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Even businesses are looking at their supply networks differently as they work hard to source local alternatives to global supply chains. If Government incentivised and prioritised local procurement we can enhance our long term supply chain security which could provide the catalyst for a manufacturing led recovery.
Mark Phillips, National Head of Performance Improvement and manufacturing sector expert, explains how COVID-19 has affected the manufacturing industry, how generations to come will change their consumer behaviours as a result, and how the manufacturing sector could potentially lead the economic recovery of Australia.
Welcome to Boardroom.Media. My name is Velvet-Belle Templeman and I'm here talking to Mark Phillips, National Head of Performance Improvement at Grant Thornton. Mark specialises in commercial and strategic advisory with an extensive knowledge of the Australian manufacturing industry. Today we'll be talking about how the manufacturing sector is adapting to the challenges and opportunities posed by Covid-19. Thanks so much for joining us, Mark.
Thank you.
Mark, let's just rewind a bit. How much manufacturing does Australia actually do?
That's an interesting question. There's a lot of stats around. The stats will tell you that 6 per cent of GDP, which is relatively low, constitutes manufacturing. We were 10 per cent, roughly in 2010. So whilst the economy is growing manufacturing has been declining. But the truth is that there's not much that we cannot manufacture. A lot of people don't understand that as a country, as a nation, we actually can manufacture most products. It's through economic circumstances, because we're too expensive, we choose not to manufacture products.
So in short, if we take a submarine as an example, we don't produce a submarine, but we can produce somewhere between 60, 70, 80, 90 per cent of the components that go into a submarine. So whilst you can pick items that we don't produce as a nation, we do have the capability to produce most products.
So clearly a lot of our products come from overseas. I think it was only late last year that Huggies moved their factory offshore, but it's also electronics, construction materials and clothing. What happened when Covid-19 became an international health crisis and the borders started to close?
So let’s be honest about what's really happened in the marketplace. What's happened is transparency and we haven't had transparency for a long time. So now we have consumers for the first time starting to understand and broadly consumers starting to understand what we do or don't make. In respect of business, it’s actually a true understanding of their supply chains. For businesses, it’s that small component that they didn't think about in their supply chain that comes from an entity that is impacted by Covid-19 and are not able to provide them the product that they need. Or it’s actually a case of understanding where they actually sit and their relevance in the supply chain.
So what I mean by that is that as production scales up, organisations, businesses want to support their major customers and quite often Australian customers are not major customers. The lead time on accessing product is taking a little bit longer. So I would say the main thing that came out of Covid-19 is the first time ever a true sense of transparency in the manufacturing sector.
Now, Mark, perhaps unsurprisingly, Bill Shorten made a call in parliament a couple of weeks ago to invest more in our manufacturing sector to ensure that we're not as heavily dependent on global supply chains. What would you like to see from our governments?
The federal government and state government they are talking the right language. They're talking about our need to have more sovereignty in respect of manufacturing. The federal government has a manufacturing taskforce in place. I have a little fear with the government. Government talks about creating the economic conditions, It talks about lower exchange rates. It talks about stability of power. It talks about us being able to create the circumstances to which organisations can actually invest and government has talked about certain sectors. It's talked about fertilisers, chemicals, it's talked about value adding to the food sector. It's talked about more flexible type manufacturing, which would be your digital type manufacturing activities. My primary concern though with government is if I can use an analogy or a way of simplistically putting things forward, it's almost like what they're doing is they're taking a fisherman and they're giving a fisherman a great outfit, a great fishing pole, fantastic bait. No good if you're fishing in a barrel that doesn't have any fish in it.
I think that's my primary concern at the moment with the direction that government's going in. Even if we create the best economic conditions, a lot of manufacturing decisions are made by multinational organisations and we have 185 countries that are going through Covid-19; 185 countries are all going to want to localise manufacturing. So is our voice strong enough? There was one comment though that I picked up on Andrew Liveris, who's from Dow Chemicals who heads the manufacturing taskforce. And to quote him, he actually said, and I think very correctly, “we drank the free trade juice for too long”. And he's right. Australia raced to zero tariffs, which in theory sounds fantastic, but what it does is it takes away some of the financial impediments for manufacturing locally which allows us to be more open to receiving imports.
In respect of what I would love to see government do, I'd love to see government influencing critical mass. Government itself represents 20 per cent of purchasing and when you add state governments, local governments, hospitals, government funded not for profits, schools et cetera, et cetera, they constitute about 30 per cent of the buying power of Australia. I would like government to start to buy local and buy local, even if it costs more. Because if I'm buying local and I'm costing more, I'm actually creating a knock-on effect by producing manufacturing jobs. It's actually a multiplier for the economy. The second thing I'm doing is I'm creating a revenue flow that comes back to the government. Government effectively charges us, state governments there’s payroll tax, federal government, we've got income tax and we've got corporate taxes. If we keep the margin in Australia, we keep making the money in Australia, we'll actually tax the money in Australian. Any premium the government pays on local procurement will actually be paid for tenfold.
So Mark, if we were to do this and if we were to invest more in the manufacturing space, how would the sector tackle an increase in demand? It can't just be as simple as turning up the speed on the production line.
Yeah, that's correct and you don't actually want to turn up the speed on the existing production line. We do have some really good capacity. We saw that with the massive run on toilet paper and effectively they talked about being able to take equipment out of mothballing and actually start to increase production. We do have idle capacity sitting in the marketplace, but modern manufacturing equipment is so fast. It is so precise it produces product at such high quality at such high consistency that what we need to do is actually look to scale up our equipment. In scaling up our equipment we gain flexibility. We gain improved quality. What we reduce is what I call watching labour in manufacturing. The worst job is to watch a machine manufacturing. Modern manufacturing equipment doesn't require you to watch a machine manufacturing. So I'd like us to put more investment into, and I'd love to see government supporting the purchase of equipment that will actually improve our existing capacity.
I'd like to see some innovation, whether it be government, banks, superfunds supporting the purchase of the equipment. Equipment is a solid asset. Unlike research and development, you can send research and development offshore very quickly. A piece of equipment is not that easy to move and I'd love to see us actually spending more on bringing up the level of quality. The worst thing we could do is just to turn up the speed on the production line. We won't effectively gain some of the efficiencies that we require.
Now you touched earlier on local manufacturing, I heard some local manufacturers are really stepping up. Do you have any examples of this?
Yeah, look, actually they're all stepping up. They're all stepping up in different ways. You've not heard a lot of press in respect of manufacturers stating that they need to put their hand out for support. What you're saying is stepping up in lots of different ways. The current press obviously talks the good news stories. You know, organisations like Four Pillars producing hand sanitiser, and that's a fantastic example of redirecting a business. A business can actually do things differently. We actually have a history in our manufacturing sector of re-engineering businesses, whether it was the move away from the manufacturing of automotive vehicles to the move away from producing some of the lower cost, higher volume plastic items that now come out of China. Those businesses have actually redesigned themselves in such ways that they're actually able to produce different products.
In fact, I've got one client who I helped them buy a facility that manufactured automotive windscreens largely for Toyota because we know Toyota is no longer producing vehicles in the Australian marketplace. But this particular client Solos, they are now manufacturing glass and architectural glass for the construction industry and it's just a great example of organisations transitioning. So we've seen the transition in response to clear changes in the marketplace. What we're seeing with Covid-19, it's a little bit different. What we're seeing with organisations is taking the opportunity to improve their processes, to improve their systems, to repurpose their equipment. There's a lot of goodwill in the sector. I've got manufacturers that have moved away from a full shift five days a week down to four days a week, three days a week, and there's a sort of working together to work their way through the changes. I've a couple of manufacturers that are actually involved in plastic-based product and they're ramping up medical products and then ramping up medical products, not in a direct response to our request from government, but actually in a way to demonstrate to government that we do have the ability to produce products. We do have ability to produce products for the marketplace and let's start to use this capability as and when we start to transition out of Covid-19.
What about workforce? Is the manufacturing sector eligible to access the government JobKeeper program and what are they doing to keep their people engaged?
So the workforce is interesting. Manufacturing is typically considered to be an unskilled industry and there's been lots of commentary of recent that it's the unskilled labour of the marketplace that is going to be impacted most as we transition out of Covid-19. What people don't understand about the manufacturing sector though is that unskilled labour actually pays at the higher end. So whilst JobKeeper program is a fantastic initiative in keeping businesses whole per se, the $750 a week doesn't actually cover the employee costs. It actually is contributing towards those costs. The manufacturers are in the process of accessing JobKeeper. They are looking at keeping their employees actively engaged.
They're looking at ways that they can actually utilise this time when I've got access to resource, I've got access to capacity but I may not have access to sales. It allows me to recalibrate my equipment so that my equipment is actually operating more efficiently. It allows me to spend time looking at quality systems. It allows my employees to be creative on what else could we be producing. The process of moving from one product to another product is not driven by the product per se. It's driven by the process of the equipment and a lot of the innovation in manufacturing comes from the shop floor. So the term unskilled is used quite often in manufacturing, but the people who work on the manufacturing floor are so skilled in understanding how to be resourceful they will be utilising their time effectively to improve the position of the business as we go through Covid-19 and as we come out of Covid-19.
And Mark, when talking to your clients, what are you hoping to see happen in manufacturing going forward? What do you think Australian manufacturing will look like in the next year or two?
So look, it's going to be very interesting. We've got a marketplace that’s changed dramatically. Sovereignty in respect of manufacturing has changed. When we talked to sovereignty in the past, it would have been do we have the ability to manufacture the products that we need to defend ourselves? Well, defending ourselves in the past has largely been considered defending ourselves against a war. Whereas now we are defending ourselves against an infection that we're aware of. We're defending ourselves in respect of cyber security. We're defending ourselves in respect of the environment. So we’ve actually got, I think, a resurgence in the respect for and the understanding for manufacturing. That said, it's going to be a slow recovery, it'll take two years plus at least for us to see the marketplace recover. I think with government more focused on procurement, on government playing a bigger role in procurement and I can't understate just how important it is that government must start to give some teeth to government procurement.
Traditionally with government procurement, we would allow a multinational to come up with a very shallow reason as to why we can't produce something locally. We really need to, if I use the example of the submarine, we really need to look at how can we produce 50, 60, 70, 80 per cent of the government purchase locally. If government plays that role we actually could have a manufacturing led recovery and manufacturing has a greater multiplier effect on the economy. So what I'm asking my manufacturing clients to do is to stay positive, to help with the language to the public, the consumer that yes, we can manufacture in Australia. And, yes, manufacturing is important in Australia and try and rebuild the pride in our manufacturing sector because the manufacturing sector whilst it’s only 6% of GDP, it has the opportunity to be the cornerstone of the of recovery.
Whether recovery is in the government getting involved in infrastructure or organisations growing through innovative ideas. You need somebody to produce the product to support those activities. And that's really where I think the focus needs to be. If I can reflect a little bit and go a little bit further out rather than just two years. My grandparents used to save every piece of cardboard, every metal can, every item that they could find to use it for a rainy day. My grandparents always referred to the depression and I never understood why it was that they behaved the way they behaved. Thanks to Covid-19 generations to come will change and behave very, very differently in respect of where do we buy our product from? Who produces our product and what went into our product.
So look, I think manufacturing has a great opportunity in front of it. I think government has a great opportunity to really support manufacturing. I think for too long, we have raced towards zero tariffs. We have dug minerals out of the ground, lithium out of the ground exported that product offshore and we've not value added that product in Australia. We need to focus on how do we value add in Australia, how do we keep product in Australia? How do we actually bring the pride back to manufacturing?
Some great insights there, Mark. Thank you for your time.
Thank you. It's a very interesting topic for me. I'm very passionate about it and I would love any opportunity to talk to people about what opportunities there are in respect to manufacturing.
