29/09/2011

The current debate about a crisis in Australian manufacturing mistakes the scoreboard for the match report.

Manufacturing’s share of the Australian economy and jobs is declining, only because other sectors of the economy like services are increasing. It is a relative downturn, not an absolute one. Manufacturing still employs around one million Australians and has done so since the 1960s. Decade on decade, manufacturing has delivered comparatively high productivity levels.

Further, because modern manufacturing includes a myriad of activities in addition to production – design, logistics, customer solutions, support services, research – its economic contribution is downplayed as these are not counted as manufacturing in national statistics.

So we look at the scoreboard, the high impact job losses and fierce global competitive and cost pressures confronting manufacturers and conclude the decline of Australian manufacturing is inevitable and terminal.

Notwithstanding this perfect storm of adverse events, there is evidence that Australian manufacturing is not dying, but morphing in response to unprecedented forces of change.

Competitive, forward-looking manufacturers are succeeding not by competing on price, or even on quality. They are riding the waves of change and capitalising on new prospects and opportunities from:

• the disappearing boundary between manufacturing and services;
• mass customisation, not standardised mass production;
• new niches from unbundled global value chains and outsourcing;
• technologies that transform businesses and costs;
• intangible assets, like know-how and know-who, becoming decisive for business success.

The transformation of Australian manufacturing is evident through:

• manufacturers as smart specialists in global niches
• manufacturers as innovative customer problem-solvers
• manufacturers changing the game with new business models.

Manufacturers as smart specialists in global niches

Increasing globalisation and the rise of low cost competitors from emerging economies are a fact of life. But this also brings new and more varied opportunities for Australian manufacturers to do business globally by specialising in selected niche business activities, rather than owning the whole production process.

Businesses are redesigning their supply chains and reconfiguring which value-added elements are best suited to their enterprise at home and where and how to partner globally.

Kitchen components and services company, Amorini Australia sources Italian designs, German components and French and English software systems to which they supply their expertise to assemble and integrate components into kitchens that are sold at a premium to large-scale development projects in China.

Niche high-end manufacturer of fashion hats and handbags, Kaminski Australia, manufactures offshore, but owns distributorships in the UK and USA and employs managers in Japan who sell to retailers and distributors.

Westray Engineering, a specialist metal manufacturer in the rail, automotive and construction sectors, has pursued a deliberate strategy to create a new position in their supply chain. They have leveraged their skills and assets to expand their business offerings into consulting services on manufacturing processes and equipment installation, and into tooling designs for Australian entrepreneurs. A key feature is Westray’s proficiency in managing and auditing their cross-border supply chain of six partner factories in China and one in Thailand.

Manufacturers as innovative customer problem-solvers

Manufacturers are succeeding by adding services to products and integrating their business offerings into their customer’s business, making themselves indispensable to their customers. The practice of bundling products and services together and the trend for customers to be increasingly involved in designing and producing their own purchases provide a competitive edge. Together they open up a new range of innovative business opportunities for manufacturers as customer problem-solvers.

GPC Electronics, one of the largest contract electronics manufacturers in Australia, realised it can never compete internationally as a high-volume, low-cost producer, and so distinguishes itself by its superior use of knowledge, particularly about the competitiveness drivers and needs of its customers. GPC rejects the traditional outsourcing model that relies on cheap labour and relentless driving down of costs. Rather, they focus on understanding exactly what makes their customers competitive and tailor their products and services to help their customers achieve these goals, e.g. winning greater market share, fast time to market, minimising working capital and the like.

J. Robins is the only volume producer of women’s shoes remaining in Australia and survives because of their focus on ‘just in time’, mass customisation. J. Robins provides high quality designer fashion shoes to meet the needs of its retail store customers in a fraction of the time it takes offshore producers to supply. They bring together lean manufacturing processes, flexible teams of multi-skilled workers using high quality machinery to respond with speed and agility and supply products of superior value to their customers.

Manufacturers changing the game with new business models

Advanced manufacturing technologies, revolutionary online services, and low-cost, accessible transport and information and communications technologies have enabled massive business model change by manufacturers. These technology shifts can be game-changing in the new ways manufacturers create and capture value for customers, partners and themselves, and so generate a new source of distinctive competitive advantage.

Beacon Lighting reconfigured its business model to combine strong product design and quality control, closely managed outsourced manufacturing and continuous investment in new business developments including adding lighting advice services and new solar power business lines to their offerings. They are not only a lighting manufacturer, but a retailer, and a service provider.

Kimberly Kampers, a provider of off-road travelling and camping vehicles for ‘grey nomads’ and enthusiasts, has produced a formula for success by aligning their design capability and patents with lean manufacturing processes and a highly-trained workforce that concentrates on ensuring positive customer experiences and good value. Customers are a community of interest that is integral to the operation of the business, not just as consumers, but as researchers, product testers and marketers.

A country that makes things?

The debate rages on whether it matters to be a ‘country that makes things’ in the 21st century.

Some demand strong government action to redress the loss of Australian manufacturing. Others say it makes no economic sense to give special treatment to manufacturing, and warn against a return to protectionism. Commentators urge manufacturers to become more innovative, productive and knowledge-intensive, based on using more advanced technology and trading ‘blue collars’ for the white coats or caps and gowns of knowledge workers.

None of these prescriptions provides the complete answer. New evidence that questions conventional understandings of innovation and productivity is the key to a sustainable future for Australian manufacturing. The fresh insights are:

• Innovation is more about problem-solving and learning than about scientific discovery, more about the customer than the producer, more about the marketplace than the laboratory and more about business transformation than technology.

• Productivity is not about doing more with less, nor about working people harder for longer. Productivity does not equate with efficiency; it centres on innovation and transformation – of business capabilities, skills, technology and competitiveness.

• In practical terms, the productivity gains that matter to manufacturers come from increasing revenue, not just cutting costs.

Anticipating and better serving customer needs and creating skilled, high performance workplaces provide the key to profitability and longevity of manufacturing.

Vital ingredients are problem-solving for demanding customers; organisation of people and operations for agility and flexibility; smart use of market and customer knowledge; and adapting leading edge technologies and processes to new uses.

Manufacturers need to be serial experimenters constantly striving to find and maintain their competitive edge by anticipating and meeting the needs of paying customers better than their competitors do.

A platform for action

To cheat the death sentence that most believe is the fate of Australian manufacturing, manufacturers and their advocates need to take action on three fronts:

•    Experiment with business innovations

Consider making innovative changes to the standard business model, i.e., in how firms create and capture value for their customers, their partners and themselves.

To help choose from the many options for business model innovation, try out disciplined experiments. More potent ways of engaging customers will be central to these business innovation experiments.

Improvise and learn about what works for the individual manufacturing enterprise.

•    Invest in people and skills

Manufacturers are challenged by skills shortages, growing competition for talent, wage pressures, and the need for continuous upskilling of the manufacturing workforce and management.

Intensifying competition and the changing models for business success in the manufacturing sector present even more urgent and critical skills imperatives.

Deepening and expanding the skills, capabilities and adaptability of manufacturing managers and workforces is essential for enterprises to profit from innovative manufacturing business models.

Manufacturing enterprises must urgently invest in the new constellation of skills required for high-performance and empowered workplaces. Not only technical skills, but creative thinking and problem solving and skills in global collaboration and partnering.

•    Multiply knowledge connections

In the modern era, manufacturing is not a solitary pursuit.

Being well-connected and highly proficient at collaboration is a key attribute allowing manufacturing enterprises to access and absorb knowledge and to transform it into new competitive capabilities.

In the global internet age, knowledge is an asset that can depreciate rapidly and needs to be continually refreshed. Flows of knowledge are critical and these only happen through people, their networks and relationships.
Being connected counts. While access to information is easy and cheap, access to knowledge comes from engagement and collaboration with people and organisations. Manufacturers must position themselves in rich webs of relationships and knowledge flows.

The reported demise of Australian manufacturing is greatly exaggerated. There is reason for optimism as the best of Australian manufacturers are showing the business acumen, ingenuity and resilience to succeed against the odds in a hyper-competitive global business environment.

Narelle Kennedy
CEO Australian Business Foundation
September 2011

This article draws on research and case studies by the Australian Business Foundation, including the Manufacturing Futures paper prepared for the NSW Business Chamber.

If you have any questions in regard to this article, please contact us at TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.