Innovation funding - the key to increasing our productivity

Rebecca Archer

Welcome to the third season of Navigating the New Normal, Grant Thornton's podcast exploring trends in business and the market place. I'm Rebecca Archer and today I am joined via Zoom by Sandie Boswell and Jacky Millership, partners in our Innovation and Incentives Team, currently working from home. Today we're talking about innovation, research and development and the modern manufacturing strategy.

Welcome, Sandie and Jacky.  

I guess firstly, innovation has been a key topic of conversation in Australia since the start of the pandemic as we become more reliant on domestic capabilities. Jacky, where are we seeing the most innovation?

Jacky Millership

Look, I work with manufacturers across the spectrum, everything from food and beverage, defence, clean energy, medical technology, mining technology, transportation – and we're seeing innovation across the board. And look, adversities always had this impact. Decades ago, we were talking about the tyranny of distance breeding innovation. Now it's the tyranny of border disruptions, breeding innovation.

The Australian manufacturing sector is incredibly good at stepping into the breach when circumstances require it. We're seeing companies that are caught out by a lack of supplier continuity, and after assessing their supply options, many have stepped up and onshored capability for their own production, or for their sector. I've got a great company example of a producer of lids and caps for beer, wine and spirits, who identified a supply chain gap. Believe it or not, there was no producer in Australia of lids for glass jars. So they invested in that capability, and created a new market for themselves and solved a problem for the manufacturing sector. But we're also seeing enormous investment and focus on ‘industry 4.0’. And that's all about harnessing the best of intelligent automation and real time data, to achieve not only globally cost competitive production, but harness data to value add the entire product lifecycle from R&D prototyping, production, logistics right through to sales and service.

But we're seeing innovation that's not just about products, but also about business models. Companies have had to pivot really quickly. For example, in terms of export markets, we've had various bilateral trade tensions that have played out in the last few years, but also in response to an incredibly dynamic consumer market. Think about suppliers supplying customers who now want to work from home, or who are demanding safety measures or who want to buy Australian made. So look, all this innovation requires clever minds, a huge dose of entrepreneurialism, a good willingness to take risks. But of course it requires capital. And that really leads to the question of what is the role of government support. Governments have a range of policy levers to exercise, of course, but as my role in Grant Thornton very specifically is around helping our mid-tier clients access government grants, I'd like to just, confine my thoughts to that issue of grants. And I'm sure Sandie will pick up on other things after me. But the key question is, are businesses getting enough support from government? And it's not really a simple question to answer, because what we really have is a two speed economy playing out right now. If you're a business in hospitality or tourism, for example, you know the COVID restrictions have been pretty crippling, and you'll view government support perhaps as necessary for survival. But on the other hand, if you're an innovative manufacturer and you're able to invest, then for many, the market has offered unprecedented opportunity and growth. Government support for the manufacturing sector isn't about saving companies from going bust. It's about accelerating growth, and setting Australia up in the longer term to take more meaningful global market share. Some businesses are getting support to do this, but not enough to my mind, anyway. Here and now, there is incredible opportunity to ramp up Australian capability and scale, and we need really bold leadership and perhaps some more what I'd call a ‘Singaporean style’ of government, which is a really entrepreneurial co-investor. One last thing about the federal government grants for the manufacturing sector is to note that they aren't really great for everyone. The manufacturing sector focus for the federal government is really driven by the Modern Manufacturing Strategy, and that just focuses on six national priority areas. So they are Food and Beverage, Med Tech, Space Tech, Defence, Resources and Critical Minerals Processing, and Recycling and Clean Energy. Now I'm all for investing where you get the best bang for your buck, but this does mean there are winners and losers when it comes to federal government support. I've got a company that wants to onshore the production of lawnmowers. Companies producing OEM quality automotive components for aftermarket treatment. Companies producing products for the construction sector. And so the list goes on of companies that are outside the federal focus. I think just before I hand over to Sandie, I do just also want to say that State Governments, of course, are not bound by federal policy. And there are some good programs in some states of Australia, for any company investing in growth and generating jobs. Over to you Sandie.

Sandie Boswell

Thanks, Jacky. And thanks Rebecca for having us today. It's great to be on the podcast. Jacky's raised some really interesting points, and I suppose I just want to expand on that because for me, where we're seeing the official figures from our main area of support for business investment in R&D. So where are we seeing that innovation is by 12,000 companies accessing the main platform for support, being the R&D tax incentives, so that tracks business investment on R&D. Predominantly within that, is about 7,000 companies accessing from the services sector, and 4,000 from manufacturing, and they're mostly SMEs. Are businesses getting the support they need? Well, I think it would be great to see more. I'd love to see what the UK has been doing over the past few years in their economy. Since 2017, they've lifted their support for innovation nearly every year by up to 1%. So in 2017 they provided an incentive of 11%, and now it tracks at 13%. Um, interestingly, the CSIRO recently did a study that found that for every dollar that's invested in R&D in Australia, it generates $3.50 in returns to the economy. So doesn’t it make sense to put more dollars into these key support programs? I'm a big fan of broad indirect programs, complementary direct funding, and I know Jacky is very passionate about that, because I think this allows innovation to support and land where it's needed. But it also gives the sector targeted support as well. There are some industries that are being overlooked, I think, where we could pump some more money and more support. So agriculture and agri-tech is one that springs to mind. I do a lot of work in that sector and I think that could have a greater focus from the government. There's very few companies that are accessing those formal support programs – there’s only about 500 corporates that access the R&D tax incentive from the latest figures, for which an industry that's pushing innovation in the frontiers in Australia, from things like food alternatives ag tech itself, sustainability, not to mention carbon neutrality. It seems undercooked to me that the level of support that they get isn't enough. I mean, that's just one example, and there are many more.

And I think through the MMS, the government is trying to address this, aren't they, Jacky?

Jacky Millership

Look, perhaps I could just should start off by giving a little bit of context for the MMS or the Modern Manufacturing Strategy before I launch into that. So look over a year ago, in the lead up to the last budget, the federal government announced this $1.5 billion Modern Manufacturing Strategy. And if you recall at the time, it was in the context of an ‘unprecedented budget’ to help the nation recover from the COVID-19 recession, rebuild an economy for the future. It was all about moving us from JobKeeper into JobSeeker and into the JobMaker economic plan. And of course, the point was made that the manufacturing sector and the MMS was a key part of the JobMaker plan, with a strong acknowledgement that manufacturing is critical to the Australian economy. Now, of the $1.5 billion Modern Manufacturing Strategy, $1.3 billion was allocated to a single program, the Modern Manufacturing Initiative. I'm sorry they all sound the same, but I'm just going to call it MMI from here on in. And of course, that's only focused on those six national priority areas I mentioned earlier.

So when we had that $1.5 billion announcement, of course we were really excited about the MMI, because we haven't had such a strong budget allocation for the manufacturing sector for a long time, indeed. But what has played out is that this $1.3 billion will entirely be allocated to a really small number of projects, in a very rarefied atmosphere. If it’s okay, I’ll just take the time to break that down a little bit. So $1.3 billion Modern Manufacturing Strategy – $800 million of that was allocated to a single round of collaboration projects. Now, that provided up to $200 million for very large scale collaborations. Results of the applications are not yet known, but at the end of the day we'll only have something like a dozen projects spread around the country that feature this business to business and/or business to research collaborations that they’re called. You got to think these really large scale manufacturing collaboration hubs. So $800 million down on collaborations, a handful of collaborations. And that just left $500 million for some streams of projects that were for, rather than these large scale manufacturing collaborations, for individual companies to access. Now, the projects had to fall into an integration or translation theme integration, meaning integrating into value chains. Translation means translating good ideas to commercial outcomes. Now that $500 million has been fully allocated already in just two rounds of funding, with $1-$20 million available per grantee. Now, Round One funded only 34 companies. Round two will be of the same order, so you can see what I'm saying. $1.3 billion sounds like this huge sum, but simply put, it just isn't nearly enough to have a meaningful impact on the manufacturing sector at large. Now I think the program is a great initiative. I don't want to sound a downer, but we need much more ambitious allocation of funding for this sector in the next budget. If the government really does think the manufacturing sector is important for Australia, and it has the vision to realise the importance of accelerating new onshore capability, here, now, while this opportunity is presenting and setting us up as I said before to take a bigger slice of the world market.

Rebecca Archer

Well, it's a comprehensive explanation that you've given and it's greatly appreciated. You've obviously alluded to the fact that perhaps the investment wasn't enough, but are we expecting anything further in terms of investment for manufacturing in this year's federal budget?

Jacky Millership

Look, I'm not aware of any leaks to that end, I would dearly like to say we're expecting it. We certainly want to see a further allocation, but we like to see the government not just put more money into that fund, but actually learn from what the MMI implementation has got us so far. And I think there are some really important lessons that we can take from how it's been implemented. One of the key bugbears around this program to date has been the fact that there's been absolutely no pre-warning of dates before funding rounds open, and to rub salt into the wound, they've only allowed application periods for four week windows. Now that is just simply not enough time to plan your project, get the quotes, do your business modelling and all the other project planning that you need to do so that you're in a position to even write up the grant application and prepare the mandatory documentation package of attachments.

So, as you recall, I said, 34 companies were funded in round one. Well, to add real insult to injury, this rarefied opportunity, Round Two, opened on the 13th of December and closed on the 13th of January. Some of my clients very diplomatically said “Oh, the government's got a very wicked sense of humour”. That's not probably how I would have put it. I mean, I was frankly quite dismayed at the lack of respect for industry that displayed, I mean two years of COVID disruption. Just about everybody I know is physically and mentally tapped. They're just exhausted, and to expect a four week turnaround over a much needed Christmas break. Let's ask their companies and staff to work over Christmas, and it's just not viable. We have to do better than that. So look, the first thing I would ask – sorry, that is a bit of a rant – but the first thing I would ask of a hypothetical new program is published a schedule of rounds at the outset.

Secondly, going to what I said earlier? We just need many more companies to benefit per round. Drop the cap of money available if we need to. But let's just put a reasonable budget in there. $500 million for individual company applications is just too small. The third thing I'd say about the way that the MMI has been implemented so far is that we really would like to see a less prescriptive interpretation of the road maps. So let me explain that because what I'm referring to, there are road maps that the government developed in tandem with industry for each of those national manufacturing priority areas to identify, where it was felt the best opportunities for Australia are. So look all well and good, but nonetheless, we are talking about very concise documents that simply cannot list every opportunity that is good for Australia.

And after reviewing the successful Round One recipients, it really does seem that if your specific product wasn't listed in a road map, you really didn't have a strong case. So yes, alignment with road maps. That's important. But let's not fall into blinkered decision making. I think they're my key takeaways from what we've seen so far.

Rebecca Archer

So in addition to the MMS, we did see a $107.2 million investment into supply chain resilience. Do you feel that that was sufficient considering the current operating environment should this be increased as we ease into COVID normal.

Jacky Millership

Now, I think you know how I'm going to answer that. When I talked about $500 million through the MMS, I mean, look, $100 million is just a tiny drop in the ocean for supply chain resilience. It's honestly laughable with once again not wanting to say that the program itself wasn't well conceived, but the funding just is too small a drop. We've had two rounds of funding so far, and it looks like that's totally exhausted that allocation already. Round one has already been allocated, and Round Two, yes, you guessed it - was opened over Christmas. But anyway, it was tightly focused on bio, pharma and agri chemicals in Round One; semiconductors and water treatment chemicals in Round Two. So you can see what I'm saying. The program was really tightly directed and didn't address broader supply chain resilience. And look, while I appreciate your focus on the critical sovereign capability in the first instance, we really do need that program opened up to wider applications with a far more realistic budget.

Rebecca Archer

So, Sandie, what other future opportunities for business?

Sandie Boswell

Thanks Rebecca, I think well, we know from studies, looking to 2030 that the ageing population in Australia is going to cause us 6% shortfall in the working population that's available in the coming years. So that's going to make it difficult to get GDP growth. And innovation is the key to filling this productivity gap. That study also found that 92% of future jobs are going to need digital skills, and 45% of those jobs will need configuration skills and confidence of working with digital systems and technology, so that's a lot of IT skilling that's going to be needed. I think where the government can support to create these opportunities is at both state and federal levels. I think it's essential, particularly sustaining the R&D tax incentive program that supports over 12,000 businesses nationally. I know that Innovation Australia is looking to support business here in New South Wales, and we see many smaller grant opportunities that I think great, but they're hard to know about and this is a challenge for Corporates. At Grant Thornton we can help you with this. I mean, we have companies coming every day to our Innovation & Incentives team to help them find the right grant funding for them.

What I'd love to see in the budget and have we seen any election promises and the budget has been brought forward. So it's a sort of a strange time frame. But I have been thinking about this as we've come out of the pandemic. I think it would be good to see what the UK has done with their periodic upticks to the main support to foster innovation here. The USA has just recently revised their program as recently as January this year; Hong Kong has introduced a great program in 2018 and coming back to the UK they've increased their level of innovation spend by 19% in 2021 probably from the SME sector. And that would be because of the uptick in the support. There it’s the manufacturing and scientific sectors, and they make up over 70% of who's accessing their programs. In Australia, we're seeing a falling investment in innovation as a total R&D expenditure is falling. So I think we need the budget to address this. More collaboration in the public sector is a must and I know the government wants to address this.

Rebecca Archer

So Sandie, you've just talked about what's going on for innovation in Australia. It has flat lined according to Innovation Australia in recent years, sitting at 2012 levels in 2021. How do you anticipate this trend? Is it going to continue do you think?

Sandie Boswell

Well, sadly, I think it could. If we don't continue to support innovation at the current levels, if not higher. We need to have some good measures to drive R&D here in Australia, which is a good, strong, indirect support of undertaking R&D here, that's easy to understand and to access. Support for our exporters is vital and it should be expanded. Help them establishing markets offshore. We currently have an export market development program grant but only provides a really small level of support and it needs more funds injected into it to allow people to re-establish their markets offshore, coming out of the pandemic. We work with a lot of companies accessing that program and they heavily rely on it as the country is opening up, and international borders are opening as well.

We have seen a lot of governments around the world that I've touched on already increasing their support for R&D investment. So China, for example, is increasing for SMEs and large corporate. So both ends of their corporate spectrum. New Zealand's introduced a 15% tax credit, so I think the simple answer is we need more government led incentives at both the state and federal level.

Rebecca Archer

So what are some measures that you think would be good to see from the government and in particular in the upcoming budget to drive research and development into the future in Australia.

Sandie Boswell

So I suppose I've got some really simple messages here. An uptick in innovation investment overall is really vital. Don't cut it, increase it. It's going to address the key challenges that we face as an economy overall, such as carbon neutrality, sustainability. And then it is an economy, the ageing population issue which will impact our workforce. So having indirect, broad based programs that are useful for companies and easy to access is vital for that. Jacky, what's your thoughts?

Jacky Millership

I totally support all of those points. You've made the standing there absolutely on point, I guess just putting my manufacturing sector hat on. I would kind of ad a few nuances, perhaps, but look, the manufacturing sector has all of the right elements to take its rightful place on the world stage. But we need a government that's more entrepreneurial and bold. We need a much bigger budget for individual companies willing to make strategic investments in this sector. We’d like to see the government take all of that good home work that went into the creation of the modern manufacturing strategy, treat what we've done today is a pilot program, and scale it up.

In other words, take the lessons we've learned from the allocation of the funds to date and implement the next version of the modern manufacturing strategy. And lastly, with that lens of the opportunity for scaling up the sector and in the context I mentioned earlier, we'd like to see more companies benefit from the program. Let's also why don't we have preferential loan programs sitting alongside the grants? Grants aren't the only options we need to think outside the box. Industry is not asking for handouts. They need an entrepreneurial partner in government that can help them respond to the global opportunity before us in a timely manner. If we can have any influence on thinking in this area, you know, that is absolutely what we'd like to see.

Rebecca Archer

Well, Sandie and Jacky thank you so much for your time and your fantastic insights and ideas. Can people track you down on LinkedIn or phone, email if they'd like to talk more about innovation?

Sandie Boswell

Absolutely. So we're on our Grant Thornton website and were easy to find.

Jacky Millership

We certainly welcome conversations with all companies in this space.

Rebecca Archer

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