Beware of dire predictions that manufacturers will be wiped out by the strong dollar unless they’re propped up by the government. All our experience says it won’t happen.
Manufacturers and their (highly vociferous) unions gave us the same warning in the 1980s when the Hawke-Keating government decided to take away their protection from imports. It didn’t happen – the industry adapted, and survived to complain another day.
Though manufacturing’s share of the nation’s total output (gross domestic product) and total employment has been declining for the best part of 40 years, little of this is due to the removal of protection.
Most is explained by the services sector growing at a faster rate than manufacturing grew. On the employment side, it’s also explained by computerisation and other technological advances raising the productivity of labour in manufacturing, so that the same quantity of output could be produced using fewer workers. (Agriculture and mining have the same characteristic, in contrast to the labour-intensive services sector.)
So it’s only in recent years that the absolute quantity of Australia’s manufacturing production has begun to decline. Manufacturing survived the removal of protection by rationalising its production, becoming leaner and fitter.
And probably by hastening its introduction of the latest labour-saving technology. When employers get their unions to pressure Labor governments to provide protection (or, these days, direct government grants), the workers imagine they’re protecting jobs.
In truth, all they can protect is profits. That’s certainly the history of what happened in manufacturing during protection’s last hurrah in the decade before 1987.
One way manufacturing responded to the removal of protection was by getting into the business of export. That was utterly contrary to the prediction that without protection against imports it would cease to exist.
When vested interests make such claims they’re playing on the public’s lack of knowledge of economic history, lack of imagination and lack feel for how market forces work.
In a market economy, nothing stays static. Industries could just sit there doing nothing until their last customer leaves, but they don’t. They take evasive action. They cut their coat according to their cloth. More formally, they adapt to their changed economic environment.
Individual firms may bite the dust, but the industry regroups and survives. Consider the advent of television from the mid-1950s. Many people imagined it would spell the end of radio.
Instead, radio changed its programming markedly and survived. It went from being something people sat in the living room listening to, to something they carried around with them, particularly in their cars. They listened to it while they were doing something else: driving somewhere or cooking the dinner.
Many people imagined television would spell the end of the cinema. It’s true most of the cinemas in every suburb were converted to supermarkets, but then along came the video cassette recorder and video lending shops. Finally, someone invented the multiplex cinema, a classic example of exploiting economies of scope (producing more than one product at the same plant). Today a wider range of movies would be showing in any city than when suburban cinemas were at their height.
So what can we say about how manufacturers may adapt to a prolonged high exchange rate? Well, one possibility is that they simply move their production abroad to where labour is dirt cheap.
You have to suffer all the illusions and delusions of protectionism and mercantilism to think that would be a terrible thing; that most of the displaced workers wouldn’t be able to get work elsewhere in the economy. But, in any case, I doubt if nearly as much of it will happen as is feared.
So what else? People say the high dollar reduces the international competitiveness of our manufacturers. Actually, it reduces their price competitiveness. So one way to respond is to search for ways to reduce their production costs – by becoming yet more capital intensive (raising the productivity of their labour) or finding other efficiency improvements.
Another response is to find non-price ways to stay competitive. A reputation for high quality can justify pricing at a premium. Indeed, if you’re smart you can get into the space where the causation is reversed: people take your higher price as a sign of higher quality (utterly contrary to the most basic assumptions of conventional economics).
You can use superior design to justify charging higher prices. You can beat the foreign mass-producers by being more carefully and quickly attuned to changing fashion. Or you can be more willing and adept at customising your product. If all else fails you can get yourself a reputation for giving good after-sales service.
This is an old Australian angle, but still relevant: look for niches to occupy. One advantage of our smallness relative to the rest of the world is that what seems too small to the big boys seems quite big to us.
If manufacturers are to get their cut from the much-foreshadowed blossoming of the Asian middle class, it’s pretty safe to be in niche areas that are too small for our bigger rivals to worry about, or that somehow exploit the novelty of our Australianness.
I think this time it is quite likely manufacturing’s output will decline. But it’s even more likely we’ll retain a manufacturing sector that’s leaner and fitter than it is today.
If it does survive and prosper it will be because manufacturers and their employees find ways to raise their productivity and respond with a wave of innovation. There’s nothing like having your back to the wall to call forth such an uncharacteristic response.
And it’s a safe bet those firms that do best in adapting will be those that do best at enlisting the engagement and initiative of their employees.
Ross Gittins is the economics editor.