Towards 3% R&D – A future made feeding Australia by Allen Roberts

A loss of sovereign control of industry is a key issue raised in our editorial series – Towards 3% R&D – Turbocharging Australia’s Innovation Effort – Here, Allen Roberts examines innovation in the critical food manufacturing sector.

The recent declaration of ‘A Future Made in Australia’ by the Prime Minister Anthony Albanese has put the future shape of the nation’s manufacturing sector back on the agenda.

There was however, nothing specific on the importance of agricultural innovation and value adding through the manufacturing sector, or the strategic value of food security.

The decline in Australian owned manufacturing in the food industry has been close to total.

The FMCG manufacturing industry has seen input prices increase by 49 percent over the decade to 2020, while the wholesale prices received have increased by only 24 percent over the same period (Source: AFGC Sustaining Australia Food and Grocery manufacturing 2030 report).

This downturn, and the 20 years prior which display similar trends, has seen locally owned businesses either go bankrupt, or become subsidiaries of foreign conglomerates, relegating them to mere outposts.

From an era where medium-sized businesses thrived across various product categories, employing significant numbers in quality and R&D, today these businesses have largely disappeared.

This transition has been marked by a shift towards centralisation of product development and scientific research abroad, leaving Australian operations with minimal operational and decision-making authority.

This trend raises critical questions of how we feed ourselves, and make a useful contribution to the global food supply.

Notwithstanding the international ownership of most of food and beverage manufacturing, it contributes 6.5 percent of GDP, 32 percent of total manufacturing output, and employs 240,000 people, 40 percent of which are in regional areas.

By any measure, the food manufacturing sector is profoundly important to Australians. Its future resilience and growth of sovereign capability should be paramount.

A lack of sovereign control

The lack of sovereign control of the resources and capital needs to generate growth is disturbing.

Central to an innovative and resilient manufacturing industry is the capacity to generate intellectual capital that translates into manufactured product.

The progressive ‘internationalisation’ of company R&D noted above, has been matched by a progressive emasculation of the sovereign capability to generate the Intellectual capital necessary for long term growth.

There is a significant number of SME’s in the sector, but collectively they contribute very little to the total of manufactured product.

They are typically mixing often imported ingredients in low tech environments with a few employees and casuals.

Distribution is largely through secondary channels like farmers markets, and local retailers and food service.

They do not have the resources to compete with the R&D capability of multinationals, and the previously available intellectual assistance from federal and state institutions has been removed.

Take for example the CSIRO that in the past worked closely with business.

Often this was in an informal and personal collaboration between individuals that enabled a thriving environment for problem solving and innovation.

CSIRO’s sites in North Ryde, Werribee, and Canon Hill have either been downsized or sold off, and skilled employees made redundant.

Contributing to this erosion of the collaboration that in the past generated much of the ‘ideation’ that sets the stage for innovation, has been the demands of successive governments for a ‘productivity dividend’.

This was typically two percent annually which compounds quickly to a killer blow to capability.

The ‘dividend’ was code for removing those informal but fundamental creative collaborations with domestic companies, and encouraging the multinationals to centralise R&D elsewhere.

The power of the supermarket chains

The power of the supermarket chains, currently under scrutiny has also played a key role in this process.

SME’s simply do not have the deep pockets required to generate and maintain traction through the retail FMCG oligopoly.

To be successful, SME’s need to be able to absorb the reality of this gross power imbalance with retailers.

Financial capital is necessary to enable the generation of the Intellectual Capital that underpins genuine innovation.

Further investment is required to design, build and install the equipment to produce the innovative product.

Deep pockets are then required to meet retail trading term and promotional demands, as well as investment in the advertising necessary to attract consumers to a new product.

As the power of the retailers has overwhelmed the diminishing group of domestic suppliers, we have been left with multinational suppliers and retailer house-brands, themselves often manufactured offshore.

The focus of government policies remains short-term, driven by electoral cycles rather than the decades required to bridge the gap between science and commercial success.

Differing jurisdictions follow their own nose, resulting in a siloed effort across the country, rather than a coherent and coordinated effort.

The outcome is a mix of differing priorities, investment plans and initiatives around the country, sometimes used as incentives for business location.

@AuManufacturing is in the fourth and last week publishing contributions from readers for our series – Towards 3% R&D – turbocharging our national innovation effort – and will shortly publish contributions in an e-Book. Information: Peter Roberts, 0419 140679 or write to [email protected].

Grant programmes send the wrong message and encourage behaviour that rarely delivers the outcomes touted in the press releases.

Culturally and politically risk is toxic to the body politic. However, the acknowledgement and management of risk is a fundamental element in successful innovation.

Successful risk management becomes a function of the extent to which a whole range of data, combined with qualitative assessment of what the future will look like is considered.

Removing the capacity to make those assessments severely compromises the value of any conclusion reached.

A way ahead for the sovereign Australian food sector

The only potential solution to those institutional blockages to innovation in manufacturing industries generally is a confronting one.

Government needs to ‘upskill’ itself to be in a position to substitute early equity funding for grant funding.

Such a change requires a cohort of skills and experience not currently available within government and bureaucracies, but selectively available in industry.

The early equity would be recoverable by those that are successful at a pre-agreed point, at a pre-agreed rate.

This removes the inertia and rent seeking evident in grant funding, replacing it with a modified form of Venture Capital.

In addition, FIRB needs to adjust the guidelines that currently rely on an intense focus on the economics of ‘comparative advantage’.

These rely on projections of current and past quantitative models of industries that usually bear little resemblance to what ultimately evolves.

They never reflect the strategic value of sovereign manufacturing.

In the absence of meaningful strategic change, what remains of the domestically owned food manufacturing industry of any scale will disappear, and current and new SME’s will have no hope of replacing them.

Also published in this series:
Towards 3% R&D – The right question? Or are there bigger issues by Allen Roberts

Allen Roberts is a catalyst for thinking differently for enterprises facing change. In a career of more than 40 years he has worked with manufacturers creatively, and been an advocate for deeply considered change. Allen is Director of consultants StrategyAudit.

Picture: Bega Cheese Heritage Centre/Bega Cheese is Australia’s largest locally owned food manufacturer

This series is brought to you through the support of our principal sponsor, public accounting, tax, consulting and business advisory BDO, and R&D tax incentive consultancy Michael Johnson Associates.