What will it take for Australia to compete globally while it is operating as class leader in a high-cost environment?
Outline of Current Problem
Australia has greatly benefited from the insatiable appetite of its iron ore, coal, and natural gas resources by its Asian and distant neighbours. This appetite has resulted in billions of Australian dollars being repatriated back into Australian industries such as mining, energy and infrastructure. These hundreds of billions of dollars flowing back into new projects have led to the ability for firms operating in these industries to pay high-wages. On the positive side, the income generated from selling raw materials to the world has resulted in a soft landing for Australia’s economy while the entire world was drawn into -- and struggling with -- the GFC in 2008 and 2009. The story is not all bad!
While Australia’s mineral and resources sector has grown exponentially, the Australian manufacturing sector has fallen behind – some would even argue that it has fallen off a very large cliff. This is especially true for Australia’s proud automotive industry. All major car producers in Australia– Ford Australia, General Motor’s Holden (subsidiary), Toyota – have now publicly announced that they will be closing their factory doors in 2017. The departure of Australia’s automotive industry will lead to the elimination of thousands of jobs in these factories – and will result in an even larger flow on effect in the wider supplier and distribution system.
During the last ten years, the Australian economy has moved from a low-to medium cost environment to now becoming class leader in the high-cost production group. Based on Boston Consulting (BCI) Group’s Global Manufacturing Cost-Competitiveness Index, Australia now ranks as number one in the list of countries researched in highest average manufacturing labour costs. The BCG Index identifies and compares shifts in relative costs and uses data for a range of countries from the year 2004 to 2014.
Australia is presently 60% more expensive than the United States of America; 24% more expensive than Germany; 20% more expensive than Brazil; 18% more expensive than Switzerland and last but not least 13% more expensive than France. Both the Unites States of America and Mexico have dramatically improved their competiveness in manufacturing against other economies in the BGI Index.
Economists have long warned about the potential negative trend within Australia’s high-cost operating environment. During a large part of the 20th century, Australian manufacturing has developed itself behind tariff protectionist’s and domestic employment regimes. This has ultimately resulted in low-level productivity improvements and even further stifling innovation. While operating in a high-cost environment, Australia is increasingly drawn into the nether regions to offset these high-costs with the required productivity improvements required. This offset holds true if Australia, or any other country for that matter, was to compete in a low-cost region.
Many dominant sectors in the Australian economy are presently facing the problem that there is a lack of focus on those productive improvements that really matter to the firm. Instead the larger industries in Australia are pursuing the strategy to focus on those improvements that are not really important in a high-cost operating environment. This leads to adverse outcomes as sketched in the earlier part of this commentary.
Competition in a High-Cost Environment
The question that then begs -- how will the firm then compete successfully in a high-cost environment?
It is fairly easy to state what and how success is achieved in a low-cost operating environment. It is focused on the following two axioms – one is through building efficiency in the productive environment while the other axiom is focused on easy access to production inputs for which there exists a comparative advantage.
The high-cost environment as stated above is more challenging. In order to achieve success in a high-cost environment, the firm has to provide the highest degree of value for the lowest amount of cost. It is a fallacy that this cannot be achieved. It can however only be achieved and sustained when the firm is engaged in a process of (continuous) innovation through integration – and not fall into the classical trap of securing innovation in a loose -- or alternatively -- through an ad hoc way of working. Within this environment, innovation (new business models, systems integration, high performance workplaces, etc.), invention and the associated design skills that provide practical realisations are key to retaining a vibrant manufacturing sector in Australia.
It is also important to note that in these high-cost environments – medium or low technology -- new thinking around creativity, design integration combined with other axioms of integrated innovation, business analytics and customer experiences have to be incorporated. Adjacent to this, firms working in a high-cost environment need to adopt an open or at least semi-open approach to business innovation, acquisition or brokering information, sustainability, platform thinking and to develop deeper and more meaningful connections with a growing services and solutions culture.
Roos (2012) describes that integrated innovation is comprised of five dimensions. The five dimensions are (1) enablers of innovation, (2) innovation strategy, (3) innovation management system; (4) value creating innovations, and (5) value appropriating innovations. They all have to be present and deployed correctly. The paper provides further insights and a detailed table highlighting the details of each of these five dimensions.
In order for Australian firms that operate in high-cost environments to deliver sustained competitive advantage, future workplaces and future manufacturing overall must adopt new approaches to both leadership and management.
Concurrently, there must be a transformation within the workforce to engage with change and innovation. Firms will need to be open to provide ‘additionality’ in their absorptive capacity to both integrate and diffuse existing knowledge as well as to develop news ones to pave the path to a new emerging manufacturing skills-based ecosystem.
The interdependency in Australia’s elaborate production system will provide ample opportunities for firms to collaborate, develop networks and clusters between private and public entities, partnerships with research and learning & teaching providers to test, experiment and validate new ideas.
The future workforce will be required to not only specialise, but engage in a deeper and more meaningful way with boundary crossing competencies such as creative thinking, problem finding and solving, teamwork and communication.
Boston Consulting Group (2014). The Shifting Economics of Global Manufacturing.
Roos, G. (2012). Manufacturing for the Future. Adelaide Thinker in Residence 2011, Policy Report, Department of the Premier and Cabinet, Adelaide, Australia.
There is a lot to look forward but outcomes and positive externalities do not happen overnight and for sure not by themselves. Business as usual within the firm and the government is in the Australian context not an option.