Hurdles to Manufacturing

There are eleven hurdles that must be jumped if Australia is going to move towards some sort of self-reliance by Manufacturing.

1. First margin.

The culture of Australian customers would have to change such that they identified the most profitable supply chain instead of focusing on FOT prices and First Margins.

All our manufacturing businesses had Quality, Cost and Leadtime built into their business plan. After going through the manufacturing wipe out of the 80’s and taking onboard the manufacturing values instilled by John Button we recognised that you had to give the customer what they wanted when they wanted it. To do that you needed to have a system that would deliver a quality, as in fit for purpose, product to the customer in the required lead time and at a competitive cost. 

After 10 years in Australia I realised this was incorrect. Europeans buy with their eye, Americans with their stomachs and Australians with their wallet. Forget being competitive. In Australia if you are not the cheapest you don’t get the business.

But that is only the first part of the price story. Price depends on who is buying the product. We found that in many organisations the purchaser was on a first margin bonus, and often the first margin was worked out on FOT pricing not FIS pricing. 

2. Disintermediation.

The Australian corporate mentality would have to change to include the total supply chain including all costs including stock outs and discounts as well as interest of capital requirements and all supply chain costs.

Disintermediation is so much more than cutting out the middle man. When you buy on price alone you must order 13 weeks in advance and pay at least 50% up front. The goods are made and shipped and you pay the rest. They then are shipped to Australia where they are warehoused. At the time required an individual order is picked and shipped. This causes three extra costs:

1. The cost of capital for holding the goods during manufacture, shipping, warehousing, picking, and shipping.
2. The cost of discounting the product that you over ordered.
3. The cost of stock out for the product you ran out of but couldn’t wait 13 weeks to refill.

A normal football season is a great example. Every year some clubs do better than expected some worse. The order for replica jerseys has to be made 3 months before the beginning of the season. You run out of the great sellers and have to discount the flops. But more importantly you miss out on the specialised products. 

When the Swans won the GF in 2005 they hadn’t had a GF win since 1933. Our company was given an order for 5,000 specially designed GF jerseys at 10.00pm on the night of the game. They were delivered to Sydney on the Wednesday afternoon in time for the ticker tape parade on Thursday. They left the factory at $20 and were sold directly to the public for $120. The AFL made more money on that one order than they did for the whole yearly program for all clubs. 

When it came to negotiations for the next year the AFL went to a direct supply from China for 50cents a garment. There wasn’t anybody there that understood what they were doing.

3. ESG and CSR.

Australians would have to stop being hypocritical and place the same ESG and CSR requirements on all their global suppliers and not just the local ones.

Australians run around virtue signalling while exporting pollution and human misery. I spent 2 years of my life researching a new production method that saved 90% of water usage. We used it but the cheaper offshore manufacturers never did. The CSIRO was a world leader in recycling, but the rest of the world didn’t care.  Why is it that virtues are paramount in some industries but not others?

There is no greater hypocrisy than listening to people who say we cannot meet the  pricing levels of our competitors when they do not have to conform with our standards in the areas of HR, OH&S, Waste management, banking, Wokeness and PC.

4. What happened to Cradle to Grave?

In the 80’s during the height of the economic rationalisation drive to globalisation there was a major drive to Cradle to Grave technology in the supply chains of the developed and Western world. Globalisation killed it. The probability is that woke corporations would resurrect it in Australia.

A significant proportion of R&D went into Cradle to Grave technology, something the cheaper Asian suppliers never bothered with. However, with windfarms being replaced with larger turbines and the oldest solar panel nearly ready for replacement the Cradle to Grave story must raise its head again. This is an area of more growing hypocrisy. All business in Australia by law must return land to its original use when they are finished except the renewable energy sector. You can put a 7m x 7m x 7m concrete block in the ground and leave it there when you build a bigger one. Any other industry would have to remove it. As I understand it the plan for the solar panels is to ship them to Africa where cheap labour will be used to dismantle the for recycling. 

5. Labour Costs.

Labour needs to be viewed from a sociological point of view and not just a purely economic one. Any discussion of labour must include a starting point of allowing investment to return 10 – 15% on the capital invested. 

The recent Federal court decision signals the need for the culture of wage rates to be dramatically changed.

Jobs in manufacturing have been much maligned since the beginning of industrialisation. Employment needs to be viewed through the eyes of sociology not just economics. 

The present psychological mantra surrounding manufacturing is outdated and incorrect. The elites assume incorrectly: people do not like repetitive jobs, all people want to rise to the top, manufacturing jobs are not inclusive and rewarding. There is a great amount of dignity in a manufacturing job.

There are all the old arguments about the gap between minimum wage rates and welfare payments. 

6. Socio – economics.

Manufacturing jobs allow many people whether they are immigrants, refugees or Australian born citizens that are physiologically or intellectually predisposed to manufacturing jobs to assimilate more easily into society and become self-reliant.

The discussion on economic rationalisation, the theory that efficiency and productivity should be the primary measures of economic success, never strayed into the realms of sociology, which was a major flaw. How can you measure overall economic efficiency and productivity if you disregard the equal and opposite reaction? When measuring productivity in society you must take into account the societal cost of unemployment benefits, mental illness, suicide, drug dependence. 

It has been well documented that as human beings we need to survive, procreate, and believe. Take those away and you take away the meaning of life. As we touched on above, not everybody wants to be an elite, in fact Pareto established that 80% are more than happy not to be elite. In The Parallel University I told the story of the personnel officer at BASF in Melbourne in 1968. In summary he said there were 350,000 employees in the company worldwide. They had a hierarchical system of management with about 12 layers. There were more jobs in the top 9 layers than people that wanted to get to them. 

7. Red Tape.

There is no way a manufacturer can build a business in Australia and bear the costs of the present red tape, green tape and blue tape.

When President Trump was elected Anthony Pratt made a promise to build more manufacturing in the US, he then backed it up with a similar commitment to Australia. The result to date is clear and was made clearer in May 2020 when in an  interview Pratt stated that at present he invests $500mill per annum in new machinery in Australia and he was prepared to stand by his commitment to invest $2bll over the next decade. Enough said.

8. Senior Management Balance.

A key element for any successful enterprise is a balance of entrepreneurship, administration, and technical ability at the most senior management level. 

Sometimes those three abilities may be within one person but that is incredibly rare. Two I know of are Rupert Murdoch and Dick Pratt. They were as comfortable on the factory floor as the boardroom or in the office. 

About 10 years ago I saw a list of the CEO’s in waiting for the ASX 50, over 30 of them were the CFO’s, it was then I started investing more offshore. 

I argue that you cannot guide an organisation through a crisis unless it is your third business cycle. The first time you are in shock watching what is happening. The second time you can read the play and study the moves less emotionally, and by the third time you can guide others through the crisis. That begs the question as to how boards of large corporations can bring on board CEO’s from another industry.

Deming Part 1 shows how Japan’s leaders embraced the new culture.

Bottom line. Are there enough people with manufacturing expertise to help build a manufacturing culture and individual manufacturing enterprises?

9. Manufacturing Culture.

Manufacturing requires a specific culture which includes:

1. Quality. Get it right the first time.
2. Cost. Eliminate rejects and waste.
3. Continuous improvement. 
4. Focus on total cost.
5. Reject the process of apportionment of blame and focus on process improvement.
6. Give the internal and external customers what they want when they want it.
7. Remove barriers that strip people of dignity.

Australia lost its ability to manufacture after the economic rationalist revolution. While Americans moved their factories offshore, they still trained manufacturers and sent them offshore to train the new workforce. Australia outsourced the whole manufacturing process and, in the process, lost its ability to build the required culture.

The Einstein of Quality. https://www.bing.com/videos/search?q=DEMING&&view=detail&mid=D58B6C952E2518EC704FD58B6C952E2518EC704F&&FORM=VDRVRV and Deming Part 1. https://www.bing.com/videos/search?q=DEMING&&view=detail&mid=419553B0184B52BA7ECD419553B0184B52BA7ECD&rvsmid=C9EEBE1636F7439BD029C9EEBE1636F7439BD029&FORM=VDRVRV

describe the requirements for a manufacturing culture.

American Factory https://www.bing.com/videos/search?q=American+Factory&docid=608018612671744043&mid=069FB09C353799A29168069FB09C353799A29168&view=detail&FORM=VIRE

explains the cultural differences between China and The US and shows why Australia has no hope. This is the most important point for Australians to understand, until they do trying to build substantial manufacturing abilities is a worthless activity.

10. Sovereign Risk.

Australia used to be renown for low sovereign risk, however recent events have increased that risk to Paul Keating’s banana republic levels.

There is a long list of increased sovereign risks headed by Labor’s manifesto at the May 2019 election and Daniel Andrew’s BRI agreements. Gina Rinehart made it clear Roy Hill wouldn’t exist if she had known the amount of red tape that confronted the project. Think Adani and the Paradise Dam. 

In recent times State Governments has shown their lack of understanding of economics.

Australia is a land where you need to be big enough to get the ear of government, SME’s need not apply.

11. Return on Capital.

Capital markets require a 10 – 15% on funds invested. If you can do that while putting up with poor management, virtue signalling, red tape and increasing sovereign risk, go for it.

Over the last decade we have seen huge amounts of capital being thrown at the FAANGs and STATs. Private equity has been big in bricks and mortar. To build a manufacturing base substantial capital is going to be needed. The use of Superannuation has been floated. The problem is that the starting point at the table must be an acceptable return on that capital. 

We note that at present there is a move in the IR area. I have seen and heard demands of better wages, more productivity, more holidays, no person to be worse off and the list goes on. I have not heard anybody mention that there has to be an acceptable return on capital. 

The main destructive force of socialist economies has been investment in SOE’s that do not return on capital. The CCP was smart enough to realise that and decentralise the decision making.