Revitalising Manufacturing Research Down Under: Lessons From Germany For Australia

Luke attended the OECD forum. He is currently studying his PhD at the University of South Australia in the field of International Relations, specifically examining Transitional Justice. 

Abstract

This paper will contend that the manufacturing sector has a crucial role as a competitive and viable part of Australia’s future economy despite the recent trend towards deindustrialization. Australia’s situation is contrasted with the case of Germany, a nation which has maintained a highly successful and competitive national manufacturing industry in spite of rising costs and cheaper overseas competition. This analysis focuses specifically a few central aspects to Germany’s manufacturing success: the turn to smart manufacturing, attention to small-medium sized manufacturing firms, and the public-private Fraunhofer-Gesellschaft research institute. This research aims to critically examine the differences within the Australian situation regarding the manufacturing sector, in order to better identify the ways in which Australia can effectively learn from the German model in order to revitalise the manufacturing sector.

Policy recommendations

Developing Specific Research Institutes: Australia needs greater direct government investment in research through public-private research institutions such as Germany’s Fraunhofer-Gesellschaft which specialises in top-end research and technological innovation within the manufacturing sector.

Stronger Emphasis on Developing Small-Medium Sized Manufacturing Companies: Australia should place a stronger emphasis on building small to medium sized manufacturing companies that may be competitive in niche markets. Through research support centres, tax incentives and other government support schemes, these firms can increase their competitiveness against foreign companies.

Investment in Smart Manufacturing: Germany has maintained viable and competitive manufacturing sectors due to heavy investment into new technologies, so-called advanced smart manufacturing, hence Australia’s future in manufacturing relies upon investing within these technologies through the research institutes.

Global Context

The 2016 US-election of Donald Trump proved among numerous other things, that manufacturing matters for many communities and national economies. Indeed, many argue that Trump’s protectionist populist rhetoric about the return of manufacturing in the US was a core component to his election victory (Roberts et al, 2016). The strong desire for greater levels of national manufacturing is also replicated within Australia where the controversial demise of the Australian-made car industry coupled with an overwhelming national desire for ‘more manufacturing at home’ has sparked debate of whether manufacturing can be integral part of the national economy (Wade & Ting, 2017: np).

However, manufacturing industries have left OECD countries in great numbers in favour of low-cost countries such as China (The Economist, 2015: np). Many have called this economic change a natural continuation of global capitalism as companies seek low-cost markets while developed countries are forced to restructure their economies (The Economist, 2015). Nevertheless, advanced, so-called ‘smart manufacturing’, along with other key changes in research and policy have called these assumptions into question as developed countries such as Germany, have utilised their educated workforces to manufacture highly sophisticated, technologically-advanced products. These changes tie in very well with the 2017 OECD forums focus upon ‘digitalisation’, ‘the rapid pace of technological development’ and the ‘future of work’ (2017). Indeed, some suggest that such smart production, or digitalised economic production will spell a fourth industrial revolution, or industry 4.0, that will favour manufacturing production in developed countries with higher levels of education and technology (Bowcott, 2017; Yoo, 2016). These predictions would reverse the current trend of low-cost mass production manufacturing and its so-called ‘race to the bottom’ to find cheaper labour in order to cut labour costs (Bowcott, 2017; Klein,1999).

Consequently, within this global milieu this paper identifies the possibilities for Australia to develop a future manufacturing industry, based upon the changing global phenomena and, specifically, the example of Germany.

Australian Context

The heyday for manufacturing with Australia was the 1960s when large-scale foreign investment in the Australia manufacturing sector was common and international competition far fewer (Clark et al, 1996). In this period manufacturing accounted for over 25% of Australia GDP and made a significant imprint on Australia’s collective idea of itself as a country that had the capacity to make things – a legacy, which continues today (Clark et al, 1996). However due to Australia’s strong currency, high wages, high energy costs and the rise of manufacturing in cheaper, less regulated parts of the world, particularly Asia, the competitiveness of manufacturing in Australia has been greatly reduced. Indeed it now accounts for merely 6.05% of the Australian GDP, down from 14% in 1995 (Foley & McLean, 2017: np).

The controversial demise of the Australian-made car industry coupled with overwhelming national desire for a greater level of Australian on-shore manufacturing has created a complex dilemma for Australian policy makers and the business community (Wade & Ting, 2017). Though agriculture, mining and the service sector are vital components of Australia’s economy, manufacturing plays a crucial role in the flow-on effects it creates within other sectors of the economy, particularly within local communities. Indeed, Mazzarol notes how the ‘closure of manufacturing plants’ often ‘impacts significantly on the large supply chain of components suppliers who feed into these existing factories’ (2014: np). Similarly, the DIIS states how the ‘manufacturing industry… contributes around $100 billion to Australian GDP annually… [and] employs around 900,000 Australians (DIIS, 2017: np). Likewise, a national manufacturing industry is vital in generating long-term innovation and creativity, which in the future can strengthen other sectors of the economy.

German Context

The rise of Germany as a modern manufacturing powerhouse has its roots in the country’s long history of national manufacturing which began before the 1st world war, though many of its major car companies really came into beginning just before the Second World War such as: Volkswagen; Mercedes-Benz and BMW (Judt, 2005). Nevertheless, following the end of the second war and the US-led Marshall Plan, Germany re-emerged strong from its post-war devastation and many of the key companies that already existed began to manufacture successfully again on-mass whilst newer manufacturing companies emerged (Judt, 2005).

In 1973, the Fraunhofer Society was formed as a government-private research institute, connected to German universities that provided short-term affordable research, especially into the manufacturing industry (Elliot, 2016). This change, among other factors such as political alliances between business and labour during the 1980s, helped Germany to swiftly adjust to foreign competition in ways that British manufacturing, for example, failed to achieve (Judt, 2005). Similarly, the Fraunhofer Society developed advanced research, re-training and expertise to small companies, which couldn’t otherwise afford it, allowing German manufacturing companies of all sizes to compete internationally, despite the rise of Asia.

In the contemporary period following the establishment of the European Union and the Euro, the Fraunhofer-Gesellschaft institute, as it later became known, was crucial in German adoptions of advanced, so-called ‘smart manufacturing’ or industry 4.0. In this regard, Germany utilised their educated workforces to manufacture highly sophisticated, technologically advanced and competitive products. Today, despite international changes in which manufacturing industries have left OECD countries in great numbers in favour of low-cost countries such as China, Germany has maintained manufacturing as a central component of its economy (Rattner, 2011). Indeed, the manufacturing sector was a crucial factor in Germany overcoming the 2008 Global Financial Crisis and today represents 22.8% of its GDP (Simon, 2017).

Lessons from Germany: Towards a New Manufacturing in Australia

Australia’s situation is very different to that of Germany. The major manufacturing firms that produced within the country were in the last decade or two, often shielded from global competition through government subsides which delayed their exit from Australia. Unlike Germany, Australia has not yet seriously understood the need to change manufacturing production away from low-cost labour with mass production towards smart manufacturing. One major disadvantage of Australia is its geography – a large island separated from overseas markets in completely opposite fashion to Germany, which is centred in the middle of the Europe. However, the proximity to Asia is a potential advantage for Australian future manufacturing. Consequently, from Germany’s example, some key lessons can be learnt.

1.   Building Private-Public Research Institutes

The first major step towards revitalising Australia’s manufacturing sector is through the strategic development of a manufacturing-focused private-public research institute similar to Germany’s Fraunhofer-Gesellschaft institutes. This German research organisation, funded both by the government and private industry is a ‘$2.45-billion enterprise that operates over…60 research institutes’ which specializes in short-term research projects that can be directly applied to industry, in particular the manufacturing sector (Wessner, 2014). The research undertaken in these centers allows Germany to constantly upgrade, redevelop and adapt to the global competition, providing ‘applied science for companies that would otherwise find the cost prohibitive’ (Elliot, 2016). Hence, through detailed government support for industry research, German manufacturing companies, both large and small, could upgrade from the previous low-cost mass production-style manufacturing towards high-tech smart manufacturing.

One important component of the Fraunhofer-Gesellschaft institute is its link to German Universities. Indeed, Wessner explains how ‘each Fraunhofer institute is linked with a German university…[which] picks their own research fields, selects their own projects, and decides how to handle project results’, attempting to create a bridge between university and ‘industry-specific product and process improvements’ (2013). Thus, the institute acts as a testing ground for industry innovations, creating what ex-German parliamentarian and innovation policy specialist Ulrike Flach calls ‘the most market-friendly approach to government-led research there is’ (cited in Gummer, 2014: np). In the US, the Obama administration setup a comparable nationwide research institute known as the National Network for Manufacturing Innovation (NNMI) which has received over $1 billion in government funding and has built 9 institutes across the country with others planned - revitalizing research within US manufacturing (Gummer, 2014).

Similar processes should begin in Australia if the nation is serious about manufacturing. In Australia’s context, such an institute could utilize Australia’s already advanced university research network, strong legal and political system, and proximity to emerging Asian markets to find Australia’s niche markets and competitive advantage.

2.   Developing Small-Medium Sized Manufacturing Firms

A second major lesson from Germany’s manufacturing success is its attention to small-medium sized companies. These smaller manufacturing firms, known in Germany as ‘Mittelstand’, have been heralded as a major component of Germany’s accomplishments in manufacturing as they have firmly taken control of many niche markets (Rattner, 2011). Indeed Simon explains how ‘48% of mid-sized world market leaders in manufacturing come from Germany’ and have create an estimated ‘1.5 million new jobs’ per year (2017: np). Although larger manufacturing firms from Germany are well recognized around the world, the continued success from the smaller companies is central to the competitiveness of Germany’s manufacturing sector (Wessner, 2013). In many other OECD countries, these small-medium sized manufacturing companies are forgotten or overlooked in favor of supporting the larger companies.

In Australia, attention should be given to the development of small-medium sized firms that seek out small-medium gaps in the global market, either as exporters of high-quality, high-tech products or as firms that provide high-tech parts for larger companies. Although Germany also has huge manufacturing companies, the small-medium sized enterprises are a major factor in its success and help not only the German economy and employment, but also the strength and development of larger firms themselves (Wessner, 2013).

The difference between Australia and Germany is highlighted by Mazzarol who explains how Germany’s ‘small and medium sized firms comprises around 16.5% of all businesses in that economy…[while] by contrast, for Australia’s its only 3.7% of the total’ (2012). As a result, greater attention in the manufacturing sector for Australia requires a stronger focus on small-medium sized companies and niche markets. A key step forward in achieve this is through improving tax incentives for small to medium sized manufacturing businesses. One example would be for smaller Australian firms, strictly kept to the manufacturing sector, to have their current tax threshold definition of below $2 million revenue to one that is below $20 million in revenue, thus creating initially greater competitiveness against foreign companies (Wessner, 2013). Similar steps have been taken in Germany, such as within the solar-panel industry (Denning, 2016; Elliot, 2013). Thus, the success of Germany’s model which, places attention on small to medium sized companies provides an example for a possible Australian manufacturing-based future.

3.   Concentrating on Smart Manufacturing: Industry 4.0

A clear reason for Germany’s manufacturing success has been its turn away from old-style low-cost mass production towards high-tech smart manufacturing, or industry 4.0. Smart manufacturing refers to the ability, through high-tech computers, to monitor manufacturing data throughout the entire process of the product in order to respond to rapid changes in the international market. Smart manufacturing allows companies to access necessary information throughout products manufacturing stages and total supply chain. Through the improved harnessing of data, the quality and efficiency of the product can be more closely monitored in order to adjust the manufacturing process quicker and at a decreased cost. For example, Pearson notes how ‘Bosch, the German manufacturer, has embraced technologies such as connected assembly lines, predictive maintenance, and self-aware machines…achieving a 20 per cent annual increase in productivity and $1.4 billion in additional sales’ (2017). The Fraunhofer-Gesellschaft has been central to this technological change and long-term planning by the government.

Therefore, any policy recommendation regarding the future of Australia’s manufacturing industry must include the necessary changes towards smart, high-tech manufacturing. Indeed, Pearson affirms, the ‘days of low-value mass production in Australia are nearly at an end’ and thus the nation ‘need to think about the areas where Australia has competitive edges, and find ways to leverage them’ (2017: np). Nevertheless, current ‘Australian manufacturing is still strongly oriented towards lower-technology production’ which will need to change so that Australia can combine its manufacturing base with ‘digital technology to improve speed, efficiency, accuracy and customization’ – i.e. smart manufacturing (Pearson, 2017). Considering that few economies within Asia, with some notable exceptions, possess the same levels of worker education, political stability, infrastructure, advanced university systems and economic strength as Australia, many niche markets exist for high-tech manufacturing which Australia could strategically control.

Considering, as Pearson notes, that ‘any form of manufacturing where labor is a significant proportion of the total cost will move to a place with low labor costs’ it is important that Australia learns from Germany and invests in advanced manufacturing that takes advantage of Australia’s educated workforce, universities and infrastructure (2017: np). Initiatives for smart manufacturing in Australia already exist (Wessner, 2013), however, these efforts must be supported through overall strategic policy with the clear goal of establishing smart manufacturing in Australia.

Conclusion

The rapid pace of technological development, were outlined as a major theme for the 2017 OECD forum along with ideas around the future of work. It is apparent therefore that many economic sectors will drastically change due to technological breakthroughs such as smart technology and so-called digitalisation. The manufacturing sector especially, is currently undergoing a radical change. Through analysing the successful German transition from old-style low cost mass production manufacturing to globally competitive high-tech manufacturing, it remains clear that through key economic initiatives manufacturing production can and will change in the direction of digitalisation.

Consequently, for Australia to revitalize its otherwise largely uncompetitive manufacturing sector, key initiatives that draw on the German example are needed, including: building relevant public-private research institutes; supporting small-medium sized manufacturing firms that seek out niche markets; and abandoning old style manufacturing in favour of technological advancement in the form of smart manufacturing. Developing a viable manufacturing sector within Australia is not only desired within the national community, but also is a crucial component to economic growth, creativity and future entrepreneurism in the country.

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