04/10/2020
The proposed Morrison Government 2020 Modern Manufacturing Strategy (MMS) is aligned with world-best industry policy, but its success depends on how broadly we define manufacturing and the calibre of the committees making the strategic decisions. The priority sectors – Resources Technology & Critical Minerals Processing; Food & Beverage; Medical Products; Recycling & Clean Energy; Defence; Space – were identified over a decade ago, by most state governments and the Federal Government, as the sectors with the most potential.
The strategy addresses the lack of a consistent approach to diversifying the Australian economy that has long held back growth. Australia is consistently ranked as having a high quality research and development (R&D) sector, sound political and civil society institutions but a poor ability to convert these advantages into economic success.
Extraordinarily high prices for our main commodity exports have driven the economy in recent years. However, it has become increasingly clear that relying on a small number of industries with few customers in our highly uncertain times is risky. We need strong and vigorous trade-exposed sectors to give us resilience in the face of unpredictable events such as the COVID-19 pandemic.
Furthermore, whereas a strong mining sector has national benefits, such as keeping the purchasing power of the Australian dollar high, its benefits are mostly concentrated in its small workforce and foreign shareholders. The low rate of productivity growth across Australian industry more broadly remains a concern and does have widespread implications for employment and wages.
We need to grow new challenger firms and successful industry clusters, but we know from the history of other successful industries – mining in Australia, wool production in New South Wales, digital technologies in Silicon Valley, cars in Japan; chemicals in Germany – that this takes decades to achieve.
The history of how new industry sectors emerged to be world leading shows that relying solely on the market or waiting for a hero industry champion to come along, is the long and slow route. The winning formula has been a combination of direct intervention by government, community backing and market forces.
The American post-WWII economic miracle has its genesis in long-term industry programs which were under the direction of expert committees (e.g. DARPA, E-ARPA, NIH, DOD, DOE, SBIR etc). Their interactive and curated seed and development model is an effective way to manage the uncertainty inherent in developing frontier industries. An Australian example is the R&D corporations set up under an act of parliament and controlled by industry and their experts with government oversight. The proposed MMS process appears to follow these tried and true funding models.
Co-development: the key to developing competitive industries through the Modern Manufacturing Strategy
The MMS is an opportunity to make systems and incentives more responsive to industry and household needs. A co-development model has had considerable success around the world in doing just this.
Under this model, the users or broader networks of stakeholders are brought into the design and development of the good or service early on in its development. It features mission and end-user directed invention; joint research-industry activities; cooperatively funded translation activities; early integration of marketing and commercialisation into planning and sometimes, government procurement of frontier products.=
The Australian agricultural sector is a good example of co-development. Its collaborative business model began in the 1930s, and by 1990, a series of partnership agencies facilitated knowledge sharing between farms, research institutes, government and extension services (under the auspices of the R&D corporations).
Similarly, mining in Australia is low cost not just because we have a lot to dig up but because we are very good at digging it up. It has benefited from massive investment in technology, and this has been heavily subsidised by governments. Robotic mining, or remotely operated mining, which reduces accidents and hence downtime, is a recent example.
The current Australian Technology Investment Roadmap (September 2020) and National Hydrogen Strategy (November 2019) are excellent examples of mission-driven strategies that combine R&D with commercialisation and scale-up across the economy. The Clean Energy Innovation Fund and Australian Renewable Energy Agency (ARENA) (both established in 2012) were created to achieve the mission.
We can better integrate complementary sectors by strengthening R&D agencies, business advice units, engagement and collaboration programs. These have been shown to be effective for the businesses directly involved. The latter, when operating effectively, can enable Australian firms to fully realise business opportunities domestically and internationally. This integration and support occurs in some areas of education, health, agriculture and mining but is less apparent across the other sectors.
We should also recognise that incorporating end-users into the development of new products early in their lifecycle lowers the risk of new product development. This ensures that the new product meets consumer needs, that there is an early demand for the product and that there are early adopters or demonstrators to encourage other consumers to enter the market. As many innovation pathways span firms, industries and sectors, this is not confined to within-firm best practice.
Avoiding the mistakes of the past
While the Modern Manufacturing Strategy shows a great deal of promise, the Federal Government’s approaches to growing new and emerging services and products has been hitherto patchy and ad hoc in many areas.
• Australia has a history of short-lived industry programs. Frequent name, guideline and content changes.
• Business finds it hard to know about the programs.
• Programs are often amended or cancelled before being evaluated. Potentially valuable programs (e.g. Commercial Ready) have been de-funded.
Our advantages are well known but underexploited. We are open to trade, friendly to competition, have reliable and effective institutions and a culture of trust and fair play among a great deal else. To harness these advantages to foster new industries, we need to focus on a few key issues.
Consistency first
The instability of industrial policy and programs has been inefficient and new systems are required to end this wastage. The most egregious example is surely energy policy, but the stop-start pattern has been repeated in other areas as well. For example, it is not clear that our financial sector is well adapted towards supporting innovative SMEs. There is a sophisticated multi-faceted role for government as co-partner in industrial development policy that has been inadequately developed and inconsistently applied in Australia.
The right people
It is essential that the MMS decision-making bodies consist of people who are experts in the relevant science, technology and market for the sector under consideration. This is not an occasion for a committee that balances political forces, or rewards cronies. To do so would undermine the whole strategy and lead to its eventual demise. These experts will be people who know what has been tried before; what has been shown not to work; what is being developed elsewhere; how our inventions might dovetail with others’ work; who are the best collaborators and who might undermine the market.
Government agencies also need to be part of the co-development team. Governments should require that policy levers guiding industry development and technological change initiatives are co-ordinated between government departments and levels of government. Business development has been thwarted too often by one area or level of government being at odds with another area. Intermediary bodies need to have access to central bureaucratic units who have the power to enforce consistent decisions, as we have seen with the recent recalibration of the economy around the outbreak of COVID-19. A peak body to ensure coherence and correct prioritisation with a long-term view is needed.
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