – whether tariffs or quota would be lifted Ideally, a sunset clause would also be included, allowing all the terms of the agreement to be renegotiated after a specified number of years.

Alternatively, the Government could simply state how much protetion it was prepared to offer and invite foreign firms or existing Australian-foreign joint ventures to state their interest.

In effect we would auction off the right to produce in Australia, in much the same way as we auction off the right to explore for oil and minerals.

Would the foreigners be interested? Almost certainly. We may think our market is small. But for most foreign firms anxious to sell abroad, a guaranteed share of the Australian market on terms arranged in advance would be irresistible.

At present, exporters to Australia have to compete with a host of other foreign producers for a small and fluctuating share of our market. Under the “tariff tendering” scheme I have suggested, these producers would know in advance that they could plan on being able to sell for a long period of time to a large proportion of our 15 million reasonably prosperous consumers.

Certainly, many Japanese firms would give a lot for such an opportunity. Today, more than a dozen electrical and electronic consumer goods producers compete fiercely for shares in both the Japanese and overseas markets.

They have the “expand or perish” mentality of Japanese business. Market share is their God. Profits are secondary.

To gain a privileged position in a market the size of Australia’s they would bid ruthlessly against each ‘other. They would, for example, do their pricing on the basis of marginal rather than average cost for the parts and components supplied to their Australian subsidiaries.

Nor, judging by past experience, would the Japanese be able to do much to restrain what they themselves refer to as their constant state of “over-competition”. On the contrary, if they thought other foreigners, such as US or Korean firms, were also eyeing the Australian market, the bidding would be even more ferocious.

In effect, we would be able to exploit their expansionist psychology for our own benefit. Singapore already does this when it encourages Japanese and other firms to bid against each other for government construction contracts. The results are often ruinous for the firms concerned. But they are great for Singapore.

Other Asian countries, including those who have traditionally concentrated on exports, do the same thing when they use access to their domestic market as a lever to persuade Japanese firms to provide large-scale, import-substitution investments with good technological spin-offs.

India has been able to revolutionise its inefficient car industry by relaxing its restrictions on foreign investment to allow selected Japanese firms the right to enter into large-scale ventures with existing Indian firms.

China has gained large television and other consumer goods factories on the same basis. Taiwan has been able to persuade Sony into providing an efficient VCR factory, with even the promise of future exports. It is making similar negotiations with Japan’s large car producers.

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EVEN Malaysia looks like getting a reasonably efficient car industry from Mitsubishi Motors of Japan, in exchange for an exclusive position in the Malaysian market.

Nor do we have to look only to Asia for examples. Already the United States and the Europeans, Britain in particular, exploit the Japanese psychology, when they use trade pressures and voluntary, restraints to force the Japanese to. manufacture locally.

Their experiences to date have been quite good. Production costs are not much above Japanese costs. Some even claim lower costs.

The Japanese go to a lot of trouble to maintain quality, and to train local workers.

Further gains for recipients are the chance to study Japanese management techniques at. close hand, and the path-breaking agreements the Japanese have in some cases been able to obtain from ‘the unions.

True, it might be harder to cut costs in Australia, given our smaller market and greater labour problems.

We might well end up in some cases having to pay a price in the form of continued protection for the foreign investors.

But if we selected the investors carefully it would not need to be a very high price. We would probably be looking at an average of around 10 to 20 per cent protection – not a very large sacrifice for the technology and employment gains.

If we allow for flow-on effects local procurement, training, a broadening of our industrial base – the cost to Australia would be even less.

If the investment was confined to production of final consumption goods, cost pressures on the rest of the economy would be avoided.

A large number of foreign firms investing quite heavily in a range of industries over a fairly short period could provide just the fillip that Australian manufacturing so badly needs.

And the presence in Australia of a reasonable number of foreign manufacturers bringing in good technology, would make it much easier for us to produce, and sell, the new-tech, speciality items that are supposed to be the last remaining hope for a world-competitive Australian manufacturing sector.

Underlying all this, however, is the larger question of whether protection should be allowed to play any role whatsoever in Australia’s manufacturing future. That many abhor protection is not surprising, given the bad record of the past.

But is it totally sinful to provide limited protection along the lines suggested? Surely a range of lowprotection, middle-technology industries providing employment would be better than the range of high-protection, low-technology industries such as clothing and footwear) that we preserve in order to provide employment.

Under present policies, we protect the latter, but are reluctant to do anything about the former. We cling to the industries we do not need, and bankrupt, or ignore, the industries we need.

And do we really have to be manufacturing world beaters anyway? Other societies protect inefficient sectors, agriculture in particular. In Japan, they also protect an inefficient service sector, mainly for employment reasons.

They are happy to be carried along largely by their very efficient manufacturing sector.

Australia could survive quite well by operating in reverse. It has a very efficient farm and minerals sector, and a reasonably efficient service sector. Between them they could easily carry a less efficient manufacturing sector.

The ultimate goal should be an Australia which gains most of its needed foreign exchange through exports of primary goods, which employs the bulk of its labour force in the service, or tertiary sector, and whose manufacturing sector can:

• Produce enough import replacement goods to keep the current account in balance during the difficult years to come;

• Employ the 20-25 per cent of the labour force that cannot find employment in the primary and service sectors; and

• Operate at an efficiency not too far below international levels.

It might not put us at the top of the world’s economic pecking order. But it would stop the decline in our manufacturing base, and ultimately our world economic standing.

At least, it is worth thinking about.