Grand designs: The high-risk plan to make Australian industry great again

Surrounded by bushland and birds on Sydney’s lower north shore, less than 10 kilometres from the city centre, sits a boxy, glass-mirrored research and manufacturing plant in the well-to-do suburb of Lane Cove. There, medicines are developed for the nation and globally, for use in procedures from cardiac surgery to treatments for myeloid leukaemia to a drug designed specifically for Australian hospitals that sedates ice addicts who become violent in emergency departments.

It’s the type of critical manufacturing that the Albanese government wants more of in Australia. It intends to invest tens of billions of taxpayers’ money under its Future Made in Australia Act, with more details to be revealed in next month’s federal budget.

The Albanese government wants the Future Made in Australia Act to reshape the nation’s economy so that it’s less dependent on exporting raw materials such as iron ore, coal and gas, and instead focused on investing, supporting and helping create industry that researches, designs, builds and exports value-added products and services. This may include manufacturing batteries for home solar energy storage or electric vehicles, solar panels, and spending more to build industries in quantum computing and medical manufacturing.

Treasurer Jim Chalmers is a fan of Italian economist Mariana Mazzucato who has advocated a “Mission Economy”.Credit: Jamie Brown

Since taking office in 2022, Albanese has been talking about reshaping the economy, with blunt statements such as: “Australia should be a renewable energy powerhouse, not just a raw materials supermarket.”

Albanese unveiled the Future Made in Australia Act this month with bold remarks but scant detail. “Our government is investing in manufacturing to make more things here,” he said. “We’re building the infrastructure and clean energy to power new growth. We’re training people in new technologies. We’re facilitating private sector innovation and catalysing new investment.”

The policy immediately prompted a backlash, including claims that the government had bought into the controversial philosophy of influential Italian economist Mariana Mazzucato – a favourite of Treasurer Jim Chalmers.

Mazzucato, who visited Australia last month, is a proponent of the so-called “Mission Economy”. That is, one where the government becomes an active shaper of markets by setting a direction and integrating the private sector and community into trying to solve today’s social and economic problems, such as climate change. It involves big government spending, and Mazzucato regularly cites as an example what the US government did in the Apollo program to land a human on the moon in the 1960s.

Chalmers has argued that the current times demand a new approach, amid the global energy transition and splintering geopolitics with trade conflicts and wars.

However, the concern of some economists and the federal government’s own Productivity Commission is that the Future Made in Australia Act could lead to the government wasting money, if it goes down the path of subsidising the production of goods and services where the nation doesn’t have a comparative advantage.

Business leaders, such as David Thodey, a former Telstra chief executive and chair of CSIRO, echoed those concerns. “We must avoid governments propping up inefficient and non-competitive companies and sectors. Therefore, you need capable people making these funding decisions with transparency and accountability.”

Thodey led a review of the federal government’s public service for the Morrison government.

One of the features of Mazzucato’s “Mission Economy” is that a government’s public service must communicate and work together – not in silos – to get the best outcomes on big policy implementation. This would need to happen with the Future Made in Australia Act, say some business leaders, if it is to succeed.

University of Technology Sydney (UTS) chancellor Catherine Livingstone who has run companies such as Cochlear and chaired major corporates, including Commonwealth Bank, said greater consultation and true codesign with business was required to shape the policy.

Livingstone said in the design of the Future Made in Australia Act, it was important to ask what Australia’s comparative advantages are, why we haven’t leveraged them, why we aren’t investing more in intellectual property – and then ask how the government can contribute.

“To talk about ‘we have to bring manufacturing onshore’, or simply that we need to have more manufacturing – until you have a market and have developed products or services to address that demand, you shouldn’t even be thinking about manufacturing,” she said.

“We do need careful thought about policy design architecture and its delivery architecture,” said business leader and UTS chancellor Catherine Livingstone.Credit: Dominic Lorrimer

Livingstone was concerned about the size of government involvement in this new policy. “It is the role of government to guide the economy, but based on what’s proposed, I am concerned about the scale of government as a participant, partner, investor and enabler.

“This is such a step change from the way that the economy and policy has run that the degree of disturbance could be counterproductive.

“We’re not a small enough nation where we can course correct quickly, and we’re not large enough that we can afford too many wrong decisions. We do need careful thought about policy design architecture and its delivery architecture.”

Thodey, who chairs Ramsay Health Care and Xero, and will become the next chancellor of the University of Sydney, said he supported “Made in Australia” if it drove productivity, kept intellectual property and jobs here, and drew in foreign investment. “Made in Australia should mean high quality, innovative products that are efficiently produced, globally differentiated and competitive.”

He added that the federal government needed to take a long-term perspective in its planning, which meant decades, not just a political term. “The funding process must transcend the political cycle.”

Criticism has been made of the policy announcements related to the Future Made in Australia Act, such as the $1 billion investment in the Solar Sunshot program in NSW’s Hunter Valley region – where coal jobs are being lost – ahead of next year’s federal election.

“Made in Australia should mean high quality, innovative products that are efficiently produced, globally differentiated and competitive,” said David Thodey.Credit: Louise Kennerley

Investing in manufacturing solar panels has been questioned, given China dominates global production and produces them cheaper than any competitor. In 2023 alone, the cost of producing solar panels in China fell by 42 per cent, according to energy analysts Wood Mackenzie.

But that isn’t deterring the government. “We often get it put to us that we should only rigidly stick to comparative advantage,” said Ed Husic, the federal Minister for Industry and Science. “China never had a comparative advantage in producing solar panels, or most of the things that are being used as part of the [green energy transition].”

---

Manufacturing has declined significantly in Australia in the past half-century. In the 1960s, manufacturing represented approximately 30 per cent of Australia’s gross domestic product and employment. It’s now 5.2 per cent of GDP and 6.5 per cent of employment.

One of the arguments supporting the federal government’s plan to rebuild and reshape Australia’s manufacturing base is that the nation and our economy can’t be left behind, as others – from the United States and Europe to India, China, Japan and South Korea – collectively spend trillions to incubate homegrown industries to fuel the green transition.

“Being in the race does not guarantee our success – but sitting it out guarantees failure as the world moves past us,” said Albanese.

Another reason why world leaders are investing in manufacturing is the COVID-19 pandemic, which forced many to consider what goods are strategically important and should be produced closer to home. The disruption the pandemic caused to global supply chains left many countries, including Australia, dangerously short of medicines and medical equipment.

The changing geopolitical landscape, exacerbated by rising tensions between the US and China, has also accelerated this shift, as has China flexing its economic might to punish nations it found itself in conflict with. China imposed trade sanctions on $20 billion of Australian exports after political tensions between the two countries escalated under the Morrison government.

This has made nations, including Australia, wary of relying on it for the supply of critical goods.

Future Made in Australia has been likened to a small-scale version of the US Inflation Reduction Act (IRA), which has provided tax breaks, grants, loans and other incentives to spur industry development in cleantech.

A number of Australian companies have benefited from the IRA, such as Syrah Resources, an Australian miner that produces and refines natural graphite to be used in the batteries for electric vehicles. It was a recipient of IRA loans that helped it establish a $US176 million ($273 million) processing facility in the US that opened this year.

Syrah received a 10-year loan of $US102 million at an average interest rate of 3.89 per cent. “It was an extremely competitive funding position, and a lot more advantageous than any commercial debt funding that could be achieved,” said Syrah’s chief executive, Shaun Verner.

Syrah Resources chief executive Shaun Verner said the company is applying for another loan under the US government’s Inflation Reduction Act. Credit: Eamon Gallagher

He said the US government wanted to secure supplies of critical minerals and processing to support electric vehicle manufacturing at a rapid pace. Tesla is the largest customer of Syrah’s processing plant.

Syrah also receives government tax credits on capital and operating expenditure from the US government. It has applied for another IRA loan of $US350 million to fund further expansion in the US.

Verner argued there was room for Australia to compete with US and Chinese manufacturing with its Future Made in Australia Act.

“The demand for raw materials and processed materials into the supply chain over the next decade to support the energy transition is enormous. There has already been significant government program development and support, but there’s still a lot left to do,” he said.

The Future Made in Australia Act is expected to bring several government funds under its umbrella, from the $15 billion National Reconstruction Fund, the $4 billion Critical Minerals Facility, the $2 billion Hydrogen Headstart fund, and the $1 billion Solar Sunshot fund.

Separately, there’s the $20.5 billion allocated to the Clean Energy Financial Corporation for funding the development of new green energy grid infrastructure. And the government’s $20 billion Medical Research Future Fund.

Dr Andrea Douglas, head of industry engagement for CSL, was part of an industry group working with the government on medical manufacturing investment plans, and also examining the need for more research funding and better infrastructure to support start-ups.

“It’s a really good thing that the government’s talking about strategic assets in Australia and particularly advanced manufacturing,” said Douglas.

CSL, one of the nation’s most successful global companies, made a submission to a parliamentary inquiry last year calling for the federal government to consider reform of the tax and skilled migration systems to help accelerate advanced manufacturing investment.

---

Ivan Power, a former Macquarie Group investment banker, has been tasked with leading the National Reconstruction Fund, which has seven priority investment areas. They are broadly defined as value-add in the resources sector, investment in transport manufacturing and parts, medical science, defence, renewables, agriculture and manufacturing technologies. The final sector could span robotics to quantum technologies.

Power, who started in the role in February, will seek co-investment from superannuation funds, domestic and international companies and private equity groups. He wouldn’t disclose the size of the reconstruction fund’s investment team.

“Our job is to facilitate flows of capital to develop industrial capability,” he said. “Everything that we’re doing has to have a commercial rationale on price.”

The National Reconstruction Fund, which will make debt and equity investments, must deliver an average return of between 2 and 3 per cent above the five-year government bond rate.

Phebra, a private pharmaceutical company that employs 160 people and is based in Sydney’s Lane Cove, also welcomed the government’s Future Made in Australia Act.

At the end of last year, its chief executive, Andre Vlok, went to Canberra to tell the company’s story to politicians. Phebra has been operating for three decades, and has grown by supplying a niche range of products and essential medicines to Australian hospitals and international markets.

It was an important player during the pandemic and kept operating throughout to address the shortages in medicines and equipment.

Federal Industry and Science Minister Ed Husic and Phebra chief executive Andre Vlok at the pharmaceutical group’s Lane Cove manufacturing and research site.

“There is a dire need for onshoring manufacturing, there’s no doubt about that. Every country in the world is currently talking about sovereign manufacturing capability, and Australia was found wanting during the pandemic,” said Vlok.

On a walk-through of the Lane Cove facility with Industry and Science Minister Ed Husic and this masthead, Vlok said the group would be looking closely at the opportunities under the Future Made in Australia Act.

“The shareholders have built up the company through its own funding. But we’ve got to a stage where we need to accelerate the growth of the business and the private shareholders can’t continue funding it. We have to assess all avenues of potential funding.”

Read more:

• Budget’s $1.5b prescription for making medicines in Australia
• ‘I’m not trying to own the past, I want us to own the future’: Chalmers attempts to escape Keating’s shadow
• Albanese has a new slogan. Just don’t play a drinking game with it

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.