6 August 2020
Working man's paradise lost
In 1948, at Holden's Fishermans Bend plant in Melbourne, Prime Minister Ben Chifley welcomed the first all-Australian made automobile with the immortal words, "She's a beauty". In these post-war years, the Australian economy was in full flight, with unemployment sustained at under 3% and annual GDP growth at around 5%. By the 1960s, Volkswagen, Ford, Toyota and Chrysler had joined Holden in producing motor cars in Australia, and close to 24,000 Australians were employed by Holden alone across 7 production facilities. 1.23 million Australians, or 29% of the workforce, were employed in the manufacturing sector, and its GDP share was at the same level. But, by 1996, these shares had fallen to 14%, and in 2017, when the last Australian built motor car rolled off Holden's production line in Elizabeth, Adelaide, just 7.1% of the Australian workforce was employed in manufacturing, contributing only 6% to national output.
The decay of Australian manufacturing has for years been shrugged off by policy makers as natural and inevitable. The decision by Tony Abbot's government in 2014 to end financial support to the local automobile industry signalled to many the abandonment by the Commonwealth of the manufacturing sector. But we must not forget that this decay has resulted not from a reduction in global demand for manufactured products, but from a reduction in demand for Australian manufactured products.
Small fish in a big pond
The reasons why Australian manufacturers have struggled to compete are, of course, many and varied. Trade liberalisation has removed the tariffs that inflated the cost of imported products. The increased supply capacity of our regional neighbours has improved their economies of scale and driven down costs abroad. Infrastructure originally developed in the post-war golden years has struggled to keep up with the 21st century's technological advancements. Our vast distances and small population beget high transportation costs. And, to be sure, input costs such as for energy are significantly higher for our manufacturers than for many of their competitors. As remarked in The Million Jobs Plan released this year by Beyond Zero Emissions:
"For most of the last half century Australian industry has been fuelled by cheap natural gas. But this era has ended, with Australian manufacturers now paying at least twice as much for natural gas as competitors in the United States, Russia, and the Middle East."
While all this remains true, the tendency to compare Australian manufacturing with its Chinese counterpart, and to point to China's low cost of labour and extraordinary population as the reason Australia cannot compete, is faulty reasoning and self-defeating. China is not Australia's true competition. Australia's competitors are the other highly developed nations of the world who share our high labour costs, expensive real estate, and high standards of environmental protection. Manufacturing in Japan, Germany and South Korea, a few of the world's wealthiest nations, contributes more than 20% to their GDP. In Sweden, with a population of less than half of Australia's, and consistently ranked with among highest quality of life on the planet, manufacturing's GDP share is more than twice what it is here. Even in New Zealand, one of the most remote countries on Earth, manufacturing manages a 10% contribution to national output.
Ceding supply-chain sovereignty
The production capabilities built-up in Australia in the early decades of the 20th century insulated us from the biggest supply shocks of the time: the two world wars. Boosted by war demand, facilities expanded and then allowed us to prosper in the baby boom decades that followed. Times have indeed changed. In the greatest supply chain disruption to hit Australia since world war two, the consequences of our neglect have been revealed. The sudden restrictions in overseas markets have shone a stark, bright light on Australia's reliance on global supply chains.
As Treasurer Josh Frydenberg stated in April, "there is a need for a proper assessment of global supply chains and what they will mean for Australia". In one of countless examples, Australia imports an estimated 90% of medicines and around 80% of pharmaceutical ingredients from China and these supplies have been profoundly impacted by the pandemic as factories in China have gone into lockdown. Similarly, the vast majority of chemicals essential to treat our water and sewage systems are sourced offshore. During this crisis, water suppliers and treatment companies have needed to coordinate with national authorities to ensure they have enough chemicals to keep treating water and to prevent disease. We have been rudely reminded of our vulnerability and the undeniable reality that a strong manufacturing sector is vital not just for employment and wealth, but for national security.
A road to recovery paved in green and gold
Clearly, we must rebuild manufacturing capacity with urgency. All signs currently point to an unpredictable future, not a return to the stability we so long took for granted. We can only assume that shocks to global supply chains will not only recur, but may become more frequent and more severe. How we respond to those shocks, and whether we have the resilience to withstand them without damage to our quality of life, will be determined by the action we take now.
So, where do we start? A return to the protectionist trade policies that underpinned the rise of Australian manufacturing in the 20th century would likely do more harm than good. Hawke and Keating's embrace of an open economy in the 1980s lit the fuse of almost three decades of continuous growth that brought Australian living standards to among the highest in the world. Instead, the answers will lie in redressing Australia's poor cost competitiveness. While we cannot reduce transportation costs or increase our domestic economies of scale, and we should not reduce worker's share of revenues by reducing wages, we can reduce the cost of energy.
The basic laws of supply and demand tell us that the price of electricity will be reduced by increasing production during periods of high demand. More basic still, production will become cheaper by replacing costly, antiquated generation facilities with cheaper, more reliable, modern technology. According to analysis by CSIRO and AEMO, the levelised cost for new black coal electrons is approximately $144.60 whereas their estimated levelised cost of new green electrons is approximately $57.80 per MWh for wind, and approximately $53 per MWh for solar.
It does not require much imagination to conclude that investment in renewable energy generation must be at the heart of Australian manufacturing's recovery. As the Grattan Institute argued in May this year, "Australia has an historic opportunity to create a multi-billion-dollar, export-focused manufacturing sector based on globally competitive renewable energy". While it is true that a rapid growth in the share of electricity produced by renewable sources will require proportional investment in firming capacity, this is an issue only of proper planning, according at least to former Prime Minister Malcolm Turnbull.
Two steps forward, two steps back
A renewable powered future is considered by some to be practically inevitable. AEMO predicts that by 2040, 85% of our electricity will be supplied by green sources. If so, what is the need for anything to change? In an electricity market in which generation, transmission, distribution and retail is predominantly deregulated, will the guiding hand of the market not move us gently but steadily towards our destiny?
This kind thinking will guarantee it will not. Although market forces are the dominant driver of investment and development in Australia, the States and the Commonwealth will always set the rules within which the market operates and will, therefore, continue to heavily influence the direction of such investment. These rules are far from consistent and far from predictable. On the one hand, over the last few years, the Commonwealth government has scrapped the Carbon Pollution Reduction Scheme, cut the Renewable Energy Target, declined to participate in the recent UN climate summit in New York and doubled down on its commitment to coal mining and gas production. On the other hand, that same government has co-funded the Renewable Energy Hub Marketplace to help wind, solar and battery storage companies compete for project investment. At the same time, State governments in New South Wales and Queensland have launched Renewable Energy Zones to attract large scale renewables development by the private sector.
Mixed messaging leads only to confusion and uncertainty. Confusion and uncertainty will not support the nationwide program of private investment that is needed to realise Australia's green energy future and reborn manufacturing industries. Overcoming a threat to our national security and prosperity requires coordinated, unified action across all levels of government, and across the manufacturing and electricity generation sectors. This view is shared by WWF-Australia and EY who commented in a recent joint report:
"Building energy productivity and renewable energy into expanded manufacturing for critical supplies – like food and pharmaceuticals – will build an energy fit supply chain that cuts energy costs, freeing up funds for innovation and job creation." (Delivering economic stimulus through renewables report)
"Government will need to play a leadership role to ensure that the opportunities and benefits of renewables turn into reality, and building on past successes will be the foundation for achieving a renewables-oriented domestic economy." (Australian renewable export COVID-19 recovery package report)
Helping the will find the way
What form action will take is not for us at Ashurst to say. Whether through ambitious emissions targets, improvements to transmission infrastructure, direct public investment in large scale projects, or backstop electricity purchase agreements, as surveyed in the Million Jobs Plan, the solutions will be found not by the lawyers, but by those in our community who are tasked with making the decisions and doing the work required to meet the challenge we face.
While the challenge is great, there is now a growing chorus of voices giving reason to hope. Hot on the heels of the Grattan Institute's call to action, Commonwealth Opposition Leader Anthony Albanese proclaimed that "lower energy costs will deliver investment in energy intensive manufacturing like steel and aluminium and boost regional jobs and economic activity". Not to be outdone, Commonwealth Minister for Industry, Science and Technology, Karen Andrews, recently addressed the National Press Club on the vitality of manufacturing to National Security and the need for "an alignment of government effort" and the "big role [for governments] in streamlining [development] processes and facilitating new [manufacturing] project approvals or upgrades".
At Ashurst, we believe in the power of ideas and of the will to overcome. We are proud to count as our clients organisations whom we know will be among the forces that propel us towards a future of renewed stability and prosperity. A future that will be made green in Australia.
For further information, please contact:
Christopher Starkey, Partner, Ashurst
christopher.starkey@ashurst.com
