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Australian manufacturing – competing in a global market

15 March, 2006

Heather Ridout: "It costs $A45,000 to employ a process worker in Australia; it costs $A4,500 to employ the same worker in China."

The University of Sydney's workSite section

Heather Ridout is the deputy chief executive of the Australian Industry Group, one of Australia’s leading employer organisations formed when the Metal Trades Industry Association and the Australian Chamber of Manufactures merged in 1998.

The AIG covers a diverse range of manufacturing industry employers - in food, IT, chemical, engineering, call centres and labour hire. Heather Ridout has established herself as an energetic spokesperson on behalf of the AIG and the ongoing development of Australian manufacturing. Ridout is also a member of the advisory board of Work and Organisational Studies at the University of Sydney.

In this interview, Ridout outlines the challenges facing Australia as it tries to reconcile a commitment to a safety net of good wages and working conditions while competing with the highly productive low wage economies of Asia.

How would you characterise the current performance of Australian manufacturing?

Manufacturing in Australia has had a couple of very good years, the best for some time, that peaked about the beginning of last year and has been easing since - but its still done very well. We created about 40,000 jobs last year, we’ve lost a few but generally we are still ahead; we’ve had a big increase in investment and R&D last year – a big increase in investment in technology last year; in a sense the industry has performed well and it’s taken opportunities to develop into the future which augers really well for the future of Australia.

Are some sectors performing better than others?

Over the last year or two the goods sector has performed better than the services sector. That’s going against the world economic evolution in a sense and it is hard to sustain and it’s being supported by the dollar, which is giving us a chance to compete in world markets; the growth in housing and construction has been a huge support to the manufacturing sector and that’s been really, really good. We’ve had reasonable employment growth and reasonable real wage growth and people have felt confident and interest rates – how could I forget that - have been remarkably low, even though they may be higher then in other countries they are very, very low. So people have had a big opportunity to spend and they’ve been doing it.

The manufacturing industry, which supplies a lot of the stuff people buy, has been the beneficiary but the future’s problematic. It’s difficult because those people understand that the future of manufacturing lies in being a global economic industry and what is going to make it successful is increased technology and R&D so we can capture bigger markets. Our future lies in linkages with overseas markets and overseas suppliers and that’s a very complex mosaic and as we know there’s a massive [manufacturing] oversupply around the world.

Any developed country has unrelenting pressure on manufacturing which is driving down prices and is happening in Australia which must tackle the balance of trade - which has been falling. That’s been a huge contributor to how competitive we must be to get the benefit of all the low priced manufactured goods, but that’s a threat too because we can’t go on being as competitive without more opportunity. Manufacturing, no less in Australia than in any developed country, has got unrelenting pressure from countries like China. China poses a huge challenge. Ross Perot talked about the giant sucking sound from Mexico, well that giant sucking sound of lost jobs is now coming from China – it is staggering.

What sort of impact is China having on manufacturing industry jobs?

In a sense the amount of jobs, as I said in manufacturing over the past 12 months have been growing so we’ve done very well in an industry that that is so internationally competitive. We’ve done extremely well. In contrast the US has lost 2.5 million manufacturing jobs in three years. That’s just mind-blowing, more than the twice the whole Australian manufacturing workforce. So you can see why the pressure is on – they might blame Japan or China but it is difficult in areas where those countries are so much more competitive.

One of our members who has operations in both China and Australia has told me that his Chinese operations are twenty times as competitive as his Australian operations. And his New Zealand operation is only 20% better than Australia. It costs him $A45,000 all up to employ a process worker in Australia, it costs $A4,500 to employ the same worker in China. I say “Oh, but they wouldn’t be as productive”, and he says they are twice as productive as the Australian worker. This may not be the equation in every area but was certainly in the one he quoted. And you have to add on a bit for transport costs. So you have a 20 times differential …

Chinese workers have little time off, live in dormitories far from their homes – we wouldn’t want to replicate this.

But that’s the classic pattern of industrialisation, isn’t it? When you think of what happened in the industrial revolution, it’s happened in Mexico and it happened in Australia. I think this is where organisations like the ILO haven’t moved on - you can’t knock a Chinese person for wanting to get a job that might feed their whole family for a month.

But it’s the sheer scale -

Oh, it’s just enormous and it’s a really huge, huge challenge for the whole economy. But it worries me that people say China’s developed more and opened up huge opportunities in natural gas iron ore – good, great, and that’s going to be good for Australia – and our steel members feel they are getting a lot of business, but we don’t want to say well that’s all we can get out of China. We also need to make sure we’re getting a share of the high value added exports – we need a balanced approach to Chinese development, not just saying well we can do what we’ve always done, dig up the rocks and send it there – it’s not going to make Australia a wealthy country with lots of good jobs in the future – so it is a challenge for us.

China enjoys a trade surplus with Australia –

China is like that with a lot of other countries – it’s a very big challenge for us to balance the books. China does have a very strong export development strategy that will evolve. They do have the advantage over us, which is why we should not get carried away by the increase in our exports to China.

Should Australia pursue individual free trade agreements or favour a multilateral approach?

Smart countries can do more than one thing at a time - someone said that once, Paul Keating I think - a very good remark although I don’t think he likes bi-lateral trade agreements by the way. Australia has everything to gain and very little to lose from free trade agreements because we have such an open economy – basically we have quarantine arrangements to protect the agriculture sector and the rest we’re an open economy.

How have Australia’s often strained relations with Asia impacted on Australian manufacturing?

Its hard, but 60% of our exports goes to Asia, like what we were taking about with China – huge opportunities and issues with industry, and I think with trade agreements we need to put a line in the sand and mark the spot where we want to be so we can negotiate. The world has changed since Paul Keating called Dr. Mahatir’s behaviour recalcitrant, and that caused a massive panic and that went on and on. Australia has a very high Asian population - an Australian born Asian population – we are a multicultural society with so much potential in our community and our Asian population, and I think our members are engaged up there. We’ve strengthened our relationship with Thailand, China– including last year’s visit from president Wu – we’ve got a pretty good foothold in the region. I think Australia’s relationship with China is strong so I would be very surprised if we didn’t have trade agreement soon.

How well has Australian manufacturing exploitated new technologies?

I think it's been huge – investment in IT technology in Australia has been one of the mainstays that has given us strength over the past 4-5 years and it has probably been the issue along with microeconomics. There have been two big drivers - productivity which has been stellar, but the future has to be that we just don’t do R&D into existing technology. We’ve actually got to look at using new technology in a better way. We can’t say we’ve bought this new piece of machinery with all of this great computerisation which enables us to produce the goods. What we’ve got to do, for example, is was what Holden did - put in technology to create a prototype for the whole computer modelling to create a Holden Monaro in much shorter time, with greater sophistication, and a much better car using the technology. We need further technology research.

Is that why you’ve been speaking out about the need to lift Australia’s higher education performance and funding?

Everyone thinks there’s a solution to the higher ed sector and there isn’t one - it’s not financially viable under the current model. The injections required of public money would be enormous, the tensions that would arise between regional universities, universities that do research and universities that do no research – all that would continue. I think the government did a very good process of outlining the solution to the community and their proposals, even though they are not perfect, they go a long way to say how can we build a more viable sector in the future. Our organisation was pretty quick to point out to the private community that the public’s contribution to higher education had gone far enough and the extent for future increases should be capped.

What about the Howard Government’s proposal to link higher education funding to industrial relations reforms?

Well I think there are two places where is great pattern-bargaining going on – one is in the universities and the other is in the manufacturing industry. So it’s a tough industrial environment, higher education, but when the Commonwealth is putting in a lot of money they would say – just like in most industries – you’ve got to make productivity measurable.

Is there much of an exchange between the manufacturing sector and the universities?

We would like more co-operation between industry and higher education institutions. Only 12% of our members consult with a higher education institution. Yet higher education is where 80% of Australia’s research is done. There is a huge opportunity to build a richer dialogue – there is enormous potential but often that commercial understanding is missing – there are key issues that have to be resolved. But I guess one of the big issues that has to be resolved is that we need to get a better alignment between university needs and industry needs, which again is one of the issues for our members.

How do you see employment relations in the manufacturing sector these days?

We’ve been one of the few industrial countries who have actually continued to support a safety net which has been updated every year. The AIG have never argued against the increase of the minimum wage. We supported paid maternity leave and we supported leave for casuals. So we’ve been very out there trying to say you should have a reasonable amount of protection available to all workers. The issues of redundancy packages have been alarming and it is a fine ball to juggle. It’s just always a balancing act.

Job security has been recognised as an issue in industrial relations – with the casualisation of the workforce. New rights were established for casuals - the workforce has changed a lot and it’s not easy to run a one size fits all cases. People work differently. I suppose you and I grew up – you got a full time job and worked 38 or 40 hours a week and got holidays - but I think people have a different approach now. A lot of young people say I get a 25% loading and I don’t get sick very often so this suits me.

I think it’s a matter of having as much choice as you can. Employers say to their workforce, “I don’t want you to work in the traditional manner.” From a public policy perspective we could make people work longer, expect to update skills, so you need this combination of people who are willing to try new skills; at the same time you need people who are part time, short term …

It does create a sort of underclass -

Yes, it’s an unknown territory – I am not sure we can go back. We have to be able to make our own decisions – that’s the kind of community we are. The manufacturing industry employs such a range of people - they’re good jobs, they pay well.

Are manufacturing industry employers committed to employee training?

You used to have the big public utilities doing huge training - and now they’ve stopped and that doesn’t help. Manufacturing employers are all under pressure, they don’t know what to teach. I think we’re really in a transition. Four or five years ago they would undertake training, now they say I’m not too certain of the future. It’s great to see last year employers actually making a commitment - R&D went up, which is great, and they took on more people. I don’t know how long its going to last – the impact of exchange rates are huge.

The training issues need to be resolved. There are a number of solutions to it – one is looking at the qualifications and the way they are used and how they attract people into working longer. The average age of Australia’s workforce is 37-38 and in manufacturing its 39 years. There is a need to train workers and it is terribly important.