Parliament of Victoria

Economic Development & Infrastructure Committee

Submission to the

Inquiry into Manufacturing in Victoria

Proudly Delivered by:

AMAus Swinburne University of Technology (AGSE)

CSIRO (MSE) Advanced Manufacturing CRC

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20 August 2009

The Hon. Christine Campbell MP

Economic Development and Infrastructure Committee

Parliament of Victoria

Re: Joint Submission on Inquiry into Manufacturing in Victoria

Dear Minister

The Advanced Manufacturing Cooperative Research Centre in collaboration with Advanced Manufacturing Australia, CSIRO through the Division of Materials Science and Engineering and the Australian Graduate School of Entrepreneurship at Swinburne University of Technology welcomes this opportunity to provide joint input to the timely Inquiry into Manufacturing in Victoria and argue a compelling case for making the advanced manufacturing industry a high priority for policy makers.

The manufacturing sector plays a vital role in the creation of sustainable wealth, employment, education and creation of innovation driven and globally competitive firms and thriving profit factories. This is more relevant given the growing pressure of global competition, the impact of the global financial crisis and climate change. Victorian manufacturers are rapidly moving up the value and supply chains, with world class capabilities in systematic and continuous innovation, entrepreneurship and clusters as a platform for sustainable growth of existing and new firms. The Victorian Government in partnership with all relevant stakeholders can play a crucial role in accelerating the competitiveness of sustainable Victorian manufacturers and removing the obstacles to growth.

Yours sincerely

Ivan Deveson AO

Chair

Advanced Manufacturing CRC

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1. Executive Summary The open ended nature of the Terms of Reference created a unique opportunity to approach the Inquiry into Manufacturing in Victoria from a multi-stakeholder and multi-disciplinary perspective including strategic foresight. The emphasis was to identify trends, challenges and opportunities for creating a Victorian based high end manufacturing oriented ‘eco system’. This ‘eco system’ could transform existing manufacturers toward a new level of global competitiveness in the context of the knowledge and carbon constrained economy. It would also spawn and nurture new sustainable advanced manufacturing firms like the next Nokia.

Item 1: Explore the Necessary Criteria used by Businesses to Transfer Offshore Manufacturing to Victoria

There are several features that might attract foreign investors. First, there are a number of distressed undervalued assets in wake of the global financial crisis. Secondly, there is the potential to develop clusters. Australia already has several clusters in such areas as wine and medical research. In Australia, Scone in the Hunter Valley has a cluster for the racing industry, Torquay has one for surf wear, Clayton is a hub for the IT industry and Geelong has a focus on wool and textiles. Overseas clusters include Israel’s focus on agricultural technology, Holland on transport and Scotland focuses food and drink, biotechnology, semi-conductors and tourism.

The Victorian Government can play an important role in developing clusters, focusing on Victoria’s manufacturing regions and suburbs. Australian manufacturers need to identify their value proposition and plan for the future, looking at where the future growth will occur and whether this matches any of our strengths.

Based on the literature and the brainstorming session, the joint submission by the AMCRC and its stakeholders makes the following recommendations. The Victorian Government:

• Commission a feasibility study on the role of Government in creating resilient and profitable clusters and supply chains;

• The focus inbound investment attraction should be on new or so called future manufacturing firms rather than existing manufacturers from overseas;

• In partnership with all relevant stakeholders should aim to facilitate the establishment of 500 innovative businesses with 10 employees as opposed to 10 large firms with 1000 employees every year.

• Play an important role in helping existing struggling manufacturers to become advanced manufacturers by transferring their skills to new growth platforms and developing innovation and entrepreneurship skills.

• Commission a study which reviews and benchmark the efficiency and effectiveness of existing Victorian Government investment attraction value propositions, systems, strategies, practices and performance with the best in the world and with footloose global investors.

• In partnership with all relevant stakeholders commission a Research Report on ‘How to create an eco-system that nurtures globally competitive Victorian based advanced manufacturing firms and industry clusters and how to attract globally competitive advanced manufacturing firms from across the world to Victoria’.

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Item 2: Identify and Report on the Factors Which Influence Businesses in Determining Whether to Manufacture in Australia or Overseas Including the Consideration of:

2(a) The Retention of Intellectual Property Rights

The literature on innovation systems in general and intellectual property in particular provides a rich source of evidence based information on the impact of IP on the location decisions of corporations. The Australian Graduate School of Entrepreneurship does not believe that we have large problems with IP rights in Australia.

Speaking from a practitioner’s perspective Mr. Jason Watson, Specialist Counsel at FAL Commercial and Technology Lawyers outlined five practical recommendations at the AMCRC brainstorming session. These include:

• Focus on Smart Attraction and Retentions; • Education; • Clearer Commercialisation Drivers; • Collaborations; and • Developing Comparison Tools

2(b) Maintaining Consistent Quality Standards in Line with Both Federal and State Laws

The literature on quality systems in manufacturing in particular provides a rich source of evidence based information on the importance and impact of quality systems and accreditation on firm performance. Quality systems are essential to match the value proposition of advanced manufacturers from Japan and Germany but they do not necessarily give the local firm a competitive advantage vis the best in the world.

Proposed strategies for the Victorian Government are:

• Change funding arrangements to assist local manufacturers adopt Lean manufacturing philosophies;

• Encourage longer term strategic thinking;

• Revamp the state based Productivity Places Program (PPP) to align with the National Model;

• Liaise with the National Manufacturing Training Network to utilise the skills of the publicly funded RTOs to improve manufacturing performance; and

• Support the MITUP program for automotive and textile and Fibre sectors.

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2(c) Probity Matters

The literature on probity and corporate governance systems in organizations including manufacturing provides a rich source of evidence based information on the importance of this aspect of the inquiry. Overall, the literature suggests that raising the standards of probity and corporate governance will help make advanced manufacturers more competitive.

Speaking on the above issue, Mr. Paul Geyer, State Manager of the Australian Institute of Company Directors made the following observations:

• There are 662 laws that impose personal liability on director for corporate breaches making Australian Boards overly cautious and risk averse.

• Corporate growth strategy typically involves reducing costs (via off-shoring), organic growth, Mergers and Acquisitions (70% of which fail) and Innovation (products, services and marketing).

• The best growth prospects for firms now come from innovation;

• Due to the ageing population, 30% of SMEs will be sold because of ageing owners and poor succession planning;

• Strategic partnerships are very important for Australian firms;

• Streamlining liability laws should be a priority for the Victorian Government;

2(d) Assistance and Incentives Provided By Governments

There is a rich body of literature on assistance and incentives provided by government to firms and the impact on the ability to compete on global markets. Speaking at the AMCRC brainstorming session, Ms. Angela Krepcik, CEO of the Advanced Manufacturing Australia made the following observations:

• Reduce the multitude and complexity of existing government support schemes;

• Increase the accessibility of manufacturers to government support schemes;

• Ensure that the support schemes meet the changing needs of Victorian manufacturers;

• Foster global engagement, this is extremely important to the manufacturing sector whilst volumes continue to reduce and survival for some is in international programs and projects (i.e. Aerospace and Defence)

• Enhance innovation & the adoption of advanced technologies;

• Building skills and business capabilities;

• Adopting environmentally sustainable production processes;

• Make grants effective with economical impact and return for the $;

• Empathy…….business/industry associations, particularly industry bodies who advocate existing programs.

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2(e) Impact of the Global Financial Crisis on Future Decisions Regarding Manufacturing Locations

There are well established, diverse and rich of bodies of literature on impact of economic recessions on firms and their decisions as to where to locate their manufacturing operations. Speaking at the AMCRC brainstorming session, were Ms. Christena Singh, Senior Economics at Sensis made the following important observations:

• The impact of the GFC is manifesting itself in the form of structural change with significant macro and micro economic effects. This is having a huge adverse impact on demand for manufactured products as measured by a drop of 77% (the highest in any sector of the Australian economy).

• Business and Consumer Surveys by Sensis, the Melbourne Institute of Applied Economic and Social Research all show a huge drop in confidence.

• Reasons as to why the negative impact has been so strong are mixed given that Australia is still not technically in a recessions. Weak business investment and dropping consumer demand could be responsible. Multinational firms have withdrawn manufacturing from Australia.

Dr. Charles went on to explain that the current global financial crisis is unprecedented in the post Second World War period and is the most serious shock to the global economy since then. The biggest impact of the CGF has been on the global Financial Sector leading to huge changes in Investment Banking management and leadership teams.

Australia managed to escape the worst of the GFC because our financial and banking system is well regulated. We have a well capitalised banking and credit system. Demand from China has been strong for many years. A Free Trade agreement with China is very important for Australia. The impact on Australian manufacturing has been significant which has shifted the focus on survival and cost cutting. The key message by Dr. Charles is that firms must focus on the fundamentals including business creativity, strategy and skills upgrading. There is a need to develop clusters.

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2. Introduction In this submission we have concentrated on the Advanced Manufacturing Sector. Although many of the recommendations equally apply to manufacturing in general we believe we are best placed to concentrate on this sector.

The Executive Summary examines three key issues:

• Definitions of advanced manufacturing, why it is important and is likely to become more so in the future and implication for Victorian Policy maker priorities;

• What are the key challenges faced by the Australian and the Victorian advanced manufacturing industry;

• What actions the Victorian government should take in order to make the industry sustainable and profitable for the benefit of current and future generations of Australians and deliver triple bottom line benefits.

What is advanced manufacturing, why its importance is growing and why does it deserve to be a higher priority for Victorian Policymakers?

The Advanced Manufacturing CRC defines advanced manufacturing firms as sustainable and globally competitive leaders in innovation, entrepreneurship and export performance based on continuous co-investment in cutting edge research and commercialisation of IP, education and training and close collaboration with other organisations such as CRCs and other stakeholders for the benefit of Australia’s economic, social and environmental well being.

Prof. Danny Samson from the Department of Management and Marketing at the University of Melbourne defines advanced manufacturing as the production of goods or services with a high component of value add through differentiated technology, design and smart processes. Notable Australian examples are companies like ANCA who are world leading manufacturers of high precision tool making robots that compete on world markets on the basis of cutting edge Information Technology application and Intellectual Property commercialisation in niche markets.

Assoc. Prof. Sami Kara, Director of Research at the School of Mechanical and Manufacturing Engineering defines Advanced Manufacturing as knowledge-based manufacturing. It is related to core technology of a manufacturing firm, which differentiates one from another. The concept of Advanced Manufacturing, refers to manufacturing firms whose core technology is not a particular product or technology, rather it is the know-how, which is hardest to imitate by the competitors. For instance, one can disassemble and try to reverse engineer a Cochlear Implant, but it is almost impossible to put it together for a competitor even if they have the individual components. Therefore, Cochlear is classified as an advanced manufacturing firm since their core technology is process know-how, which cannot be easily imitated and as result customer are willing to pay premium price for their product.

Austrade (2009), BRW (2009), the Australian Industry Group (2008) and others have recognised Australia’s advanced manufacturing as being a world leading industry with a bright future. Austrade notes that Australia has a proud record of originality in advanced manufacturing. It is a country that gave birth to the ultrasound scanner, the black box flight recorder and the bionic ear. Today, the sector accounts for around 50% of Australia’s A$104 billion annual manufacturing output and is one of the fastest growing export sectors. Part of this success is due to Cooperative Research Centres, which facilitate cross fertilisation, knowledge transfer and co-investment into cutting edge IP between R&D institutions and the manufacturing industry. As a result, manufacturing currently attract more than $3.9 billion annually in R&D or 49% of all business expenditure on R&D. Close to $10 billion is invested

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annually in new plant and equipment. Advanced manufacturing has become a direct channel for inward investment. In 2006, the value of FDI in Australian manufacturing reached $60 billion. Some advanced manufacturing sectors have attracted particular attention from overseas high tech companies. These include Boeing and BAE Systems for aerospace components; Toyota and other auto manufacturers; BASF and DuPont in the chemicals industry and Siemens in energy and water.

Advanced manufacturing in Victoria has the best chance of being profitable and sustainable given the fact that its competitive advantage lies in IP, continuous research and development, fast commercialisation and clever marketing to sophisticated buyers who look for innovative and premium quality solutions to their needs.

The new breed of advanced manufacturing firms can leverage both the strengths of the Victorian and Australian economy and society which includes stability, resilience and innovation. The Advanced Manufacturing sector builds on the other strength of the Australian economy; education and research. The combination of Australia’s economic resources, advanced manufacturing skills and R&D base provide Australia with an excellent environment for developing advanced manufacturing. In essence, we are looking at the role that each stakeholder plays in creating the right environment for the emergence of the next wave of highly profitable and sustainable advanced manufacturing firms in Victoria. These firms are leaders in their field of IP and remain at the top of the value chain using their core capabilities in continuous and radical innovation, value creation and value capture for the benefit of Australia. The business model of Apple ‘iPods’, which is captured in the slogan ‘Designed by Apple in California. Assembled in China’ can be a benchmark and a strategic direction for Victorian advanced manufacturers who can thrive by focusing on high value R&D, commercialisation and marketing in Australia and outsource the low margin assembly work to Asia.

The continuing competitiveness of the materials and manufacturing sector depends in large part on its ability to innovate. R&D Participants work with the Advanced Manufacturing CRC, and other stakeholders to build, grow and transform Australian manufacturing in areas such as clean technology, automotive, biomedical and smart materials.

For example CSIRO:

• Provides innovative solutions to enable its partners in manufacturing to be globally competitive and sustainable.

• Creates success through the development of new technology, new products and new processes which often leads to the development of new companies and in turn, employment opportunities for Australians.

• With Dulux Powder Coatings/Orica has developed an award winning, cost effective and environmentally sustainable powder coating system. The process has been successfully trialled and is now being customised for coating automotive plastics.

• With Olex to develop a ceramifiable polymer. The revolutionary fire performance cables are expected to make a significant contribution to the Australian economy, earning approximately $75 million over five years.

These successful partnerships demonstrate that Government, CRC's, R&D Providers and manufacturing companies can work together to achieve world class innovations for Victorian manufacturing industries.

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Why does the advanced manufacturing industry need to become a high priority for policy makers in Victoria?

Economic: The industry makes a positive and significant contribution to the Victorian economy through sustainable and globally competitive firms that compete on the basis of innovation and entrepreneurship and export lead growth.

Environmental: The industry is rapidly migrating to new platforms of sustainable manufacturing and its firms are leaders in developing environmentally friendly products, services and solutions that can benefit the Victorian economy and the planet’s eco system.

Social: The industry creates meaningful, highly paid and sustainable job opportunities for the current and future generation of scientists, engineers, technicians and managers by co-investing in cutting edge research and commercialisation and world class education and training.

Cultural: The industry sets new standards of strategic thinking, ethical business practices and collaborative partnerships with R&D providers and government, which can help other industries to re-invent themselves for a future in the 21st century.

Challenges and Opportunities Faced by the Advanced Manufacturing Industry in Australia.

In the wake of the global financial crisis, advanced manufacturing industries around the world are constantly co-investing with government and R&D providers large sums of money and time into building up their capabilities to innovate and compete in a turbulent and competitive space, Australian advanced manufacturers face a number of challenges on how to:

• Remain globally competitive in a fast changing, knowledge driven and environmentally constrained global economy;

• Engage profitably with global supply and value chains;

• Position the Australian advanced manufacturing industry for sustainability and growth in emerging fields such as renewable energy, water, food, health and human wellbeing;

• Profit from the low carbon economy and climate change using the national innovation system; and

• Facilitate more scientists and engineers from our R&D base to spend time in Victorian manufacturing industry e.g. utilising the Enterprise Connect ‘Researcher in Industry’ model.

Actions that the Victorian Government should take in Support of Advanced Manufacturing

The Victorian Government can play an important role in making the advanced manufacturing industry even more globally competitive and sustainable by:

• Making advanced manufacturing a higher priority for industry policy;

• Developing policies that attract investment and high quality advanced manufacturers which will nurture 21st century industries;

• Making funds available for specialist education and skills training in general and innovation and entrepreneurship in particular;

• Reviewing the impact of public policies and regulations and streamlining them in support of advanced manufacturing.

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3. Terms of Reference and our Responses In developing this submission, we used a method called ‘triangulation’ which draws on different perspectives to view a common research question. First, we looked at the existing research literature on successful manufacturing strategies and public policies. The literature gave us optimism and a better understanding of why advanced manufacturing in Australia is full of opportunities especially when federal and state governments create a climate for manufacturing enterprises to move up the value chain and win global markets through innovation, entrepreneurship and collaboration. Second, we organised a Brainstorming Session on 15 July 2009 at the Australian Graduate School of Entrepreneurship. The focus was on the identification of the most pressing issues and the most innovative public policy solutions in support of Victoria’s manufacturing future. The event attracted close to 60 informed stakeholders from industry, R&D providers, Austrade and other experts and practitioners who are ideally positioned to contribute to the Inquiry into Manufacturing in Victoria with a view to making the manufacturing industry globally competitive, export oriented and sustainable from an economic, social and environmental perspective. It provided valuable ideas for advanced manufacturing. Third, we used our own combined experience in working collaboratively to influence and implement public policy in advanced manufacturing. It is from this position of evidence based insight, experience and foresight involving multiple stakeholders and multi-disciplines that this submission endeavours to make a contribution to the future of advanced manufacturing policy, strategy and performance in Victoria in the 21st century

Item 1: Explore the Necessary Criteria used by Businesses to Transfer Offshore Manufacturing to Victoria

Insights into the criteria used by firms to make decisions on where to locate their plants can be gained from at least four fields of research literature. First, there is the Marketing Research literature which draws heavily on Psychology. Second, there is international business strategy literature which contains valuable studies and evidence. Third, the literature in Geography and Urban Studies provides rich empirical studies which have explored this research question. Fourth, the Management Accounting literature provides studies which delve into the tools and methodologies available to firms to make informed decisions about the best place to manufacture. It is not the intention of this submission to delve deeply into each of these literatures rather the aim is to point to sources where valuable empirical based evidence can be found and how to develop a research agenda around the issue. Overall, the research literature shows that manufacturers seek to optimise their benefits.

The United Nations Development Program website has research publications that explore the criteria used by corporations to make location decisions and how public policy and investment climate can impact on them. The Paris based International Chamber of Commerce also has publications on criteria used by corporations to make informed location decisions.

Nicola Watkinson, National Manager, Investment at Austrade provided some insights when she did a presentation at the brainstorming session hosted by the Advanced Manufacturing CRC. Ms Watkinson says that investors are looking for several things: places that offer anything that’s best in class, high levels of innovation, quick delivery that will reduce the need to hold stock and guarantee short production runs, the ability to customize products to suit different markets, particularly Asian growth markets, anywhere that has free trade agreements that offer good access to key markets and the sleeper, sustainability. Places that have a regulatory regime around emissions and power pricing are in a strong position.

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As an example, she cites the example of Chinese carmaker Geely paying $US40 million ($A49.9 million) to Melbourne-based Drive Train Systems International. The Geely acquisition has triggered speculation that Australia’s car sector is poised for a flood of investment as well as new retail car brands from China, as the world’s biggest car market and maker in-waiting seeks better technology and fresh markets. The acquisition will put DSI products and technology into China’s auto industry, one of the fastest growing markets in the world.

Ms Watkinson says Australia has several features that might attract foreign investors. First, there are a number of distressed undervalued assets in wake of the global financial crisis. Second, there is the potential to develop clusters. Australia already has several clusters in such areas as wine and medical research. In Australia, Scone in the Hunter Valley has a cluster for the racing industry, Torquay has one for surf wear, Clayton is a hub for the IT industry and Geelong has a focus on wool and textiles. Overseas clusters include Israel’s focus on agricultural technology, Holland on transport and Scotland focuses food and drink, biotechnology, semi-conductors and tourism.

The Victorian Government can play an important role in developing clusters, focusing on Victoria’s manufacturing regions and suburbs. Ms. Watkinson believes that Australian manufacturers need to identify their value proposition and plan for the future, looking at where the future growth will occur and whether this matches any of our strengths. She has nominated several areas. There could, for example, be research collaborations in biomedical polymers; engineering and design services and testing products in tough conditions.

It is important to note that the role of manufacturing has changed. It is now more about where it fits in the supply chain. Examples include ANCA P/L and Micronisers who thrive by using competitive advantage via innovation to fit into global supply chains.

Attracting investment for manufacturing is now a number one issue for governments everywhere including the Victorian Government.

Venture capitalist and entrepreneur Bob Beaumont made the following observations:

• Australian manufacturers need to constantly focus on making things better, faster, smarter, lighter and cheaper;

• SMEs need to focus on what they do best and how to become larger and more profitable by possibly becoming part of the next generation global supply chains;

• Australia has been the best kept secret. The challenge to communicate ‘What is world class from Australia that can be promoted to the world’;

• There has often been a disconnect between Government and business;

• The Australian Government is a major player in procurement but it does not seem to have the mandate to make SMEs and integral part of their parts and supply chain especially for big ticket defence and infrastructure projects;

• Need to focus on the question of ‘How do we address opportunity in an innovative way?’;

• Most importantly, we need to work out how to engage and leverage alumni and grey hair power for the benefit of Australia;

• Clusters emerge and sustain themselves because of opportunities they identify; and

• Need to look at the best cluster models in Italy.

Based on the literature and the brainstorming session, the joint submission by the AMCRC and its stakeholders makes the following recommendations:

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• The Victorian Government together with industry needs to build on its competitive strengths which include relative economic power on a regional and global scale, trade and investment policies and programs, stability and governance, competitiveness in knowledge intensive manufacturing, world class scientific, engineering, management and commercialisation as well as trade skills, world class research, development and entrepreneurial skills to capture the value of innovation;

• Victoria has attributes that give it an advantage in certain niche areas especially in products where innovation and high levels of skill are required;

• The Victorian Government together with industry and R&D providers needs to nurture world leading and sustainable advanced manufacturing firms across all sectors including IT, biotech, food and clean technologies;

• The Victorian Government can commission a feasibility study on the role of Government in creating resilient and profitable clusters and supply chains;

• The focus of Victorian Government inbound investment attraction should be on new or so called future manufacturing firms rather than existing manufacturers from overseas;

• The Victorian Government is in an excellent position to use its finite resources to support only truly sustainable manufacturers who are globally competitive;

• The Victorian Government in partnership with all relevant stakeholders should aim to facilitate the establishment of 500 innovative businesses with 10 employees as opposed to 10 large firms with 1000 employees every year. This will require both technical and management and entrepreneurship skills and access to resources. Education is the key to building these skills. For example, Silicon Valley is an offshoot of Stanford University, Route 128 is an offshoot of Harvard and MIT, Cambridge Technopole is an offshoot of Cambridge University. As a lead founder for the education sector, the Victorian Government can play a critical role;

• The Victorian Government can play an important role in helping existing struggling manufacturers to become advanced manufacturers by transferring their skills to new growth platforms and developing innovation and entrepreneurship skills. This means developing support skills through education involving TAFE and the Universities. Specifically the Victorian Government should ensure that these two levels of education and training providers are delivering customized education for individuals, firms and sectors in the advanced manufacturing space. For example, the TAFE division of Swinburne University of Technology has recently introduced a Vocational Graduate Certificate in Global Manufacturing; and

• The Victorian Government can commission a Study which reviews and benchmark the efficiency and effectiveness of existing Victorian Government investment attraction value propositions, systems, strategies, practices and performance with the best in the world and with footloose global investors. The study should tap into the leading Marketing Strategy and Public Policy team of experts in Victoria and Australia (including the Melbourne Institute of Applied Economic and Social Research, the Melbourne Business School, the Centre for Strategic Economic Studies at Victoria University, the Australian Graduate School of Entrepreneurship and other centres of excellence);

• The Victorian Government in partnership with all relevant stakeholders should commission a Research Report on ‘How to create an eco-system that nurtures globally competitive Victorian based advanced manufacturing firms and industry clusters and how

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to attract globally competitive advanced manufacturing firms from across the world to Victoria’.

The central research questions need to be:

• What should the Victorian Government do better or faster to attract direct investment in sustainable manufacturing?

• What capabilities, skills and policies does Victoria need to have in order to attract leading, sustainable and profitable advanced manufacturers from around the world?

• How to increase the global competitiveness of the Australian and the Victorian economy?

• How to reposition Australia and Victoria as the first choice for leading, sustainable and profitable advanced manufacturers around the world?

• What is the relationship between successful clusters (networks of organizations working together to drive innovation and entrepreneurship) and the location decision making by advanced manufacturing firms.

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Item 2: Identify and Report on the Factors which Influence Businesses in Determining whether to Manufacture in Australia or Overseas including the consideration of:

2(a) The Retention of Intellectual Property Rights

The literature on innovation systems in general and intellectual property in particular provides a rich source of evidence based information on the impact of IP on the location decisions of corporations. The Australian Graduate School of Entrepreneurship does not believe that we have large problems with IP rights in Australia.

Speaking from a practitioner’s perspective Mr. Jason Watson, Specialist Counsel at FAL Commercial and Technology Lawyers outlined five practical recommendations at the AMCRC brainstorming session. These include:

Focus on Smart Attraction and Retentions:

Businesses licensing technologies overseas can adopt a strategy for retaining IP by manufacturing key components in Australia under secrecy and then supplying to overseas licensees. This allows for quality control and maintaining oversight of activities and sales.

Education, Education, Education

• We commonly come across a lack of understanding of what IP is and the issues associated with it.

• Unless innovators are well versed in IP management, the financial benefit of our R&D investment may flow off shore to organisations more savvy in IP than Australian innovators.

• Although IP can be very complicated, there are some basic fundamental points that assist in the majority of cases. All graduates should have an understanding of these fundamental points and tips on avoiding issues, such as:

• What is IP?

• How is IP protected?

• How can I conduct a patent search?

• Who owns IP?

• Recognise and promote professional associations within the IP and commercialisation context (e.g. LESANZ).

Clearer Commercialisation Drivers

• Australian public research bodies tend to have a protectionist attitude associated with “their IP” and a driver of obtaining the “best return for the Australian taxpayer”

• These drivers tend to lead towards a disparity of opportunity and expectations in terms of:

Financial terms based upon deals done by large overseas businesses;

Milestones that simply cannot be met by Australian SMEs.

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• As a result, these types of deals often:

Either take a long time to negotiate (months to years), delaying the dedication of resources to commercialisation opportunities; or

Fall through at the outset;

Fall through after significant resources have been dedicated but milestones not achieved; or

Need to be renegotiated when milestones can’t be achieved.

• There needs to be an easier mechanism to do these types of deals. We need to realise that pushing for the best return for the Australian taxpayer and creating unnecessary milestones (hurdles) may impact on the likelihood of the innovation staying in Australia and actually making it to commercialisation.

• The Government is in a good position to develop clearer policy on what types of deals can be done and what is expects out of them. In addition, we should be able to specify whether there is “benefit for the taxpayer” either as a short term financial return or longer term opportunity.

Collaboration challenge:

• Collaborations are very useful but sometimes there are roadblocks to their success:

Establishment of collaborations can be very time consuming – establishing barriers and re-hashing common issues rather than moving into collaboration;

Differences in expectations or disputes can arise:

• Ownership of IP

• Competition

• Value of Contributions

• Commercialisation Pathways

• Need to move towards more standardised models to facilitate collaborations. For example, the Joint Strike Fore collaborative program.

• The Victorian Government needs to identify and encourage linkages between companies, both here and overseas. This can be done looking at the existing literature and best practices in industry and developing a customised policy solution for Victoria.

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Developing Comparison Tools:

• We currently lack the tools to compare one opportunity against another from an investment perspective.

What are the factors that make one innovation more successful than another and how can we assess these at the outset?

• How do you assess the quality of a patent application at the outset?

• Incentives such as the Advanced Manufacturing CRC and development of the Commonwealth Commercialisation Institute may assist in these areas.

• Once developed, these tools should be used in putting together research funding proposals.

2(b) Maintaining Consistent Quality Standards In Line with Both Federal and State Laws

The literature on quality systems in manufacturing in particular provides a rich source of evidence based information on the importance and impact of quality systems and accreditation on firm performance. This field of research was particularly popular in the early 1990s when American, European and Australian manufacturers reviewed their quality systems in order to respond to the huge market share inroads on global markets made by high quality Japanese and other advanced manufacturers. For example, the PhD dissertation by Terziovski (1993) looked at the significance of quality accreditation on the performance of Australian and New Zealand firms and could not find a positive and significant relationship. This is not to suggest that quality systems are not important. In fact quality systems are essential to match the value proposition of advanced manufacturers from Japan and Germany but they do not necessarily give the local firm a competitive advantage vis the best in the world.

Notwithstanding the rich insights from the literature on Quality, Mr. Juris Liberts, Manager of the Centre for New Manufacturing at Swinburne University gave a practitioners perspective on the subject matter. The three factors that lead manufacturing decisions include cost, quality and lead time.

Some of the quality related issues in manufacturing include:

• A shift to short term cost down thinking vs. long term strategic Lean thinking for SMEs;

• From a quality/lead time driver to a unit cost down driver;

• Manufacturing is becoming $ focussed rather than customer focussed i.e. $ efficiency Vs Lean efficiency;

• Manufacturing Industry Teacher UP-skilling (MITUP) and National Manufacturing Training Network (NMTN) underutilised by industry and government;

• Lack of funding to adopt Lean introduction for SMEs under pressure to reduce manufacturing costs under GFC; and

• Lack of a national approach to funding lean programs especially Productivity Places (PPP).

The Priorities should include:

• Maintain strong VET up-skilling agenda;

• Short term rather than strategic thinking re GFC;

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• Reduce time delay and cost of up-skilling shop floor persons trained in Lean/Problem solving techniques; and

• Sustainability/ ‘Carbon Accounting is the ‘sleeper’ especially for exporters to EU. Support up-skilling costs.

Proposed strategies for the Victorian Government

• Change funding arrangements to assist local manufacturers adopt Lean manufacturing philosophies;

• Encourage longer term strategic thinking;

• Revamp the state based Productivity Places Program (PPP) to align with the National Model;

• Liaise with the National Manufacturing Training Network to utilise the skills of the publicly funded RTOs to improve manufacturing performance; and

• Support the MITUP program for automotive and textile and Fibre sectors.

2(c) Probity Matters and Corporate Governance

The literature on probity and corporate governance systems in organizations including manufacturing provides a rich source of evidence based information on the importance of this aspect of the inquiry. Overall, the literature suggests that raising the standards of probity and corporate governance will help make advanced manufacturers more competitive. This point was elaborated by Dr. Peter Verhezen, Visiting International Scholar at the Department of Management and Marketing at the University of Melbourne. In his short paper titled Good Corporate Governance in the Australian Manufacturing Industry, Dr. Verhezen has noted that the Australian Stock Exchange has clearly spelled out some corporate governance principles1 which are in line with the some Global Corporate Governance Principles – as expressed in the OECD good corporate governance principles2

1 The ASX and the Australian Corporate Governance Council indicate the following important 10 principles: (1) Lay solid foundations for management and oversight with implies that one need to recognize and publish the respective roles and responsibilities of board and management; (2) structure the board in such a way to add value which will require the board to implement an effective composition, size and commitment of board members to adequately discharge its responsibilities and duties; (3) promote ethical and responsible decision-making which means that ethical decision-making is actively promoted; (4) safeguard integrity in financial reporting which implies that a proper structure is in place to independently verify and safeguard the integrity of the company’s financial reporting; (5) make timely and balanced disclosure of all material matters concerning the company; (6) respect the right of shareholders that also assumes that the effective exercise of such rights, including minority rights, are facilitated; (7) recognize and manage risk based on a sound system of risk oversight and management and internal control; (8) encourage enhanced performance allowed by fair review and by actively encouraging an enhanced board and focusing on management effectiveness; (9) remunerate fairly and responsibly in such a way that it ensures that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is well defined; (10) recognize the legitimate interests of stakeholders, both in terms of legal and other obligations.

and promoted by the

2 The OECD Principles: (1) Rights of shareholders refer to the basic rights of ownership and information. (2) Equitable treatment of shareholders implies equality per shareholding of minority and foreign

shareholders. (3) The role of stakeholders which recognizes their rights and encourage cooperation and information-

sharing.

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ICGN3. Obviously, it can be assumed that manufacturing companies who follow and implement those governance principles may be found less liable to possible litigation suits or ethical breaches. Corporate governance principles are justifiably considered as a needed check and balance system of top management of the firm who run the firm on behalf of the owners. However, management should aim to implement such governance principles which go beyond mere compliance. A firm is a legal entity with rights and responsibilities just like a natural, civilized and compassionate, person emphasizing the overall reputation of a firm and responsibility to a number of stakeholders. Instead of a naïve belief in the single principal-agent theory and its exuberant laissez-faire model based on individual self-interest only, a multiple-principal-agent theory will have more chance to embrace necessary changes to address the global challenges. Hence, a broader definition of good corporate governance should be opted for, taking into account the relationships between shareholders, their board members and top management on the one hand and the different stakeholders who could significantly affect the value of the corporation on the other hand. The fiduciary duty of acting with due care by the boards of directors to the shareholders and by corporate managers to the corporation is here broadened and embraces prudential considerations of how the relationship with other stakeholders could be affected by corporate decision-making. Hence, corporate governance can be defined as the interactions between coalitions of internal and external actors and the board members in directing and steering a corporation for value creation. A corporation can be seen as a bundle of resources and relationships that produce an output in the form of wanted or needed goods and services. The enhancement of stakeholder interests from a board perspective is defensible and necessary, especially if such an argument protects the best interests of the firm, even though such interests may appear incongruent with non-financial goals4

(4) Disclosure and Transparency rules provide timely, accurate and cost-efficient information on all matters

regarding the corporation, including financial and operating results, change of ownership, voting rights, key executives / board members and their remuneration, governance structures, and policies and issues regarding employees.

.

(5) Responsibilities of the Board detail their accountability to the company and shareholders and their role in ensuring compliance with laws and regulations and the integrity of the financial reporting process.

3 See Wallace et al (2005). The ICGN’s Corporate Governance criteria include the following: (1) corporate objectives that optimize shareholder return over time; (2) communication and reporting imply disclosure of accurate, timely and adequate information, and meeting regulating guidelines where they exist; (3) voting rights in the form of ‘one share one vote’; (4) corporate boards should guarantee the fiduciary duty to the shareholders and as result being accountable to the shareholders; (5) corporate remuneration should align the interests of shareholders with those of the Board members; (6) Strategic focus implies that major changes to the core business should not be made without prior approval by the shareholders; (7) Corporate Governance Practices concerning operating performance should ensure that the Board spends its time focused on optimizing the company’s long term operating performance; (8) Shareholder return over a longer period with an emphasis on outperforming companies in relevant equity peer group; (9) Corporate Citizenship refers to the fact that companies should abide by the laws of the jurisdictions in which they operate, looking at the wider stakeholder issues that are more likely to create wealth and employment on a sustainable basis; (10) Corporate Governance implementation will require to develop practical codes of conduct and stress the importance of dialogue between shareholders and the company to address and solve issues. 4 Even though the Delaware jurisdiction – which rules over a great number of Fortune 500 Multinational Corporations - has historically speaking always strongly favoured shareholder rights in its strict legal interpretation, the state Supreme Court has also recognized two important principles in the classic Time-Warner case: “(a) the fiduciary duty to manage a corporate enterprise includes the selection of a time-frame for meeting corporate goals; (b) Directors must chart a course for a corporation which is in its best interests without regard to a fixed investment horizon” (Dimma, 2002: 166). In other words, these two principles now considered as the contemporary mainstream view in the Anglo-American governance framework, it may be appropriate to deviate from short-term shareholder interests in favour of longer-term corporate interests if the interest is fully compatible with longer-term shareholder interests.

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The emphasis should be to use those governance principles to attain a superior position in the market in terms of reputation, credibility and reliability among its main constituents and clients. Moreover, it is our sincere belief – especially after the recent ethical debacles, including the ongoing global economic crisis – that well performing manufacturing companies will ultimately evolve into what is called Global Corporate Citizenship, underpinned by spirited leadership and social entrepreneurship. These notions of governance and citizenship are pointing in the direction of engaging, innovative and integrated business solutions that can start taking on and hopefully transforming our daunting global challenges. Aligning a firm’s commitment to moral values with a competitive strategy is a calling and an art, not [just] an engineering problem. Having a passionate purpose that aligns financial and non-financial objectives and unleashes energies will allow businesses to take sensible risks. To build in best practices may have unexpected positive effects on our environments and even on our psyche. Visionary, purposeful and compassionate leaders function like alchemists who bring to the physical realm dreams and hopes that become attainable in a sensible business proposition. The way our products are manufactured and delivered could constitute a new sustainable and often profitable ecological niche which over time will turn into mainstream manufacturing. Responsive organizations identify, embrace and implement best practices, based on transparency, accountability, fairness, ethically responsible behaviour and governance mechanisms in a strict legal sense. Strategic savvy organizations, however, go beyond best practices and pursue some form of “spirited” sustainability or common good incorporated into their strategy and risk management.

Speaking on the above issue, Mr. Paul Geyer, State Manager of the Australian Institute of Company Directors noted that his organization runs professional development course aimed at raising the standards of probity and corporate governance at the company director and Board level in Australia. He made the following observations:

• There are 662 laws that impose personal liability on director for corporate breaches making Australian Boards overly cautious and risk averse. Growing numbers of company directors have resigned from their position due to the exposure to liabilities;

• Growth in companies including manufacturing firms is by the Risk position and by Strategy;

• Corporate growth strategy typically involves reducing costs (via off-shoring), organic growth, Mergers and Acquisitions (70% of which fail) and Innovation (products, services and marketing).

• The best growth prospects for firms now come from innovation;

• There is an urgent need to bring people with international experience on Australian boards;

• There is a need to broaden the skills base on the boards and expand the talent pool. More women and people from diverse backgrounds should be engaged. The Victorian Government should encourage this by leadership on its own boards;

• Due to the ageing population, 30% of SMEs will be sold because of ageing owners and poor succession planning;

• Strategic partnerships are very important for Australian firms;

• Streamlining liability laws should be a priority for the Victorian Government;

• The AICD can provide manufacturers with experienced and educated company directors; and

• Firms like Deloitte have implemented Innovation Programs across the organization which could be used as a guide for manufacturing firms.

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2(d) Assistance and Incentives Provided by Governments

There is a rich body of literature on assistance and incentives provided by government to firms and the impact on the ability to compete on global markets. Michael Porter’s 1985 classic strategy book on ‘Competitive Advantage of Nations’ clearly shows that Governments can play a useful role in creating a policy and economic environment for firms to grow and compete. Numerous literature reviews on this topic have been published in the top tier academic journals under Strategic Management, Economic Policy etc.

Speaking at the AMCRC brainstorming session, Ms. Angela Krepcik, CEO of the Advanced Manufacturing Australia made the following observations:

• There is a myriad of Government Assistance programs offered by State Government, broadly these are:

Tax rebates and concessions

Business advice and referrals; Grow your business,

R&D – Innovation programs; Developing products and services programs,

Employer services; Environment and sustainability programs,

Export Assistance / Trade Fairs and Missions; Industry Sectors assistance,

Information Technology; Management programs and Assistance,

Regional programs and assistance,

Multi media and more.

There is an urgent need to work towards harmonization by:

• Consolidating existing State Government manufacturing support programs;

• Ensuring that manufacturing industry grant schemes meet the objectives of both government and industry: “relevancy” – change the mindset – demand driven;

• Streamlining grant application and approval processes; and

• Ensure eligibility criteria match the changing needs of Victorian manufacturers

Some of the concerns of the advanced manufacturing industry include:

Where to go:

Internet often confusing re: searches (not user friendly);

Too many grants for SME’s to absorb;

Then it becomes too difficult – which contributes to inadequate awareness;

Marketing is generally through e-blasts, then you are left to your own devices;

More face to face interaction with Industry, responsiveness – huge lead time;

Too much “red tape”, slow approval processes, cumbersome and “bureaucratic”;

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Often too difficult to put the required resources into the research & development to come up with a robust application;

A lot of effort for little return;

Perception that funding tends to only be available from “development to sample” rather than the full commercialisation process;

Grants are rarely provided without companies also providing matching funds, Government should be more mindful of the contribution and investment of the time companies provide (costs associated can be significant and risk taking);

Overall there need to be more Government Grants for the Manufacturing sector that is beyond the automotive sector;

There are numerous grants for the automotive sector giving some reassurance as to the value and assistance / stimulus packages to keep the industry local;

When developing support for manufacturing, an appropriate balance needs to be struck between support for the automotive industry, which has been the most strategically important and largest advanced manufacturing sector, and other parts of manufacturing industry including advanced manufacturing beyond the automotive sector;

Both the Commonwealth and the Victorian governments are providing significant support for the automotive industry with the aim of enabling the industry to remain committed to investing in and producing cars in Australia. The Green Car Innovation Fund is a case in point. It is aimed at assisting the automotive industry to adopt much more fuel efficient and less CO2 emitting technologies;

But the immediate reality is that the production levels of the three local car manufacturers have fallen sharply making it imperative in the short to medium term until car production volumes can return to pre GFC levels for the advanced manufacturing industry, which in the past has been to a significant degree reliant on sales to the automotive industry, to find alternative outlets for its production;

OEMs and Tier 1 suppliers must closely integrate their supply chains in innovative ways that seek to share rewards and responsibilities across the supply chain members, rather than create winners and losers within the chain; and

Move from vertical integration to cooperative clusters needs to be enabled by new technology and integrated supplier development programs that improve efficiency and productivity as well as creating “partnerships”.

Industry/Government aspirations include:

• Encouraging manufacturing companies to diversify into growth areas;

• If the AM industry / capability goes off shore, maintenance will be difficult (increased cost and lead time issues, logistical chaos);

• More engagement with industry;

• In order for the advanced manufacturing industry to reduce its reliance upon the automotive industry it must foster new technologies in order to take advantage of opportunities in alternative markets;

• Overseas experience shows that strong economies need to possess a strong manufacturing base;

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• Critical component of industry capability is to have a “healthy” supplier base;

• Exclusivity is not part of the future;

• Off-shore supply chain creates inefficiencies;

• Advanced Manufacturing needs to become a high priority for policy makers; and

• Industry and governments need to embrace the supply chain, work in collaboration with industry to search for new markets, create opportunities and assist the manufacturing industry to diversify.

Recommendations for the Inquiry into Manufacturing in Victoria include:

• Reduce the multitude and complexity of existing government support schemes;

• Increase the accessibility of manufacturers to government support schemes;

• Ensure that the support schemes meet the changing needs of Victorian manufacturers;

• Foster global engagement, this is extremely important to the manufacturing sector whilst volumes continue to reduce and survival for some is in international programs and projects (i.e. Aerospace and Defence)

• Enhance innovation & the adoption of advanced technologies;

• Building skills and business capabilities;

• Adopting environmentally sustainable production processes;

• Make grants effective with economical impact and return for the $;

• Empathy…….business/industry associations, particularly industry bodies who advocate existing programs.

The Australian Industry Group (AiGroup) summed the problem up in an excellent report entitled “A New Victorian Industry and Manufacturing Strategy, August 2008”.

• “AiGroup believes the needs of government and the needs of business should be given equal prominence in any grant scheme. Indeed, funding limits ensure assistance programs tend to be supply-driven, with the focus skewed towards program objectives rather than business outcomes. Rather than governments starting from a position of “how can we best assist companies”, AiGroup members frequently believe they are required to “fashion” applications to fit government criteria. Furthermore, the competitive application process may result in the rejection of otherwise worthy and potentially successful proposals. Smaller companies, with little or no experience in submitting applications, are likely to be especially disadvantaged. From a practical perspective, AiGroup believes the Victorian Government needs to be especially sensitive to demand for grant programs, and be prepared to increase funding where required”.

• We believe that Ms Angela Krepcik gave real-life examples of these statements during the public hearing.

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2(e) Impact of the Global Financial Crisis on Future Decisions Regarding Manufacturing Locations

There are well established, diverse and rich of bodies of literature on impact of economic recessions on firms and their decisions as to where to locate their manufacturing operations. The classic studies include works by prominent economics like Schumpeter, Keynes and many other more recent examples.

Speaking at the AMCRC brainstorming session, were Ms. Christena Singh, Senior Economics at Sensis and Dr. David Charles from Insight Economics at Deloitte.

Ms. Singh made a number of important observations:

• The impact of the GFC is manifesting itself in the form of structural change with significant macro and micro economic effects. This is having a huge adverse impact on demand for manufactured products as measured by a drop of 77% (the highest in any sector of the Australian economy).

• Business and Consumer Surveys by Sensis, the Melbourne Institute of Applied Economic and Social Research all show a huge drop in confidence.

• Reasons as to why the negative impact has been so strong are mixed given that Australia is still not technically in a recessions. Weak business investment and dropping consumer demand could be responsible. Multinational firms have withdrawn manufacturing from Australia.

Dr. Charles went on to explain that the current global financial crisis is unprecedented in the post Second World War period and is the most serious shock to the global economy since then. Business cycles in economics were once abolished. We now need to rediscover Economic History to find comparable loss of confidence in the financial system and the freezing of credit. The biggest impact of the CGF has been on the global Financial Sector leading to huge changes in Investment Banking management and leadership teams.

Australia managed to escape the worst of the GFC because our financial and banking system is well regulated. We have a well capitalised banking and credit system. Demand from China has been strong for many years. A Free Trade agreement with China is very important for Australia.

There is also a need to rediscover prudence and ethnics. Lack of credit has had a big impact on the auto sector in Australia and particularly the USA. There are now signs that the GFC is starting to abate. Reasons for the GFC include massive over-leveraging. The impact on Australian manufacturing has been significant which has shifted the focus on survival and cost cutting. Massive restructuring is currently underway in the global auto industry (GM, Chrysler under Chapter 11). Australian manufacturers need to find a niche by rethinking their business models and building innovation to offer something unique to the market.

The key message by Dr. Charles is that firms must focus on the fundamentals including business creativity, strategy and skills upgrading. There is a need to develop clusters.

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4. Conclusion The Inquiry into Manufacturing in Victoria has provided an opportunity for the Advanced Manufacturing CRC, Advanced Manufacturing Australia, CSIRO and the Australian Graduate School of Entrepreneurship to engage its most important stakeholders in the preparation of this joint submission. A large number of issues, research questions and recommendations have been generated. It is hoped that the Victorian Government will make advanced manufacturing and all the stakeholders an important public policy and budget priority in the future. The AMCRC and its consortium looks forward to working with all relevant stakeholders in shaping a sustainable and profitable future for advanced manufacturing firms and those aspiring to move up the value chain.

5. References

1. Austrade, 2009, Australia – Your Competitive Edge: Stability, Resilience and Innovation

2. Australian Fair Pay Commission, 2009, Manufacturing Industry Profile, Research Report No. 6/09, March 2009

3. Australian Industry Group, 2008, ‘AIG Submission: A New Victorian Industry and Manufacturing Strategy’.

4. BRW, 2009, Profit Factories: Why Manufacturing in Australia is full of opportunities. July 9-15, p. 20-26.

5. BRW, 2009, Start Small: Nanotechnology is revolutionising industry. July30 – Sept. 2, 2009, p. 26.