With the significant disruption to Australia’s supply chains caused by the Covid-19 pandemic, the question now focusing the minds of supply chain managers is whether production outsourced to China can be brought back onshore—and if so at what cost.
The short answer is that it is indeed possible to re-shore manufacturing but it will take a change in government policies as well as sizeable state incentives to private enterprise to turn the ship around.
Most of all, however, it will require a change in the Australian consumer’s thinking and buying patterns. Inevitably ‘Made in Australia’ goods will cost more—sometimes even double or triple the price tag of a ‘Made in China’ equivalent.
Are consumers prepared to pay for quality goods made in their own back yard knowing that this is in the best long-term interests of the country? Only time will tell.
Can Australian Manufacturing be Brought Back Home from China?
The COVID-19 pandemic exposed the weakness of Australia’s decades-old policy of favouring mining at the expense of industrial development, eventually leading to an increase in manufacturing offshore, especially in China.
When China went into lockdown early in 2020, the dependency on outsourced production cost Australia dearly, with supply chains hit by significant disruption.
Is it possible to reverse the offshoring trend to protect Australia from similar situations in the future, and if so, at what cost? Before attempting to answer such questions, it’s helpful to look in a little detail at the drivers behind the offshore manufacturing trend.
Why China Became Australia’s Factory
Several factors lie behind Australia’s industrial deference to overseas manufacturers. Let us look at some of the main ones:
1. Economic Benefits
With significant reductions in labour and capital investment expenditure, production costs can be slashed by some 20 to 40 percent, and for labour-intensive products, up to 50 percent and beyond. The main reason for these savings is the availability of cheaper labour—manufacturing labour costs in China average $5.5 (USD) per hour against the Australian average of $15 (USD) per hour.
An added factor is that Chinese companies produce in bulk for global consumer markets and therefore import raw materials, e.g. plastics and resins, in quantities so vast that they attract significant discounts from suppliers.
Even when other costs such as coordination, transport, and logistics are taken into account, it still makes sense for many companies to outsource to China as onshore overall production costs would be much higher, a study of Australian manufacturing firms concludes.
2. Access to China’s Mass Consumer Market
A strategic consideration for many firms is that sourcing from China also offers them access to the ever-growing and ever-spending domestic Chinese consumer market.
3. Wealth of Professional Talent
China has a wealth of low-cost professional talent, including scientists and engineers, and boasts many superior technological capabilities.
4. Environmental/Regulatory Issues
Some companies have moved their manufacturing facilities to China because regulatory, environmental, and social restrictions are not as rigorously applied in that country as they are in Australia.
The main effect of this offshore flight? Manufacturing’s contribution to Australia’s GDP has fallen steadily from 16 percent in 2008 to 5.7 percent in 2019.
How Would Re-shored Manufacturing Impact Consumers?
Without doubt, the cost of goods currently imported from China, such as telecommunications and electrical equipment, toys and sports equipment, clothing, IT products, machinery, home ware, and furniture, will skyrocket.
Just by how much it is difficult to say, but we can deduce that if companies are cutting their production costs by 20 to 40 or even 50 percent by using China as their factory, their costs will rise by at least that much if they bring manufacturing back onshore.
That additional cost will be passed onto the consumer—there is no way around that reality.
Ali Baba and the $4 Pyjamas
This is no fairy tale, but an example of the cost challenges of manufacturing consumer products at home.
The owner of an Australian clothes maker explains in a blog concerning the price of manufacturing ethically onshore that it costs her around $23 (USD) to turn out a pair of women’s long pyjamas—that’s cost price, before any mark up for profit.
The costs involved, she says, include importing yarn from India, knitting it into fabric, colouring and screen printing the fabric, cut-to-trim fees to Australian seamstresses, and various overheads such as labelling, marketing, and graphic design fees.
By contrast, a pair of women’s long pyjamas can be ordered online from Chinese ecommerce giant Alibaba for just $3.99 (USD). The question is, will consumers be ready to pay higher prices for quality, made-in-Australia goods, or will they start ordering much cheaper offshore products online?
Can a Re-shoring Drive Reverse the Outsourcing Trend?
The answer to this important question is that it can be done but the battle will be long and hard, and will almost certainly require changes in government policy.
Let’s examine some of the issues that need to be addressed if Australia is to restore local manufacturing capability:
Increased costs to consumers
Are Australian consumers prepared to pay double or even triple the price for, say, their children’s school uniforms? The factors that drove manufacturing offshore in the first place—notably labour costs—still exist today and would come back right into play should companies bring their manufacturing back onshore.
A strong campaign urging consumers to ‘Buy Australian’ would be needed to convince consumers that it is in their own interests to pay higher prices for locally made goods.
In its Atlas of Economic Complexity database, The Harvard Kennedy School’s Center for International Development in an online data base has Australia at number 93, alongside Senegal, Pakistan, and Mali, in a list of 133 countries ranked according to the complexity of their economies and opportunities available to develop new products.
This less-than-ideal situation is ascribed to the fact that iron ore, coal, and oil has generated much wealth for Australia, creating a tendency for the country to neglect its industrial sector.
Australian labour costs are among the highest in the world, and consumer demand is falling dramatically due to the global recession. Under these conditions, private enterprise will simply not be able to afford to kick-start onshore manufacturing without government incentives such as tax breaks, access to finance, and business investment schemes.
The United States, spooked by supply chain bottlenecks caused by the virus, has pumped $345 million (USD) into a Virginia-based drug company to make medicines that are currently almost exclusively supplied by China.
The US government’s Biomedical Advanced Research and Development Authority also relaxed some rules, making it easier for companies to manufacture in the US. The Australian government would need to make similar investments in local industry to encourage on-shoring.
There Are Some Hopeful Signs…
The word ‘on-shoring’ is increasingly being heard in government and business circles, as is talk about the need to restore local manufacturing.
Former Dow Chemical Chief Andrew Liveris, who is advising the Australian government on ways to mitigate the economic effects of the pandemic, is adamant that the country has to “look at on-shoring key capabilities.” He has decried as “old and broken” Australia’s model of exporting commodities and importing finished product.
If Liveris can persuade Prime Minister Scott Morrison’s government to finance the on-shoring of key industries, and if the Australian public can embrace the idea that ‘buying local’ is both responsible and ‘cool’, on-shoring may yet reverse the country’s dependence on outsourcing.
…But Will Re-shoring Become Reality?
My concern, and I guess that of many other observers, is that rather than go down the long and costly road of re-shoring production, Australian manufacturers will simply find other countries to outsource to—such as Vietnam, India, or Thailand.
They may feel satisfied that they have shored up their supply chains and are safe from the type of disruptions that throttle global supply chains from time-to-time.
As in the past, Australia could well take the easier way out now—and pay the price later. Only time will tell, of course, and the best scenario would be one in which no country has to deal with another situation like the global COVID-19 crisis.