Bringing manufacturing home is Anthony Albanese’s ‘reason for being’

Hard heads say betting taxpayer money on local production is costly and risky but the Prime Minister is doubling down.

Anthony Albanese declared the Rheinmetall factory in Ipswich is producing good, secure jobs for young Australians. Picture: NCA NewsWire/Tertius Pickard

The US Centers for Disease Control and Prevention defines long Covid as “signs, symptoms, and conditions that continue or develop after acute Covid-19 infection”. Australia, broadly speaking, managed the pandemic better than most countries, although we’re still dealing with the medical, economic, political, social and psychological aftermath.

It often seems like we’re a different country, but that’s because the past keeps coming back to haunt us, with its withered hand grasping for taxpayer support. New suits, old ideas for fresh (borrowed) money.

Intervention is in vogue, insinuating itself into the policy mainstream as globalisation is in retreat, rapid decarbonisation requires a public nudge, and pandemic shortages and national security are cited as justification for sovereign capability. Don’t forget this is a joint political enterprise by the majors, with its rebirth by the Coalition; it’s just that Labor finds it easier to do it “one more time with feeling”, as the conductor says to the orchestra.

From now until election day, Labor will be waving a banner emblazoned with “Future Made in Australia”. The slogan will be laminated into ALP talking points, along with “good, secure, well-paid jobs” and “renewable energy superpower”. “I want manufacturing to be brought back here in Australia,” Anthony Albanese told reporters in Ipswich, west of Brisbane, during a visit on Tuesday to the Rheinmetall facility, which produces Boxer combat reconnaissance vehicles.

“We need to be more resilient as an economy. We need simply to make more things here. Providing good jobs, secure jobs with a highly skilled workforce, taking advantage of the opportunities that are here to advance manufacturing.”

A few days earlier, the Prime Minister headed a posse of ministers on a visit to the site of AGL’s Liddell Power Station (retd.) in Muswellbrook in the upper Hunter Region. They were there to launch Solar Sunshot. It involves up to $1bn in production credits for the local manufacture of solar photovoltaic (PV) panels, cells, modules and associated infrastructure; the government hopes it will be the first of many projects with funding from the Australian Renewable Energy Agency.

Albanese described it as “one of the most significant” announcements the government will make this term. Experts were less impressed, seeing Labor’s solar push as a political move rather than sound economics, given China’s market dominance. The Grattan Institute’s energy program director Tony Wood said solar “has been a commercial bloodbath over the last 10 or 15 years”. “In 2008, the top two are now numbers nine and 10 and seven of the others have gone broke,” he told this newspaper’s Colin Packham.

Jim Chalmers says spending to encourage investment in manufacturing will be a mainstay of next month’s budget “because this is how we secure our prosperity into the future”. It’s a short rhetorical hop to how we underwrite our defence and, naturally, the transition to a net-zero economy.

“In 2024, good energy policy is good industry policy – the same thing,” says Climate Change and Energy Minister Chris Bowen.

After running hard on this theme during the 2022 election, Labor is establishing an off-budget $15bn National Reconstruction Fund to provide finance – including loans, guarantees and equity – which it hopes will “drive investments that add value and develop capability” in seven areas, including renewables, medical science and defence. The NRF has been slow out of the blocks, but is a ­personal mission for Albanese.

“A Future Made in Australia is more than just a kind of a passing press release,” the Treasurer told Sky News this week. “This is in lots of ways the Prime Minister’s reason for being. This is something that he believes in deeply, as we all do. But investing in industry or co-investing in industry is not what it might have been 40 or 50 years ago. It’s not what it might have been in the 80s or 90s. The geopolitical situation is different, our economic circumstances are different, global and domestic.”

Manufacturing never left Australia, it’s just the rest of the economy, especially mining, got a lot bigger. In 1990, manufacturing ­accounted for 15 per cent of gross domestic product, while mining made up 5 per cent; today, those shares have been flipped. Over the past three decades, manufacturing’s share has plunged by half in the UK and one-third in the US.

But over that time, the volume of Australia’s factory output has increased by 20 per cent. In February, there were 915,000 people employed in manufacturing. This was slightly above the pre-pandemic headcount, but around 200,000 fewer than prior to the deep recession in the 90s.

Let’s not kid ourselves about manufacturing’s glory days in the 60s and 70s, when around one-quarter of workers toiled there. Much of it occurred behind the tariff wall, where foreign grifters sucked on the taxpayer teat, turning out substandard whitegoods, TVs and cars for a less demanding, less materialistic nation. Is Fortress Australia what we yearn for when we tell pollsters we want to be a country that makes stuff?

If there’s an argument for subsidising manufacturing, employment is not a strong point. Only one in 16 workers is employed there. Labor is touting its job-making record since coming to ­office, with almost 800,000 more people in work today, including 81,000 in manufacturing.

The modern factory does not need as many workers; many floors are “dark”, not a soul in sight, with operators using robots – not necessarily because they’re cheaper or more compliant than people. Rather, they work round the clock, don’t get sick and in, say, a paint or vaccine factory, there’s less spillage or wastage, which ­materially boosts the bottom line.

Australia has high labour costs compared with Asia’s factories to the world and almost everywhere else. In its health check on Australia, the International Monetary Fund noted the ­average annual growth in our unit labour costs over the past two decades was 4.1 per cent; in the US, it was 1.6 per cent, and 2.8 per cent in Germany.

In the 70s and 80s, as Albanese said the other day, high wages were the reason companies departed our shores. That’s changed. Vince Allen, co-founder and chief executive of Sundrive Solar, the company that struck a deal with AGL to develop to commercial scale the facility for solar panels at the Liddell site, said solar manufacturing costs were once dominated by labour, land and equipment capital expenditure.

Due to rapid advances in productivity, manufacturing costs are now dominated by fundamentals, such as materials, electricity and transport. “Australia has a very unique advantage in each one of those three aspects,” said Allen, who with David Hu turned a ­garage PhD project into what he claims is the world’s most efficient commercial-size solar cell using copper plating technology.

Many feel solar is the technology that got away, given Australia’s pioneering work and uptake of rooftop solar, where we lead the world in per capita usage. But as Albanese lamented, only 1 per cent of PV panels are made here. To meet our 2030 emissions targets, with renewables making up 82 per cent of our electricity market, Bowen says we have to put another 60 million solar panels on.

To justify huge industry outlays in the NRF and other vehicles, Labor is keeping jobs in the narrative frame. Yet, big data, AI, virtual reality, machine learning, robotics, satellite technology and genomics – technologies where Australia is well behind the global frontier of deployment (but not research) – are looking like our best path up the value chain. As Swinburne University of Technology’s Beth Webster has argued, like agriculture and mining “we can produce sufficient manufacturing value-added with 1-2 per cent of our workforce in the future”.

One of the things holding us back is availability of finance, especially for small and medium enterprises, the firms that dominate investment, patents and new methods, and raise productivity. We spend an average of just under 2 per cent of GDP on R&D, equal to Norway and just above Canada. But countries on the global frontier of innovation – the US, Germany and Japan – are spending 50 per cent more.

Reserve Bank assistant governor Brad Jones refers to the SME sector as an “engine of innovation”. Many encounter the “valley of death” – the long lead time between converting greenfield research ideas into commercially viable propositions, as firms burn through cash. Yet, because there are so many of them, even a small increase in the share of SMEs successfully innovating would have a material impact on our economy.

Jones told the National Small Business Summit on Thursday it was in our collective interest for the financial system and policy settings to interact in ways that continue to support innovative local entrepreneurs. “If history is any guide, the positive externalities could entail benefits to the Australian economy and society extending well beyond just the firms producing them,” he said.

But it’s our dire productivity growth that is of most concern. In the decade to 2022, we had zero growth in manufacturing productivity. By contrast, the UK had annualised growth of 2.3 per cent, while 19 countries in the euro area achieved 1.9 per cent a year. We’re grinding it out via lacklustre GDP growth with a 1 in front of it, lucky to have strong export prices. But as the IMF warned, unless we change our ways, “a secular productivity slowdown” imperils our future living standards.

Amid the resurgence of industry policy, especially the mammoth subsidies in the US, Europe and China, a forthcoming report from the IMF will caution how industrial policy is prone to policy mistakes and elevated fiscal costs. The Productivity Commission, bulwark against handouts, has warned against self-reliance and domestic production via large-scale industry programs.

Australian governments spent $13.8bn in 2021-22 on assistance, perhaps more if you unpack a myriad of carbon abatement measures, which support private businesses. The commission’s deputy chair, Alex Robson, said the new subsidies, local content rules and trade barriers by the big players are often “simply a form of old-fashioned protectionism”.

Trying to match them would hurt us, Robson said last July in ­releasing the commission’s Trade and Assistance Review. “Each dollar spent on subsidising domestic production capacity in non-comparative advantage sectors is a dollar taken away from sectors in which we enjoy a comparative advantage,” the review states.

Relying on local production comes with risks. There are also much cheaper ways to fortify vulnerable supply chains, such as storage or relying on old friends or making new ones in trade. In a full employment economy, you wonder where the workers are going to come from? What do we want less of in our economy?

Canberra’s economic officials are alive to the fact there’s no free lunch. Someone always pays – through higher prices or personal and company income tax. Surely they’re conveying this hard truth up the ladder to ministers. Something’s got to give when all this funny money dries up.