Building economic security. Margaret Simons
With imports restricted as international borders closed, the coronavirus pandemic exposed Australia’s inability to manufacture what it needs, prompting an urgent debate about how the country can improve its economic security.
In December 2019, Steve Csiszar, chief executive of Med-Con, feared his company was going under.
The Shepparton-based Med-Con was the last Australian-based manufacturer of surgical face masks. It employed just 17 people and was running two mask-making machines on an eight-hour shift, with a third kept for parts.
“You could have shot a cannon through the offices and factory and not hit a soul,” Csiszar recalls.
For years, Csiszar and his co-owner and business partner, Ray Stockwell, had been unable to compete with cheap imports of face masks from China. During the bird flu epidemic and the SARS epidemic, Med-Con tendered for government contracts to supply masks. It lost out both times.
While a mask made in China could land in Australia for a cost of about 17 cents a unit, labour, transport and power costs meant the Med-Con equivalent cost closer to 50 cents.
And Csiszar says no one wanted to hear about quality. Even now, he says, there are masks on sale in Australian supermarkets that – to his expert eye – clearly don’t meet the standard claimed on their packaging.
“Some of the low-cost producers, my experience has been that they ask what standard you want them to give you, and they give you a paper that says the mask meets that standard, whether it does or not,” he says.
But then Covid-19 hit and everything changed. Australia’s international borders were mostly shut and masks made in China were suddenly hard to get. Public servants were beating a path to Shepparton.
What happened next made news around the country. Government grants and the Australian Defence Force helped Med-Con build new machines and greatly increase its output, moving to a 24-hour-a-day, sevenday-a-week operation. It was a rare feel-good story: the plucky little Australian company coming to the rescue.
But underneath lies a darker narrative. Just as the face mask has become a symbol of our time, the story of Med-Con is emblematic. It is an exemplar of Australia’s loss of manufacturing ability since tariffs were dismantled in the 1980s and ’90s.
Since 2000, jobs in manufacturing have declined by about 200,000. The sector now accounts for only 7 per cent of national employment – less than in any other OECD economy. As the country grew wealthier, we used more manufactured goods but made fewer of them. The idea Australia couldn’t, and didn’t need to, compete with the manufacturing nations in Asia became conventional wisdom.
But Covid-19 has shifted the conversation about manufacturing. Now, being able to produce what we need onshore has become a matter of national security and sovereignty. We are at the beginning of a public policy debate about exactly what that might mean, and the extent to which the government should intervene.
So far, the government has not released a comprehensive manufacturing strategy. The minister for Industry, Science and Technology, Karen Andrews, says she is finalising a plan that will “enable our manufacturers to scale, become more competitive and more resilient” in the interests of job creation, economic growth and Australian security.
“We need to do a number of things, including making science and technology work for industry and focus on areas where Australia has an edge over our international competition,” she said.
Liberal senator David Fawcett, chair of the joint standing committee on foreign affairs, defence and trade, has called for strategic government interventions based on a rigorous “sovereign risk” assessment. He says Australia should avoid “binary” debates between leaving the country entirely exposed to world markets and “socialist” calls for government-mandated manufacturing.
Meanwhile, in July, the Australian Manufacturing Workers’ Union released a report written by The Australia Institute’s head of the Centre for Future Work, Dr Jim Stanford, which painted a disturbing portrait of where Australia’s manufacturing sector stands and suggested a way forward.
Stanford turned on its head the presumption that high wages make Australia uncompetitive. Rather, he said, restoring Australian manufacturing is our best hope of maintaining high wages and reducing casualised, poorly paid work – the gig economy.
Med-Con could be seen as a case in point. When the company began to ramp up face mask production, it needed more staff. Willing recruits were found among the people recently laid off from the cafe where Csiszar and Stockwell got their daily caffeine fix.
In shifting from hospitality to manufacturing, those new employees also moved to full-time, better-paid work, and they are receiving training.
Stanford found manufacturing jobs tend to pay an average of $81,000 a year and are likely to be full-time.
But at the moment, he says, in its manufacturing profile and in the increasing casualisation of work, Australia resembles a developing nation. Our national wealth and our wages are vulnerable to the roller-coaster of international commodity prices. Harvard University’s “economic complexity” index, which assesses each country’s ability to make unique products and services, supports his claim. Australia has fallen 29 places on the index since the turn of the century and is now ranked 93rd – just above Pakistan and Mali and behind Morocco and Uganda.
Stanford describes the Harvard ranking as “a shocking insight into Australia’s underdeveloped role in world trade and our precarious dependence on exports of unprocessed raw materials”.
We are similarly reliant on imports even to maintain our limited manufacturing capacity. Take the surgical face mask, for example. Most have three layers of fabric, including an internal, electrostatically charged filter. Then there is the nose wire, and the ear loops or head ties. Currently, all these components are imported.
According to the Stanford report, this is a typical story – more than half the materials, parts and supplies used by Australian manufacturers are made offshore.
The fabric in face masks is a petrochemical-based non-woven material called spunbond. The last Australian manufacturer of spunbond, Kimberly-Clark’s Albury-based plant, closed in 2015.
Before Covid-19, Med-Con was importing spunbond from China and India, but when the pandemic hit, the price went through the roof and supplies became uncertain. So, the company began airfreighting material from Europe. Normally it would have come by container ship, but there was no time. The freight costs, subsidised by government, cost more than the fabric.
Some companies have announced plans to make spunbond in Australia, but Med-Con would only require a small part of any factory’s output. Csiszar says that for the material’s manufacturing to be viable, there would need to be other buyers. One of the industries that uses spunbond is car manufacturing – the very industry Australia lost when successive governments declined to intervene to save it.
Stanford says Australia lost car manufacturing partly because the resources boom led to “overappreciation” of the Australian dollar, which led to an “artificial and unsustainable increase in apparent Australian production costs”. In 2019, he notes, hourly labour costs in Australian manufacturing were about 10 per cent lower than in the United States – suggesting we might have been able to keep making cars onshore after all.
Today, Caltex is Australia’s top manufacturing company, followed by food producer Fonterra, the Perth Mint and BP Australia. According to Australian Bureau of Statistics reports, food and beverages account for a quarter of manufacturing jobs and this sector, at least, is expanding. Machinery, metals, textiles and clothing are all in decline.
Manufacturing is the sector of the economy most likely to invest in innovation, research and development and Australia’s performance in all of these is slipping due to the manufacturing decline. Instead, we are becoming a cottage-industry nation. All those people suddenly churning out cloth masks on home sewing machines are more typical than we might think.
Jim Stanford calculated that while there are more than 86,000 manufacturing businesses in the country, just 8 per cent have more than 20 employees. Forty-seven per cent have fewer than 20 employees, while 45 per cent have no employees – only the proprietor, often working from home.
The smallest businesses will probably not outlast their proprietor. They are also unlikely to invest in research and development or capital equipment, or to export their products.
So, what can be done? There are areas of consensus and difference in the emerging debate.
No one is arguing Australia can make all, or even most, of what it needs. Nor is anyone suggesting that tariffs should be reimposed. Australia is an exporting nation and has a strong interest in World Trade Organization arrangements – although Stanford argues that future trade agreements should be negotiated with an eye on manufactured exports, not only resources and agriculture.
Stanford and David Fawcett both argue for a role for government procurement to
“buy Australia”. Minister Andrews says that while government buying is a “very powerful and important tool … it’s essential we don’t advocate a return to protectionism”.
Scott Morrison this week signalled that energy policy is key to the future of Australian manufacturing, but he advocates gas, while Stanford points to Australia’s “superabundance” of renewables, “unmatched in the industrialised world”, and how big manufacturers, including BlueScope Steel and Carlton & United Breweries, are already contracting with renewable energy suppliers, while others are building their own solar arrays.
As for what we should seek to make, most point to pharmaceuticals, batteries and aluminium – making use of Australia’s healthy supplies of opium poppies grown in Tasmania, lithium and bauxite. A common theme is the need for more skills and training and more research and development.
Targets for spending on research and development, investment in university–industry collaborations and skills training were a feature of the manufacturing strategy Labor took to the last election, as was a future fund for investment in advanced manufacturing.
All sides appear to agree government must be a player. As Stanford writes: “No country was ever naturally ‘endowed’ with an innate ability to produce high-value innovationintensive manufactured products. Those industries were built in other countries (like Germany, the Nordic counties, Japan, Korea, and now China), with the support of deliberate, pro-active industry policy interventions.”
Today, the Med-Con factory has 10 machines, the new ones built by an Echuca manufacturer, financed by a government grant. There are new software and accountancy services, new toilets. There are more than 120 people on staff, making about 12 million masks a month.
The company is on track to make 59 million masks for the national stockpile by December. It is also supplying state government health services, police and other emergency workers.
Yet the future is uncertain.
When the crisis recedes, will the Commonwealth go back to buying face masks only on price, or will it support the local industry?
“What concerns us is what happens next year and the year after,” says Steve Csiszar. And the national debate that would answer his question is only just beginning. •