Australian manufacturers are being urged to cut their spending and improve their productivity to remain globally competitive.
Recently, car manufacturer Ford announced that it was closing up shop in 2016, because production in Australia was four times more expensive than in Asia and double the price of Europe. Some of that could be blamed on Australia's relatively high Australian dollar, making imports more competitive, and exports expensive, but much of it has to do with falling productivity.
As the Nobel laureate Paul Krugman famously put it, "Productivity isn't everything, but in the long run it's nearly everything."
As productivity falls, the cost of producing each 'widget' goes up. Add to that rising labour and power costs, more government green and red tape and you can see why Australian manufacturers are struggling.
As an example, steel makers BlueScope Steel Limited (ASX:BSL) and Arrium (ASX:ARI) ex-Onesteel, have both received government payouts to help them compete against cheap imported steel. But that's only really a short-term measure, and our steel industry could go the way of the car industry, unless it finds new ways to increase productivity and competitiveness.
Incitec Pivot (ASX:IPL) recently took advantage of 40% lower costs in the US to build a new ammonia plant in Louisiana, rather than Australia, and projects get off the ground in half the time in takes here.
Another way of increasing productivity is by adopting new technology. According to a survey by Australian Industry Group (AIG), manufacturers cutting spending could end up shooting themselves in the foot, by not adopting new technology. The report finds that half of the 350 chief executives interviewed who planned to invest in new technology expected their labour productivity to rise.
According to AIG chief Innes Wilcox, the report finds clear evidence of a link between technology investment and improved productivity. A lack of technology investment, and a slowdown in spending on research and development slows productivity growth.
Now that the Australian dollar has fallen below parity, some of the pressure to become more productive has been released, but could quite easily reverse course.
Foolish takeaway
With the resources boom past its peak and slowly tapering off, other industries need to take up the reins and by increasing our productivity, should be able to compensate. The alternative could be much worse, including a recession with high unemployment.
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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.
