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Australian manufacturing swamped by the Chinese tsunami?

06 March, 2006

In July last year, Victoria's Manufacturing Minister Andre Haermeyer issued a stern warning. "There is a tsunami out there called China and we have to find a way around it, Haermeyer observed.

Greg Barns

Six months on, and the tsunami has swept up a factory belonging to a company that manufactures an Australian icon - vegemite. Kraft Foods announced this month that it would be closing one of its two Melbourne plants, one that makes biscuits and moving it to China. The company's Port Melbourne plant that manufactures vegemite and peanut butter is here to stay - for the moment.

Get used to it. Over the next five years we can expect that China's lower labour costs, increasingly efficient and well educated workforce will give Australian based manufacturers every reason to relocate some or all of their business. A trend confirmed by senior Australian Treasury official Dr Martin Parkinson, who says the "gradual global shift of manufacturing production to low-cost countries, including China", will continue to place competitive pressures on parts of Australian manufacturing.

But while some of Australia’s politicians are trying to get a handle on what the growth in Chinese manufacturing of products such as clothing, footwear whitegoods, car parts and electronics, means for domestic manufacturers over the next five years, others were quietly excited by the opportunities that China’s moves towards a freer currency presents. Trade Minister Mark Vaile, who is overseeing progress on the proposed Australia-China free trade agreement, says, "China is Australia's second largest export market and the revaluation of the renminbi (yuan) will make Australian exports cheaper, having a positive impact especially on resources and agriculture products".

In short, the rise of China over the next five years - and longer for that matter - is a double-edged sword in Australia. For every business and industry that is gaining from China’s phenomenal economic growth, there is another that fears for the future. Australia’s manufacturing sector, while comprising less than 15 per cent of the nation’s GDP these days, is still a politically powerful lobby group. It received about $6 billion in Federal Government assistance during 2003 and 2004.

And while the Australian manufacturing industry and it’s political allies like Haermeyer have not yet resorted to asking the Federal Government to do as the US did last year, impose quotas on Chinese imports of textiles and clothing products, there is no doubt that a battle plan is not far away.

Even if the Australian manufacturing sector mounts its guns and aims them in the direction of China, it needs to bear in mind that the Howard Government's much vaunted free trade agreement will see the light of day over the next two years.

Perhaps that's why Howard’s Industry Minister Ian McFarlane was lukewarm in his response to Haermeyer’s call last year for an Australia-wide, long-term manufacturing strategy to counter the Chinese tsunami. His spokesman said that Haermeyer’s idea of a summit to discuss such a strategy was a “nice idea”.

Perhaps McFarlane’s coolness is influenced by the fact, as the Australian Department of Foreign Affairs and Trade has noted, from “small beginnings, Australian exports of manufactures to China have grown rapidly - their value increasing by 160 per cent between 1999 and 2004, compared with only 13 per cent to the rest of the world”.

This is not to say that Chinese imports into Australia will not ensure some Australian manufacturers in these areas feel the chill winds of increased competition. Remember, however, other manufacturers here are relishing more trade with China.

Take the Australian automotive industry, worth over $27 billion in sales each year and located in the politically powerful and sensitive states of Victoria and South Australia. General Motors, Toyota, Ford and now to a lesser degree Mitsubishi, all have a substantial presence in Australia. They are licking their collective lips at the prospect of exporting cars and auto parts to China - already the third largest motor vehicle market in the world.

Contrast this with the clothing industry - which has been in decline in Australia since the government of Bob Hawke in the 1980s began to liberalise trade. Now China dominates the Australian clothing and footwear market. In each case over 60 percent of the clothes and shoes available in Australia come from China. A leading clothing manufacturer, Andrew Edgar, the managing director of a household clothing brand name in Australia, Yakka, says the threat of low cost competition from countries such as China is an irreversible reality. “The die is already cast”, Edgar said last May.

Although, even in this case the impact of Chinese imports might be exaggerated. As the ANZ Bank’s Chief Economist Saul Eslake noted last July, “for all the public attention devoted this year to China’s exports of textiles, following the (belated) dismantling of trade barriers erected under the Multi-Fibre Agreement and Agreement on Textiles and Clothing, their share of total exports has fallen from nearly 24 per cent in 1997 to 15 per cent in 2004 and to less than 14 per cent in the first four months of 2005.”

Perhaps the image of a tsunami to describe the likely impact of China on Australia’s manufacturing industry is a just another case of empty political rhetoric. But that's not to say that the impact of Australia's burgeoning economic relationship with China will not change the manufacturing landscape in this country over the next five years.

Greg Barns is a former state and federal government adviser and a Hobart based author. He is a former adviser to New South Wales Premier Nick Greiner and federal Finance Minister John Fahey. He is the author of What’s Wrong with the Liberal Party? (2003) and Selling the Australian Government: Politics and Propaganda from Whitlam to Howard (2005).

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