Some people may still be moaning about the loss of Australia’s car making industry, but let’s get one thing clear.
Hardly any Australians bought locally made cars. Out of the 1.13 million cars that were sold in 2013, just over 100,000 bought were locally made. That means, less than 10% of Aussies bought an Aussie made car.
Looked at another way, 90% of Aussies didn’t want an Aussie made car or couldn’t care less about where their car was made.
Throw in the closure of an Alcoa smelting plant in Geelong and it’s easy to get caught up in the hype about the failing manufacturing industry.
And while the headlines can be dramatic, the actual data isn’t pretty either. Last year, 8.7% of Australians were employed in the manufacturing sector. But if you go all the way back to 1987, 13.1% of Aussies held manufacturing jobs.
In thirty years, manufacturing went from being Australia’s largest employment sector to our fourth.
And just so you fully understand how little manufacturing there is in Australia, the industry contributed 6.8% to the 2013 gross domestic product figure. It was fourth on the list of contributing sectors.
The thing is, traditional manufacturing as we know it is over. Ignore the headlines; Australia has to find a way to move forward. Perhaps, this could open up new opportunities…
Let me give you an example.
When personal computing in offices started becoming common place, many feared that it would be the end of administrative workers. One computer processor could do the work of four or five typists. And thanks to word processing software, editing your own work was far easier. Oh the tragedy! We’ll all be out of work!
But instead, many workers became more productive. They did their own editing and own typing. And personal computing didn’t create mass joblessness…it actually shaped entirely new industries.
Simply put, it revolutionised how people worked, what they could produce and how everyone connected.
What I’m saying is that even though traditional manufacturing jobs are on the decline, over time, it will create other employment opportunities.
Right now, I’m not sure what these new opportunities will be. But there are some technology driven companies that are still manufacturing in Australia, in spite of high labour costs. They’ve found a way to make it work.
And while I doubt manufacturing will ever be Australia’s dominant employment sector again, the industry has the chance to reform itself.
And it will start with the high technology businesses. For instance biotechnology, telecommunications or aerospace companies. Basically, forward thinking companies that require highly skilled employees to make their products.
Let’s be clear. Aussie companies will always struggle to be competitive internationally. Especially when firms are up against countries with lower taxes, lower running costs and especially lower wages.
However, the Aussie manufacturing sector can still survive if it makes niche products that buyers are willing to pay a premium for. And as Australian companies spend about 10% of GDP on research and development, high tech companies could create a new era of manufacturing in Australia.
Both Cochlear [COH:ASX] and ResMed [RMD:ASX] are good examples. Both firms have found a way to produce goods locally and still make a profit.
They’re’ not the only ones. In fact last year, small-cap analyst Tim Dohrmann tipped a stock that’s building an innovative product locally. That wasn’t the reason he recommended the company. What it does prove though, is that there are innovative firms investing and keeping their manufacturing close to home.
However the biggest boost to local manufacturing may actually come from the government.
Many biotechnology companies are pushing the Aussie government for something called ‘patent box’ tax breaks.
Already, the Australian government offers a 45% tax deduction on research and development. That gives companies an incentive to further invest in their R&D departments. But there’s no motivation for businesses to produce locally once they reach the manufacturing stage.
The patent box concept is simple. Rather than paying the standard company tax rate, the tax office would apply a ‘patent box’ tax of as low as 10% on profits of intellectual property produced in Australia.
The UK is a great example of this.
Last year in the UK, the government introduced a patent box tax rate of 10% on all intellectual property manufactured in the country. When that came into effect, pharmaceutical company GlaxoSmithKline [LON:GSK] confirmed it would build its first manufacturing plant in the UK in 40 years. It will transfer 150 of its overseas research projects to the UK because of the patent box.
This lower tax could offset the higher labour costs and the distance from global markets faced by Aussie companies.
Dr Anna Lavelle of Ausbiotech put it bluntly when explaining how unbalanced government interest was for the manufacturing sector.
‘In the last two decades, Australia has been steadily losing its manufacturing sector to Asia, while governments continue to prop up unsustainable traditional manufacturing with millions of public dollars. Meanwhile innovative manufacturers with the jobs and economic support of the future, like biotechnology, are being left to “sink or swim”.‘
A patent box tax would go a long way to encouraging business to manufacture their goods locally.
We doubt it will ever happen.
Shae Smith+
Editor, Money Weekend