Fulfilling Australia’s Modern Manufacturing vision

Podcast transcript

Therese Raft

Welcome to Navigating the New Normal – Grant Thornton’s podcast exploring trends in business and the marketplace.

Today I am joined by Richard Nutt, Tax Partner and specialist in global trade and customs, and Mark Phillips, National Head of Performance Improvement and Manufacturing industry expert. Today we’re talking about Australian manufacturing beyond the initial round of MMI funding and how we land those 10 year roadmaps. Welcome Richard and Mark!

Richard Nutt

Yeah, good afternoon Therese.

Mark Phillips

Good afternoon, Therese.

Therese Raft

Okay, now let's start with sentiment. All six priority roadmaps are now out. How are you feeling about the goals we've set and what those roadmaps say about the future of manufacturing in Australia?

Richard Nutt

Yeah, look. It's got to be a positive when government made a commitment to invest in manufacturing in Australia. I note with interest, Therese, of the sectors that we’ve chosen to be part of the initiative – it's probably already, I would say in some instances, quite mature manufacturing sectors. Especially the food and beverage, who are already enjoying excellent growth in international markets – which I get this is where this initiative is steering us towards. So I'm just interested, has that been done on purpose to give us maybe a better return on the investment sooner rather than later, because I think with some of the sectors that have been chosen, it's going to be a longer burn and it's going to be a long time before we see any return on that investment.

Mark Phillips

Look, I think the setting of the priority industries is great because it's a recognition that we have an opportunity for the reverse of the trend, which has been a decline in manufacturing. I don't think the public would dispute that there's no future for manufacturing. It's now moved on from the ordinary days when Parliament basically stated, we didn't need an automotive sector and we could do without manufacturing. And we've moved now into a recognition that not only is manufacturing wanted, manufacturing is supported more broadly by the community, more broadly by the investment marketplace. So there is clearly a future manufacturing and I think my main thing that I'd like to look at is that is government best place to pick winners. We've come up with six focus industries and to me the simplicity of manufacturing should be value adding where you either have a market or you have a competitive advantage. If we produce the raw materials we should be value adding in this country. There has to be a competitive opportunity associated with that.

Richard Nutt

I do note as well the timing of when this initiative was launched towards the end of last year, was complementary to the time when Australia agreed to be signatories to the Regional Comprehensive Economic Partnership, which is the largest free trade agreement agreed upon with 15 key trading partners of Australia, most notably China, Japan and Korea are going to participate in that. And that should actually help countries to get more involved in the global value chain when manufacturing products, because it’s got a lot of simplified processes around what they call rules of origin. And it's then trying to simplify some of the challenging aspects of when dealing internationally and non tariff barriers, which can prohibit your market access ability into certain markets.

Therese Raft

So one of the things that I find quite interesting about the six priority sectors is that there are some common themes around tech and automation and digitisation, so it’s manufacturing, but it's not manufacturing as we knew it, is it?

Mark Phillips

Look, it's manufacturing with less reliance on labour. There's a couple of reasons why you want to look at manufacturing with less labour. Labour is an expensive input and labour is something that can't be calibrated. And what I mean by that is that the more physical interaction into the manufacturing process, the greater likelihood that you're going to potentially have quality or consistency issues. But the flip side is that there's still a lot of opportunity that's more broader than the need to get too heavily involved in tech and automation because what tech and automation tends to do is make it less palatable to get involved in bespoke product. And bespoke product manufacturing always gives you a much higher margin if you can get it right. If I can produce one item: 100,000 units, all the same colour, all the same dimensions, I have a less excited customer than if I can produce one item that is to that customers design, their desired colour and everything else. So it improves margin, and with margin obviously comes improved probability. The other thing too is that you need lower volumes at higher margins, so you become – it's easier for an investor to get a return on their investment.

Therese Raft

Richard, just on that. Would there also be an element of demand for those more bespoke products, particularly from an international market?

Richard Nutt

Well, that's it. I think the point – if you've got a product that differentiates itself from the norm, you’ve got chance… greater chance of succeeding in the international market. I think if you look at the food and beverage sector and the agri sector here in Australia…Australia is known as a procurer of fine foods and obviously quality ones. So that's why there's a big appetite to purchase Australian made products in overseas markets, especially within Asia, and as a consequence get better margin on that product because of the position of the Australian made flag, or indication on the product. So yeah, I agree with Mark’s point. It's, you know, the more bespoke product and the higher end products with that association IP, it's got better value. But there's less chance of some sort of a country being able to manufacture it, you're going to get a greater demand and wanting for that product.

Therese Raft

Now, if I can ask you both to take your consulting hats off for just a second, there's clearly some opportunity in this space. If you are an entrepreneur or an investor, would you be looking to set up a business and one of these sectors right now?

Mark Phillips

That's an easy question for me to answer. I tend to be a little bit entrepreneurial myself, so I may have made some personal investments in manufacturing. If you're going to make an investment, you make an investment because you're going to see a return on that investment in a relatively short time frame. I think right now, supply chains are being stretched and they are, there's more evidence of how stretched they are of recent, being so stretched is presenting lots of opportunity. And if you've got confidence in your ability to source product, to manufacture products, to work with your supply chains to deliver against customer expectations, it's a good time to invest. I think the main thing, though, is that most investors look for a relatively short payback period or a relatively short time frame to which they see a return on their investment. And whilst some of the government programs do talk about outcomes 10 years out, most investors will look for something that delivers on their expectations in a much shorter time frame. If you could find me a magical source for cedar timber right now, I would grab it as a manufacturer because there's now a 12-month waiting period for accessing some raw materials from offshore. So it's a golden opportunity if you can produce a substitute product.

Richard Nutt

Yeah. Look, I agree with Mark, I think if I was to invest, you'd have to really scrutinise what industry sector you're going to go into. But I think towards what Mark was saying and I think one of the opportunities is anything where we can add value. So if we're extracting something out of the ground, ie some minerals and we can value add it, I would definitely be invested in that sector because I think that's where the biggest growth potential for Australia. You know, I think we can become a strong manufacturing sector in this space sooner rather than later. And I think you'll get a better, quicker return of investment rather than waiting for the 10 year period. Conversely, I think, you know, I think there's more opportunities if I was a food and beverage exporter as well, is to tap into the feel good factor about Australian made products in that space and trying to exploit the markets like India, and the US who's got a thirst for Australian products, but to my knowledge, these seem to be untapped markets.

Therese Raft

So would you anticipate there potentially could be a lot more entrants into the market thinking that this would be a good time to add to the scale rather than to add a different kind of manufacturing to the mix?

Mark Phillips

I'd be more inclined to focus on, are you in the market already? This is a golden opportunity for you to expand what you're doing coming into a market as a new entrant, you need to have either some competitive advantage, be it a guaranteed offtake for your product, some IP that allows you to produce something that is wanted and desired right now. I'd ask that existing businesses that are either manufacturing or delivering end product to consumers to look at opportunities. So, so the place I'd look is either existing manufacturers growing their footprint or do I have an opportunity for import substitution? So I think import substitution is a great opportunity because you you've got a customer that's been buying a product that you've been sourcing offshore. You've now got a situation where access to supply chains is a little bit difficult. Access to raw materials is difficult. There is some concern around confidence that people can keep supplying. So I think existing importers of product, talk to manufacturers as manufacturing capability that can actually turn an imported product into a locally manufactured product fairly quickly.

Richard Nutt

Yeah. Look, I tend to agree with what Mark said and I think it's going to be very hard for a new entrant as well. I think the biggest opportunity is, you know, tapping into an existing manufacturer and see how you can get some growth possibly into international markets or substituting imported goods. But on that point, right, um, I think there's a missing piece in this strategy as well to stem the imports of imported goods in Australia. I think we need to give some incentives to say, “hey, in addition to these grants, what incentives can we offer companies to stop sourcing goods from overseas?” I think that is part of the missing piece at the moment in the jigsaw puzzle because I think that could just discourage people from investing, in some instances, in manufacturing.

Mark Phillips

I'm less concerned about that point. And it's more because the capital cost of equipment is very similar. Doesn't matter which country you manufacture from. The cost of labour is less of an issue because most of the new equipment is highly automated. Your raw material input costs is clearly one of the costs where you've got to look at where you can and can't be competitive. And I think if we are producing the raw material on shore, government influencing the conversion of raw material into value add product is clearly the most simplistic opportunity for us to improve our competitive position. Not only does it create local economic development, it actually reduces the amount of waste it shipped all around the world. It reduces the amount of inefficiency and with the reduction in waste and improved efficiency comes a reduction in price. So if we start to spend more focused on value adding local, we will actually have an opportunity to not only grow the economy, grow jobs, but we could actually deliver product to the marketplace at a lower cost.

Therese Raft

And it's really interesting that you've both kind of spoken a little bit about the domestic market because it does seem to be a tension between the domestic and the international market. So if we tackle maybe the domestic and the international one by one, what are the kind of domestic opportunities, particularly for – at least in the first instance – those six priority sectors?

Mark Phillips

Yeah. Look from a domestic perspective, I think the opportunities as we've been stating to clearly value add to existing product and that's why the strategy around the food – food and agriculture makes a lot of sense. I think from a domestic perspective there needs to be a marketplace available. And it's interesting one of the objectives that they've identified as the defence sector: we create a market, we create a market because the Australian government purchases quite a lot of product in the defence space and negotiates with global marketplaces in who buys what defence products from what country. But to me, the best opportunity domestically comes from the domestic market itself. And I'm not sure that we've done enough work around looking at what are the products that we are importing at present that we could actually domestically produce – and they may not sit in these six categories. I'll give you an example. We import a lot of grey iron castings or import grey iron castings that are machined. We export a lot of the scrap material that's used to produce the product. Clearly, that's a product that we should be producing more locally and that's not to fill an export demand, it's to fill a domestic local demand. Export in that circumstance would just be icing on top.

Richard Nutt

Look, I think that's critical to the success of Australia going forward over the next 10 to15 years because there is a demand for local products. But unfortunately a lot of them are imported from overseas. Whereby we've got the raw materials to fill the local manufacturing, but also top it off and become leaders in export markets of certain products. I think the good one – we had a discussion about this just a week or so ago, Mark – about value adding is about lithium, which is in car batteries right? Now, it's stating the obvious, you know, surely that can be manufactured or value added here and still be competitive. It’s through technology and innovation that we can serve international markets – to me that that's a no brainer.

Mark Phillips

Yeah, look, I think, I think that's correct. We missed the boat on certain raw materials. Iron ore would be the classic. Bauxite wouldn't be far behind in that we don't do a lot of value add to aluminium based product. We don't do enough value added to steel based product. And lithium is a new market. It's a market that is growing at a rapid pace. And uh, we are seeing use of lithium in vehicles, for battery powered vehicles. We're going to see lithium used in batteries for commercial and domestic use. So it's a significant area of growth – presents a lot of opportunity. And I think it's one of these markets that requires capital and access to resources. And I think if government was to take a longer term view of the marketplace and I mean, well beyond a 10 year view, producing lithium based product would be an ideal opportunity. I don't think there's a single taxpayer who would be upset seeing taxpayer dollars invested in the on shoring of manufacturing based product that we can actually present what the future looks like. Unfortunately, the decisions on where we manufacture a product are largely made not by governments, but they're made by international businesses. Government has the ability to influence where international businesses invest their dollars.

Therese Raft

So on that. And I find this very interesting. You've raised this point of international businesses. Having a look at the roadmaps – they all talk about providing opportunities and incubators to allow those small and mid-sized companies to really ramp up. So is there an opportunity here for a bit of a rebalance between the smaller, up and coming companies and the companies that have been dominating the market up until now?

Mark Phillips

I'd love to see a program that looked at supporting SME because the SME sector does create a lot of the new jobs, but I would love to see government influencing strategically those investments that can't be made by the small to medium size enterprises. To establish a melting facility is this substantial investment and there's no SME that would be able to contemplate that. So I think we need a two pronged approach where we're actually strategically looking at the right international investors that could actually – or international businesses – that could actually provide some of the base material to which we can value add to.

Richard Nutt

Yeah look, with some of the work I’ve done for clients over the last few years, I’ve seen a common trend of the multinationals who have actually been manufacturing, doing some value added manufacturing here in Australia, especially in the pharma industry. You know, just recently, you know, they've taken that decision to offshore that product. You know, the product that which we re-import into Australia because of demand for the product. I think we need to get – the government needs to get aligned to these companies to sell them a longer term vision that we want you to manufacture here in Australia as well. Because again, what Mark’s saying, the SME is an important market place, but the international companies as well – the global companies – have a significant influence on our success of manufacturing here in Australia. And we just need to give them that security as well that hey, we want to do business with you but we want you to be manufacturing here as well.

Mark Phillips

All sophisticated international businesses include government grants as one of their anticipated revenue sources when making investment decisions, and it's naive to think that we can attract international investment without actually playing in that space. And that's why I think, as I said, SME’s – we do need to support them. They are creating the jobs. But I think when you want a strategic footprint to be developed, the international players need to be considered. They need to be courted appropriately. And we need to either support where we are not competitive or play the game where government support is an expected contribution.

Therese Raft

So let's say we get the domestic market right. So we've got the right incentives in place. We're supporting the SMEs to grow. Once we start looking overseas, at those international markets, what are the opportunities for us there? I mean, we all know very much that our major trading partner is China, but surely there are some other opportunities in a global marketplace?

Mark Phillips

Look, I think the opportunity sit in the products, not necessarily the markets. And what I mean by that is we're a clean and green country in many respects. We have the ability to produce a lot of agricultural based product and I think that is something that we actually should be looking at how we can encourage opening up further markets for the food and beverage industry. I think from a markets perspective, we've got to target the markets that will respect and will allow our product into their countries, and if somebody doesn't wish to respect that and support that, we should turn to alternative countries.

Richard Nutt

Yes, it's a good point – is that markets, it's certainly not a level playing field. I mean, we've seen just recently, um you know, we've got a free trade agreement with China for example, and you know, it's really helped grow wine exports into China. But obviously, we've done too well in that space. You know, obviously because it was a growth market and I know for some companies who I have had discussions with, it was 40% of their export sales, so a big market place. But I think it's part of the strategy… We just had a demanding and too close relationship with one country and we've allowed ease of trade to be sacrificed above longer term objectives. That is, we need our eggs to be in numerous different baskets, not just one. And open up, not just on the tariffs, but also it's the importance of the non tariff barriers. And that is, you know, can you actually get your product into a particular country. So, in Japan, for example, they still have a quota regime. So for example, if we were sending seafood – Australian seafood – into Japan, we can only export so much of a particular seafood because they've got quotas we’re limited to. Conversely, do we have a quota of Japanese seafood we could import into Australia? I don't see much of it. So it’s interesting dynamics in and around these non tariff barriers that need to address – that gives an equal playing field aside from removing what are called tariffs by virtue of agreeing to a free trade agreement. And hopefully that would give it a level playing field and be more easier for companies to access new international markets.

Therese Raft

Well, that's a really interesting point because there'd be some countries around the world that we might like to do business with that already have their internal capability and might not be interested in what we have to sell them.

Richard Nutt

Yeah. And so Therese, that's a really good point because for example, if you notice RCEP – part of the negotiations, as well as the appetite, or the carrot to get China involved was India's participation. But they've [India] ceased negotiations at the last minute because there was some commentary around the impact of what potentially China might have. And obviously they're looking at their self-interest point of view as well. Where unfortunately it’s not stopped Australia over the years. We’ll actually make it easier for countries to import goods into Australia. We've never thought about the level of protection for local manufacturers. Well we haven't for a long term anyway and I think India has been a bit more smarter in that space.

Therese Raft

A lot of the countries we've mentioned in terms of an export market have been in Asia, India. Is that really where we're limited to because of our proximity to those destinations?

Richard Nutt

I think it goes back to what Mark’s points was as well. If you've got something of value, that another country doesn’t manufacture, at an affordable price, it opens you up to new markets. So it doesn't become country specific. You know, talking about value adding – the UK would be a good target right? European countries, especially with – the, you know – batteries. Rather than sourcing from Asia, where they might be sourcing the product, why can't the source from Australia? Knowing, you know Australia and UK are about to sign or are hoping to sign a free trade agreement, and they've got strong manufacturing of cars that would be an obvious trading partner and avenue for new markets.

Mark Phillips

There are a couple of things that give you competitive advantage. We've got to bear in mind that every country wants to export. There's no real countries out there turning around saying we want to import, they all want to export something as part of developing prosperity. There are obviously a couple of areas where we should be focusing. We talked a lot about value adding to product but the area that we've probably not talked about much is development of IP and the export of IP. And Australia's got a sensational track record for the development of IP, whether it be in smelting technologies, whether it be in WiFi technology, there are a lot of areas where Australia's lead on innovation. But we haven't obligated those who locally innovate, or we haven't incentivised those who locally innovate, to actually value add domestically. And if we were to reflect on the role that we have played as a nation in developing some of the critical IP that’s in the marketplace – and that point specifically to WiFi – if we were to support, incentivise the value add of that domestically, IP is one thing that does give you competitive advantage. But at the moment we have a good system to fund the development of IP, but we don't have, at present, really an obligation associated with value adding IP. And what I mean by that particularly is that we will provide R&D tax incentives and support programs with its commercialisation programs. Those recipients aren't obligated to value add that IP or keep that IP domestically. And I'd love to see some smart thinking from a government perspective on how we can actually do that because I think that will have a significant impact on our competitive advantage.

Therese Raft

It's really interesting. You've mentioned IP which, at least from my perspective, will require some very highly technical skills. Right at the very beginning of this podcast we were talking about how automation is actually going to help to reduce labour. What are the skills that will be required for this future modern manufacturing vision that the government has set out for us.

Mark Phillips

So automation, what that does is that takes away the physical handling and the need to watch machines. And physically handling product is not necessarily a lot of fun. So we are stepping away from that into greater automation. But with automation comes the skills to program the robotics. It comes with the skills to look at pushing the limits of the automation process to see whether or not we can further automate or effectively produce product to a greater degree of complexity than we currently are. So it brings a different style of thinking. What I really like about that style of job is it's actually encouraging greater participation rather than, as I said, a lot of traditional manufacturing is not necessarily manufacturing that we really want to keep encouraging. So I think with the development of IP you need people to develop IP. At the moment, robotics can't nor can artificial intelligence develop IP yet. And so we need people to develop IP. Those people need to understand if that IP can actually be manufactured and in order for that to be manufactured, you need a manufacturing mindset as well. So there's nothing to fear in respect of automation. With scale brings greater jobs and with scale brings opportunity for you to move into different places, different opportunities. And I think for us – we're the masters of creating bespoke; which is products of one. And that is definitely the opportunity if you're going to get improved profits, greater margins and greater satisfaction.

Therese Raft

Richard, this question is directed at you and this is very much your wheelhouse. We’d also need some skills around supply chain as well, won't we?

Richard Nutt

We do, yes, and we do. So supply chain’s the important piece, because you know, it goes from being able to source the goods right through to the end and delivery point of the goods. And without a strong, robust supply chain, and understanding all the weak points in the supply chain, it's very difficult for companies to succeed either domestically or internationally. And I think going back to Mark’s point, it is getting harder to source materials from overseas because of the contraction or demand of, of capacity through the shipping lanes. So, you know, you’ve got to sort of look for alternative sourcing points. Look, you know, at the strengths and weaknesses of your shipping lanes, your trading lanes, whether it's via air or sea that you can actually serve the market place. An interesting point was around the COVID vaccine. So this is temperature controlled equipment required. Well, it's a military operation because there's only certain carriers globally who has that capacity or if not, they've had to create capacity, to move the vaccine around with temperature control. That in itself is a challenge. You know, you can imagine you didn't have this infrastructure in place 12 months ago, but all of a sudden you got to very quickly – you’ve got to create that infrastructure. And then obviously if you're coming in from overseas, you need that capacity to move it from A to B in temperature control. Then domestically when it arrives, it needs to be stored in a certain temperature. And then you need the vans to deliver to delivery point in a certain temperature. So developing a robust supply chain isn't easy. And again, do we have the capabilities in Australia – both inbound and outbound – to service our potential supply chain needs?

Mark Phillips

Can I say with supply chain, procurement is one area that raises concern for me. I mean, procurement used to be very much a profession. It's still a profession, but it's a different style of profession. Procurement today, thanks to the Internet and the availability of information has become more of a digital research based approach rather than a creative approach. And what I mean by that is that a very, very good procurement person can look at the existing supply chain, can create a supplier if they need to because the supply might not be where it needs to be, or they can look at supplements, they can look at sub components, or they can look at innovative ways to change that relationship such that they're able to get greater understanding of how to source and manage products. So I think the supply chain is critical, but I think what COVID has highlighted is that some of the traditional skills around procurement needs to be brought back into the marketplace.

Therese Raft

I'll be honest, Mark and Richard, I came into this podcast really excited about these roadmaps and, and not that my excitement has been dimmed, but it is clearly so much more complex than hitting milestones at 2, 5 and 10 years. In fact, it sounds like 10 years might not be long enough to make this shift.

Mark Phillips

Look, I'm actually really excited about where manufacturing is at the moment. I used to spend a lot of my time trying to defend the importance of manufacturing and now, thank you COVID, there's no need for me to defend the importance of manufacturing. I think we need two things. We need the ability to map out a roadmap for the Australian manufacturing sector or the Australian economy. And it could be a 20, 30, 40 year roadmap, which is what are the products that we think we should be value adding and what's the supply chains we should own. Complement that with capturing the opportunities that are available in the short term to either keep existing manufacturers enjoying the life they've got at the moment or growing that manufacturing base by looking to import less, certainly import less for domestic consumption to look for export opportunities. I think we're in a really good position that if government was to go to taxpayers and say that we're looking at spending money on putting in place a well protected – and I don't mean tariff protected – but a well protected, well supported manufacturing sector, every taxpayer would say that is what we need. So it's a really positive time if you're looking to grow in manufacturing sector in Australia.

Richard Nutt

Look, I agree with what Mark saying. I don't think there is a negative, I think there's opportunity and I think COVID has changed our thinking to manufacturing here in Australia. So I think now is the time to capture it and think more, as I said, and what Mark said earlier on, don't just necessarily think about these six sectors that's been identified. Think more broadly, you know, think more broadly about what we're good at doing and what can we can actually encash and turn into – into gold really – because that's what we need to do. We need to think about what we're going to do well in the immediate short-term future in terms of manufacturing. What's our capabilities? And that could be continued to encash on the food and beverage agri sector. But then what can we – could we develop – for that longer-term future as well, which is going to create a footprint for jobs in the years to come, again around those high value products as well. So I think it's quite exciting and governments could be in a good position to build a prosperous future for Australia in the next 20-30 years.

Therese Raft

Well, Richard and Mark, thank you both so much for your time.

Mark Phillips

Thank you.

Richard Nutt

No, thank you.

Therese Raft

Now can people track you both down on LinkedIn, phone or email if they would like to talk more about what's next for the MMI?

Mark Phillips

Most definitely LinkedIn is obviously an easy pathway to come to us. If you're a manufacturer, I'll take a phone call 24/7. Always keen to help. So you know where to find us and we are very much keen to support.

Richard Nutt

Yeah, same here, Therese. Very happy to take enquiries via LinkedIn, email, mobile phone. It's always switched on.

Therese Raft

Awesome. Thank you so much

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