Introduction
2.1
This chapter will provide the groundwork for the discussion for the following chapters. It will discuss:
the necessity of maintaining a baseline strategic manufacturing capability;
the vulnerability of the economy and the nation without such baseline manufacturing capability; and
the importance of supply chains, including reference to the Productivity Commission's work and international initiatives.
Necessity of maintaining a baseline manufacturing capability
2.2
The committee received many submissions extolling the virtues of the manufacturing sector in Australia, but at the same time expressing concern at the decline of the sector.
2.3
For example, the Advanced Manufacturing Growth Centre (AMGC) argued that:
…manufacturing is an essential capability that is key to lifting Australia’s capacity to create complex products for domestic and global markets.
2.4
The Australia Institute provided a summary of the arguments:
There are many core reasons why Australia needs a healthy, proportionate manufacturing sector:
Australians are buying more manufactured goods over time; and manufacturing output is growing around the world. The absolute decline of manufacturing in Australia is an exception to the experience of other industrialised countries.
Manufacturing is the most innovation-intensive sector in the whole economy. No country can be an innovation leader without manufacturing.
Manufactured goods account for over two-thirds of world merchandise trade. A country that cannot successfully export manufactures will be shut out of most trade.
Production costs in Australia are not expensive relative to other industrial countries (now that the Australian dollar is once again trading in normal range).
Even small remote countries (like Korea, Ireland, New Zealand and Israel) are increasing their manufacturing output and preserving and creating manufacturing jobs. Their experience demonstrates that we cannot blame geographic isolation for our de-industrialisation.
Manufacturing anchors hundreds of thousands of other jobs throughout the economy, thanks to its long and complex supply chain. A myriad of supplies and inputs are purchased by manufacturing facilities.
2.5
Despite the recognition of manufacturing's importance, submitters also noted the decline of manufacturing in Australia and that Australia's lack of manufacturing capability has been exposed by the 2020–22 pandemic. Oz Minerals observed:
The COVID-19 pandemic has highlighted issues that can result from reliance on offshore manufacturing. In the mining sector, COVID-19 created supply issues for consumables, heavy industrial components and specialised equipment – all made with general manufacturing skills which are now considered 'highly specialised skills' in Australia. While COVID-19 exposed these issues, they are not necessarily a direct result of the disruption caused by the pandemic.
2.6
A similar point was made by the Australian Sovereign Capability Alliance:
The COVID-19 pandemic has highlighted this dependence on foreign enterprises and governments for PPE, respirators and essential vaccines and pharmaceuticals during this crisis. This submission establishes that the problem extends to other key industry domains and concludes that Australia’s lack of manufacturing resilience leaves the nation dangerously exposed to other crises such as war, grey zone conflict, trade disputes, cyberattack, natural disasters, future pandemics, and other events.
2.7
Infrabuild expressed its concern should Australia's manufacturing capacity further decline:
As a relatively isolated country geographically, it is important that Australia retains broadbased manufacturing capability in products that are essential to its sovereign interest.
The absence of robust domestic manufacturing industries would likely lessen competitive price pressure on imports, resulting in greater variability in pricing and overall cost and process inefficiencies. Additional inventory would need to be held at all levels of the supply chain to ensure continuity of supply and to reduce risks of late/non-delivery. The longer and more complex a supply chain, the greater the risk that it is disrupted by one or more factors, as is being experienced in the current pandemic.
Vulnerability of the economy and the nation
2.8
National emergencies (war, natural disasters and pandemics) have demonstrated the need for strategic good to be manufactured in Australia, despite the costs associated with production relative to importing goods. Such items include, but are not limited to: food; fuel; medical supplies (including medicines); and key transport vehicles such as trucks and shipping.
2.9
Documents accessed from the Department of Defence through Freedom of Information provide a window as to how potentially vulnerable Australia is without a comprehensive manufacturing base.
2.10
In 2017, the Vice Commander of the Australian Defence Force (VCDF) Rear Admiral (VADM) Ray Griggs initiated a review of Defence's mobilisation architecture with a corresponding report published in June 2019.
2.11
The report was developed with information and perspectives from the following sources:
(a)
senior personnel across Defence Groups…;
(b)
US think tank personnel (CSBA, CSIS, CNAS, Eisenhower Institute);
(c)
extant legislation, doctrine, policy, procedures and guidance;
(d)
open source articles on mobilisation related issues;
(e)
foreign military internet websites;
(f)
ANU National Security College workshop ' Future Cyber War: How would Australia mobilise a response' held in November 2018, summary provided at annex B;
(g)
Engineers Australia Workshop on the effects of a collapse in global governance on the global supply chain held in February 2019, summary provided at annex C; and
(h)
Head National Resilience Task Force and Australian Vulnerability Profile Project members from, CSIRO and Emergency Management Australia.
2.12
The report concluded:
Australia is a largely de-industrialised multi-cultural nation. It is highly connected to the global commons and has limited diversity in imports, exports and tax revenue. This situation leaves the nation exposed to major disruptions of global governance and supply, such as could be expected in the event of a major war or global catastrophe.
2.13
Of most interest within the report, was the following document:
Engineers Australia Workshop 'Industry Responses in a Collapse of Global Governance' on the effects of a collapse in global governance on the global supply chain (February 2019).
2.14
The exercise and report came to some startling conclusions on how vulnerable Australia is. This workshop reviewed the following scenario:
The workshop looked at the effects of a collapse in global governance, resulting in major disruption to the global supply chain. It sought to identify areas within each sector that would be affected, what those effects might be and how effects within one sector might affect others. They considered responses and preparatory methods of mitigation and resilience.
2.15
The workshop advised that, in the scenario provided:
Australia would suffer massive upheaval within one week due to job losses, social unease and hoarding.
Within a fortnight, due to stocks of imported supplies drawing down, major social infrastructure such as treated water would begin to fail and essential services such as health care would be degraded.
By the two-month mark liquid fuel would be almost exhausted, and by three months there would be wide-spread unemployment, no transport capability, and services that rely on imported spares (such as electricity and telecommunications) would begin degrading significantly.
To overcome these challenges, the nation would require transformation in terms of the degree of personal responsibility for preparedness, management of industrial and social supplies to survive extended periods without access to global supply chains, and a review of governance to ensure federal, state and local governments can take legitimate control of essential services.
2.16
The report indicates quite clearly that with limited domestic manufacturing capacity, Australia is vulnerable to major geo-political upheavals and supply-chain issues.
Crucial importance of supply chains
2.17
This exercise highlighted the crucial importance of supply chains. Again, a number of submitters mentioned supply chains as a key concern in terms of maintaining and developing Australian manufacturing capabilities.
2.18
Sanofi, a global healthcare company, observed:
…increased government restrictions put in place by some countries during the early stages of the pandemic affected the flow of personal protective equipment (PPE) and some medicines, from raw materials to finished pharmaceutical forms. These measures had a serious and detrimental impact on the globally integrated supply chains that ensure quality, safety, innovation, and distribution of medicines and vaccines. This demonstrated that supply chain integrity is inextricably linked to the free move of pharmaceutical ingredients across international borders.
2.19
Consumer Healthcare Products Australia, a peak body representing the manufacturers and distributors of consumer healthcare products, also observed:
…'on-shoring' of manufacturing should not be viewed as a pathway to complete medicines self-sufficiency. With competitive international market conditions and the higher costs of domestic operations, it is in the interest of consumers, government, and sustainable industry that the supply chain for packaging, raw materials, and medicinal products remains robust. Even wholly domestic product manufacturing operations would still be reliant on the international supply chain for raw materials and components.
International initiatives
The United States
2.20
Given the increased recognition of supply chains' importance, countries are beginning to introduce new initiatives in order to secure their supply chains.
2.21
In the United States, President Biden signed Executive Order (E.O.) 14017 on 24 February 2021. This EO directed a whole-of-government approach to assessing vulnerabilities in, and strengthening the resilience of, critical supply chains. The EO stated in part:
The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security. Pandemics and other biological threats, cyber-attacks, climate shocks and extreme weather events, terrorist attacks, geopolitical and economic competition, and other conditions can reduce critical manufacturing capacity and the availability and integrity of critical goods, products, and services. Resilient American supply chains will revitalize and rebuild domestic manufacturing capacity, maintain America’s competitive edge in research and development, and create well-paying jobs. They will also support small businesses, promote prosperity, advance the fight against climate change, and encourage economic growth in communities of color and economically distressed areas.
More resilient supply chains are secure and diverse — facilitating greater domestic production, a range of supply, built-in redundancies, adequate stockpiles, safe and secure digital networks, and a world-class American manufacturing base and workforce. Moreover, close cooperation on resilient supply chains with allies and partners who share our values will foster collective economic and national security and strengthen the capacity to respond to international disasters and emergencies.
2.22
The United States followed up this initiative with a 'Summit on Global Supply Chain Resilience' on 31 October 2021. This took place:
…with the European Union and 14 like-minded countries to foster greater international cooperation on near-term supply chain disruptions and chart a course to strengthen and diversify the entire supply chain ecosystem over the long term—from raw materials, intermediate and finished goods, manufacturing, to shipping, logistics, warehousing, and distribution.
The European Union
2.23
Even prior to the pandemic, the European Union (EU) is also looking at strengthening its supply chain resilience. During 2020, in response to the pandemic, the European Commission announced further initiatives; in particular, the Strategic Investment Facility. The EU Commission noted:
The outbreak of the pandemic has shown the interconnectivity of global supply chains and exposed some vulnerabilities, such as the over-reliance of strategic industries on non-diversified external supply sources. Such vulnerabilities need to be addressed, to improve the Union's emergency response as well as the resilience of the entire economy, while maintaining its openness to competition and trade in line with its rules. The new strategic European investment window will focus on building stronger European value chains in line with the strategic agenda of the Union and the New Industrial Strategy for Europe, as well as supporting activities in critical infrastructure and technologies.
Australian initiatives
The Productivity Commission
2.24
The Productivity Commission (PC) did an extensive study into supply chain vulnerabilities during 2021. Their report was provided to the Commonwealth Government on 22 July 2021 and publicly released on 13 August 2021.
2.25
The Commission developed a framework to identify supply chains that are vulnerable to disruption and applied it in the context of Australian imports and exports. The Commission then identified strategies to manage supply chain risks and the circumstances under which government might intervene. The PC explained:
The purpose of this study is to help further Australia’s preparedness to deal with possible global disruptions to the supply of inputs (upstream risks) as well as global disruptions to markets for goods and services (downstream risks). The report considers the factors that make supply chains vulnerable, with a focus on the international linkages and dependencies from trade. Significantly, we have developed and piloted a framework for identifying those supply chains and products that are vulnerable to disruption and critical to the effective functioning of the economy, using trade and production data. We then explore risk management strategies for governments and businesses and provide policy guidance on the roles for government.
Commonwealth Government policy
2.26
In October 2020, as part of its response to the pandemic and JobMaker plan initiative, the Australian Government announced a $107.2 million Supply Chain Resilience Initiative in order to quickly address critical supply needs..
2.27
The intent of the initiative is to place Australia in a stronger position to respond to any disruptions to the supply chain in the future.
2.28
The policy aims to build a comprehensive understanding of critical supply chains. The government explained that it will work in conjunction with industry to:
identify the essential goods and services critical to Australians at times of crisis;
map industry supply chains and Australia’s manufacturing capabilities; and
evaluate supply chain resilience under normal circumstances and in possible crisis situations.
2.29
Furthermore, the government explained that it will work with industry to identify possible supply options to identify and address vulnerabilities in domestic and international supply chains for identified critical products. The outcomes of this work will be published in Sovereign Manufacturing Capability Plans.
2.30
The Commonwealth Government explained that these could include:
long-term international supply contracting;
domestic manufacturing; and
broader activities to promote better information sharing and collaboration between industry and governments.
Committee comment
2.31
This chapter has outlined the importance of manufacturing to a developed economy such as Australia. Innovation, resilience, self-reliance are all key benefits that manufacturing provide to a nation's economy—not to mention employment creation and skills development.
2.32
The committee notes how the Australian manufacturing sector has declined since the liberalising economic reforms of the 1980s and 1990s. In 1990, manufacturing stood at just under 14 per cent of the economy, which had more than halved to 5.6 percent of the economy by 2020.
2.33
The CFFMEU commented:
The dire state of manufacturing in Australia is highlighted in the Harvard University Atlas of Economic Complexity, which for 2019 state:
Australia is a high-income country, ranking as the 8th richest economy per capita out of 133 studied. Its 25.4 million inhabitants have a GDP per capita of $55,057 ($52,203 PPP; 2019).
GDP per capita growth has averaged 0.9% over the past five years, in line with regional averages.
Australia ranks as the 86th most complex country in the Economic Complexity Index (ECI) ranking. Compared to a decade prior, Australia's economy has become less complex, worsening 6 positions in the ECI ranking.
Australia is less complex than expected for its income level. As a result, its economy is projected to grow slowly. The Growth Lab's 2029 Growth Projections foresee growth in Australia of 2.5 percent annually over the coming decade, ranking in the bottom half of countries globally.
It will probably come as a surprise to many that countries such as Armenia, Cyprus, Jamaica, Kenya, Panama and El Salvador have a higher ranking than Australia.
2.34
The Department of Defence's 'thought experiment' produced some startling analysis of how potentially vulnerable Australia—with its now limited manufacturing sector—has become, reinforcing the need for a diverse economy with a strong manufacturing sector.
2.35
The pandemic has reinforced the view that greater attention and policy work needs to be undertaken to strengthen supply chains, not just here in Australia, but globally. Initiatives taken by the US and the EU demonstrate that open, free-trading economies are reliant one another for primary, secondary and manufactured products for the continued successful functioning of their own economies in time of crisis. The committee is heartened that the PC has undertaken valuable work in identifying Australia's supply chain vulnerabilities.
2.36
To ensure Australia's remains capable of sustaining its security during times of global upheaval, further attention must be given to securing supply chains and maintaining and strengthening a viable manufacturing sector.