INDUSTRY AND COMMERCE

AUSTRALIA,,> I FOR RELEASE: IMMEDIATE

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NO.: U2A/80

Address by the R t . Hon. Phillip Lynch, MP  to the Sixth Program for Management Development  at the Melbourne University Graduate School of  Business Administration, Melbourne, Thursday

8 th May 1980

My purpose today is to outline the present state of manufacturing  industry in Australia and its prospects for the eighties and at the  same time, I want to focus on a number, of major issues that will face  manufacturers in the course of the decade.

Employment Manufacturing is a very significant sector of the Australian economy.  It is not only a major employer but an important area of prospective  employment growth.

In the years ahead manufacturing* s job-creating potential can be one  of the bright spots on the employment horizon. Some of the other  economic sectors - in particular mining - have limited prospects for  job creation simply because they are highly capital intensive.  Manufacturing however is an area where considerable employment can

be generated through growth in output. Â· >

The sector accounts for about 20 per cent of total employment and a  somewhat higher percentage of gross national product. However the  percentage of employment represented by manufacturing has declined  from 25 per cent in 1966 to today's 20 per cent. This decrease is

also occurring in other developed countries. For example, the  average percentage employment figure for manufacturing industry in  selected OECD countries was 28.8 per cent in 1975> compared with 31-2  per cent in 1 9 6 6 . .

This decline largely reflects the growth of employment which has  occurred in the tertiary sector, rather than an actual decrease in  the manufacturing workforce. In absolute terms, employment in  manufacturing in Australia increased between 1978 and 1980, and is  now at about the same level as in the late sixties, despite the

fall in the percentage of total employment which it represents. The  increase in numbers employed in manufacturing over the last two years  is an indication of the benefits which can be gained from a strong  manufacturing sector.

Structural Change These figures also strikingly demonstrate the fundamental shake-out  that has occurred in manufacturing industry since the 19 6 0 s .  Structural change has been a marked feature of the,last two decades.

The 1970s were a decade of change. They brought problems which our  industries, with high manufacturing costs, low plant throughput and  excessive reliance on protection against overseas competition, were

not equipped to meet. Restructuring had to occur, and it did occur.  The process has not yet concluded. But we now have a manufacturing  sector which is in a far.better position to meet the challenges and  grasp the opportunities of the eighties.

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Industry characteristics *Â·- .

Let us consider for a moment some of the recent characteristics of  manufacturing industry. Xt is now much less reliant on tariff  protection - the average rate of tariff protection has been reduced  by 40 per cent over the last ten years. The 'syntec1  index of

Australia's international competitiveness has increased by 23 per  cent since 1976 and now stands at a higher level than in late 1971Â»  before the problems began. As a result the outlook for manufactured  exports is favourable. .  Ã¢ÂÂ

The value of exports of Australian manufactured goods (including  processed foods) in 1979 was S3Â·5 billion, an increase of 36 per  cent over the previous year. Net fixed capital expenditure by  manufacturing industry in 1977-78 was $1.9 billion. As of last

October, there were some $7Â·2- billion in manufacturing investment  prospects committed or in final feasibility study. This is project  expenditure only - it generally excludes routine replacement of  existing facilities.

Government policies Â·

The Government's policy initiatives toward manufacturing industry have  I suggest had an important bearing on the improved outlook for the  sector. The 1979/80 budget contained measures which were specifically  designed to promote industrial growth by fostering exports and encourÂ­

aging innovation. Export incentives, in the form of export market  development grants and export expansion grants, increased to $ 2 1 5   million, an increase of 270 per c'ent on the previous year. We recogÂ­ nised the need for industry to increase its commitment to innovation

and technology by providing $ 3 2 million for industrial research and  development. We also provided $1.5 million for productivity improveÂ­ ment programs, and $54.5 million in bounty arrangements covering such  products as ships, machine tools, books, agricultural tractors and

heavy commercial vehicles.

This direct assistance to industry through the budget was supplemented  by a number of new or improved taxation meaxures, involving substantial  cost in terms of revenue foregone - special taxation allowances on  conversion from oil-fired equipment, investment allowances and

increased retention allowances were estimated to cost about $ 3 0 0 millic

But by far the most important achievement to assist manufacturing  industry has been the curtailment of inflation. Our current 10.5  per cent inflation rate, though uncomfortably high, is well below  the average OECD rate. The present level of inflation compares more

than favourably with the 17 per cent before we took office in 1 9 7 5 Â· The control of inflation has been a fundamental goal of government  policy and we are committed to a further reduction. Our success in  this area has meant our industries are more competitive both at home

and abroad.

The types of industries we should encourage in Australia are those  which can take advantage of the special skills and abilities of the  Australian workforce, using advanced technology and innovative  management. The Government however is not in the business of nominatii

the industries which offer the best prospects for development in the  eighties. We do not intend, and should not be expected, to 'pick  winners1. We firmly believe that the best mechanism for influencing  decisions about what to produce, and how and where to produce it is  Ã¢ÂÂ¢  the market place. Government involvement and intervention in the

decisions which are more properly the function of the market place  must be kept to a minimum.  The primary responsibility for responding  to opportunities must always lie with private enterprise.

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Australia's prospects are however being significantly influenced  by international developments which are impinging more and more . on the growth and prosperity of the manufacturing sector. DemoÂ­ graphic and technological pressures will also affect the pattern of  demand for manufactured products and employment. It is not possible  or even desirable to insulate manufacturing industry from these  pressures.

On the international front, a number of economic developments should  be highlighted. These include the effects of the oil price rise,  exchange rate variations, the rapid industrialisation of Asian  developing countries,  the increased international mobility of private

capital and the rapid diffusion of technology. These indications of  increasing interdependence among the economies of the world will  have an important bearing on our prospects for the 1980s.

Energy resources -

No single event has more starkly demonstrated the. linkages between .   national economies than the four-fold increase in crude oil prices in  1973-7^ and the further rises which have followed. However, some  favourable long term effects have, emanated from this shock. There  will be a boost to exploration and development in the mining industry

generated by the world energy shortage and Australia's relative  abundance of energy resources.  Manufacturing industry would be exÂ­ pected to share the benefits indirectly through additional sales of  machinery equipment and materials to mining projects.

Competitively priced electricity based on abundant coal supplies  gives Australia further comparative advantage in its energy situation.  Energy costs in Australia are relatively low. Incremental costs of  base load electricity supply to heavy industry are eight cents per ,

kilowatt hour in Japan. The corresponding costs in Europe and the '   United States are about four and three cents per kilowatt hour ' respectively. The Australian cost is 1-gÂ· cents per kilowatt hour. This has been one reason for the surge in investment, in aluminium

manufacturing.

Competitiveness Â·  '

In addition many areas of manufacturing are benefiting from our  enhanced competitiveness. The competitiveness of the import competing  sector has recovered markedly since 1973-74. We are now more price  competitive than at any time since 1971-72. Our export prospects in the  developing Asian economies are favourable. In fact, the proportion of  our manufactured exports going to these markets has been rising in  recent years. However, we can do better than this.

A Bureau of Industry Economics index of competitiveness for exporting  industries has indicated that, on average, these industries are now  better placed to obtain new export orders than they have been since  the early 1970s. The developing Asian markets, and increasingly China,

should be significant target, areas. We must maintain and attempt to  increase our share of these markets.

Investment projects Other developments also offer the promise of increased employment. A recent Department survey reported that there is about eight billion  dollars of investment on private sector projects where construction is

underway or about to begin and another eight billion dollars on projects  at the final feasibility stage. This total of 16 billion dollars does  not include all the infrastructure development (roads, railways, civil  services, housing etc.) .

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Technological innovation .  ^

Another factor which will have important implications for employment  prospects x-fithin manufacturing will be technological innovation. New  technology usually results in lower production costs and an increase  in output per person employed. The combination of lower prices and

higher real incomes that results from increased productivity is likely  to lead to enhanced demand for other goods and services throughout  the economy and thus to increases in employment opportunities in a  wide range of industries.

Industry must ensure that its expenditure on R and D is increased. It  also must take steps to see that it is not misplaced. Effort must be  concentrated in those activities with significant market potential.  Increased expenditure on R and D is a necessary condition for the  maintenance of a competitive edge in manufacturing. The direction and

force of our R and D effort are of critical importance.

Not only must we hold on to and increase our technology base we must  also be ready to import and adapt overseas technology which we cannot  economically develop in aÂ·nation of our limited population. The  adoption of new and appropriate technology xvill provide a stimulus to  increased productivity. In turn, more rapid growth of labour productÂ­ ivity will assist us significantly in avoiding inflationary 'pressures  and improving international competitiveness. ^

In many advanced countries, growth of labour productivity has been  slower in the 70s than the 50s and 60s. Australia has been an  exception with productivity here growing at a faster average rate  between 1970 and 1977 than in the period 1950 to 1970. However we  should not be complacent. It is possible that our apparent better  performance now is in itself a reflection of poor performance in the  past - a closing of the gap between ourselves and our competitors

rather than achieving an edge over them. Of course there are those  in our community who regard technological change as a threat to ’  employment and an inhuman process of labour displacement. There are  even calls at times for artificial barriers to be erected in order to  impede progress toward higher productivity.

It is opportune at this time to set those alarmist statements in  perspective. Firstly, our competitors, whether in exports or imports,  are investing heavily in new technology. If we fail to keep pace with  cost savings which are^being achieved by our rivals the inevitable

result must be lost markets and lost employment. Secondly, ours is  an advanced nation with a well developed technological infrastructure.  There is every reason to suppose that we can deploy complex equipment  more efficiently and effectively than many less developed nations, and

so gain a competitive advantage over them. Thirdly, Australia has  frequently proved its capacity to develop technology of its own - and  by doing so create export opportunities. InterScan and the atomic  absorption spectrometer are well known examples. Provided we choose

to take a place in the forefront of the technological revolution we  can expect that Australian inventions will increasingly be an exportÂ­ able commodity. Conversely if we were to withdraw from whole areas  of scientific advancement it would be difficult to maintain the  viability of related areas of our technical infrastructure.

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In summary the position regarding advanced technology is relatively  clear cut as far as Australia is concerned. We have everything to  gain and in practical terms we have little to lose. Our rivalsÂ· can  be expected to accept progress with open arms. Australia's choice  is between allowing Australians to sell, install, operate and service

the new equipment - or denying them that opportunity and letting it  pass to our rivals overseas. Whichever we choose, the productive  work will be performed on up to date machines., The only question is  whether it takes place here or elsewhere. 1

Much of what I have been saying relates to increasing the productivety  of Australian labour. At this point I must emphasise that higher  productivity is not an end in itself. One of its principal attractions  is as a path to lower costs..- a means to offset the relatively high  wages of Australian employees. .

35-Hour week On the other side of the coin proposals exist which would severely  decrease the productivity of labour in this country - and I refer in  particular to the 35 hour week. There is no way that the 35 hour week

could be implemented - short of reducing existing hourly pay rates or  withdrawing existing award provisions - without producing a significant  adverse impact on production costs. Australia's manufacturing industry  on the average achieves a productivity increase each year of around two  per cent. By comparison, depending on the means adopted, a 35 hour '   week has been estimated to increase costs by some 15 to 20 pfer cent.

It is obvious that the effects on our competitiveness would be disastÂ­ rous. In a fiercely competitive international environment, higher  costs mean lower sales - and fewer jobs.

There are those who seek to uraw parallels with 19^-7, when the 40  hour week was introduced. In the current circumstances of sluggish  international growth, high inflation and high unemployment,  such  comparisons have no validity. Our international rivals for export  markets would be quick to take advantage of any foolish steps we

take on this matter. The bustling' economies of the Asian Pacific  region are certainly not comtempiating reduced working hours - and  increasingly theirs is the competitive challenge which we must meet.

Government regulation I have already mentioned the liberal philosophy of minimising  government intervention in business activity, or indirect subsidisation  through tariffs. It also means seeking to avoid intervention of a

regulatory hind. The last decade has seen increased community calls  for government regulation of business. The Trade Practices legislation,  P.J.T.,  foreign investment controls and the recent national companies  and securities commission are obvious examples of such intervention. We accept that some interference is unavoidable if our private enterprise-

system is to function with proper regard for the public interest. It  is however important that we avoid excessive regulation and unnecessary  costs to business. The sheer cost to business of providing information -  the so called paper burden - is of mounting concern, and I have recently

taken steps to help minimise these costs. '

Another proposed regulatory area now under study is the possibility of  class actions. I take this opportunity to warn of the very real costs  of such a concept. Industry has already expressed grave concern at the  implications of class action suits. Provisions of this type could result  in greatly increased costs to business and the community generally. Class  action legislation has the potential to eliminate the principal impedÂ­ iment to spurious or vexatious lawsuits - the expense involved. WideÂ­

spread litigation would be a very real possibility - and litigation is a

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process which traditionally creates very significant financial burdens.   Ultimately, these burdens would be borne: by the Australian public, In view of this inevitable consequence of class action legislation,  any recommendation to implement a provision of this type would need to

meet a very stringent test of proof of over-riding community interest.

Grounds for optimism It is perhaps a reflection of Australia's strong prospects that the  concerns I have brought forv/ard relate entirely to matters which lie

within our own control and choice. With an industry and trading  environment conducive to economic development, and with the international  advantages Australia possesses, we have firm grounds for optimism in  the eighties. It is up to us all - Government, management and workers

to overcome our problems and make the most of the very real opportunÂ­ ities confronting us. I particularly expect a very real contribution  from people such as I am addressing today, the managers of our economy  in the eighties and beyond.

Canberra ACT '  Â· .  -  '

8 May 1980 Y

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