Australia turns to idled factories to pull it out of COVID slump

Sydney, Australia | Mon, September 7, 2020 | 06:41 pm

In 2017, Australia’s last car produced rolled out of a General Motors plant in Adelaide City, ending seven decades of local automobile tradition and the illusion that factories in the country will ever compete globally. Three years later, policymakers are again looking to produce to generate some growth as they struggle to steer the economy through the coronavirus and its worst record-breaking recession. Although Australians are unlikely to buy millions of cars, fridges and toasters made locally, as they did in the 20th century, a government push that puts manufacturing at the center of its longer-term recovery plan has strong industry support and has kindled ventures that would have seemed far-fetched half a year earlier.

There is a realization behind the pivot that Australia was too dependent on Asia for the supply of critical goods. A recent downturn in relations with China, Australia’s largest trading partner, only reinforced that view. “When you look at it over time, we’ve been running down our manufacturing and we’re at this turning point-we ‘re thinking maybe we shouldn’t do that,” said Drew Woodhouse, Bain & Company’s Sydney-based consultant who is looking at supply chain issues. For several, the coronavirus has shown that globalization ‘s advantages, namely low tariffs and cheap labor, are minimal while the world economy is grinding to halt.

This has encouraged those in the industry to consider seriously putting in onshore operations, even though it means some prices are going up. What corporations claim is needed in the longer term are changes that reduce energy prices, promote creativity and cut investment red tape. Andrew Liveris, former head of U.S. industrial giant Dow Chemicals, returned earlier this year to join the engineering consulting task force of Prime Minister Scott Morrison in his native Australia. “We’ve got a lot of uncertainty about how to get authorised investments here,” Liveris told Reuters. “So we have to adopt a business-friendly environment to attract foreign direct investment to an economy that can punch above its weight in terms of quality research and quality technologies.”

(Re)start your engines

Burdened by vital shortages during World War Two, Australia expanded its tariff-protected manufacturing sector in subsequent years. But production had increasingly moved offshore by the end of the century as companies and policymakers welcomed the upsides of globalisation. Manufacturing accounted for just 5 %  of gross domestic product in 2019 , down from about 25 %  in 1960, while its labor force share fell to 7 % from 17 %  in 1984. Liveris said manufacturing should account for between 15 %  and 20 % of GDP.

Although some economists see that as an ambitious target, some early movers have been galvanized by the shift in thinking. H2X, a startup formed in May, aims to resuscitate local automobile production by making hydrogen cars in Port Kembla, a smelting town about 100 km south of Sydney. Brendan Norman, the company’s chief executive who previously worked on hydrogen-powered cars in China, expects a prototype to be ready later this year and start production in 2022. By the end of this year the operation is aiming to employ 100 people, which could ramp up to 5,000 by 2025.

Norman said that by 2024 production could use 80 per cent of local content. That bet is based on the belief that Australia already possesses most of the skills and materials necessary to make items such as supercapacitors and fuel cells, even if the scale of manufacture is not yet there. “Australia can certainly compete in this because it’s manufacturing high-tech and that’s something we feel we should be able to encourage us to come back,” he said. “If we’re manufacturing the bulk of the world’s hydrogen, I ‘d like to think we can produce the tools needed to use it properly.”

Scope for reform

H2X ‘s plan relies less on the low labor costs provided by offshore production and more on the value of intellectual property, just like the high-tech factory sector in Germany. Visy Industries, a recycling and packaging company, expanded into glass production in a deal worth nearly A$ 1bn ($730.80 m). That move comes as China’s recent waste import curbs force Australia to come up with innovative ways to manage its garbage. One of the Manufacturing taskforce ‘s central proposals is to reduce energy costs by boosting distribution. Australian companies pay about 50 percent more for natural gas than their export customers, said the country’s competition watchdog.

Last week Treasurer Josh Frydenberg said policies that promote entrepreneurship and cut red tape will be key in the national budget next month. Tony Shepherd, former president of Transfield Services, an infrastructure company, said Australia needed to use the crisis to better streamline investment policies across multiple layers of government. “We couldn’t even produce the basic medical supplies, and we were concerned about toilet paper,” he said, referring to earlier this year’s panic buying of toilet tissue. “If that’s not enough of a wake-up call to get politicians going, I don’t know what it’s like.”

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