Why Local Manufacturing is Dying

In many of my meetings with Clients and Consultants, the question of a future dated manufacturing resurgence / renaissance often arises. We are currently experiencing the fallout from a high dollar, high cost of business and high wages resulting in many industries moving offshore to reduce costs and remain competitive in a global marketplace. The result is that many manufacturing companies and sometimes entire industries are now moving to an offshore manufacture model.

This is not a new phenomenon. Years ago, I experienced the transition to offshoring of one of the first industries to succumb to the differences in costs between Australia and LCC manufacturers - Electronic Manufacturing. While we still have a small assortment of boutique manufacturers operating from Australia in this industry, we have a dramatically reduced workforce and capability in this arena compared to the industry of 1-2 decades ago. There is a lot of talk currently about the concept of reshoring of electronic manufacturing in the US. Sadly I do not see the same happening or being possible in Australia. In the following article, I will try to articulate the reasons why we need to preserve existing manufacturing capabilities to at least a global level of competency if we are ever to expect a return to manufacturing glory in the distant future and the challenges facing resurgence if these competencies are not maintained.

1. Manufacturing is a rapidly evolving industry

When I last managed an electronic manufacturing facility in the early 00's, we were working on products a lot larger with significantly less complexity to the current offering that we purchase and have come to expect as "cutting edge" technology. This is one of the most rapidly evolving manufacturing industries. As consumers we have come to expect everything to be smaller, lighter, faster and with more capability than the previous model. Take mobile phones for an example. When we purchase our new phone on contract from our service provider it is often the best thing on the market. We sign up for a 2 year contract with this phone with the current provider. One of the best perpetuators of new business in the mobile phone market is the speed at which the designers are able to improve their designs.

Often before your phone contract has expired, your "new" model has been superseded by 2-3 advances and the flashy new phone that you were once showing off to anyone who would pay attention is now hidden in your pocket and only brought out when necessary while you wait for the day you are eligible for a free upgrade. Such design advances need to be supported by technological advances in manufacturing capabilities. Practices need to be refined, improved and invented in order to keep pace with cutting edge designs. Equipment similarly needs to be capable of higher precision and faster throughput to keep up with demand.

The countries that are currently manufacturing invest time and money to keep ahead of the curve in this aspect while those where manufacturing has left the country do not see the benefit in keeping up with advances when there are no sales to justify the expense. Very quickly we start to lag behind our competition and the road back onshore becomes harder with every day we let the local industry fade.  

2. Staff capabilities and willingness

As mentioned above a key roadblock in returning to onshore manufacture once an industry has left is the fact that often staff capabilities are not developed at the same speed at which those in country that is now a manufacturing powerhouse. Bringing the industry back to Australia is not as simple as flicking a switch. The staff need to be retrained to be aligned with current practices and technologies. That goes for those staff that are willing to return to the industry.

Another key issue is the fact that consecutive redundancies when an industry is on the demise tends to inspire those staff with higher experience and better capability to look towards roles in industries that offer more stable employment. These people are not likely to leave the stable work environment they have found to return to an industry that has already failed to compete globally. Personally, having experienced redundancies on more than one occasion whilst managing a manufacturing facility, I would not be lining up for interviews if the industry had a resurgence in Australia. I am certain I am not the only one from my industry with this sentiment.

So the staffing issue becomes twofold, there is a lack of capability with regards to current practices coupled with a lack of willingness to return for key staff.

3. There are multiple LCC destinations waiting to collect business lost from China

It is no secret that China is rapidly becoming a victim of it's own success. The cost of labour is rapidly rising with some customers stating they are experiencing up to 40% increase in the wage component of their manufacture per year. Over the past decade, I have seen the landscape change dramatically as well. China was once a virtual 24/7 manufacturing destination. Most workers lived at the factory and many worked at least 12 hours a day 6-7 days a week. Cars were less prevalent than motorbikes. Now there are peak hour traffic issues in even the smaller cities as the ownership of cars becomes more prevalent. The workforce also starts to have a realisation of their individual value and their ability to negotiate better rates with the factory as the demand outstrips supply for human resources in many roles.

Surely this indicates a light at the end of the tunnel and a shift towards reshoring, right?

Unfortunately no. China may be the best know destination for manufacturing, many of us now expect to pick up an article from a retailer and see the familiar "Made in China" tag. However, There are a multitude of countries in the region ready and willing to fill China's shoes should the customer become upset with the price increases. Thailand, Vietnam, India and Philippines are all LCC centres with either established or developing capabilities keen to "steal" business away from the main player in the region.

When we look at the possibility of an industry returning to Australia, we are not only doing a 1:1 comparison against China pricing and waiting for the break even point to be breached. We need to compare all current and upcoming centres against our local costs and capabilities. It is not an easy road back.

It is a foregone conclusion that many industries will not see a resurgence of manufacturing in Australia. The gate has been open too long and the horse well and truly has bolted. We will similarly never be able to curb consumer acceptance of cheaper imports when they often are comparable in design and quality to the local product. However we need to look at how we can preserve those industries that still survive and manufacture locally and are globally and technologically competitive while we can. Remember once they are gone, they are not likely to be back.