The business of Business - Heather Ridout, AIG

Seeking clues to the outlook for Australia's manufacturing industry, Henry Mendelson goes to the top.
Chief executive of the Australian Industry Group, Heather Ridout is the voice and face of the manufacturing sector. Her policy interests embrace the whole range of industry and for a number of years she has been active in developing the Group's public policy in relation to industry, innovation, education and training. If you want to know where manufacturing's going, you ask Heather Ridout.

Asked how she would characterise the current performance of Australian manufacturing, she is, if anything, a realist. On the one hand she is quick to point out that Australian manufacturing accounts for the largest share of business activity, employment, business research and development and a substantial proportion of business investment in the overall economy. The realist in her acknowledges that despite these impressive statistics, the industry is facing enormous challenges posed by global competition, predominantly led by China.

Naturally, any buoyancy, however small, tends to focus on the metal based products sector and, as a result, impacts most on the larger producers. Not all the points are scored by the big boys, however, according to Ms Ridout.

Not Robinson Crusoe
"Obviously, some large manufacturers have access to economies of scale and the ability to effectively market their goods both domestically and overseas. Also, they may be able to source skilled labour more easily, given their ability to train their workers in house and conduct more effective recruitment campaigns. These factors may in some cases give larger manufacturers an edge in comparison with SMEs.

"However, often SMEs are involved in smaller, more specialised markets where product differentiation in terms of quality, technology, service and focus on customer relations can be important in maintaining a competitive edge. In these cases economies of scale and scope may be less important in terms of building competitiveness," she said.

Not that the printing industry has any robinson crusoesque characteristics in this summation. The Ai Group head honcho warns that support for the sector is limited, recalling that the paper, printing and publishing sector struggled in the final quarter last year but on average saw solid growth in activity from mid-2006 to September 2007.

"The sector has faced similar pressures as the rest of the manufacturing sector as a whole, including competition from cheaper imports, the negative impact of a high dollar on exports, and the ability to compete with imported goods. However, solid economic growth in Australia and globally has provided some support to the sector," she added.

Not surprisingly, the discussion soon evolved to the current crisis of skilled labour shortages. Ridout accepts that they are set to continue for some years yet and that they will for some time to come limit the degree to which Australia's manufacturers can successfully compete with overseas competitors. She has for some time now called on government at all levels to deliver world class education and training systems.

Tackling innovation
Heather Ridout welcomes the government's recently announced national review of Australia's innovation system as timely.

"If Australia is to improve on its business innovation efforts and attract global corporations to its shores, then our investment in business research and development and innovation more broadly needs to be strengthened," she claimed, pointing to Industry Minister Kim Carr's recent announcement of the creation of Innovation and Manufacturing Centres to focus on business support for innovation and a Green Car fund for developing fuel efficiency technologies.

"The next challenge for the government will be to strengthen R&D tax incentives, encourage greater collaboration between industry and research institutions, streamline programme offerings at federal and state levels, and to focus the training sector on building innovative skills and capabilities," she added.

At the same time, she explained that innovation covers a wide range of business change and problem solving, from incremental to more significant changes to products, business structures and processes.

"Indeed, today's perception of innovation has become so broad that it has become difficult to distinguish innovation from simple, old-fashioned good business practice.

"For example, while the Australian Bureau of Statistics noted that 34 per cent of Australian businesses undertook an innovative activity from 2004 to 2005, only eight per cent of goods and services innovation was 'new to the world'.''

Need to do more
The World Economic Forum ranked Australia 22nd on innovation performance in 2007-2008. Using the more traditional, and narrower, measure of innovation, covering research and development expenditure by business, Australia ranked 15th of 29 listed countries in the OECD, with the gap between Australia's performance and the top ranking country (currently Sweden) widening considerably over the last decade.

"There is an urgent need to do more to lift the pace and level of innovation in Australian business," Heather Ridout urges. "Based on our research in the manufacturing sector, innovation expenditure by manufacturing was equivalent to 3.2 per cent of sales in 2005-06. In total, 41 per cent of innovation effort was in new products, 36 per cent on new processes, 16 per cent on organisation change and seven per cent on other innovation activities.

"While Australia has focused on new products and processes, with lean production a significant trend in recent times, the rest of the world has been increasingly concentrating on organisational change or business innovation models.

"The reality for Australian business is that they must engage in all elements of the innovation spectrum, with new product development blending with new organisational models, along with continued efforts to lift investment in new technology, processes, supply chains, skilled labour and new markets.

"Yet, despite the need, investment in new plant and equipment by manufacturers fell by 12.4 per cent in 2006/7 and is expected to fall again in the current year."

It's a mixed bag of achievement. On the one hand, frustration, competition and the need for greater ecological awareness. On the other, the Heather Ridout's take on the coming year is one of generally positive growth, paralleled by the challenge to rack up R&D to stay competitive with the rest of the world.

On the environmental side of the ledger she is ever the realist, saying that plans throughout industry to initiate reduction of electricity, gas and water consumption are set to continue. However, she points out that industry needs to be mindful that its interests are not overlooked in the debate about climate change and that the interests of trade-exposed sectors are properly supported.

The jury is out ...

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