Australian manufacturing is back

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The Australian article by Rowan Callick.
24 March 2016.

The collateral damage from Australia’s decade of commodity kingship includes the “realistic” notion that our manufacturing is doomed.

The debilitating but widespread notion of economic complementarity between Australia and China, which played into this false determinist narrative, held that this naturally meant we shipped out resources and bought manufactures in return.

BlueScope Steel, spun off from BHP Billiton at the start of its glorious ascendant decade, offers an intriguing counter-narrative.

The demise of carmaking, wrongly viewed as the death knell of manufacturing, does not tell the entire story of a sector in which Australians have demonstrated a considerable capacity.

The car industry employed — and continues to do so — brilliant engineers and others who will strike out in all sorts of interesting directions in the years ahead.

And here’s something extraordinary, a counterintuitive jewel.

Of course in big-picture terms, Australia will continue to produce efficiently many of the resources that our bigger Asian neighbours require, and will rely heavily on imports from smart, large-scale manufacturers in the region, especially in China.

But that’s not the whole story.

BlueScope is a telling, if still rare, example.

It is Australia’s biggest single investor in China, where it employs 1500 people in five centres — Xi’an, Tianjin, Suzhou, Guangzhou and its HQ in Shanghai — and is the leading producer of various hi-tech flat steel products.

Its output is bought and used, not stockpiled. It has carved out important markets in an economy where such inputs are extraordinarily competitive.

There is massive overcapacity in China, which the government has decided to underwrite through credit expansion to ensure it maintains its raw growth targets.

In the past five years alone, the production of finished steel products in China has soared by 145 per cent. BlueScope does not lack Chinese rivals determined to grab its markets, within China or Australia, or elsewhere in our region.

Most steelmakers have been suffering losses in the past couple of years as a result of the oversupply of the global market, of demand falling since 2014, and of stagnant steel consumption markets within China itself.

Last year China produced 819 million tonnes of crude steel, when demand reached only 707 million tonnes.

In the face of growing dumping actions around the world, and as China’s own economy — most manifestly in its property sector — was slowing for a while, the defiant response of China’s Ministry of Industry and Information Technology stated mid last year that “the win-win solution is to push out our superior production capacity to the world”.

BlueScope has been able to survive in this climate, after tightening its own belt appropriately, by providing innovative products and marketing them in a very focused manner.

Not business features widely perceived, even now, among the state-owned enterprises that comprise BlueScope’s principal competitors.

Bernie Landy, the company’s China president, says: “We leverage our core competency and we minimise our exposure to commoditised products” that suffer most as cycles turn down.

“We compete in industrial and commercial construction markets where customers have plenty of choice and are price sensitive. Competition is fragmented and fierce.” But after 10 years selling coated steel, and 20 years both Lysaght’s steel cladding and metal buildings, Landy says the answers are clear in theory — if, of course, immensely challenging to execute with the consistency demanded.

The key solution is “a high quality, branded, premium niche position”. And as China’s market is evolving rapidly — as are others in the region — “adaptability is crucial”. Identifying, hiring and keeping talent is a critical skill, as a foray has been transformed into a long-term commitment to the market.

This rare example provides a model that may profitably be deconstructed by Australian firms trying to grow in the wider world.

It starts, naturally, by a company’s principals getting on planes to take a good, hard and preferably long look at a potential market.

BlueScope would never have maintained such a market in China for so long if it had simply been shipping products there rather than running an operation in the country. Investment is a vital part of growth, providing the crucial market intelligence unobtainable in any other way.

The free-trade agreements with our three biggest export markets — China, Japan and South Korea — provide a terrific lever with which to open fresh growth opportunities.

It doesn’t matter if China is slowing to a “mere” 6.5 per cent growth, Japan remains stagnant, and South Korea is growing only at the same rate as Australia.

It’s the markets for particular products that count, not diffuse, economy-wide macro data. And our output is becoming rapidly more competitive, thanks to the dollar, the reduction of barriers, and the baptism of market fire that tends to ensure only the best gets to position itself for export.

A market breakthrough in a stagnant economy remains a market breakthrough. At one end a big corporation such as BlueScope is showing the way, and at the other, tiny firms are getting the Export Finance and Insurance Corp to stand behind their export contracts with small but strategic loans. Australian manufacturing will not be what it was. But in myriad ways, it’s back. And it’s in China and the rest of Asia.