A future for our factories in contract manufacturing?

21 October, 2005

(David Forman) In towns and cities across Australia there are empty factories and empty warehouses - the outcome of two decades of economic reform and the gradual globalisation of manufacturing.

Production has moved off-shore, and from former textile mills and clothing and footwear factories to truck, car and agricultural equipment production centres, enormous capital investments lie idle.

Sometimes production went to low labour-cost nations in South East Asia. Other times it went to international hubs in the US or Europe as the reduction of trade barriers made possible economies of scale and international marketing.

The flow of manufacturing overseas has often seemed a tide against which there was no swimming. But could it be that Australia is feeling helpless when in fact there is an alternative to being either fully integrated into international companies' manufacturing investment plans or not being involved at all?

In an age when businesses are disaggregating into functional units, all that old capital and all those years of actually building things do have a value (see accompanying article The Frictionless Economy).

As Dr Charlie Mullen, director of high tech consulting with California-based Technology Forecasters says, the ability to manufacture is itself an intellectual property. In fact, as original equipment manufacturers focus their energy and dollars on devising, developing and marketing ideas for new products, they are increasingly getting out of the business of making things themselves and are contracting out the job of getting dirty hands to specialist manufacturers.

It's hardly a new idea. But it is an idea whose time has come in the industries building the new economy and creating the jobs of the next decade.

Sure, it's highly unlikely that Australia is so clever at making shoes and shirts that it could have stopped the exodus of those businesses to South East Asia over the past two decades. There's simply not enough intellectual value-added that can be put into some products to compensate for extremely low labour rates.

But that is not the case in some other industries. Even the giant automotive companies work with partners to share production lines in some countries. In any industry, if there is the possibility of running multiple clients' products off a single production line, the possibility of turning the domestic division of one multinational company into an independent partner of many is a possibility.

It certainly has to be worth exploring that potential before shutting the doors of a factory, at which point the game is over.

When you think about it, Australia is perfectly positioned to carve out a niche as a contract manufacturing base. It's close to Asia, where there are attractive markets and where much contract manufacturing already takes place, but has proved economically stable in the past 18 months and already has the hard and soft infrastructure established.

So why haven't we heard more about it?

Probably because firstly, Australian manufacturing managers have for too long had a reactive, branch-office mentality. The biggest decision of all - whether to continue in business - has been allowed to be made in a boardroom overseas, with managers here thinking they had no alternative but to accept the remote leaderships' decisions.

Secondly, because Australians are poor at one of the core skills needed to build a sustainable contract manufacturing business: marketing.

Aggressively selling oneself to a client and establishing seamless communication and understanding of customers' needs are emerging as two of the crucial ingredients for building a sustainable contracting business as competition between large contract manufacturers intensifies. Just providing products may well place a business on the road to becoming a commodity supplier, but that route probably means forestalling the inevitable, rather than saving a business.

Survival depends on building services around the production process (see accompanying articles High tech industries just do it, too and Those who can, speak).

The rest of the world is switching on to these new ways of thinking. But Australia needs to do more than just catch up with what's going on overseas. It has to become a world leader.

And soon.

US electronics outsourcing industry newsletter Manufacturing Market Insider says the gap between the largest participants in the industry and the rest is growing and as this continues it will be harder for smaller companies to win work from large original equipment manufacturers.

Which could mean Australia can buy in quickly and carve out a niche or keep waiting and find there is no room left for it join the game.

This article was sourced from the Australian Business Foundation