We can catch Australia – by manufacturing our way to success

There is only one way we will catch Australia in wage rates and standard of living, and that is by growing our manufacturing sector.

Various reports have concluded productivity in New Zealand is low compared to other developed countries and while that is true as an average across the whole economy, it is not true in the manufacturing sector.

Professor Paul Callaghan from Victoria University has calculated what we need to produce per employee to catch up with Australia and manufacturing is clearly miles ahead of any other sector.  By his calculation we need to exceed $143,000 of revenue per employee.  Manufacturing revenue per employee is $240,000 (total manufacturing) or $250,000 (manufactured exports).

Fonterra comes in at $550,000 revenue per employee and Fisher and Paykel healthcare comes in at $400,000.  This is clearly the way to go, we need more manufacturers with high productivity and we need them to grow their business.

While tourism is a high export earner for the country and is very important, its productivity per employee is relatively low.  Tourism’s economic contribution divided by the number of full time employees is $77,814 revenue per employee, well below the $143,000 we need to catch Australia.

It is well known that in order to have a better standard of living, the most important factor is our productivity.  Productivity, some economists say, is not everything, but is nearly everything.  Productivity does not mean working harder, it means working smarter.  Making and exporting higher value, higher profit goods and services, per hour worked.  I include services in the definition of manufacturing, because modern manufacturers are increasingly adding services into their business offering.

Take Tait Electronics as an example.  They don’t just manufacture and sell hand held communication devices for police and other emergency services; they also provide all the necessary installation, training and back up support for the equipment.

Manufacturing is increasingly highly skilled and more highly paid as a result.  Modern manufacturers employ people with PHD’s, product and package design skills, information communication and technology skills, engineering skills, marketing skills, intellectual property skills, database skills and the list goes on.  When I travel the country, manufacturers tell me one of the biggest constraints to their growth is being able to find and employ enough skilled people.

This message is echoed in a recently released report by Deloitte, Global Manufacturing Competitiveness Index 2010. CEO’s of manufacturing companies from around the world were surveyed on what were the most important contributors to their manufacturing competitiveness and top of the list overall was “talent driven innovation”.  In other words, no matter what country you are manufacturing in talent was seen as a key competitive advantage, unless you were in South America where it ranked second behind “quality of physical infrastructure” which is clearly a weakness for that part of the world.

The Deloitte report points out that the competitiveness of a country’s manufacturing sector is critical to its long term economic prosperity and growth, and indeed if you look around the world, there is no country that has a high standard of living that does not have a strong and competitive manufacturing capability.  The Deloitte report notes that a globally competitive manufacturing sector creates a sustainable economic ecosystem, encourages domestic and foreign investment and improves a country’s balance of payments.  It creates good jobs, not just within the sector, but spilling over into areas such as financial services, infrastructure development and maintenance, customer support, logistics, information systems, healthcare, education and training and real estate.

A strong manufacturing sector boosts a country’s intellectual capital and innovativeness, underwriting research and development, pushing the technological envelope and driving growth in demand for highly skilled workers and scientists.

There have been many high profile leaders in New Zealand in past years predict that manufacturing is a sunset industry, that we can’t compete with China and that the new economy will be a weightless services economy.  They were wrong thankfully, since as the Deloitte report points out, economies built primarily on services will be second tier.  Manufacturing is the biggest employer in the Auckland region and the second largest employer in the country, and contributes to around 50% of our exports.

It is time we all got behind manufacturing and celebrated it for the success story it is and put some thought into how we get this sector to double in size?  The Deloitte report points out manufacturers cannot go it alone and governments must play their part by developing policy and national manufacturing strategies that are collaborative, integrated, focused and effective.  Public policy that has had a positive impact on other countries manufacturing competitiveness has included a focus on science, technology and innovation, technology transfer and adoption, intellectual property protection, having a skilled well educated workforce and a cohesive national policy on manufacturing competitiveness.

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