Future Made in Australia Act: Ambitious Vision or Unrealistic Dream for Australia's Manufacturing Future?

Future Made in Australia Act (FMAA)

Mind the Innovation Gap

Manufacturing, a pivotal force in Australia's economic history, once propelled our nation’s GDP to 30% in the 1950s. Although this figure has dwindled to less than 10%, it's important to emphasise our manufacturing sector's latent capacity for growth and innovation. The Future Made in Australia Act (FMAA) is not merely a proposal but a necessity for our economic future. Its implementation is pivotal in unearthing the potential of our manufacturing sector and ensuring its growth and sustainability.

Decades of outsourcing manufacturing to other nations have also resulted in exporting our unexpected discoveries. The lack of robust domestic manufacturing in Australia has led to missed opportunities for innovation. As Alexander Hamilton warned in his 'Report on Manufactures,' nations that neglect domestic manufacturing are destined to remain subservient. On the other hand, China became the global hub for manufacturing and leveraged foreign firms to expedite their local EV industry. Consider the case of Tesla's 'Giga Press,' which was developed in partnership with a Chinese-owned company (Xiaomi). Xiaomi now utilises similar 'Gigacasting' machines for its new SU7 EVs, allegedly manufactured by Haitian Die Casting in Ningbo. When Tesla ventured into China, it assisted Chinese firm LK Group in developing the world’s largest casting machines for Tesla parts. Consequently, LK Group sold similar casting machines to six Chinese firms, likely automakers.

Let's look at broader elements of industry development.

Any industrial policy is a long-term game. The rule of thumb says 20 years. The recent revival of industrial policy in France began in 2005 with Beffa's recommendations commissioned by the French Government, leading to the creation of an innovation agency, funding for critical sectors, and the establishment of the Strategic Investment Fund and Grand Loan to support growth businesses and strategic sectors. In Japan, a new industrial policy plan aims to shift away from traditional monopole structures, focusing on five strategic areas: environmental industries, cultural sectors, and advanced technologies. Korea has developed sector-specific strategies for its flagship industries and identified 17 priority growth engines across green tech, high-tech convergence, and value-added services. Korea’s selective and strategic approach to industrial policy is a success. Before COVID-19, Australia had a positive trade balance of just $44bn – a mere third of South Korea's $125bn—an industrial policy with a long-term game and dynamic capabilities to assess and recalibrate.

The appreciation of the Australian dollar from 2000 to 2013 worked against the international competitiveness of Australian manufacturing. Looking back, Scandinavia and Germany exemplify how precise labour costs can maintain a highly competitive manufacturing industry. Their success stories should inspire us to believe in the potential of the Future Made in Australia Act (FMAA).

The key feature of the FMA Act should be mobilising multiple industries and stakeholders. Meeting the ambitions set out in the FMA Act requires coordinating efforts in diverse areas of the economy. This requires a mission mindset, significant cultural change, sustained political will, radical transparency, and micro-feedback loops. Australia's current policy landscape for manufacturing is a patchwork, pulling in multiple, often conflicting, directions. Policies without mission are like vectors, with a direction and magnitude. If the policy mix has too many agendas, all these vectors will cancel out. This lack of a unified approach is a pressing issue that understandably breeds scepticism, if not alarm, among industry players at the prospect of increased government intervention.

Problem worth solving

We have been suffering from the Dutch Disease – the curse of the resource boom. Supply chains are a critical concern in maintaining and developing Australian manufacturing capabilities. Australia is a large island with a low population. Our market is therefore not only small but remote too. This puts us at a significant disadvantage because whether we like it or not, we live in a global economy and must compete globally. Australia is not equipped for “Horizontal Manufacturing”. Let’s make anything and everything mindset will not work. We will end up making serums and vaccines, laboratory reagents, vehicle bodies, butter, frozen vegetables, pig fat, chemical wood pulp and goat meat.

The AFR notes that “about 70% of products sold to foreign buyers, on a net basis, are minerals and energy. Add in food, alcohol, wool, tourism and metal products, and the figure rises to around 99%”.        

Australia’s FMAA needs to be selective, strategic, technology-focused industrial policies that seek new areas of competitive advantage – aka Green Growth Strategy. For example, the FMAA should go the extra mile in positioning Australia's semiconductor capabilities within an alliance context (such as Five Eyes, AUKUS, or the Quad) to secure the supply chain and leverage its innovation strengths in a market environment. The goal should be to establish a fabrication capacity that is both financially viable and sustainable, backed by Australia's experienced yet modest research base. Australia and India can strengthen their semiconductor industries through collaborative initiatives. Joint commercial projects, such as the Australian Space Agency's International Space Investment program with India’s ISRO mission, leverage the complementary strengths of Australia's research institutions and India's semiconductor talent. Research collaboration, facilitated by Australian universities expanding into India, can build a talent pipeline for the future. Reciprocal access to R&D infrastructure, including India's Semiconductor Laboratory and Australia's National Fabrication Facility, enables rapid prototyping. ?Outsourced assembly and test (OSAT) partnerships offer seamless technology transfer, while preferential visas promote talent mobility, enhancing both nations' semiconductor industries.

We need to engineer market-shaping conditionalities. With conditions, industrial policy can lead to transformation. Without conditions, it might lead to subsidies, guarantees, and handouts for firms to stay in place.

FMAA has a Design Problem

The design challenge is having conditions that set a direction while leaving the how-to experimentation and discovery open. Remember, outsourcing manufacturing is an outsourcing discovery, too.

Malcolm Turnbull's Ideas Boom has lowered the entry cost for entrepreneurs, creating buzz and excitement. We know that most early-stage startups fail. However, the research also reveals that many entrepreneurs, even without an initial productivity advantage, manage to develop one over time. The presence of firm and patent clusters effectively drives entrepreneurs to enhance their productivity. Failure to do so inevitably leads to their exit from the market. Another example is the American automotive industry, where 400+ companies in the early days of the 20th Century were eventually pared down to a handful of survivors. Accelerating entrepreneurial innovation is a long-term game. It takes close to 20 years for an innovation ecosystem to flourish. A good policy design may expedite that. The economy’s constituents are somewhat fragile, but the economy itself is antifragile. For the economy to grow, some of these parts need to fail. A start-up's failure will strengthen that industry as others learn from it.

Here's the condition: clusters foster low vertical integration among their constituent firms. This means that companies don't need to control every production stage internally. Instead, they rely on a network of other specialised firms to handle different aspects of the value chain, from research and development to marketing and distribution. This distributed model creates opportunities for agile, niche companies to emerge, reducing barriers to entry for new entrepreneurs. Harness the power of clusters for productivity growth. For instance, the government does not have to give up on low-productivity firms. Exposed to proper competition, these firms could flourish. Providing the right incentive or competitive pressure can be the remedy.

In a sense, the bad companies never perished, and we will never know which excellent companies benefited from government subsidies, specific schemes, credit benefits, tax exemptions, etc. It is called an attribution error. Some of these design conditions in South Korea and Taiwan are incredible. The government will give you everything, but if you don’t meet the global market test regarding price, innovation, and efficiency and fail that test, it’s over for you. Not only will these benefits be taken away, but you will also be ultimately out of the loop, and the government will not give you any—especially in the case of South Korea, which was brutal with failed entrepreneurs—mission-driven market shaping at its best.

The COVID-19 pandemic has starkly underscored the importance of manufacturing self-sufficiency and shorter, less complex supply chains, making it a critical area for immediate attention. One of the initial conditions that matters is leadership. Many people in the right place at the right time with the right skills matter. Even at a metalevel, individuals are vital in this industry, not just a specific person but also the role of people and talent.

The true potential of Future Made in Australia will be realised when we as a nation are determined to design our missions and set a 20 to 50-year strategy to gain back those market share percentages of GDP that we had in the 50s.

Thoughts?