The high road or the low road – by Dario Valenza

@AuManufacturing’s series Towards 3% R&D has been noticed from Canberra to business. Here, Dario Valenza charts some of the impediments to manufacturing and asks whether there is a path ahead, without sacrificing the things we value about Australia.

Let’s start by acknowledging that we have a high cost base in Australia because of geography, regulation, and taxation.

Our geography dictates long supply-chains. So, the costs of getting raw materials and intermediate goods to and from manufacturing business, and finished goods to consumers, are necessarily relatively high.

We have a complex multilayered regulatory system that requires expensive compliance and produces expensive outcomes.

All Australian businesses need to comply with extensive environmental, OH&S, IR, legal, reporting, and taxation requirements.

Regulatory complexity gives rise to a whole industry of consultants and advisors that are a necessary cost for productive businesses.

This compliance burden is onerous before considering the risk of regulatory capture by large businesses aimed at squeezing out innovative challengers.

Time and resources spent on consultants and compliance add to the total cost of goods produced.

Regulatory complexity also generates friction and uncertainty with respect to approaching operations in a flexible and agile way.

Everything from expanding plant to adjusting workforce size becomes slower and more expensive because of all the regulatory boxes that need to be ticked.

Specialised industries also have to deal with industry-specific regulators that add a further layer of cost and complexity (for example in chemicals, food, aviation and medical sectors).

Taxation is layered on top of high compliance costs, with state and federal taxes piling up, and adding administrative overheads – not to mention the time-consuming accounting required by the GST regime.

Many industries are also competing with government for talent, given the large number of technical and administrative roles created by government in industry-related areas.

All of the above adds up to a high-cost base and limits agility and appetite for innovation.

Protecting our high standard of living

It could be argued that some of these policy settings are required to safeguard Australia’s high standard of living, social safety net and extensive public services.

However, if this high cost-base is exposed to free trade policies with countries that do not share the above cost-inflating inefficiencies, then competition becomes impossible.

It is not economically rational for private businesses to compete directly with jurisdictions where the same product can be made at a fraction of the cost.

Yet this economically rational decision, multiplied across the economy, is deadly in the long term to sovereign skills, capability, and independence.

One or the other has to give – if we are to maintain the barriers that local manufacturers must overcome, then the playing field must be levelled with respect to foreign competitors.

Combining the free flow of capital and labour with complex regulations and high taxation, in a geographically diffused environment, is guaranteed to disincentivise local manufacturing.

This in turn decreases the complexity of the supply chain and skills base, making it progressively harder to make complex products.

It results in a simple economy dominated by exporting raw materials with no added value, and importing labour and capital to invest in non-productive land and services businesses.

This leads to a vicious spiral of increasing land, energy, and transport costs, which further disincentivises manufacturing.

In a perfect world where supply chains are safeguarded by an international rules-based order, it is feasible to accept that local manufacturing is not necessary. It is more efficient (though ethically dubious) to let poorly paid, poorly safeguarded overseas workers make things for us.

But in the long-term this makes us vulnerable to any disruption of supply chains and international trade policies, and unable to make the very things we need to defend ourselves in case of conflict.

Real incentives are needed

The only way to regain manufacturing complexity is to remove local hurdles and account for international ones.

Real incentives must be brought to bear for entrepreneurs and investors to choose manufacturing over real estate, resources, services…

Innovation, high-tech, next-gen, advanced manufacturing and related buzzwords are a way to narrow the gulf.

High added-value manufacturing is the only viable kind at the moment.

But it is also struggling against the headwinds of high cost, complex regulation, and aggressive taxation.

If we’re serious about national sovereignty, plotting our own course, increasing standards of living, and giving people the option of a fulfilling career making things, we have to acknowledge the underlying facts and adjust policy accordingly.

Dario Valenza is an architect who brought his interests in design and design thinking into manufacturing, where he was involved in composites manufacturing, yacht building and the automotive sector. Dario is founder of drone manufacturer, Carbonix.

Picture: Dario Valenza