Melbourne’s Second Speed Economy

Bob Birrell, Ernest Healy and T. Fred SmithCentre for Population and Urban Research

Monash University

Melbourne’sSecond Speed Economy

Bob Birrell, Ernest Healy and T. Fred SmithCentre for Population and Urban Research

Monash University

Melbourne’sSecond Speed Economy

Katharine Betts

2006

ii

Preface

Melbourne’s second speed economyISBN 978 0 7326 2405 7

Published by the Centre for Population and Urban ResearchBox 11A, Monash University VIC 3800Website: <arts.monash.edu.au/cpur>

© Centre for Population and Urban Research, Monash University 2006

Studies of Australia’s economic past and prospective future have been dominated by economists. Theirtools of trade, when applied to the circumstances Australia faces tell us that there is only one economicpathway open to us. This is to go with the global economy and let market forces determine the outcome.But what happens if the resulting adjustments undermine Melbourne’s inherited economic base withoutgiving rise to a viable alternative.

Do we accept our fate and fall in behind the rest of the nation. This is what the Howard government wantsus to do and what the Bracks government has accepted as the way forward as well. Or, alternatively, do weactively seek adjustments that will ameliorate the regional impact? We believe the latter.

The work reported here is designed to contribute to this objective. It builds on the latest labour force data.It also addresses what is happening at the Melbourne coalface, including industries that are most vulnerableto global competition as well as those which have taken on this competition and flourished.

Dealing with industry leaders in the front line has been an enlightening experience. We began with somescepticism about the prospects of Australian firms being able to compete in a world of ferociouscompetition, both in low-tech and hi-tech industries. We ended with admiration for the commitment andintelligence of leaders who have made a success of a very difficult situation and of the capacity of Australianengineers and technologists who have helped make this success possible.

Yet, a key message from the coalface is that such success is at best temporary and contingent on continuedcompetitive effort. For this to happen enterprises need assistance. We hope this study will make clear whythis is the case and the appropriate form such assistance should take.

AcknowledgementsThanks to Trevor Worthington, Vice President Product Development at Ford, Tony Carolan, GeneralManager, Business Development at Hawker de Havilland, Dr Rainer Schanz, Executive Vice President atBosch (and other Bosch staff), Tony Malligeorgos, Director of Marketing and Business Development,Ericsson Australia & New Zealand, and Stephen Stoddart, National Automotive Manager at ACIS, federalDepartment of Industry, Tourism and Resources, for taking time out to give us the benefit of theirknowledge. Thanks also to Professor John Sheridan, Head, Mechanical Engineering at Monash, whoorganised a conference with local industry leaders and who provided advice throughout the project. Weappreciate the cooperation of many other industry people who answered our requests for information.Professor Kevin O’Connor provided valuable feedback on an earlier draft.

AuthorsBob Birrell is Director of the Centre for Population and Urban Research (CPUR) at Monash University.Ernest Healy is Senior Research Fellow in the CPUR. T. Fred Smith is Honorary Professorial Fellow in theCPUR. He was previously Deputy Vice-Chancellor—Research at La Trobe University and CEO of the LaTrobe University Research and Development Park.

iii

ContentsMelbourne’s dilemma: from protection to global competition 1

The Bracks government’s internationalist strategy for Melbourne 4Making Melbourne attractive 5People-driven growth 5

The real world: manufacturing in Melbourne 7The protectionist heritage 7Manufacturing employment in decline 7The protectionist era—what have we lost? 10The motor vehicle industry 12Motor vehicle component manufacture 14Globalisation success stories in the motor vehicle and parts industry 16Other globalisation success stories 18Policy implications 19

The Bracks government’s hi-tech innovation vision 21The vision 21Attracting the ‘creative class’ 21The hi-tech ‘master plan’ in practice 23Bio 21 25The Australian National Synchrotron 25

The role of property, business and financial services 27Melbourne and Sydney compared 27The property industry and employment in Melbourne and Sydney 30

Victoria’s people servicing strategy 34The population growth driver 34Is Melbourne’s property boom sustainable? 35The population outlook 36Keeping housing cheap in Melbourne 37

Conclusion 40

Endnotes 42

Addendum: The 2004 election campaign 42

iv

Executive Summary

There are winners and losers fromAustralia’s resources boom. Sydney andMelbourne are the prime candidates for

the loser’s role, as capital and labour are suckedinto Queensland and Western Australia.

So far, it is Sydney which exhibits the clearest signof moving into second-speed mode. The engineof Sydney’s previous strong growth, the propertyand business services sector, has spluttered sincethe Olympics in 2000. At the same time, housingconstruction has collapsed, partly because thecity is experiencing a serious net loss of residents.

In Victoria, the Bracks government has assuredthe public that Melbourne will escape Sydney’sfate. Why? Because the government claims tohave laid the groundwork for Melbourne tobecome a global centre of hi-tech industry. Thisgroundwork includes making Victoria thepacesetter for a Third Wave of Reform inAustralia, in which it is asserted that the shock ofglobal competition will help promote the renewalof the Victorian economy.

But what if these adjustments facilitate themining industry boom and at the same timehasten the demise of industries dependent on thedomestic market—the main core of which arelocated in Melbourne?

The Bracks government is remarkably confidenton this issue. It has tacitly decided to letestablished industries sink or swim. Instead, it hasput its rhetoric and to some extent its moneybehind enterprises which it believes can exploitresearch findings. Its strategy to this end includesattracting footloose capital and innovation skillsby improving Melbourne’s physical and culturalattractions.

Our analysis questions the assumptions behindthe Bracks government strategy. The main reasonwhy Melbourne has not slowed to Sydney’s‘second speed’ is that the property and

construction boom, which has been the maindriver of employment growth in Melbourne, stillhas some steam left. This boom, along withaccompanying retail, health and educationalservices has kept job growth relatively healthy.

Meanwhile, Melbourne is already being hit by acontraction of its manufacturing base, which willcertainly intensify. The motor vehicle and partsindustry is particularly vulnerable.

There is some good news. Some big firms basedin Melbourne have found a niche in the globalsupply chains of their industry. Their comparativeadvantage lies in the engineering and technicalskills available in Melbourne. However, even theseindustries are not assured of survival in the globalmarketplace and are vulnerable to the run-downof the established manufacturing base.

At the same time, on closer inspection, theglimmering hi-tech vision for the future looks likea mirage. State investments such as in Bio21 andthe Australian National Sychrotron will give awelcome impetus to scientific research but not toglobally-competitive product innovation in thenear term.

Political rhetoric aside, Melbourne’s economy ispoised in a very delicate position. It seems likelythat the property boom will abate,notwithstanding the state government’s vigorousefforts to keep it going, thereby exposing theunderlying weakness of the Victoriangovernment’s economic strategy. Should thisslowdown occur, the city would lose its mainemployment driver.

It is time the community in Melbourne was madeaware of this situation. There are ways to helpmaintain and improve the productivity of existingindustries. However, while the governmentpursues its fanciful approach to innovation, theyare likely to be ignored.

1

Melbourne’s dilemma: from protection toglobal competition

MELBOURNE’S SECOND SPEED ECONOMY

Melbourne has prospered during the economicboom of the past decade. However, seriousconcerns are emerging about the futureprospects of the Victorian economy and theMelbourne economy in particular. In part, theseconcerns stem from the observation that Australiais now characterised by a ‘two speed’ economy—with the resource rich states motoring ahead ofthe remaining states. Progress in the resourcerich states may be at the expense of the otherstates. It has been a staple of economic analysis inAustralia that when the resource-based industriesflourish this prompts concerns about the fate ofother industries (and the locations in which theyare concentrated) which are subject tointernational competition. This is in part becauseof the upward pressure placed on the Australiandollar when the value of resource-based exportsincreases sharply. It is also possible that peopleand capital will gravitate towards the boom states.

The Bracks government denies there is aproblem. According to the Victorian Treasurer,John Brumby, Victoria is powering ahead nicelydespite the resources boom. He recently claimedon radio that over the past year ‘... one in everythree new jobs around Australia has beengenerated in Victoria’.1 However, the situation inMelbourne belies Brumby’s confidence. Table 1shows the growth in employment in Melbourneover the four quarters (averaged) to August forthe years 2003 to 2006. Itindicates that employmentgrowth in Melbourne isslowing both in numericalterms and as a share ofthe growth inemployment acrossAustralia. WhereasMelbourne accounted for28.6 per cent of jobsgrowth in Australia in the

12 months to August 2004, its share had declinedto only 10.2 per cent in the 12 months to August2006. A further statistic, which should set thealarm bells ringing, is that between 2002–03 and2005–06 employment in manufacturing inMelbourne fell from 263.5 thousand to 247.3thousand (see Table 2).

Since it came to office in 1999, the Victorian stateLabor government has staked out a distinctiveposition on these issues. It has developed policieswhich it claims will help make Victorianenterprises viable players in the global economy.These policies are designed to make Melbourne alocus of innovative industries which can sell intothe international marketplace. This, it hasreassured voters, will be facilitated by the stategovernment’s encouragement of hi-techindustries and its efforts to make Melbourne anexciting place that will attract the relevant skillsand capital. All this will be accomplished, so thegovernment assumes, in a context whereVictorian firms, whether new or long established,are exposed to the full force of globalcompetition.

The possibility that increased competition fromenterprises outside Australia might have aharmful effect on the Victorian economy overalland not merely industries inherited from theprotectionist past has not been countenanced.

Table 1: Melbourne’s share of Australian job growth over the years ending August 2003 toAugust 2006

Source: ABS, Labour Force Survey.Note: the four quarters to August each year have been averaged

2003–2004 2004–2005 2005–2006

Change in employment in Melbourne (’000s) 45.1 63.9 19.5

Change in employment in Australia (’000s) 157.8 326.4 191.2

Melbourne’s share of Australia’s growth (per cent) 28.6 19.6 10.2

2

Rather, such has been the government’sconfidence in its innovation strategy that anycasualties amongst existing industries along theway tend to be seen as part of the inevitablecollateral damage to be expected from aprogressive economic policy stance.

This policy stance, if nothing else, has created agood public relations impression while Victoriashared in Australia’s post late-1990s economicexpansion. This expansion was driven by amassive property boom unrelated to the state ofhi-tech industry in Victoria. The state governmentcould parade its ‘innovative’ policies withouthaving to worry about being called to account asto their credibility. Now that the property boom isabating and Victoria is being threatened bothfrom within and without Australia—by increasedcompetition for people and capital from otherstates and the ferocious impact of Asian-originimports—any weaknesses in the stategovernment’s economic strategy becomes a moreurgent matter.

What if the innovation strategy does not work?What if, at the same time, the state’s coremanufacturing industries also begin to founder?Our review of the evidence concerning the stateof the manufacturing sector in Melbourneindicates that manufacturing employment isbeginning to crumble in the face of increasedinternational competition, particularly low-costcompetition from Asia.

The Victorian government is in a precariousposition. Melbourne, like Adelaide, is vulnerableto the structural adjustment process which all theeconomic pundits predict will intensify as

Australia’s resource-based industries flourish. Thefederal government is determined to let theprocess run, even though as the head of theTreasury, Ken Henry has acknowledged:

The adjustment will be characterised by a sizeableshift in resources from import competingmanufacturing to resources and to the sectors of theeconomy complementary with China’s developmentneeds.2

Henry asserts that government’s have no choicebut to adapt:

Our governments can embrace the challenges andopportunities presented by the globalising effects ofthe information and communications technologyrevolution and the re-emergence of China and India,or they can admit defeat by retreating to policyapproaches of the past.3

He makes it clear that the federal governmentwill not retreat. Instead, the answer is ever morereform to make our markets more competitive.To this end, he notes the Council of AustralianGovernments (COAG) has begun the process onmatters like ‘pricing, competition andcompetitive neutrality—in transport, energy andwater—that have prevented the development ofnational markets in vital infrastructure areas’.4

The reforms Henry advocates may make Australiaa more competitive player in global raw materialmarkets, thus prompting further structuraladjustment and adding to the threat toMelbourne’s existing industrial base. Where doesthe Bracks government stand on these issues? Itdoes acknowledge that competition in themanufacturing sector is becoming more intense.However, far from stepping back from the federalagenda, it is one of the most enthusiasticsupporters of it.


Table 2: Persons (’000s) employed in manufacturing and total employment in Melbourne in the years ending August 2003 toAugust 2006

Source: ABS, Labour Force Survey, quarterly dataNote: the four quarters to August each year have been averaged

2002–03 2003–04 2004–05 2005–06

Manufacturing 263.5 261.4 256.7 247.3Other industry sectors 1458.1 1505.4 1573.9 1602.7

Melbourne total 1721.6 1766.7 1830.6 1850.0

3

During 2005, the Bracks government sought toreinvent itself as the pacesetter in reform amongAustralian state governments. It did this on thebasis of a carefully researched statement thatjustified the need for a new wave of reform. Thisstatement, entitled A Third Wave of NationalReform, argues that Australia has done well interms of rates of productivity growth since theearly 1980s from two waves of reforms. The firstwave it credits to the Hawke/Keatinggovernment’s opening of the Australian economyto international competition via the floating ofthe dollar, the deregulation of the financialsystem and reduced tariff protection. Theassociated shocks are seen as very positive.According to the paper, ‘Greater integration withthe world economy created both the pressure andthe opportunity for enhanced competition andproductivity’.5 The second wave of reform andproductivity growth are said to stem from COAG’sembrace of National Competition Policy, as aresult of which (amongst other consequences),government businesses had to accommodate tothe entry of private sector competition.

It is maintained that a new ‘Third wave of reform’is needed if Australia is to stay abreast with therest of the world in the productivity stakes and tohelp Australian enterprises cope with newcompetitive challenges from China and India.This third wave should focus on theenhancement of human capital, including skillsdevelopment. The Bracks government wants toput this ‘third wave’ perspective at the centre ofthe COAG decision-making. Bracks proposes thatthe states join with the national government inpressing this agenda for the benefit of allAustralians. The document draws on modellingdone by University of Melbourne economists,which claims that the proposed reforms willdeliver a substantial productivity bonus.6

The Bracks reform agenda is remarkably upfrontin its assessment of where the Australian economyis going. The policy implications of thesecompetitive challenges are said to be that:

Australia must continue to expand its influence insectors where it has global opportunities. These

sectors, which include the traditional strengths ofresources and agriculture (and associateddownstream production) and, increasingly, emergingmanufacturing and service industries are likely tohelp drive Australia’s future prosperity.7

This is essentially the federal perspective, as statedabove by the head of the Treasury. It is implicit inthis statement that the manufacturingenterprises, inherited from the protectionist era,have had their day. From the Victoriangovernment’s perspective, any job losses inmanufacturing will be more than made up fromprospective job gains from its ‘innovation’strategy.

Meanwhile Victorians are faced with theimmediate problem that structural change on thefederal government’s terms is likely to consolidatetheir ‘second speed’ status. The Bracksgovernment has positioned itself as the championof the very policies that will accelerate thisprocess. Having entered the COAG reformprocess on these terms, it now has little room tomanoeuvre in mounting a defence of alternativegoals and policies. The Bracks government hasfinessed itself into a position which is arguablycounter to the interests of its own people.

MELBOURNE’S DILEMMA: FROM PROTECTION TO GLOBAL COMPETITION

4

The Bracks government’s internationaliststrategy for MelbourneWhen Steve Bracks and John Brumby weremobilising to take on the Kennett governmentbefore the 1999 Victorian state election, similarconcerns to those being voiced today about thefate of the states which do not share in theresources boom were being raised. For example,one of the contributors to an election taskforceset up to guide Labor policy noted that:

The Victorian economy has historically, largely as aresult of protectionism, had a production basedirected at the domestic economy. During the 1980sand 1990s, the reduction in protection and otherforms of industry assistance saw the Victorianeconomy become more exposed to internationalpressures in a way that the ‘growth states’ were not.Financial deregulation, and in particular thefloating of the exchange rate, saw the Australiandollar become a proxy for world commodity pricesand as a result, Victoria now finds itself a victim ofbuoyant world commodity prices. When commodityprices rise, the Australian dollar rises underminingthe competitiveness of the Victorian manufacturingsector by making imports cheaper and exports moreexpensive.8

Bracks was Shadow Treasurer at the time. He waswell aware of this issue. In his introduction to thetaskforce report, he notes Victoria’s ‘over relianceon manufacturing, which is subject to greatercompetition as a result of declining tariffs’.9 Quitesensibly, he declared that a new economic policywas required, which among other things would‘strengthen existing industries and clear the pathto enable new industries to emerge’. Even thehighly protected textiles, clothing and footwearindustry is mentioned as a ‘key industry’ sector inneed of support.10

As it turned out, the fears about Victoria’seconomic vulnerability at the end of the 1990sproved to be premature. There was a revival ofeconomic and employment growth in both

Melbourne and the rest of Victoria from the late1990s which has, until recently, served to allayfears such as those articulated above. This revivalhad little to do with the government’s industryinnovation strategy. Rather, the election of theBrack’s government coincided with theacceleration of a massive property boom fromwhich Melbourne has benefited. This boom hasgenerated rapid growth of investment inconstruction activities and consequentemployment in construction and associatedbusiness services.

Bracks and Brumby in particular are well aware ofthe extent to which they have benefited politicallyfrom the property boom. While they do notacknowledge the extent of their government’sdependence on this boom, they never tire ofdeclaring how important it is to promote itscontinuance. One of the policies directed to thisend is the government’s pursuit of highpopulation growth. Prior to the 2002 election, thegovernment announced a population target forVictoria of 6 million by 2025, including a specificannual growth target for regional Victoria of 1.25per cent. In order to achieve this objective, thegovernment has created a large state immigrationdepartment whose function is to exploit all thepotential visa categories through which the stategovernment can encourage settlement in Victoria.As is shown below, this activity has attractedthousands of additional people to Victoria, mostof whom have ended up in Melbourne.

Notwithstanding its ongoing reliance uponpopulation growth and associated constructionactivities as the basis for economic growth,innovation is the rhetorical centrepiece of thegovernment’s economic strategy. Leading Laborfigures repeatedly assert that their program forturning Victoria into an internationallyprominent ‘innovative’ economy will provide a


5

strong foundation for the state’s economic futureand that their policies are already workingeffectively to this end.

The favourite example in support of this claim arethe achievements of Toyota, General Motors andto a less extent Ford in selling increasing numbersof built-up cars produced in Melbourne into globalmarkets (see Table 4). This example is said toexemplify the capacity of Victorian manufacturersto incorporate the results of local research anddevelopment (R&D) into a competitive exportmarket. In the government’s May 2003 statementon manufacturing policy, it is stated that exports ofadvanced manufacturing (the main component ofwhich was built-up vehicles) reached a record highof $8 billion in 2001, up 32 per cent in 3 years.11

However, as the discussion below indicates,imports have ravaged the production of vehiclesfor sale within Australia as well as locally producedmotor vehicle components.

This inconvenient reality has not deterred theBracks government from pursuing its‘innovation’ strategy and its parallel neglect ofestablished manufacturing industries. Indeed, asthe economic boom of recent years has waned,Labor leaders, particularly Treasurer Brumby,have become more assertive in their belief thatVictorian industry will flourish in the globaleconomy and disdainful of those enterprises thatcannot survive the competitive shock.

Making Melbourne attractiveThe ‘innovation’ program is focussed on thecreation of an economic setting that the Victoriangovernment believes will encourage the locationof new industries in Melbourne. This includessupport for scientific infrastructure which isallegedly needed for cutting-edge industrialinnovation. The Australian National Synchrotronis the most lavish of such expenditures.

The Brack’s government also wants to attract‘footloose’ skills and capital to Melbourne fromelsewhere in Australia and the rest of the world.To this end, there has been heavy investment inpromoting Melbourne as an internationally-

recognised ‘place to be’. This objective is built onthe belief that economic innovation and globalcompetitiveness can be achieved through theattraction of globally-mobile creative people. As aconsequence, the provision of a physical andcultural setting that is attractive to such personshas become a preoccupation of the Brack’sgovernment. The Docklands project is thecentrepiece of this strategy. Governmentspokespersons repeatedly assert that themakeover of inner Melbourne is achieving thisgoal. Here is a typical example of governmentplace-marketing rhetoric from Premier Bracks, inresponding to Melbourne being judged the‘world’s most liveable city’:

… It’s a great international capital city … We havea diverse and culturally rich society with greatservices and world class infrastructure … We havealready seen a turnaround in the population driftaway from Victoria … this adds to our reputation asa stylish, cosmopolitan location internationally,attracting an ever increasing number of visitors fromoverseas … Melbourne is the best city in the world tovisit, or to live and work.12

This is fine rhetoric. But where is the evidence oflinks between this sprucing up of Melbourne, thegovernment’s ‘innovation’ strategy and thecreation of significant numbers of new jobs? Ourinvestigation indicates that there are someimpressive hi-tech winners located in Melbourne.But even these successes have a continuing fighton their hands to survive in a world of fiercecompetition.

People-driven growthMeanwhile, the one industry which continues todrive investment and job creation (albeit withoutany significant contribution to economicrenewal) is construction. For this to bemaintained, Victoria needs to continue to fueldemand for apartments and houses. In effect, theheart of the Victorian economy is now not abouttechnological innovation, but about populationgrowth and the associated expansion of ‘peopleservicing’. This point is documented in ouranalysis of the property boom and its flow-oneffects as regards employment creation below.

THE BRACKS GOVERNMENT’S INTERNATIONALIST STRATEGY FOR MELBOURNE

6

This is a precarious strategy. For a start, it isextremely expensive. Melbourne has a ravenousappetite when it comes to providing theinfrastructure needed to accommodate furtherpopulation growth. Transport infrastructureprovides an example. As studies of trafficcongestion in Melbourne have shown, the city’santicipated population growth (andaccompanying increases in trip numbers) isexpected to be the major source of additionalroad traffic (and thus worsening of the city’scongestion problems) over the next thirty years.13

More fundamentally, what happens if and whenpopulation growth stops? This concern is notfanciful. The Victorian government’s ownDepartment of Treasury and Finance recentlyissued an econometric study which concludesthat, as a consequence of the resources boom,Victoria’s economy is vulnerable to competitionfrom northern and western Australia for capitaland people.14 The experience of Sydney (detailedbelow) provides some insight into the widerimplications of a deflated property market for theoverall economic health of the metropolitaneconomy.


7

The real world: manufacturing in Melbourne

The protectionist heritageHistorically, manufacturing has played a crucialrole in Victoria’s economic development. Victorianpoliticians led the movement after Federation in1901 to convert the Australian government to apolicy of national economic protection. Theprotectionist approach to nation building wasinspired by the belief that, without economicprotection to ensure the growth of manufacturingindustry, Australia would remain in a position ofeconomic dependency in the world. As AlfredDeakin put it in 1906 Australians ‘should not allremain hewers of wood, drawers of water, shearersof wool and growers of wheat’.15 Victoria has sincebeen the main beneficiary of this policy, at leastwith regard to the encouragement ofmanufacturing enterprises dependent onprotection from overseas competition. During the1950s and 1960s Melbourne’s populationexploded from 1.3 million in 1951 to 2.0 million in1961 and 2.6 million in 1971, largely becauseMelbourne was the main settlement point inAustralia for overseas migrants. The main reasonfor this concentration was the availability ofemployment in the city’s expandingmanufacturing sector. This expansion was closelylinked with enormous growth in the housing andrelated urban infrastructure industries, asMelbourne’s suburban frontier spread in order toaccommodate the extra population.

By 1986, there were around 300,000 personsemployed in manufacturing in Melbourne.Despite the early 1990s recession and the initialimpact of the reductions in tariff levelsimplemented by the Hawke Labor Government, by1996 the number employed in the sector inMelbourne was still at this level.16 This outcomepartly reflected the tendency for manufacturingemployment in Australia to concentrate inMelbourne. As of 1996, around 25 per cent ofAustralia’s manufacturing employment was located

in Melbourne. By 1996, manufacturing employedfar more people than any other industry sector inMelbourne (around 18.5 per cent of the totalemployed population). These numbers do not tellthe full story about the importance ofmanufacturing to Melbourne. Many of thoseemployed in the growing business services sectordepended on demand for their services frommanufacturing enterprises.

Manufacturing in declineAll of this is now under threat. Manufacturingemployment is precariously situated. Employmentlevels in manufacturing in Melbourne remainedfairly stable to 2000–01, after which time theycontracted markedly. Employment inmanufacturing is estimated to have fallen by36,000 over the years 2000–01 to 2005–06, duringwhich time Melbourne’s share of manufacturingemployment in Australia fell from 26 per cent to24 per cent (see Table 3).17 Manufacturingemployment is precarious because most enterprisesevolved here in a protected environment, whichallowed them to compete against importedproducts in the Australian domestic market.According to the Victorian government, only 12per cent of all Victorian manufacturers aresignificant exporters of their product.18 As aconsequence, manufacturers are vulnerable to theremoval of tariffs and other protective barriers.

One response may be that while this removal ofprotective barriers has been going on for twodecades, employment levels in manufacturing inMelbourne had not declined much by the start ofthis century. However, Australia’s tariff walls arestill in the process of being dismantled. Moreover,this dismantling is occurring in the context of therecent emergence of ferocious new competitors,notably those located in mainland China. Thecompetitive advantage of enterprises situated inChina, given the extraordinary low rates of pay,

8

yet strong labour discipline, is enormous. Further,as the Victorian Department of Treasury andFinance discussion paper cited above hasacknowledged, the strength of the Australiandollar due to the minerals and energy export priceboom is adding to these competitive pressures.The resources boom and its accompanyingdemand for skilled workers is also making lifetougher for manufacturers because this demand isadding to the costs of employing engineers andtradespersons and is limiting their availability.

Table 3 tells the story. As noted, manufacturingemployment in Melbourne fell by 36,000 between2000–01 and 2005–06 from 285,000 to 249,000.Furthermore, 70 per cent of the net decline inmanufacturing employment in Australia duringthis five-year period (of 51,000) occurred inMelbourne. The decline has been severe inindustries like clothing, where labour accounts fora high share of overall costs. As detailed in Table 3,there were 31.3 thousand persons employed in thetextiles, clothing and footwear industry inMelbourne in 2000–01. By 2005–06, that numberhad fallen to 17.5 thousand persons. The loss ofemployment in these low-skilled industries may notbe lamented by everyone. Nevertheless, given thehigh concentration of non-English-speaking-migrants in Melbourne, the collapse of theclothing industry will have severe socialramifications within the Indochinese community,as in Springvale, where the clothing industry hasbeen strong in the past.

With a few exceptions, employment has fallenacross a wide spectrum of manufacturingindustries in Melbourne between 2000–01 and2005–06. Among those industries affected are thebasic chemical and other chemical industries. Theformer includes organic and inorganic chemicals,both crucial ingredients in modern industry. Thelatter includes the pharmaceutical industry as wellpesticides, detergents and cosmetics. Anothernotable industry to decline in employment (froman already low base) is the electronic equipmentindustry, which encompasses computers,telecommunications and other electronicequipment.

There are some manufacturing success storieswhich counter this gloomy record. As part of thepreparatory work for this study the Head of theDepartment of Mechanical Engineering atMonash, Professor John Sheridan, organised aforum (held on 2 August 2006) in which sometwenty local manufacturers were invited. Some ofthose present have flourished, including ANCA,the Australian-owned machine tool producerlocated in Bayswater, which is selling highprecision grinding machines and other machinetools into the global market are deservedly wellpublicised. ANCA employs some 230 persons at itsBayswater plant, including around 65 engineers.Davey Water Products which produces pumps soldboth in local and overseas markets was another.The key to their success appeared to be theirsustained effort to improve the performance andreduce the costs of their products. For this purposethe availability of creative, but practical, locally-trained engineers was critical. Blue sky, newproduct innovation which builds on scientificresearch, had little to do with their success.

There would be less concern if themanufacturing employment figures hid a recordof high productivity, where lower employmentlevels were accompanied by rising output.Unfortunately, estimates of production levels forindustry in Melbourne are difficult to procure.Nevertheless, gross-value-added data, whichestimate physical production levels for Australiaas a whole, are available. These show very limitedgains in manufacturing output this century. Totalmanufacturing output, in value added terms,grew by just 5.7 per cent between 2000–01 and2004–05.19 By contrast, gross value added in theconstruction industry grew by 43.8 per cent.Other indicators of this malaise are well known,including the declining share that Australianmanufacturers hold of the Australian domesticmarket. One estimate indicates that the share ofimports in the domestic market for manufacturedgoods has increased from 24.1 per cent in 1990 to35.4 per cent in 2000 and 42.4 per cent in 2005.20

There has been no compensating increase inexports of manufactures, at least over the past fiveyears. Rather, exports have stabilised.21


9

THE REAL WORLD: MANUFACTURING IN MELBOURNE

Some local manufacturers may survive importcompetition, but often this requires moving partof their production process offshore. As thechannels available for such relocation broadenand experience deepens in dealing with offshoreproviders, it is inevitable that further off-shoringwill occur. According to the Australian IndustryGroup’s 2006 survey of Australianmanufacturers, the level of offshore intensity, asmeasured by the proportion of sales whichinclude components drawn from overseas, isforecast to increase from 30.2 percent in 2005 to37.8 percent in 2006.22

Representatives of manufacturers are nowbeginning to make their voices heard about thesituation outlined above. They are being aidedby the stream of distress stories of workersdisplaced by factory closures in Melbourne and

elsewhere across Australia. For the most part,the Victorian Labor government (thegovernment’s submission to the House ofRepresentatives inquiry into the automotiveparts manufacturing industry, discussed below isa notable exception) has maintained a discreetsilence on the increasing level of discontentamong manufacturers. To acknowledge thedecline in manufacturing employment detailedabove would be to hand the Bracksgovernment’s political opponents a seriouspolitical weapon. Yet, behind the scenes (as isdetailed further below), economic analystswithin the Treasury as well as the Treasurer, JohnBrumby, have no illusions about the vulnerabilityof the manufacturing industries. Their hope isthat out of the ashes a new set of innovative andinternationally-competitive industries willemerge.

Source: ABS, Labour Force Survey, 2000–01 and 2005–06; customised data set held by CPUR.Note: the quarterly data for each year have been averaged in order to reduce sampling error.

2000–01 2005–06 Change Change Share of Share of2001–01 as percentage Australia Australia

to 2005–06 of 2000–01 2000–01 2005–06Melbourne numbers per cent

Textiles, clothing and footwear 31.3 17.5 -13.9 -44.2 37.2 31.2

Basic chemical manufacturing 5.3 2.1 -3.1 -59.2 39.9 28.7

Other chemical product manufacturing 13.3 12.5 -0.9 -6.5 32.6 35.3

Rubber product manufacturing 4.3 1.6 -2.6 -62.1 52.1 28.7

Plastic product manufacturing 13.6 9.5 -4.1 -30.0 46.1 36.5

Iron and steel manufacturing 4.5 6.6 2.1 45.9 11.4 13.6

Fabricated metal product manufacturing 12.4 9.2 -3.2 -25.7 23.4 24.9

Motor vehicle and part manufacturing 30.8 35.4 4.6 14.9 44.8 44.8

Photographic and scientific equipment manufacturing 4.6 3.7 -0.9 -20.2 35.1 28.5

Electronic equipment manufacturing 7.4 5.4 -2.0 -27.3 29.6 27.3

Electrical equipment and appliance manufacturing 8.8 9.3 0.5 5.4 22.5 31.5

Industrial machinery and equipment manufacturing 11.6 9.2 -2.4 -20.7 21.3 16.9

Other manufacturing 99.3 90.0 -9.2 -9.3 13.6 12.7

Total manufacturing 284.8 249.4 -35.5 -12.5 25.6 23.5

Balance of VictoriaTotal manufacturing 77.1 83.2 6.2 8.0 6.9 7.8

Table 3: Persons (’000s) employed in selected manufacturing sectors in Melbourne and Melbourne’s share of Australia, May2000–01 and May 2005–06

10

The protectionist era—what have we lost?Any defence of the outcomes of past industrialpolicies is sure to attract a derisory response fromthe free-trade proponents who dominate publicdiscourse on economic policy. Our comments arenot intended to be a blanket endorsement ofprotectionist policies. Rather, it is important thatVictorians understand how deep the losses ineconomic activity may be under the currentpolicy settings and what they might imply for thestate government’s innovation policy. As noted,the Victorian manufacturing enterprises of todayare largely a product of the original protectionistpolicies. In some cases, this includes a significantR&D element. Critics of the protectionist heritageare often blind to the scale of this presence. Ifproduction for the domestic market eroded dueto international competition, any capacity tocompete in international markets, whetherthrough exports of particular products or theprovision of R&D services, could be underminedas well.

The development of Australian manufacturingaround tariff and import quota walls meant thatboth locally-owned and multinational companieshad to establish a production base here if theywere to gain access to Australia’s domesticmarket. Some of these firms were active in R&D.ICI, for example, established a large researchlaboratory at Ascot Vale in Melbourne in 1955,which employed over 100 professional researchscientists.23 BHP had significant researchlaboratories in Melbourne. The CSIRO didsignificant R&D industrial work, including thedevelopment of the atomic absorptionspectrometer. Telecom, in the days when itmonopolised the telecommunications industry,had its own research laboratories adjacent toMonash University in Clayton. Telecom alsospecified Australian design standards for itsequipment, which required suppliers to produceto these standards. To do so, suppliers had todevelop products that met Australian-specificstandards. This is why Ericsson, the Swedishelectronic supplier, established a production baseat Broadmeadows in 1963 that employed 1000persons at its peak and a large R&D facility in 1982.

The exposure of Australian industry to globalcompetition, including the sourcing ofcomponents or services once restricted toAustralian suppliers, has put an end to some ofthis R&D capacity. The Telecom (now Telstra)labs currently operate on a very limited scale.Telstra no longer specifies unique Australiancomponents. Instead, it draws from globalsuppliers. Partly as a consequence, Ericssonceased manufacturing its products atBroadmeadows in 1998 and closed its R&Dfacility in 2002 (discussed further below). TheBHP labs are gone too. The ICI researchlaboratory at Ascot Vale has been replaced by ahousing estate. Since the parent companyoffloaded its Australian assets (mainly in theexplosives area) to Orica, this research activity hasdiminished and its operations have moved toNewcastle. The dominant pattern within the firmslisted above is to outsource R&D to wherever itcan be done most cost efficiently.

Some of this outsourcing has gone to the CSIRO.These days, however, most of CSIRO’s productdevelopment work is confined to industrycontract work, such as helping industry solveimmediate production problems, like how tomore efficiently transport fluids or measurepollutants. This may be a useful contribution tothe overall productivity of Australian industry.However, the CSIRO no longer provides a settingwhere it is likely that new hi-tech products likethe atomic absorption spectrometer could bedeveloped. The spectrometer is one of the greathi-tech success stories in Australian manufacturinghistory. It was the product of CSIRO research andsubsequent close collaboration with a few smallAustralian-owned instrument manufacturers inthe product development stage. One of thesefirms was Techtron. As the historian of thisachievement has written:

In little more than five years Techtron grew from a tinycompany employing a handful of people making smallelectronic instruments, mostly for the local market, to amajor producer of sophisticated scientific equipment ofwhich 60–70 per cent was exported. By 1966 thecompany was producing more than 12 per cent of thetotal world output of atomic absorption spectrometers.24


11

The legacy of this research is still evident in theform of the US-owned Varian Australia, whichincludes the original Techtron business. Variancontinues to manufacture scientific instrumentsat its Mulgrave plant in Melbourne.

Some of the multinational branch plants havealso gone, as their head offices realise that theyno longer need to keep these branchesoperational when Australia’s tariff walls weredismantled. Kodak is a case in point. In this case,the advent of digital technology undermined theoperational base of the local operation. All of itslocal operations, including its productdevelopment branch, have gone.

As indicated, Ericsson closed its Asia-Pacificresearch laboratory in October 2002. Thelaboratory had produced dozens of registeredpatents in core switch and signalling technology.It employed 450 researchers, and was the largestprivately owned R&D research facility in Australiaat the time.25 By 2002 the laboratory had ceasedwork on components designed to meet Australianspecifications. Almost all its work was for productsutilised within Ericsson’s global operations.Before moving its facility, Ericsson’s R&Doperations were reported to represent 15 percent of Victoria’s R&D funding.26 Ericssonmanagement stated that the decision to cease itsAustralian research and development activity waspart of a global rationalisation of thecorporation’s operations in the aftermath of thedotcom crash in 2000. The Australian operationsimply could not compete in this rationalisationagainst the many other Ericsson R&D centres,partly because of the remoteness of the Australianoperation from the firm’s major customer base.The Victorian government’s response to theclosure likewise emphasised global-market factorsand denied the possibility that unattractiveinvestment conditions in Victoria may haveplayed a role. Treasurer, John Brumby, pointed to‘… the parlous state of Ericsson’s internationalfinances’ and added: ‘We cannot change what is aglobal reaction’. The Treasurer remained upbeat:‘Victoria remains one of the best locations in theworld for IT and science R&D’.27

Other commentary, however, including that fromthe managing director of the laboratory itself, RicClarke differed. He admitted that there wasnothing that could immediately be done toprevent the closure. Nevertheless he argued thatstate and federal incentives were focussed onattracting investment, rather than on theretention of R&D activity.28 Mr Clarke stated to aHouse of Representatives inquiry that there ‘…should be no expectation that jobs or investmentonce lost will be recaptured’.29

Meanwhile, the state government is talking upMelbourne’s potential to be a hi-tech innovativehub in a Victorian economy open to globalcompetition. These cautionary tales imply somescepticism about this optimism. Nonetheless, thestate Labor government, like the current federalCoalition government does not shy away fromexposing the manufacturing sector to furthercompetitive shocks.

Given what is happening to the establishedmanufacturing sector, it continues to astoundhow confident the Victorian government leadersare that all is well. Here are some morecomments like those drawn from Mr Bracks’reform agenda paper, this time from theVictorian Treasurer, John Brumby:

On the international front, we’re facing a newgeneration of economic superpowers and growingregional economies that will transform the globaleconomic landscape …We’re also facing increasing competition fromcountries in our region with low labour costs andlarge workforces—such as China, India and theAsian Tiger economies.And just as new economic leaders will emerge, so toowill new technologies—such as biotechnology andnanotechnology—create economic challenges andopportunities.With these major international shifts on the horizon,it is vital for Victoria and Australia to positionourselves as innovators and reformer—or risk fallingbehind …

As to the context in which enterprises will have tosurvive in order to create these new products,


12

Brumby indicates:I remember when the Hawke and KeatingGovernments knuckled down to the task of seriouseconomic reform—and it was not an easy exercise.But tough decisions were made—cutting tariffs, de-regulating financial markets, floating the dollar,enterprise bargaining, competition policy, compulsorysuperannuation—a decade down the track,Australia is still benefiting from those reforms.30

These are brave sentiments. Melbourne’sproductive base must accommodate furthercompetitive reform. If that means furtherreduction in industry support, as with reducedtariffs, the Victorian Treasurer has made it crystalclear that he will lend his weight to suchmeasures. Yet, such reforms could be terminal forsome manufacturing industries, includingimportant sectors of the automotive industry.

The motor vehicle industryThe motor vehicle industry deserves closeattention. This is because it is has been portrayedas the great success story in Australia’s industrialrestructuring. As indicated earlier, the Bracksgovernment claims that developments in thisindustry illustrate the success of its hi-techinnovation strategy. The motor vehicle industryhas succeeded in developing export markets,particularly for fully-built-up passenger motorvehicles. The industry is particularly important forMelbourne. As of 2000–01 there were some 30,791persons employed in motor vehicle and partsmanufacturing in Melbourne (see Table 3). At thistime, nearly half of all employment in this industryin Australia was located in Melbourne. Accordingto Table 3, employment in this industry increasedover the five years to 2005–06. However, as detailedlater (see Table 5), more recent data up to theAugust quarter of 2006 shows that in the aftermathof recent troubles in the industry the employmentlevel is now well below the 2000–01 level.

Any decline in the motor vehicle industry willaffect multiple suppliers of materials, includingsteel, plastics, glass and fabrics to the partsmanufacturers and motor vehicle assembly firms.It may also affect the survival prospects of some

motor vehicle parts producers like Bosch, whichhave been active in new product development forexport purposes, but whose viability in Australiadepends on a strong motor vehicle assemblyindustry in Australia.

The motor vehicle was once the flag bearer forAustralian manufacturing. It was a potent symbolof Australia’s standing as a developed nation.Nonetheless, the Hawke Labor governmentdecided to diminish protection levels in theinterests of re-orientating the Australian economytowards industries that were competitive in worldmarkets. The Hawke government legislated that,from 1990, tariff protection for the motor vehicleassembly industry, which had reached 57 per centin 1984, would be reduced each year by 2.5percentage points until it reached 15 per cent in2000. The Coalition government continued theprocess when it decided to further reduce thisprotection to 10 per cent in 2005 and again to 5per cent in 2010.

A distinctive feature of the motor vehicle industryis that the federal government does have a policyin place which will continue to provide substantialfinancial support until 2015. The Victorian Laborgovernment has also added some highly specificfinancial assistance as well (detailed below), whichagain has not been available to other establishedmanufacturing industries. From the federalCoalition government’s point of view, the endproduct by 2015 will be a motor vehicle and partsindustry operating in a global market place withonly minimal, five per cent tariff protection.Whether this can be described as an industrypolicy with the objective of maintaining a viablemotor vehicle industry, as distinct from presidinghumanely over its demise if it cannot competeinternationally, is another matter.

The federal government’s assistance comesthrough the Automotive Competitiveness andInvestment Scheme (ACIS). This scheme wasoriginally intended to run for five years endingDecember 2005. It has since been extended by twoadditional five year periods. The Commonwealthincentives amounted to $2.8 billion over the first


13

stage to December 2005. The same level of supportwill apply for the next five-year stage. During thethird phase (2010 to 2015) the support will declineto $1.4 billion. The assistance is entirely in theform of credits for excise duty on vehicles andparts imported into Australia.31 One reason for thisfocus, rather than a direct subsidy to exporters, isthat such subsidies are not usually permitted underthe World Trade Organisation’s guidelines, towhich Australia is a signatory.

Australian motor vehicle manufacturers can claimthese credits firstly, on the basis of their annuallevel of production in Australia. The more theyproduce the more the potential credit that can bederived from the firm’s imports of vehicles orparts. In the second phase (2005–2010), nowunderway, this situation continues. There is asecond way credits can be claimed, which is linkedto the level of R&D expenditure and capitalinvestment of either vehicle or partsmanufacturers. However, there has been onemodification for this second phase. The federalgovernment has allocated $150 million of theavailable credits to vehicle producers on acompetitive basis determined by their level ofR&D. Again, the credits are available against exciseduties for imported vehicles or parts.Manufacturers who do not import can sell theircredits in the marketplace to those who do import.

We now explore the outcome of the abovearrangements for motor vehicle and partsmanufacturers, beginning with the former. Table 4provides a statistical picture of the industry. Itshows that production of motor vehicles in

Australia did increase through the late 1990s until2004. In 2005, local production fell to 388,985vehicles followed by a further fall of 18 per cent infirst eight months of 2006 relative to the sameperiod in 2005.32 Exports of motor vehicles haverisen though the period covered by the table.However, the scale and growth of motor vehicleimports has dwarfed exports during the 1997 to2005 period. In 2005, nearly three-quarters of amillion motor vehicles were imported as againstexports of 140,073. By 2005, the share of theAustralian motor vehicle market supplied bydomestic producers had fallen to 25.2 per cent.

The four local vehicle manufacturers have decidedto focus their production on the large car market.This is largely a product of decisions taken decadesago when it was believed that this style of car bestsuited Australian consumers. All have made veryconsiderable investments in the design, testing andtooling phase to produce new large car models,which build on their past experience with thesecars—notably the Ford Falcon, HoldenCommodore and Toyota Camry. On the otherhand, all have decided to draw on imports toprovide for the rapidly growing small car market.Toyota, for instance, ceased producing Corollas in1999. There is no prospect of the Australian firmsmanufacturing small cars in the foreseeable futurebecause of the huge economies of scale availableto producers outside Australia and the strength ofthe Australian dollar.

The big car focus now looks like a mistake. Theincrease in fuel prices, the competitive advantageof small imported cars as the dollar has

Produced in Australia Imported Total imported and Australian-madeExported Sold in Australia Total Australian-made as % of total sold

sold in Australia in Australia1997 51,759 267,509 319,266 450,102 717,611 37.3

2000 101,018 258,618 359,686 553,554 812,172 31.8

2004 131,474 276,063 407,537 694,737 970,800 28.4

2005 140,073 248,912 388,985 739,357 988,269 25.2

Source: Department of Industry, Tourism and Resources, Key Automotive Statistics, various tables.

Table 4: Motor vehicles produced in Australia, imported to Australia and Australian-made as a share of total motor vehiclessold in Australia, 1997, 2000, 2004 and 2005


14

strengthened, the reduction in tariffs andavailability of economies of scale to overseasproducers, which are not available to localproducers, all suggest a bleak picture for the localmanufacturers of large cars. The decline in localproduction in 2005 and 2006 is biting. Fordannounced on 17 October that it was reducing itsproduction of Falcons by 20 per cent, from 450 to350 a day.33

How has the ACIS scheme affected theseoutcomes? The decision to produce new modelsmay well have been influenced by the creditsavailable through ACIS. We cannot be sure, sincecompany-specific information as to credit levels isnot available on the grounds that it is‘commercial in confidence’. Nevertheless, theinducement must have been considerable, giventhat over the period 2005 to 2009, under thesecond stage of ACIS program, the motor vehicleindustry will have access to $2.8 billion fromimport duty credits, of which $150 million havebeen set aside for motor vehicle research anddevelopment projects. In May 2006, industryminister Ian McFarlane announced that Fordwould receive $47 million for the development ofalternative fuel engine technology on the FordTerritory and for the E8 platform expansion.Holden was also the recipient of $48.3 million forseveral innovative design projects including ithybrid power train development. Toyota receiveda further $5.15 and Mitsubishi $1.1 million.34

This is the positive side of ACIS. On the negativeside, ACIS adds to the incentive to importvehicles and components, since the creditsavailable for production and R&D investment canbe used to offset excise duties and thus in effectreduce the cost of imports. Alternatively, the localproducers can and do sell their credits tospecialist motor vehicle importers who do notmanufacture in Australia. Either way, ACIS servesto subsidise imports. As it turned out, the importside of the motor vehicle industry has flourishedrelative to local production. By the time the ACISscheme comes to an end in 2015, only vestiges ofa local motor vehicle production industry may bein place. Much depends on whether the local

producers maintain an export market for theirlarge cars. Ford which has not been active inthese markets to date hopes that its new-generation Falcon, codenamed Orion, willgenerate exports of 30,000–40,000 vehicles peryear.35

On this analysis, ACIS is not serving to maintain aviable domestic motor vehicle industry, but israther providing temporary assistance to 2015,during which time the local industry must proveit is competitive in international markets. Duringthis time, ACIS will actually be facilitatingcompetition from imports. If, as seems possible,the local industry does not survive, this is anoutcome that the current federal governmentappears to accept as one of the manyconsequences of globalisation. The onlyqualification to this assessment concerns theindustry’s capacity to provide R&D services to theglobal motor vehicle industry. Ford Australia’sachievement in this regard (detailed later)indicates that this is possible.

Motor vehicle component manufactureComponent producers face a two-prongedattack on their viability. The first stems from thedecline in the volume of motor vehiclesassembled in Australia since 2004. Other thingsbeing equal, the lower this volume the smallerlocal production of components will be. Thesecond derives from the changes in theprocurement policies of the assemblers. Overthe past few years, they have begun to jettisonlong-standing local suppliers if they can sourcefrom overseas at a lower cost. The ACIS schemeprovides an additional incentive since theassemblers can offset the excise on their importsfrom credits gained through production orinvestment as described above. The localproducers who survive will generally have to doso on much lower margins than before. As arecent survey of 70 Victorian componentsuppliers reported:

The Original Equipment Manufactures (OEMs)are typically comparing the ex-works prices ofoffshore components manufacturers often withoutregard to quality or freight considerations. The


15

survey and case studies indicate a majority ofcomponent manufacturers experienced pricedecreases of between 5% and 8% over the last 12months as a result of the OEM demands’.36

The seriousness of the outcome of these policiesfor Victorian firms, most of which are located inMelbourne, is documented in the Victoriangovernment’s March 2006 submission to aHouse of Representatives inquiry into theautomotive component manufacturing sector. Atthe time the submission was made, Holden hadrecently completed its contract placementprocess for components to be included in itsnew VE Commodore range. The outcome wasthat local content was expected to fall from 73per cent on the existing VZ model to 56 per centfor the VE model.37 As a consequence, therewere a number of casualties amongst the localfirms previously supplying Holden. One wasAutoliv Australia, which manufactures seatbeltsand airbags. It has announced redundancies atits Campbellfield plant and the imminentclosure of its subsidiary, Webco, by December2006. According to the Victorian governmentsubmission, job losses of some 565 from the twoplants are expected. They are the direct result ofHolden awarding its VE Commodore contract toTRW Europe, which is said to be GMH’sworldwide preferred supplier.38

Some of the component producers have reactedby moving segments of their productionoffshore, in order to reduce their productioncosts. The study of the Victorian ComponentsIndustry cited above reports that: ‘approximately40% of all Victorian automotive componentmanufacturers expect to have outsourced someor all of their production process to lower-costcountries by 2006’.39

In principle, some of thecomponentmanufacturers couldshift to internationalmarkets. However, as theindustry representativebody notes in its

submission to a Productivity Commissioninquiry:

While export markets can be developedindependently of the four local assemblers and asignificant domestic after-market exists forautomotive components, vehicle productionprovides the base that underpins componentmanufacturing.40

If local companies do turn to the internationalmarket, they are likely to move their productionto locations near to the assembly industry theyseek to serve. This is because, to be competitive,they cannot afford to pay the costs of long-distance delivery from Australia and because the‘just in time’ inventory practices ofcontemporary assemblers usually requirescomponent manufacturers to locate nearby.

These circumstances explain why componentmanufacturers are reported to be in crisissituations almost every week. The latest is GlobalEngineered Fasteners, which supplies Holden,the Pacifica Group and others manufacturerswith nuts and bolts for engines and suspensionparts as well as fasteners for other parts of carsassembled in Australia. The company has beenhit by the combination of reduced demand forits product consequent on the decline inassembly production volumes described above, asharp increase in steel costs, which it apparentlycould not pass on to its customers, and theappreciation of the Australian dollar. Evenbefore the latest crisis, the company was inprocess of restructuring which includedtransferring production overseas from itsBraeside site.41

Table 3 shows that employment in the motorvehicle and parts manufacturing industry inMelbourne rose by 4,500 over the five years to

Table 5: Employed persons (’000s) in motor vehicle and parts manufacturing, Melbourne,May 2001, May 2006 and August 2006

Source: ABS, Labour Force Survey, quarterly data.

May 2001 May 2006 August 2006Motor vehicle and parts manufacturing 33.3 30.1 28.8


16

2005–06. However, as the discussion indicates,the employment situation in the industry ischanging rapidly. By the May and Augustquarters of 2006, employment in the industrywas estimated to have fallen to 30.1 and 28.8thousand respectively, both figures well belowthe May quarter 2001 estimate of 33.3 thousand(Table 5).

Globalisation success stories in the motor vehicleand parts manufacturing industryThere is a positive side to developments in themotor vehicle industry. This is that somemultinationals have become more open tosourcing their product development activitieswhere it is most efficiently performed, even if thatis at the expense of R&D activities in the homecountry in Europe, Japan or the USA. In a fewcelebrated cases this willingness has led tosignificant R&D operations being located inbranches of these multinationals in Melbourne,particularly those engaged in the motor vehicleindustry.

Bosch, the German-owned maker of motorvehicle parts (mainly electronic components) is acase in point. Bosch has a large manufacturingplant in Clayton. Bosch established thisproduction facility in order to get behindAustralia’s protectionist walls—in this case thelocal content rules which required assemblers todraw most of their parts from Australian-basedsuppliers. As of mid-2006, Bosch employedaround 1600 staff. Apart from producing parts forAustralian use, it has also engaged in productdevelopment within the global Bosch supplychain. Bosch permits its various branches tocompete within this supply chain. Currently,about 74 per cent of what Bosch produces inAustralia is exported. The Australian branch plantspends around $55 million on R&D annually. Itemploys some 178 engineers in R&D work. It hassuccessfully developed new products, including anmotor vehicle computer, which is to bemanufactured by a Bosch subsidiary in Hungary.

According to senior executives at Bosch, thecompany can successfully compete because of the

high quality and enterprising nature of theAustralian-trained engineers it has attracted.However, the willingness of the Bosch corporateleaders to maintain the Australian operationdepends on the company being able to sustain aviable production base in Australia. Theexecutives we interviewed were very worried thatthe downturn in local demand consequent on theweakening fortunes of Australian assemblersdescribed above could threaten this viability. Thisis because Bosch exports packages of newproducts and the productive systems needed tomanufacture the products elsewhere. Theexistence of the local production line is crucialfor the testing of the productive systemsassociated with new product lines. In its absence,Bosch would have no motive to maintain an R&Dfacility in Australia.

Ford Australia provides a similar success story.Like Bosch, Ford has succeeded in carving out aproduct development role within theinternational Ford supply system. Fordinternational divides the globe into productzones. Ford Australia is part of the Asia-Pacificgroup, whose headquarters are in Bangkok. FordAustralia’s long history of motor vehiclemanufacture (since 1925) and its productdevelopment capacity—the Falcon has beenentirely developed in Australia—has provided thecompany with a springboard for the provision ofproduct development services within the Asia-Pacific group. The first breakthrough was thecompany’s role in the design of the Fiesta, a smallcar which has been manufactured in India sincelate 2005. The next and most important advanceis the company’s success in winning the contract(in competition with other Ford internationalbranches) to undertake the product developmentwork on the T6 truck. This truck is to bemanufactured across the Ford Asian and LatinAmerican production network. It is specificallydesigned for these markets. It will not bemanufactured in Australia. The Ford productdevelopment division is currently preparing forthe intensive design, development and testingwork needed to complete this contract. Some 400engineers will be involved in this work for several


17

years. They will be in addition to the existing700–800 who are engaged in the productdevelopment work for the next generation FordFalcon and Territory models.

This project indicates the enormous gains thatcan flow from successful engagement at the hi-tech end of the manufacturing process. Asindicated, Ford Australia could not have won thiscontract in the absence of its manufacturing basein Australia. In tendering for the truck contractthe product development group built on theexisting investment in developmentinfrastructure, including its clay milling prototypefacility and its product testing grounds at Lara. Aswith Bosch, Australian engineering expertise wasalso important. There are fewer comparableproduct development skills within the Ford Asia-Pacific network. This, plus the slightly lower costsof engineers relative to Europe and NorthAmerica, provided an added advantage.

Ford’s T6 Truck initiative has also benefited fromspecific federal and state government financialassistance. In May 2006, the federal governmentannounced a $52 million grant to facilitate Ford’sdevelopment work. $40 million is to becontributed to the Falcon/Territory project and$12.5 million for the T6 project.42 This grant is inaddition to the assistance that Ford and othermotor vehicle manufacturers received from ACISas described above. According to the state Laborgovernment, the two Ford projects will involve a$1.8 billion investment on the part of FordAustralia.43 The state Labor government alsomade a financial contribution, which accordingto the federal government’s press release alsoassisted both projects.44 Curiously, the stategovernment at the time did not state the level ofits assistance or which project it was directedtowards. However, according to Tom Gorman,president of Ford Australia, the total federal andstate grant was $105 million.45 Thus the stategrant appears to have matched the federal grant.

Do these examples vindicate the claims of thestate government that the motor vehicle industrycan set the pace in developing a flourishing hi-

tech future for Melbourne? To some extent theydo. The Victorian government commissionedIBM Consulting (Brussels) to provide anevaluation of Victoria’s competitive position forvarious industry sectors as of 2005. The results ofthis study for the automotive components andautomotive design sectors are reported in thegovernment’s submission to the House ofRepresentatives inquiry noted above.46 They showthat, for the automotive component sector, thecosts of production of producers located in KualaLumpur, Shanghai and Bangkok are well under50 per cent of those in Melbourne. However, inthe case of automotive design, the cost advantageof the Asian locations, while still substantial, is lessthan for automotive component manufacturing.Also, Australian design costs are well below thosein key European centres. The governmentsubmission concludes that:

A key policy imperative for the Australianautomotive sector will therefore, be to ensure that we‘move up the value chain’ in order to remain globallycompetitive. This will require investment in ongoinginnovation and up-skilling of our current workforceto keep apace of global automotive sourcing trends.47

The Ford and Bosch experiences indicate that, ifgiven the opportunity, local engineers andscientists have the capacity to compete in globalproduct development. In the case of the designarea, while costs may be lower in Asia, to thispoint the potential Asian locations have notreached the skill or experience levels of theirAustralian engineering counterparts.

The problem is that the opportunities forAustralian product development and designappear to be limited. In the case of the motorvehicle industry, it is unlikely that there will beanother product design project on the Ford scaleamong the other Australian original equipmentmanufacturers. Toyota’s product design anddevelopment process is highly centralised. Thiswork is done in Japan for all its key models, afterwhich the design and production specificationsare distributed to the company’s productioncentres around the world. The local engineeringwork (though still substantial) is about adapting


18

the basic design to meet local productionspecifications. By contrast, in the case of locallyproduced models, including the VE Commodore,Holden does most of the product development inAustralia. However, it has not had any role in thelarger General Motors supply chain for productdevelopment and design services. There is anR&D unit within Holden. It currently employsabout 30 engineers (though more areanticipated). Their role is at the pre-productdevelopment stage. They explore the designfuture for motor vehicle components. TheHolden group competes with other similar R&Dunits within the global General Motors operationfor this work. The potential scale of this workseems limited, at least by comparison with thetask of product design and development FordAustralia has taken on with its T6 Truck project.

Other globalisation success storiesWhat about manufacturing firms outside theautomotive industry? Is there a record of successof firms located in Melbourne in penetratingniches within the global marketplace? Ourinterest here is with cases where such firms havebeen able to sell R&D services or specialistproducts into the global supply chains, like Boschand Ford Australia. The prospects of start upfirms operating in new hi-tech products, as in thebio-tech industry will be explored in a latersection, where the Bracks government initiativesin biotechnology and the synchrotron areexamined.

The three case studies selected do not exhaustthe list of successes. They have been chosenbecause of their outstanding success and because(along with the automotive case studies) theyhelp to provide an empirical foundation forconclusions about the factors shaping theprospects of local manufacturing industries beingable to find an international niche.

Two of these cases come from the aerospaceindustry. The first is Hawker de Havilland whichhas been established in Australia since 1927. Itoriginally produced various commercial andmilitary planes, but since the 1990s has focussed

on producing components for military andcivilian aircraft manufactured outside Australia.The firm has been remarkably successful infinding a production niche in the global supplychain of Boeing, Airbus and other aerospaceproducers, a niche which it has been developingfor some 30 years. In 2000, the company wastaken over by Boeing.

By the 1990s, Hawker de Havilland had woncontracts with Boeing to produce rudder andelevator control surfaces. These were equivalentto 0.8 per cent of the entire cost of the Boeing777. More recently, it has been contracted toproduce the wing trailing edge for the Boeing787, a contract which is equivalent to 3 per centof the aircraft cost and worth $4 billion over athirty year period.48 Hawker de Havillandredesigned the wing flaps for the C130JLockheed Transport from metal to carbon fibrematerial and is currently manufacturing thesewing flaps. The company has also securedcontracts to produce wingtips for the A380 Airbuswhich are produced in its Sydney factory.

Hawker de Havilland employs around 800 in itsMelbourne operations, of whom 160–170 arefully-qualified engineers. They have put on some60 engineers for the Boeing 787 project, most ofwhom are drawn from local graduates.

Hawker de Havilland’s success appears to be aproduct of a commitment to continuing research,particularly the development of new compositematerials and the incorporation of thesematerials into the manufacturing of aircraftcomponents. This has included involvement withAustralian universities in a longstandingCooperative Research Centre on AdvancedComposite Structures. The availability of goodquality engineers has also been critical. Accordingto the company, competition for contracts withinthe global industry supply chains is fierce, withAsian competitors in particular keen to gain anextended foothold.49 Thus, continued successdepends on constant effort to advance thecompany’s materials and manufacturing processresearch.


19

The firm’s progress is significant because theinternational sourcing of components of theproduction process, from initial design to finalassembly, is becoming a characteristic ofcontemporary manufacturing. In the case of theBoeing 787, components are sourced in a diversityof locations, including landing gear in Japan,engines with Rolls-Royce in England, and therudder with Chengdu Aircraft Company in China.

GKN Aerospace is another successful aerospacestory for a Melbourne-based firm. This British-based, but now global manufacturer was originallyestablished in Australia in order to gain access tothe Australian motor vehicle market for thecomponents it produced. It has since also engagedin the aerospace industry, where it too, is involvedin the product development and production ofcomponents for the global aircraft industry. Thelocal branch has been able to build this businesson the basis of the technical capacity of its originalautomotive engineering workforce. According toGKN staff, the parent company decided to developthe business in Melbourne because of difficultiesin finding staff capable of doing the requiredaerospace work in Europe. It has taken on severalhundred locally-trained engineers over the pasttwo years.

A third case is Ericsson. As noted, Ericsson ceasedproduction activities in 1998 and R&D work at itslaboratories in Melbourne in 2002. The firmremains a major telecommunication supplier inAustralia, most recently having won the contract todesign and supply Telecom’s new wirelessbroadband system. Many hundreds of engineersand technologists have been engaged for the localarticulation and installation work.

The company has developed a significantengineering service capacity in Melbourne.Ericsson currently employs some 400 persons inthe Broadmeadows factory that once housed thefirm’s manufacturing operations. Most areengineers and IT professionals who predominantlyservice Ericsson products in Asia, both in the initialinstallation and maintenance of these products. Itis an operation that has grown from nothing a

decade ago. Ericsson is taking on 30–50 localengineers and IT specialists a year, with moreexpected in the immediate future.

This outcome reflects the changing nature of theelectronics industry. The service end of theproduct chain now dominates employment—rather than the design, development andmanufacturing of electronic products. WithinEricsson’s global operations, around 75–80 per centof staff are engaged in this end of the business.50

Australian engineers have found a niche in thisservice activity by virtue of the competitiveadvantage they hold in engineering and ITexpertise, in the global market place. According toseveral of the employers interviewed, to thepresent, Australian engineering skills are moreadvanced than those of their Asian counterparts.

Policy implicationsStructural change within the manufacturingindustry is well and truly underway. Large chunksof Melbourne’s industrial heritage are undersevere competitive pressure as a consequence ofthe opening up of their markets to internationalcompetition. A few firms have managed to moveaway from dependence on the domestic marketby opening export markets for their product,such as Toyota and ANCA. Some others havefound niches in the international supply chain ofproducts manufactured outside of Australia, suchas Ford Australia with its product design anddevelopment of the T6 truck, and the aerospacecompanies discussed above.

As far as the aggregate employment impact ofthese changes is concerned, there have beenmore losses than gains. The losses tend to be infirms where there is still a heavy reliance on blue-collar trade and assembly workers, as in themotor vehicle parts industry. The gains are all inindustries which, as the case studies cited aboveindicate, employ large numbers of tertiary-trainedengineers.

All of the industrial leaders spoken to in thecourse of this inquiry emphasised that continued


20

success in the global marketplace was uncertain.There are no guarantees of continuity in a settingwhere competition on both price and quality isfierce. Just because Ford Australia won thecontract to design the T6 truck does notguarantee future similar contracts. These have tobe won via competitive tenders. Likewise,Australian informants were all acutely consciousof the technical advances in India and China. Itwas repeatedly stated that Australian engineeringand IT skills are well ahead of those in Asia. But itis equally evident that at the elite end of the R&Dspectrum Asian engineers are becomingcompetitive. Microsoft’s establishment of largeresearch centres in Hyderabad (currently 900staff) and in Beijing is an indication of thechanging situation.51

The key policy relevant conclusions from thisreview are:1. The competitive position of local firms in

international markets is closely linked to anincreased supply of well-trained engineers, ITspecialists and other science graduates.

2. Success in these markets also appears todepend on the presence of a solid corporatebase in Australia. All of the successful firmscited have had a long history of production inAustralia. They have been able to launch intonew markets in part because of thismanufacturing experience and in part on thebasis of the organisational and financialstrength which derives from past success inAustralia. Our interviews with managementalso suggest that the drive to enterinternational markets often derives fromleaders within existing research or productdevelopment teams who know that if theydon’t do this, their jobs and those of theircolleagues will not survive. In a number ofcases, the corporate base is vulnerable toerosion of the Australian production base.Neither Bosch nor Ford, for example, is likelyto continue to engage in product developmentfor their firm’s international supply chain ifproduction for the Australian domestic marketcontinues to decline.

3. A notable feature of the firms that haveadapted to international opportunities is thatthey have largely done so via offering productsor services which built on existing outputs.The successes are not based on new products,but rather the refinement of existing productsand continual attention to costs. The examplesof ANCA and Davey Water Products are casesin point.

This last conclusion is in sharp conflict with someof the implicit assumptions underpinning theBracks’ government view of Melbourne’sindustrial future. The government assumes thatenterprises based on footloose capital and skillscan be attracted to or evolve in Melbourne, wherewith the benefit of scientific research newproducts will be discovered and put into theglobal market.


21

The Bracks government’s hi-techinnovation visionThe visionThe current Victorian Labor government, like itsLiberal and Labor predecessors in the 1980s and1990s, has put great store on the prospects of newtechnologically-intensive enterprises selling intothe growth markets of Asia. It has been arguedthat Melbourne is a logical locus for suchdevelopments because many of Australia’sleading centres of education and research arelocated in the city.

In the lead up to the 2002 state election, theBracks government declared its economicpriorities in a pre-election statement titled Jobs forTomorrow: Labor’s Plan for Jobs and EconomicDevelopment. By this time, existing manufacturingindustries, including textiles, clothing andfootwear barely received a mention. All theattention was on innovation targeted atinternational markets. Electors were told that:

Our ability to innovate is now more important thanever. We need to step up our ability to develop newproducts and services and better ways to make,market and deliver them to the world.52

Some outlandish goals were set including:Our goal is to position Victoria to take advantage ofthe opportunities presented by an increasingly globaleconomy. We believe that innovation is the key toboosting exports and unlocking the opportunitiespresented by the world economy …

And:This is an ambitious task that we have setourselves—to make Victoria one of the world’s mostinnovative and international focused economies.But it is a very necessary one.53

Perhaps this rhetoric was just election spin.Certainly it lacked clear mechanisms by whichthese objectives would be met. Yet, theseaspirations were backed up by serious money.

This money could have been disbursed so as tohelp firms seeking to make their existingproducts or services more competitive ininternational markets. Instead, the focus wasscientific research out of which, it was hoped,would emerge quite new, and by definition,unknown products. The government promised toput $310 million into strategic scientific andtechnology infrastructure, the centrepieces ofwhich were the investment in the AustralianNational Synchrotron at Monash University andthe Bio21 project in Parkville. These investmentdecisions were accompanied by anotherexpansive declaration, to the effect that:

This initiative is geared towards making Victoriainternationally recognised in the fields of science,technology, innovation and commercialisation: inshort, a world leader in the 21st century drivers ofprosperity.54

Did the politicians believe this rhetoric? Theirinvestment decisions suggest that they did. Thesestatements may have been influenced by thescientific research establishment in Melbourne.

Melbourne is the site of a major share ofAustralia’s scientific and medical researchinstitutes. It has produced several high-profileand articulate leaders, including ProfessorsAdrienne Clark, Gus Nossal and DavidPennington in the medical and bioscience fields.It is currently the home of Nobel LauriatProfessor Peter Doherty. These leaders have beenand are well placed as advisors to successiveVictorian governments and all have a vestedinterest in engaging the state government in aresearch-based innovation agenda.

Attracting the ‘creative class’A second influence has been a belief thatMelbourne’s charms as a metropolitan setting aresuch that with suitable embellishment and

22

promotion the city can attract footloose investors,visitors and residents, including skilledindividuals in global demand. The notion hasbeen in vogue in contemporary public policycircles for some time. The Kennett Liberalgovernment sought to make Melbourne ‘theplace to be’ by promoting the city as a venue for asequence of exciting events—the Grand Prix, theCommonwealth Games, the Melbourne ParkGrand Slam, the Grand Final—as well as thecreation of exciting locations, such as theMelbourne Casino.

The best known propagandist of this view isRichard Florida, who is famous for hisexploration of the linkages between theattractions of place and economic activity. His2002 book, The Rise of the Creative Class,55 arguesfrom American experience that the presence ofcreative people (who include those with auniversity degree) is the key to whether an urbanarea or region is a leader in hi-tech innovation.That is, it is not investors or firms with the cashand will to finance R&D, or markets that arecrucial in the hi-tech area, but a critical thresholdof these creative individuals.

This theory fits snugly within the Victoriangovernment’s innovation strategy. The Bracksgovernment appears to believe that thecombination of a fluid, cosmopolitan culturalsetting and high-amenity urban development willattract internationally-mobile, creative peoplewho will make a significant contribution to its hi-tech innovation objectives. The government’sembrace of the Docklands precinct exemplifiesthe attachment to this strategy.

The Docklands redevelopment project longpredates any awareness of the Bracks governmentof the ideas of Richard Florida. Nonetheless,Florida has since been taken up because of thenice fit between his ideological schema and theBrack’s government’s innovation strategy. Floridawas brought to Melbourne as a consultant and hisideas are now up in lights as guiding principlesfor the current phase of the Docklands project.Florida provided the foreword to a lavish coffee-

table volume on the development, published in2005. He asserts in this foreword that:

The key to Melbourne’s current and future successlies in its Stuart Hornery ‘live/work/learn/play’attitude, perfectly encapsulated by the mixed-useDocklands area. In these kinds of spaces—wherepeople of all walks of life are inspired to makegreat products, think great thoughts and live greatlives—the cutting edge of the emerging globalcreative economy is being sharpened and put togood use. Not only does Melbourne’s populationbenefit culturally, socially and economically, butAustralia and indeed the world also gain aninvaluable creative asset.

In turn, an increasing number of creative typesfrom around the globe will begin to congregate inMelbourne, which will further increase the creativecapital of the region, which will further attractcreative types and grow the native creativepopulation, and so on and so on, in an extremelybeneficial virtuous cycle.

I wouldn’t be all surprised to see Melbourne emergeas one of the defining global creative centres of the21st century—and that transforation will be madepossible in large part by the creative spirit that theDocklands reconstruction both embodies andenables.56 (our emphasis)

As another quotation drawn from the Docklandspublication indicates, the Treasurer, Mr Brumby,has embraced the Florida creed.

As Victoria’s Minister for Innovation John Brumbyputs it, the challenge now is to make Melbourne notjust Australia’s creative capital, but to establishand brand Melbourne internationally as one of theworld’s leading creative centres and a magnet cityfor new ideas and smart people. ‘Building up ourcreative capital also helps raise our profileinternationally as an innovative and dynamiceconomy with a world-class quality of life—bringing in more investment and more visitors andopening up more doors for our skills, services andproducts abroad’ says Mr Brumby.57


23

These statements suggest a ‘cargo cult’mentality. Attract the ‘creative class’ andenterprise will flourish. Even assuming for themoment that Docklands provides theappropriate setting for hi-tech activity, thestatement begs the question, where is the moneyand backing going to come from to support thisenterprising mental activity? This is a chronicproblem for entrepreneurs.

As Dr. Jim Fox, one of the few hi-techentrepreneurs who have successfully created aninternational enterprise in his Vision Systemsbusiness headquartered in Mount Waverley, hasindicated, there were only 44 companies inAustralia that spent more than $10 million onR&D in 2003–04.58

It does not follow that a culturally-vibrant city,which may attract many degree-qualified people,will on that account alone become a hi-techdynamo. The direction of causality may beopposite to that claimed by Florida. It is just aslikely that an urban area that contains asuccessful hi-tech core will, on this accountattract more professionals and that they, in turn,will generate a demand for culturallysophisticated leisure services and ‘events’.59

Nevertheless, the Victorian Labor government isdeeply committed to Docklands. Privateentrepreneurs have built the apartments andmore recently office developments haveflourished. The Docklands project also includesa hi-tech precinct. This is Digital Harbour atComtechport, which its proponents hope willbecome a ‘$300 million hi-tech campus-styledevelopment, boasting a potent mix of blue-chipcompanies and IT start-ups, along witheducators, trainers and start-up companymanagers’.60 For its part, the state governmenthas invested heavily in the associatedinfrastructure, including the reconstruction ofthe Spencer Street Railway Station which costsome $350 million. Further massive publicinvestment is anticipated, including a new $370million Melbourne Exhibition and ConventionCentre that will link Southbank and Docklands.

Just how much of the latter hi-tech componentwill come to fruition remains to be seen. It is mostunlikely that the technology precinct justdescribed will function as intended. The costs ofestablishing start up R&D operations in Docklandsare way beyond the scope of most would-beinnovators. Instead, Docklands seems to bedeveloping as a site for new office blocks whichare attracting tenants now located in the existingCBD and for speculative apartment towers.

The hi-tech ‘master-plan’ in practiceThe 2003 policy document, Jobs for Tomorrow:Labor’s Plan for Jobs and Economic Development,outlines the Victorian government’s key scienceand technology initiatives.61 Foremost amongthese is the establishment of the synchrotronfacility near Monash University at a cost of $157million, a contribution of $10 million dollars tothe Biotechnology Centre of Excellence (with afocus on stem cell research), an unspecifiedcontribution to the $400 million dollar Bio21project in Parkville in inner Melbourne and thedrafting of a development plan for theinformation communication technologyindustry.62

The projected state investment in scientificinfrastructure does add to one of Melbourne’sstrengths—its high share of Australia’semployment in scientific services. By 2005–06,according to ABS Labour Force Survey estimates,there were some nine thousand personsemployed in the scientific services industry(which includes researchers, managers and allothers employed in the sector) in Melbourne (upfrom just five thousand in 2000–01).

The ABS defines scientific services as researchactivity occurring outside the university setting.This nine thousand represented 25 per cent ofthe 37 thousand employed throughout Australiain this industry. The state government can rightlyclaim that Melbourne is the main scientificresearch centre of Australia. Furthermore, it israpidly growing. There has been a remarkableexpansion in scientific research both in and outof the university sector in recent years. Some of

THE BRACKS GOVERNMENT’S HI-TECH INNOVATION VISION

24

this growth reflects increased Commonwealthexpenditures on Cooperative Research Centresand Centres of Excellence programs. The formerrequire an input from industry, but usually derivefrom initiatives from within the university sector.It is likely that much of the growth inemployment in scientific services has been inpublicly-financed research in medical, primaryindustry and CSIRO laboratories.

But, basic research is just the starting point forthe product innovation phase that the stategovernment has so extravagantly proclaimed isthe essence of its industry policy.

The biotechnology industry illustrates how toughit is to move from research to commercialproduct innovation even where substantial fundshave been committed to the infrastructure stage.

The biotech industry has grabbed theimagination of state governments acrossAustralia. The Queensland, South Australian andNSW governments have all allocated funds tosupport aspects of the industry. The attractionappears to be that bio-tech innovation has shownstriking results across several fields, includingdiagnostic testing, drug development, newvarieties of cereal and other crops and animalgenetics. There is a global race for innovation inthese fields.

The notion that Australian researchers have someprospect of success in such a competitive fieldstems from the heritage of Australian academicand applied research (as within the CSIRO),particularly in the food and fibre industries. Inaddition, as noted earlier, there is a vocal andinfluential scientific lobby, principally associatedwith the University of Melbourne, notably at theWalter and Eliza Hall Institute, which has put thecase for aggressive investment in this researcharena.

The reality is that, even with top class research,the ratio of good ideas to potential commercialprospects is perhaps one in a thousand. From thepoint of view of researchers, good ideas are the

key performance indicator - not any subsequentcommercialisation. From their point of view, anyaddition to the funds needed to extend theirresearch capacity is welcome, since it facilitatesthe production of scientific papers.

The Victorian state government appears to beoperating on the assumption that, if an excitingsocial and physical setting for research isestablished, and bright people are assembled, thegap between an idea and a product will besomehow straddled.

The experience to date indicates that thisassumption is not justified. In 2003, the AllenConsulting Group prepared a report for theAustralian Institute for Commercialisation on theeconomic impact of publicly-financedinfrastructure in Australia. It noted that therewere very few commercial companies which hadachieved large-scale commercial operations fromsuch publicly-funded research. The reportexamined ten case studies where there weresuccessful commercial outcomes. These includedCochlear and ResMed (which specialises in thesleep disorder remedies), which are bothinternational success stories. These twocompanies accounted for a majority of theemployment and exports generated by the casestudies investigated.63 However, the reportconcluded that, even in the case of these successstories, it took one to two decades to convert thebasic research into an economically significantcommercial operation.64 Among the other caseswhich have achieved commercial operations are afew biotechnology companies, two of which,Amrad and Biota, are based in Melbourne.Amrad specialises in drugs for asthma and otherrespiratory diseases as well as oncology. Biota iswell known for its development of the anti-influenza drug Relenza.65 Both companiesemployed about 50 staff at the time the reportwas prepared.

Bio21At present, biotechnology is an infant industry inVictoria. The Victorian government’s has decidedto encourage its expansion by contributing an


25

unspecified amount to the Bio21 Project. It hasmade a financial contribution to the constructionof a building in the Parkville research precinct,adjacent to the University of Melbourne, whichincorporates office space and laboratories withstate of the art experimental equipment,including a 800MHz magnetic nuclear resonancefacility. The activities taking place within theselaboratories are orientated towards academicresearch, and most of the research staff are drawnfrom the University of Melbourne and the Walterand Eliza Hall Institute. As of June 2006 therewere 17 founding, joining and associate membersof Bio21, almost all of which were researchinstitutes. None of these members were privatecompanies engaged in the biotech industry.66

To the extent that any biotech commercialisationis occurring it is in association with the memberresearch institutes. Much of this researchprecedes Bio21, though it may well be facilitatedby the new building and its state-of-the-artequipment. The 2005–06 annual report does notdetail any specific commercial outcomesattributable to Bio21.

Bio21 should be applauded as a courageous long-term investment in the state’s scientificinfrastructure, but there should be noexpectation of short to medium term commercialreturns.

The Australian National SynchrotronThe situation with the synchrotron is analogousto Bio21.

The investment in this area of infrastructuredeserves close analysis. The Victorian stategovernment has highlighted its initiative inlocating the synchrotron in Melbourne and itsrole in placing Victoria in the vanguard ofproduct innovation economies.

The original proposal for the synchrotron camefrom a group of scientists in Victoria in the late1990s. It was for a ‘desk-top’ model, about threemetres in diameter, intended for industrialapplication. Participants engaged in the project at

this stage indicate the estimated cost was $35million.

The original ‘desk-top’ concept did not meet withapproval within the scientific community,particularly with those scientists wishing to studythe structure of protein molecules. To meet theirrequirements a much more elaborate andexpensive machine was needed. After lobbying ofthe state government by high profile leaders ofVictoria’s scientific community, the design of theinstrument was changed to embrace thesescientists’ preferences.

Interest in the proposal mounted, not just inVictoria, but elsewhere, with the Queenslandgovernment, in particular, expressing interest inbeing involved. The expectation was that thefederal government would provide infrastructuresupport, including support for the running costsof the instrument. Since there could be only onenational synchrotron the interested states becamecompetitors in the race for its location.

In 2001 the Victorian state government put adetailed proposal to the federal government forassistance in building the larger scale version ofthe instrument. Funding was sought under thefederal government’s Major National ResearchFacility Program (MNRFP). The proposal wascosted at $159 million. The Victorian governmentsought $45 million from the MNRFP. Another$15 million was to come from the private sector.The Victorian government proposed to matchthe MNRFP investment.67 Before a decision wasmade on this proposal, the Bracks governmentpre-empted further detailed federal negotiationby announcing that it would invest $157 millionin the capital cost of the building and theaccelerator ring, which is the basic component ofthe instrument. It took this pre-emptive actionbecause it saw there was a competing bid fromthe Queensland government.

This is a huge sum which dominates the state’sindustry investment budget. It represents thesingle largest investment in scientificinfrastructure since the building of the Lucas

THE BRACKS GOVERNMENT’S HI-TECH INNOVATION VISION

26

Heights nuclear reactor. The state governmenthas in effect gone alone on this investment.Industry has not provided any capitalcontribution to the construction of theinstrument.

The synchrotron building and accelerator ring isnow complete. It is anticipated that some 30beam lines will be constructed which utilise thelight generated by the synchrotron. Each beamline will cost an additional $1 to $5 million.According to Professor F. P. Larkins, Chair of theAustralian National/International SynchrotronScientific Advisory Committee, the annualrunning costs for the synchrotron will be $15–20million.68

The instrument phase of the construction(underway) is dominated by scientific researchobjectives. The interest on the part of scientists isunderstandable. The use of synchrotrons is nowan established component of cutting edgescientific research. Some 300–400 researchexperiments utilising a synchrotron have beenconducted overseas by Australian scientists.69

Consistent with this interest, the initial investmentin the beam lines is coming from Australianuniversities, and publicly funded researchorganisations, including the CSIRO and ANSTO.To this point there has been no industry financialcontribution. MiniFab, a small private firmspecialising in micromachining, has indicated aninterest in investing in one of the beam lines.However much of the proposed investmentappears to derive from an infrastructure grantfrom the Victorian state government.70

According to Professor Larkins, internationalexperience suggests that only 5–10 per cent of theoperating costs of the instrument are likely tocome from industry.71

The Bracks government is to be congratulated forits generous support to scientific research. It willgive a major boost to the research capacity of theVictorian, Australian and international researchcommunities.


The key point from the perspective of thisanalysis is that these investments will not deliver,even in the medium term, any industryinnovation dividend.

27

Some may argue that we should not be tooconcerned about what is happening to themanufacturing sector because the future of bigcities is about the provision of services. BothMelbourne and Sydney have a claim to the statusof global cities, in the sense that they are the keyinterfaces between Australian and globalbusinesses, including those active as serviceproviders to the mineral industry.

The rapid growth in the property and businessservices sector, particularly in the late 1990s, inboth cities, gives some credence to thisargument. The experience of the past five years,however, is not consistent with thisinterpretation. During this period, employmentgrowth in the property and business services inboth Melbourne and Sydney was below theoverall rate of growth in employment in eachcity. This was emphatically the case in Sydney.Table 6 shows that employment growth inMelbourne was far more rapid in the health andcommunity services sector. Also, as thesubsequent analysis shows, Melbourne’s strongergrowth in property and business services—relative to Sydney—seems largely a consequenceof the stronger property market in Melbourne.If so, much of the gain in employment inproperty and business services may prove asephemeral as the property boom itself.

Melbourne and Sydney comparedTable 6 compares employment growth inMelbourne and Sydney over the decade to 2005–06. There is a distinct change of pattern betweenthe five year period 1995–96 to 2000–01 and thesubsequent period to 2005–06. The rate ofemployment growth in Sydney was the same as itwas in Melbourne in the first period, but wellbelow that of Melbourne in the second five-yearperiod.

How could this be? Both cities have lost jobs inmanufacturing. Both also show very strikinggains in the retail sector—which mirror theboom in retail expenditure and theaccompanying growth in householdindebtedness. The health/education/cultureand recreational services areas also saw rapidgrowth in employment in both cities. Thisreflects the well known relationship betweenincreased affluence and demand for suchservices.

But Table 6 shows that employment growth inthe health and community services sector wasmuch more rapid in Melbourne than in Sydney,particularly in the period 2000–01 to 2005–06.This partly reflects the priority the Bracksgovernment is giving to expenditure in thehealth area for more hospitals, nurses anddoctors and partly the increasing scale ofdemand for these services stimulated byVictoria’s rapid population growth. There is, ofcourse, nothing intrinsically wrong with theincreased provision of such services, if they arelinked to the growth of industries capable ofcompeting in the international marketplace andthus growth in tax revenue.

Most employment analysts see the two cities,particularly Sydney, as the main beneficiaries ofthe globalisation of the Australian economy.Sydney and to a lesser extent, Melbourne, arethe main sites of Australian corporateheadquarters, and of multinationals withbranches in finance, trade and investment inAustralia. The expectation has been that firmslocated in Sydney and Melbourne would gainfrom the demand for technical, scientific,marketing, legal, accounting and other businessservices that these corporations utilise. Thefinance sector too would also be expected tobenefit from the globalisation process given the

The role of property, business andfinancial services

28


Sour

ce: A

BS, L

abou

r For

ce S

urve

y, qu

arte

rly d

ata

1995

to 2

006

*ave

rage

for f

inan

cial y

ear

Tabl

e 6:

Em

ploy

ed p

erso

ns (’

000s

) by i

ndus

try se

ctor

and

per

cen

t cha

nge

1995

–96

to 2

000–

01 a

nd 2

000–

01 to

200

5–06

, Mel

bour

ne a

nd S

ydne

y

Melb

ourn

eSy

dney

1995

–96

2000

–01

2005

–06

Chan

geCh

ange

1995

–96

2000

–01

2005

–06

Chan

geCh

ange

1995

–96

2000

–01

1995

–96

2000

–01

Indu

stry

grou

pto

200

0–01

to 2

005–

06to

200

0–01

to 2

005–

06nu

mbe

rs*

per c

ent

num

bers

*pe

r cen

t

Agric

ultu

re, f

ores

try a

nd fi

shin

g15

.415

.513

.00.

5-1

5.9

13.8

9.8

11.3

-29.

115

.4

Mini

ng1.

72.

83.

562

.326

.43.

52.

32.

6-3

4.3

12.4

Manu

fact

urin

g28

2.0

285.

124

9.4

1.1

-12.

525

1.1

240.

721

4.8

-4.1

-10.

8

Elec

tricit

y, ga

s and

wat

er su

pply

8.5

8.3

11.8

-2.7

43.4

17.1

13.2

14.6

-22.

910

.2

Cons

truct

ion98

.111

0.9

156.

613

.041

.313

6.5

164.

717

1.0

20.6

3.9

Whole

sale

trade

105.

584

.595

.5-2

0.0

13.0

144.

711

6.0

111.

9-1

9.8

-3.5

Reta

il tra

de22

1.8

227.

926

1.8

2.7

14.9

254.

826

4.8

299.

13.

912

.9

Acco

mm

odat

ion, c

afes

and

rest

aura

nts

55.6

72.9

74.0

31.0

1.6

79.3

99.0

101.

824

.82.

8

Tran

spor

t and

stor

age

74.6

76.9

87.1

3.1

13.3

91.7

103.

811

3.3

13.2

9.2

Com

mun

icatio

n se

rvice

s38

.048

.544

.727

.6-7

.742

.352

.451

.223

.9-2

.1

Finan

ce a

nd in

sura

nce

68.5

76.3

83.9

11.4

9.9

112.

012

5.4

142.

511

.913

.7

Prop

erty

and

busin

ess s

ervic

es17

5.6

237.

825

9.7

35.4

9.2

205.

431

2.4

315.

152

.10.

9

Gove

rnm

ent a

dmin

istra

tion

and

defe

nce

57.7

57.7

59.3

-0.1

2.8

67.9

57.0

80.0

-16.

040

.4

Educ

ation

98.9

110.

712

5.2

12.0

13.1

123.

412

4.1

149.

00.

520

.1

Heal

th a

nd co

mm

unity

serv

ices

131.

715

6.8

192.

919

.123

.016

0.4

181.

321

1.3

13.0

16.5

Cultu

ral a

nd re

crea

tiona

l ser

vices

36.5

49.1

59.1

34.5

20.3

46.3

55.1

64.8

19.1

17.7

Pers

onal

and

othe

r ser

vices

59.5

55.0

64.7

-7.5

17.7

70.9

73.4

9.6

3.5

23.5

Tota

l15

29.5

1676

.318

45.8

9.6

10.1

1820

.919

95.1

2147

.49.

67.

6

29

THE ROLE OF PROPERTY, BUSINESS AND FINANCIAL SERVICES

entry of overseas players to our marketconsequent on the deregulation of the dollar inthe early 1980s and the opening up of Australia’sfinancial sector to new competitors.

As far as the finance sector is concerned, Table 6does show that Sydney has done relatively wellwith employment growth of 11.9 and 13.7 percent in 1995–06 to 2000–01 and 2000–01 to2005–06 respectively. By comparison, growth inMelbourne was 11.4 and 9.9 per cent.

What about the property and business servicessector? This sector did set the pace in Sydney inthe late 1990s. There was a massive 52 per centexpansion in employment in the property andbusiness services between 1995–96 and 2000–01in Sydney (Table 6). Indeed, some 61 per cent ofall growth in employment in Sydney in thisperiod occurred in this industry sector. Theexperience in Melbourne was similar, if notquite so spectacular. However, since 2000–01 thesituation has changed. Employment growth inthe property and business service sector hasslowed in both cities, but far more so in Sydneythan in Melbourne. There was next to no growthin employment in the sector in Sydney over thefive years to 2005–06, but modest growth of nineper cent in Melbourne over the same period.

How is it that, at a time when the Australianeconomy was growing strongly, the property andbusiness services sector stalled, especially inSydney? In order to explore these issues, moredetail on the make up of the property andbusiness services sector is needed. This isprovided in Table 7. The table shows the ABSLabour Force Survey estimates for employmentin the components of the property and businessservices sector (to three digit level) for Sydneyand Melbourne for the years 2000–01 and 2005–06.

One of the attention-grabbing features of thetable is the overall decline in Sydney’s share oftotal Australian employment in the property andbusiness services sector. This fell from 29.0 to26.3 per cent over the five years to 2005–06. The

main contributor to this fall was the computerservices industry. As Table 7 indicates,employment in this industry in Sydney isestimated to have fallen from 66.5 thousand in2000–01 to 50.8 thousand in 2005–06. Duringthis time the city’s share of national employmentin the computer services industry fell from 40.6per cent to 34.3 per cent. There were also slightdeclines in Sydney’s share of nationalemployment in most of the other industrieslisted. Employment in the computer servicesindustry in Melbourne also fell, but not to thesame extent as has occurred in Sydney.Melbourne’s share of national employment inthis (shrinking) industry increased between2000–01 and 2005–06.

In the case of the computing services industry,the high concentration of national employmentin Sydney by 2000–01 (as noted above, 40.6 percent of total employment in Australia) has leftthe industry in Sydney vulnerable to marketshocks. These came in two forms at the turn ofthe century. One was the completion of Y2Kprojects and the other following theimplementation of GST, both of which involvedlarge numbers of temporary IT staff. A further,difficult to quantify factor is the trend towardsoff-shoring IT contract services.

The other notable points of difference betweenthe experience of Melbourne and Sydney in theproperty and business services sector was in theproperty operators and developers, real estateagent and scientific services industries. In eachof these three industries there was strongergrowth in Melbourne than in Sydney over theperiod 2000–01 to 2005–06.

The experience of the decade to 2005–06suggests that the impetus which globalisationgives to job generation in the property andbusiness service sector may have beenexaggerated. In retrospect, it appears that therapid growth of employment in property andbusiness services in Sydney in the late 1990s mayhave had more to do with economic activityassociated with preparation for the Olympics,

30


than with the globalisation of the economy. Thebasis for this hypothesis derives from thefollowing analysis, which indicates that there hasbeen a close correspondence between trends inthe property markets and related constructionactivity in Melbourne and Sydney andemployment in the property and businessservice sector.

Table 7 shows that much of the growth in theproperty and business services sector inMelbourne occurred in the property operatorsand developers and real estate industries. InSydney, employment in the real estate industryactually fell over these years. There was also alower rate of growth in the property operatorsand developers industry in Sydney than inMelbourne. A similar pattern is evident in thetechnical services industry. One component ofthis industry is engineering, architectural andrelated consulting services provided to propertydevelopers.

On the other hand, Table 7 shows thatemployment in the legal and accounting servicesand marketing and business managementservices industries has grown more rapidly inSydney than in Melbourne over the period2000–01 to 2005–06. These figures suggest thedisturbing conclusion that Sydney continues todo reasonably well (by comparison withMelbourne) in generating jobs in the parts ofthe business service sector and finance sectorwhich are linked to its role as a business centre,but relatively poorly in those parts related to theproperty industry. It is disturbing because, asargued below, the latter industry may be built onan insecure base, that is, further populationgrowth. This expansion is by no meansguaranteed in a two speed national economy, asSydney has already discovered to its cost.

The property industry and employment in Melbourneand SydneyThe reason why employment in the propertyand business service industry has been morerapid in Melbourne is because the city saw muchstronger growth in employment in the

components of this sector that relate to theproperty industry. The key indicator of thestrength of the property industry is theconstruction industry. Table 6 shows thatemployment in construction in Melbournebetween 2000–01 and 2005–06 grew by 45.7thousand compared with just 6.3 thousand inSydney. This in turn is linked, in large part, tothe state of the residential building situation inthe two cities.

Table 8 shows that in the 1990s dwellingconstruction approvals were much higher inSydney than Melbourne. Over recent years,however, they have fallen well below the level inMelbourne. Dwelling approval numbers inMelbourne increased from 30,831 in 1998–99 to39,240 in 1999–2000. Apart from a hick-up in2000–01, at the time of the introduction of theGST, this high dwelling approval (andsubsequent construction activity) held upthrough the first years of the 21st century.72

Dwelling approvals in Melbourne only declinedsignificantly in 2005–06 when they fell to 24,810.

These differences in the residential propertymarket appear to account for much of thecontrast between Melbourne’s relatively robustemployment growth between 2000–01 and2005–06 (10.1 per cent) by comparison withSydney (7.6 per cent). The 45.7 thousandincrease in construction employment amountsto 27 per cent of the 169.5 thousand overallgrowth in employment in Melbourne during thisperiod. By contrast, the 6.3 thousand growth inemployment in construction in Sydney duringthis period accounts for just 4.1 per cent ofSydney’s overall growth in employment of 152.3thousand.

For Sydney, the decade 1995–96 to 2005–06divides into two sharply contrasting eras, one upto the 2000 Olympics and the other the periodsince that event. There was a construction boomin Sydney prior to the Olympics, which reflectedthe refurbishment of the city’s transportinfrastructure and the construction of theOlympic sites, as well as solid growth in dwelling

31


Melbourne2000–01 2005–06 change as national national

per cent share shareof 2000–01 2000–01 2005–06

Property and business services nfd * * * *Property services nfd 0.3 0.7 146.3 22.9 10.7Property operators and developers 2.3 5.9 160.3 9.7 15.2Real estate agents 12.3 17.1 39.3 15.1 18.1Non financial asset investors * * * * *Machinery and equipment hiring and leasing 3.4 4.2 22.6 14.4 15.4Business services nfd 0.5 * * 59.4 *Scientific research 5.0 9.3 87.6 22.0 25.2Technical services 22.1 30.2 37.0 19.4 19.7Computer services 43.1 40.4 -6.3 26.3 27.2Legal and accounting services 39.4 40.4 2.5 21.4 18.8Marketing and business management services 35.3 39.9 12.9 28.0 28.0Other business services 74.2 71.6 -3.4 22.2 21.6Total 237.8 259.7 9.2 22.1 21.7

SydneyProperty and business services nfd * * * * *Property services nfd * 2.2 * * 32.1Property operators and developers 6.8 10.8 58.2 29.6 28.1Real estate agents 22.7 20.3 -10.5 27.9 21.5Non financial asset investors * * * * *Machinery and equipment hiring and leasing 5.3 5.2 -0.9 22.2 19.1Business services nfd * 0.7 * * 54.5Scientific research 4.8 7.3 50.5 21.4 19.7Technical services 26.4 33.7 27.7 23.2 21.9Computer services 66.5 50.8 -23.7 40.6 34.3Legal and accounting services 57.9 64.7 11.8 31.4 30.1Marketing and business management services 39.1 45.3 15.6 31.0 31.8Other business services 82.7 74.2 -10.4 24.8 22.4Total 312.3 315.1 0.9 29.0 26.3

AustraliaProperty and business services nfd * *Property services nfd 1.3 6.9Property operators and developers 23.2 38.6Real estate agents 81.2 94.4Non financial asset investors * *Machinery and equipment hiring and leasing 23.9 27.4Business services nfd 0.9 1.2Scientific research 22.5 36.9Technical services 113.9 153.8Computer services 164.0 148.2Legal and accounting services 184.5 215.3Marketing and business management services 126.2 142.3Other business services 333.8 331.0Total 1075.2 1196.1

Source: ABS, Labour Force Survey, 2000–01 and 2005–06, customised data set held by CPUR.Note: the quarterly data for each year have been averaged in order to reduce sampling error.*figure unreliable due to sampling error; unreliable figures not included.

Table 7: Employed persons (’000s) in property and business services industries in Sydney and Melbourne and share ofAustralian total 2000–01 and 2005–06

32


industry. Dwelling approval numbers werearound 35,000 per year in the late 1990s inSydney (see Table 8). Following the Olympics,the number of new dwelling approvals in Sydneyebbed to around 30,000 a year (2001–02 to2003–04). In 2004–05 they slumped to 20,796,with a further fall to just 16,801 in 2005–06. Inthese latter two years there have been about8,000 more dwelling approvals in Melbournethan Sydney. This is extraordinary given that by2005, Sydney’s population was 600,000 largerthan that of Melbourne (4.2 million comparedwith 3.6 million). This disparity goes a long wayto explaining the different constructionemployment outcomes in the two cities.

Dwelling approval levels are also indicators ofthe well being of the land development industryand associated shopping centre and otherpeople service providing industries. Anotherlink to these service industries from the state ofthe property market is the scale of buying andselling property on the part of investors, newhome owners seeking to the enter the housingmarket and existing home owners looking toupgrade their residence. These transactionshelp keep legions of real estate agents,accountants and other business service providersin work. Figure 1, which details the annualnumber of dwellings for which the banks andother lenders have transacted loan

1996–97 1997–98 1998–99 1999–00 2000–01 2001–02 2002–03 2003–04 2004–05 2005–06Melbourne 21305 28252 30831 39240 27871 36247 35540 32661 29078 24810

Sydney 32349 35847 35044 32881 21899 31481 30363 27841 20796 16801

Source: ABS Building Approvals NSW and Building Approvals Victoria, catalogue no. 8731.0, various issues.*detached houses and other dwellings.

Table 8: Total new dwelling* approvals Melbourne and Sydney, 1996–97 to 2005–06

Source: ABS, Catalogue no. 5609.0, Table 9

Figure 1: Number of dwellings financed, Victoria and New South Wales 1995–96 to 2005–06

2005–2006

2004–2005

2003–2004

2002–2003

2001–2002

2000–2001

1999–2000

1998–1999

1997–1998

1996–1997

1995–1996

0

50,000

100,000

150,000

200,000

250,000

Number ofdwellings

New South Wales

Victoria

33


arrangements for owner-occupiers, gives a goodindication of the volume of these transactions.Unfortunately, trend data was only available atthe state level. Nevertheless, because Sydney andMelbourne dominate their respective states inthese matters, the figure provides some insightinto trends in these transactions in the two cities.

Figure 1 confirms the earlier observation aboutthe good fortune of the Bracks government inthe timing its election victory in late 1999 just asthe property boom took off. The figure showsthat there was sizeable lift in financingtransactions in 2001–02 in Victoria. Theirnumber continued to rise thereafter, especiallyin 2005–06. The contrast with NSW is striking.After a parallel lift in dwelling financingtransactions in 2001–02, the numberssubsequently subside, especially in 2004–05. By2005–06 dwelling financing transactions in NSWwere still a little below the peak 2001–02 level. Asa result, the difference between the number ofdwelling financing transactions in NSW andVictoria has narrowed significantly since 2001–02.

34


Victoria’s people servicing strategy

The population growth driverWhy has Melbourne overtaken Sydney on theconstruction front? Could it be that the Bracksgovernment is correct in its judgement thatpopulation growth is the key to prosperity in theproperty markets? There is some correlationbetween the two, in that since the Olympics therehas been a drop in the rate of population growthin Sydney relative to Melbourne. The details areprovided in Table 9. During the years 1995–96 to2000–01 both Melbourne and Sydneyexperienced rapid population growth. Since thattime Melbourne’s rate of population growth hasebbed, to 1.1 per cent by 2004–05. But thedecline in Sydney has been far moreprecipitous—to just 0.7 per cent in 2004–05.

The key difference between Melbourne andSydney is that since 2000–01 Sydney has beenlosing substantial numbers of people to the restof NSW and particularly to interstate destinations.Until the 2006 Census data becomes available, itis not possible to assess the magnitude of theselosses. By contrast, Melbourne is likely to havegained slightly through intra and interstatemigration since 2000–01. Again, it is not possible

to assess the magnitude of these gains. In bothcities the level of settlement of internationalmigrants has held up, in part because the overalllevel of international migration has increased(see Table 11).

Extra people mean extra households and thusdemand for extra dwellings, assuming the newhouseholds can afford the price of housing. Thecosts of establishing a new house on the suburbanfrontier of Sydney is far higher than inMelbourne, as is the cost of existing houses andapartments. The Bracks government isdetermined to maintain that advantage. As shownbelow, its policies of generous land release on thesuburban frontier and low infrastructure chargesare designed to keep the price of new house andland packages cheap relative to Sydney. The costof establishing a residence in Sydney is probablyprompting some households to locate elsewherein Australia. The relatively slow growth in the jobmarket in Sydney may also be deterring somepeople from locating in Sydney.

The greater scale of housing development onMelbourne’s frontier has also given an impetus to

Source: ABS, Australian Demographic Statistics, catalogue no. 3101.0, various quarers; 2001 Time Series Data for New SouthWales, Sydney, Victoria and Melbourne

1996–2001 2001–02 2002–03 2003–04 2004–05Number of persons

Melbourne 228,395 (annual average 47,736) 52,478 42,270 37,654 41,258

Rest of Victoria 43,035 (annual average 8607) 15,334 13,563 13,615 18,452

Sydney 256,031 (annual average 51,206) 42,655 34,491 26,545 29,806

Rest of New South Wales 77,035 (annual average 8607) 22,483 18,043 12,193 23,652Per cent increase

Melbourne 7.3 (1.5) 1.5 1.2 1.1 1.1

Rest of Victoria 3.5 (0.7) 1.2 1.1 1.0 1.3

Sydney 6.8 (1.4) 1.0 0.8 0.8 0.7

Rest of New South Wales 3.4 (0.7) 0.9 0.7 0.5 0.9

Table 9: Population growth in Melbourne/rest of state and Sydney/rest of state

35

VICTORIA’S PEOPLE SERVICING STRATEGY

demand for industrial land. At the end of 2005,the Victorian government responded by rezoninglarge tracts of land on the suburban periphery ofMelbourne for industrial purposes. However, thisdoes not mean that manufacturing industry is onthe rise. Rather, as Table 10 shows, most of thisprivate sector industrial building has been forwarehouses rather than factories. Over the period2001–2001 to 2004–05, $1.8 billion was approvedfor investment in warehouse construction inMelbourne compared with $1.0 billion infactories. For the most part, the function of thesewarehouses is to deliver (mainly imported) goodsto Melbourne’s rapidly spreading population.According to Barry Marks, Colliers InternationalIndustrial Director: ‘This year 71 per cent ofMelbourne’s industrial leases were signed bywarehouse and production distributioncompanies … while only 11 per cent of the leasedeals were for manufacturing companies—a farcry from the days when Melbourne wasconsidered to be the heartland of Australianmanufacturing’.73

The Bracks government does have an empiricalfoundation for its enthusiasm for populationboosting. Melbourne’s better employment recordsince 2000–01 than Sydney is partly attributable tothe relative health of the property market inMelbourne. It is also the case that Melbourne’shigher rate of population growth during this timehas contributed to this outcome. The issue iswhether it makes sense to build Victoria’s

economic strategy around continued expansionof the property industry and indeed whether it ispossible to do so.

Is Melbourne’s property boom sustainable?The lessons of the early 1990s recession, when anincumbent Labor government was voted out ofoffice in disgrace, are still remembered. Victoriawas one of the worst hit areas of Australia. Oneconsequence was that Victoria experienced asharp increase in the net loss of its residents tointerstate destinations. By 1993–94 this lossreached almost 30,000. The effect, whencombined with a fall in the number of overseasimmigrants settling in Victoria, was to reduce therate of population growth in Victoria from 1.35percent in 1989–90 to 0.34 per cent in 1993–94.74

While this decline was largely a consequence of apreceding decline in employment opportunities,the slow down in population was seen bypoliticians and industry leaders as a majorcontributor to the contraction of the state’sproperty markets and building industries at thetime.

The Kennett government kept the populationissue at the top of its agenda. It set the paceamong state governments in pressing the federalgovernment to increase the migrant intake. TheBracks government, since coming to office in1999, has pursued a similar policy. Indeed,population growth seems to be one issue thepremier feels particularly strongly about.

Reflecting these commitments, in 2002 theVictorian government announced a populationtarget for Victoria of six million by the year 2025(from around five million in 2005). This targethas since been dressed up in a formal populationpolicy, published in 2005 and entitled Beyond fivemillion: the Victorian government’s population policy.75

In reality, the Victorian government has littlecapacity to determine the state’s demographicfuture, since people movements within Australialargely reflect the health of the respective stateeconomies and people movement to and fromAustralia is determined primarily by the federal

Source: ABS, construction approvals data, financial years 2001–2002 and 2004–2005, customised data set held by CPUR.

Table 10: Estimated value of private sector investment(approvals) in factories and warehouses, Melbourne, 2001–02to 2004–05

Factories and Warehousesother secondary (excluding produce storage)

production buildings2001–02 217,789,965 464,122,764

2002–03 180,239,150 446,682,013

2003–04 294,734,529 332,111,669

2004–05 350,198,370 539,097,553

2001–05 1,042,962,014 1,782,013,999

36


government through its immigration policy. Thelatter’s main priority is to ensure that migration istargeted to meet Australia’s skill needs, which forthe foreseeable future are likely to be most acutein Western Australia and Queensland.Nonetheless, the Victorian government has hadsome limited success in promoting its ownmigration policy.

The population outlookThe expansion of Australia’s overall immigrationprogram by the Howard government over thepast few years has, for the time being, helped theVictorian government achieve its populationbuilding objectives. Although the migrationprogram is supposed to be directed at filling skillsshortages, which are most evident in Queenslandand Western Australia, Sydney and Melbournecontinue to receive some 60 per cent of totalsettler arrivals (see Table 11). This is becausemost skilled and family migrants locate wherethere are substantial co-ethnic communities, andin the case of those sponsored by familymembers, in communities close to their families.Australia’s migration program is predominantlydrawn from Asian and Middle Eastern sourcecountries. Since the great majority of previousmigrants from these countries are located inSydney and Melbourne, most continue to locatein these cities. Similarly, the great majority ofhumanitarian category entrants locate in Sydneyand Melbourne.

The state governments have also lobbied thefederal government to give them a role inattracting migrants. The federal government hascapitulated via the establishment of a suite ofstate-specific and regional visa categories. Themost important of these, is the Skilled DesignatedArea Sponsored (SDAS) category. This visacategory was introduced in the late 1990s. Itallows persons resident in Australia to sponsortheir relatives (brothers/sisters, uncles/aunts,cousins—even nieces and nephews—since 1November 2005) under concessional terms.There is no skill-based points test for this visacategory. All that is required is that the sponsoredrelative live in certain designated areas, be aged

45 or under, and have an occupation requiringpost-school qualifications. Potential sponsorsliving in Sydney, Newcastle and Wollongong,Brisbane and the Gold Coast and Perth areexcluded from sponsoring their relatives.However, those living in Melbourne are eligible.This absurd arrangement was negotiated by theKennett government at the end of 1990s and hasbeen sustained since then, despite criticism fromother states. Nearly two-thirds of all thosesponsored under the SDAS visa category settle inMelbourne.76 This visa category is by far thelargest of the state-specific and regional suite—with 2,579 principal applicants visaed in 2003–04,2,247 in 2004–05 and 3,339 in 2005–06.

The Victorian government, along with SouthAustralia, has also been the most active directsponsor of migrants under the State and TerritoryNominated Independent (STNI) and SkilledIndependent Regional (provisional) SIR visasubclasses. The SIR visa, which is the smaller ofthe two, is distinctive in requiring the sponsoredmigrant to locate in a regional area. There are noresidential restrictions on those sponsored underthe STNI program. The numbers are smallerthan with the SDAS subclass, but are growing asthe Victorian government builds up its nowsubstantial immigration bureaucracy, one ofwhose tasks is to promote these regional visaprograms across Victoria.

These circumstances explain the outcomes shownin Table 11. As can be seen, Victoria’s share of themuch enlarged national migration program has

Table 11: Settler arrivals, New South Wales and Victoria,2001–02 to 2004–05

Source: DIMA, Immigration Update, various issues.

2001–02 2002–03 2003–04 2004–05Number of settlers

NSW 35301 36431 40561 44746

Victoria 21374 23109 28028 30581

Share of AustraliaNSW 39.7 38.8 36.3 36.3

Victoria 24.0 24.6 25.1 24.8

37

been sustained at around 25 per cent. As aconsequence the number of migrants locating inVictoria has increased. The NSW share (whichagain is almost entirely located in Sydney) hasfallen somewhat, from 40 per cent to 36 per cent.The different experience of the two states islargely explained by Victoria’s domination of theState Specific and Regional visa programs.

Keeping housing cheap in MelbourneAnother important part of the Victorian Laborgovernment’s development strategy is its low-costhousing policy. In sharp contrast to the NewSouth Wales government, the Victoriangovernment has pursued suburban developmenton the cheap. One key aspect of this policy is thevery limited contributions required of landdevelopers for local infrastructure and localrecreation and social purposes. These varybetween $3,000 and $5,000 per lot. Where asubdivision is very large in scale, a contributionmay also be required for arterial roads, usually viathe provision of some construction work.77 Butnormally developers do not contribute to thecosts of arterial roads, trunk water services ormains sewerage and drainage services. Bycontrast, developers in Sydney have to pay$90,000 to $100,000 per block as theircontribution to local infrastructure and forarterial road and trunk water, sewerage anddrainage service.78 The NSW government has alsobeen far more restrictive in releasing land fordevelopment on the Sydney suburban frontierthan has its Victorian counterpart, thusincreasing the scarcity value of such land.

These policies help explain why new blocks canbe put on to the market for as little as $120,000 inMelbourne, yet their equivalent in Sydney sell forbetween $300,000 and $400,000. They alsoexplain why only about one third of new dwellingsin Sydney are detached houses, compared withabout two thirds in Melbourne and why theunderlying rate of construction of new dwellingshas fallen so far behind that in Melbourne.

The Victorian Labor government is determinedto maintain this advantage, even at the expense of

compromising other policy initiatives. InNovember 2005, the state governmentannounced a set of major policy initiativesregarding metropolitan planning. These tell us agreat deal about the priority the Laborgovernment places on sustaining Melbourne’sproperty industry.

The original Melbourne 2030 planning scheme wasintroduced in late 2002. Its stated objective was toconstrain Melbourne’s frontier spread andinstead focus most future housing constructionwithin the established urban area. To this end,Melbourne 2030 laid down the procedureswhereby developers were to be encouraged tobuild medium-density apartment projects in some115 activity centres across the city. Themunicipalities responsible for drafting thestrategic planning schemes embodying thisobjective are at a various stages of completion.This is partly because the planning process hasbeen dogged by controversy. There has also beenuncertainty about whether there is a viablemarket for medium-density apartments, if andwhen the right to build such apartment blocks inactivity centres is embodied in planning schemes.The uncertainties derive firstly from doubts aboutthe interest of ‘empty nesters’ in apartmentliving, and secondly from the high costs ofbuilding multi-storey apartments in Melbourne,given that the building unions cover such work.79

Melbourne 2030 incorporated a legally enforceableUrban Growth Boundary (UGB), whichprevented development outside of it. Itsostensible purpose was to give added teeth to theobjective of limiting Melbourne’s outward spread.However, there has always been uncertainty abouthow ‘flexible’ this UGB would be. Would thegovernment expand the boundary when therewas any sign of a raw land shortage? If the answerwas yes, then the UGB would not function toconstrain the outward spread of the city. In otherwords a ‘flexible’ UGB and the goal ofconsolidating Melbourne would be in conflict.

In November 2005 the state government made itspriorities plain. It rezoned some 4,500 hectares of


38


land outside the existing UGB for futureresidential purposes (in areas adjoining theexisting growth corridors). This additionalresidential land will accommodate at least another40,000 dwellings. This is over and above thedwelling potential of some 130,000 alreadyavailable on land designated for residentialdevelopment within the original UGB. This170,000-lot potential represents a huge stock ofland, enough to provide for half of Melbourne’scurrent dwelling needs for at least 13 years. Thestated aspiration in the Melbourne 2030 documentis to reduce the share of Melbourne’s housingconstruction on the frontier to just 31 per cent by2030.

The government has been quite open about itspriorities. The Minister for Planning, Rob Hulls,referred to the November 2005 rezoninginitiative in the following terms:

Importantly, the adequate availability of land willprotect housing affordability and ensure Melbourneretains its competitive edge over Brisbane andSydney.80

The accompanying planning document statesthat the zoning of additional land will place‘downward pressure on residential land prices’.81

Clearly, urban consolidation is a second-orderpriority. What matters to the state government isthe maintenance of Melbourne’s comparativeadvantage in new dwelling costs.

On the other hand, the November 2005planning initiatives package included theannouncement that a new system ofdevelopment levies for new housing estates wasto be introduced. There is to be a moresystematic basis for assessment of developmentlevies. Developers of new estates within the UGBwill henceforth have to contribute at least$40,000 and up to $80,000 per hectare,depending on the time of their project.According to the government, these figurestranslate into $3,000 to $5,000 per block.82 Theseamounts are little more than the existing levies.As noted, they compare with the levies requiredon the Sydney frontier of $90,000 to $100,000

per block. They will not breach the stategovernment’s cheap housing policy, and will dolittle to improve the abysmal standard ofinfrastructure provision on the current housingfrontier of Melbourne.

Nonetheless, the state government’s policies willhelp sustain the property industry, relative to thesituation in Sydney where a house and landpackage on the frontier is well beyond themeans of most aspiring first home buyers.

The state government appears to imagine that,as long as population growth continues, peoplewill build and locate on the spreading frontiersof Melbourne, if only because of the accessibleprice structure. However, what jobs are thesenew settlers going to take on after they settle onthe periphery, tens of kilometres fromestablished employment centres? After theconstruction phase is complete a minority willgain employment in providing retail,educational, health and other services for thenew community. For the rest, aside from thelong-distance commuters, the government haswisely included in its rezoning measures asubstantial increase in land for commercial andindustrial purposes in the vicinity of the newresidential land. There are, for example anadditional 448 hectares of industrial land in theCasey–Cardinia growth area and 1175 in theHume growth corridor. The planning statementstates that this land is sufficient for tens ofthousands of additional jobs. According to MrBracks, these jobs will flow from the state’sexisting economic policies. In his words:

Victoria’s healthy economic climate has contributedto Melbourne being the nation’s leading researchand manufacturing centre. Manufacturing iscontinuing to grow despite internationalcompetition and a wide range of industries such asadvanced automotive manufacturing, highereducation, biotechnology and financial serviceschoose to locate here.83

If our analysis is correct this sunny outlook willnot come to pass. If warehouses rather thanfactories take up most of the new industrial land

39

(as is currently the case) the job generation willbe far less than the government anticipates. Inthese circumstances, will people continue toflock to outer suburbia? Some of the peopleaffected by the employment situation will chooseto commute into the job heartland ofMelbourne. Others may seek work elsewhere,including interstate.

Our main point is that the state government’scurrent heavy dependence on the propertyindustry as a fundamental driver of the city’seconomy is unwise. It is unwise because theboom of the past decade may not be repeated,especially if Australia enters a new era of higherinterest rate settings. It is also unwise because itis ‘dumb’ growth that has nothing to do with thecapacity of the population in question toproduce goods and services which can competein the international marketplace.

Its downside also includes doubts about whetherthe level of debt involved in financing propertypurchases is sustainable. The property boom ofthe last decade was partly a product of lowinterest rates and an increased willingness ofhome buyers (mainly home owners upgradingtheir home investment and investors in realestate, but also first home buyers) to take onhigher debt levels. As is well known, this has ledto an escalation of household debt. For Australiaas a whole, by 2005 the average Australianhousehold was paying around nine percent ofaverage household disposable income in intereston housing mortgage debt, up from around halfthis level in the late 1990s.84 It is all too evidentthat much of the finance derives from foreignborrowings, thus the mountainous level of netdebt now held by foreign interests ($493 billionas of March 2006).85


40

Sydney and Melbourne are the two majorAustralian cities thought likely to run at secondspeed relative to the resource driven states ofWestern Australia and Queensland. Our datasupports this expectation, though Sydney’s slow-down has been sharper than has been the case inMelbourne.

The analysis shows, however, that there is noroom for complacency in Melbourne. Over thepast few years Melbourne’s share of the growth ofadditional jobs in Australia has droppedprecipitously, from 29 per cent in the year toAugust 2004 to 10 per cent in the year to August2006. The main drag on this relative decline isemployment in manufacturing. There is a similarsituation Sydney. The difference between the twocities is that employment levels in the peopleservicing industries have grown more rapidly inMelbourne than in Sydney. Dwelling constructionlevels, though falling recently in Melbourne, haveheld up better than in Sydney. So hasemployment in the business services andconstruction industries, which are linked tourban development. Employment in the healthsector, which is mainly driven by the state andwhich again is related to population growth, hasbeen far more rapid than in Sydney.

The Bracks government has promotedpopulation growth because it understands thatMelbourne’s economy has become hooked onthe housing construction and city buildingactivities flowing from rapid population growth.There are two problems with this strategy. One isthat population growth itself is not guaranteed,especially given a possible net exodus of peopleto Queensland and Western Australia. The otheris that such growth deflects from the challenge oftransforming the Victorian economy into onethat is globally competitive. This is because itchannels scarce capital and expertise away from

industries capable of competing internationallyand obscures the underlying economic realities.Melbourne is currently growing faster thanSydney. This is not because of any underlyingsuccess in transforming the Melbourne economy,but a temporary artefact of the population andurban development setting.

Melbourne will have a continuing role as anational commercial and financial centre. It willgain some benefits from its role in helping toservice mineral producers and exporters. But justas in Sydney there is no need for a largerpopulation for this role to be fulfilled.

The state Labor government claims thatMelbourne can become a site for hi-techinnovation, particularly in product innovationsserving a global market. The government hassituated this strategy around large investments inadvanced scientific research, notably theAustralian National Synchrotron and Bio21. Ouranalysis indicates that this is a precarious wayforward, certainly in the short term. There is littleprospect that these investments will generatesignificant private sector employment growth inthe immediate future.

It may well be that heavy state investment inMelbourne as a scientific centre of excellence willpay off in the long term. But so far the stategovernment has not accompanied its big-ticketprojects with accompanying investment inVictoria’s universities. This should be an urgentpriority given that the Bracks’ governmentmanifesto regarding national reform initiativesplaces a high priority on enhancing the‘advanced skills’ of younger people.86 Themanifesto notes the neglect of the highereducation sector under the Coaliton and cites ourwork to the effect that there has been no increasein domestic undergraduate commencements

Conclusion

41

since the Coalition came to office in 1996.87 Yet sofar, the Bracks government has not provided anyadditional funds to pay for additional places atVictoria’s universities, whether to advance thescientific research agenda or for the morepractical purpose of training additional engineersor scientists.

Meanwhile, the state government has tacitly givenup on industries limited to the domestic market.It has aligned itself with the federal government’sobjective of ruthless restructuring such that onlythose industries which can compete in the face ofglobal competition will survive. This is not asensible stance. There is far too much at stake asregards employment for Melbourne residentsand the corporate organisational base. In ourview, if goods and services are to be delivered tointernational markets it is much more likely tocome from manufacturing enterprises alreadyestablished in Melbourne than from start-ups. Acentral concern is that if local productioncontinues to decline, it will remove one of thefoundations needed for tackling internationalmarkets—as was evident with the case of Bosch,Ford and Hawker de Havilland.

There is no magic solution. The die has been castas regards the removal of tariff protection fordomestic producers. Nonetheless much could bedone via an industry policy targeted to assist localproducers maintain their base. The relevantpolicies include:

1. Additional R&D assistance. There wasuniversal agreement among manufacturersthat the federal government should provideadditional financial assistance for productdevelopment that is essential for theircompetitiveness. This could involve anincrease in the present 125 per cent taxconcession level for R&D expenditures to the150 per cent level in place when the Coalitionfirst came to power.

2. An explicit industry policy. The days of bigfunding for prospective industry winners areprobably over. The state and federal

governments have made it clear that it is theinternational marketplace which willdetermine who survives. The reality is,however, that both governments do have a defacto industry policy. As this study has shown,the motor vehicle industry has received verylarge sums via ACIS and by specific hand-outs,including some $50 million for Ford from thestate government alone. Have other firmsreceived such grants? If not, why just Ford?The point is that industry policy should beopen and transparent.

3. We favour the establishment of an innovationfund available to a wide variety of firms andnot just those involved in developing newproducts. Those involved in the enhancementof existing products would also be eligible.This initiative could be dovetailed with therecent announcements from the federal Laboropposition. It proposes that, if elected, itwould replace the existing system of broadlybased tax concessions for research anddevelopment in favour of a more targetedprocess of selective industry loans or grants.88

4. Manufacturers and service providers (likeEricsson) universally agreed that good qualityengineering, IT and science graduates are oneof the key ingredients in product innovationand hi-tech service provision overseas. Thestate government should be contributing tothis output in Victoria through the support ofadditional university places, but as noted, hasso far not done so.

42

1 Radio Melbourne 774, Jon Faine Program (withChris Clarke), Wednesday 4 October 2006. TheTreasurer’s statement was based on ABS labourforce estimates for the August quarters 2005 and2006. Where possible we have used full year data inwhich estimates for each of the four quarters havebeen averaged. As to the August quarterly data for2005 and 2006, they show remarkably high growthfigures, especially for regional Victoria. These willneed to be confirmed in later estimates.

2 Ken Henry ‘An old economy is new again’, TheWeekend Australian, Inquirer, p. 26, 30 September–1October 2006

3 ibid.4 ibid.5 Victorian Government, A Third Wave of National

Reform: A New National Reform Initiative for COAG,the proposals of the Victorian Premier, August2005, p. 14

6 ibid, p. 217 ibid, p. 178 Warren Mundy, Victorian employment: current

patterns and future prospects’, in Dennis Glover,Ed. Taskforce 2nd Report: Victoria’s Economy andEmployment in the 21st Century, Australian FabianPamphlet, no. 54, 1997, p. 18

9 Steve Bracks, ‘Economic policy challenges forLabor, ibid, p. 4

10 ibid, p. 511 Victorian Government, Agenda for New

Manufacturing, May 2003, p. 912 Victorian Government, media release, ‘Melbourne

world’s most liveable city’, 4 October, 200213 Victorian Competition and Efficiency Commission,

Making the Right Choices: Options for ManagingTransport Congestion, Draft Report, April 2006, p. 50

14 Victorian Department of Treasury and Finance,discussion paper, A tale of two economies: the regionalimpact of Australia’s resources boom, May 2006.

15 Bob Birrell, Federation: The Secret Story, Duffy andSnellgrove, Sydney, 2001, p. 203

16 R. Jureidini and E. Healy, ‘A decade of change inindustry employment: Melbourne and Sydneycompared’, in People and Place, vol 6, no. 3, p. 11

17 ABS, Labour Force Survey, quarterly data, 1995 to2006

18 Victorian Government, manufacturing policy,Agenda for New Manufacturing, May 2003 p. 9

19 ABS, Australian System of National Accounts, 2004-05,Cat 5204.0, p. 23

20 National Institute of Economic and IndustryResearch, The State of Australian Manufacturing,Summary Report, AMWU, July 2006, p. 5

21 ibid.22 Australian Industry Group, Business Prospects for

Australian Manufacturing in 2006, February 2006, p.

923 K. Neill, A History of ICI Australia Research Group,

Research Group ICI Australia, Ascot Vale, 198924 J. B.Willis, ‘Three little companies—the birth of a

major Australian scientific instrument industry’ inHistorical Records of Australian Science, vol. 14, no. 4,2003, p. 422

25 The Australian, ‘Dwindling lab staff still upbeat’, 1April 2003, p. 32; The Australian, ‘R&D—picking upthe pieces, 15 October, 2002, p. 33

26 The Age, ‘Lab closure pain will spread’, 8 October2002, p. 3

27 The Age, ‘Closure will take the best and brightest’, 4October, 2002, p. 3

28 The Australian Financial Review, ‘R&D incentiveslacking, says Ericsson’, 29 October, p. 39

29 The Australian, ‘Telco “nuclear winter” looms’, 3October 2002, p. 2

30 John Brumby, ‘In the national interest: a newcooperative federalism’, speech to the SustainingProsperity Conference, 1 April 2005, pp. 6–7

31 The list of items eligible under ACIS is listed inSection 41e of the Tariff Act

32 Federal Chamber of Automotive Industries, localproduction volumes, 2 October 2006, accessed at<www.fcal.com.au/volumes/>

33 The Age, ‘Ford to slash output and lay off staff’, , 17October 2006

34 AusIndustry, media release, ‘$101 million boost toauto industry R&D’, 16 May 2006

35 The Australian, ‘Ford faces cutbacks to Falconcapacity’, 10 October 2006

36 Ai Group and FAPM, Study of the Victorian AutomotiveComponents Industry, March 2005, p. 10

37 Victorian Government, Submission to House ofRepresentatives Standing Committee onEmployment, Workplace Relations and WorkforceParticipation Inquiry into Employment in theAutomobile Component Manufacturing Sector,March 2006, p. 5.

38 ibid, p. 1139 Ai Group, op. cit., p. 1140 Federation of Automotive Products Manufacturers,

Submission to the Productivity Commission Reviewof post-2005 Assistance Arrangements for theAustralian Automotive Industry, May 2002, p. 6

41 The Age, ‘More bad news for local automotiveindustry, 8 August 2006

42 Prime Minister of Australia, John Howard, mediarelease, ‘Assistance to Ford Australia’, 5 May, 2006

43 The Premier of Victoria, media release, ‘$1.8billion investment for Victoria’s automobileindustry’, 5 May, 2006

44 Prime Minister of Australia, op cit.45 The Australian, ‘Ford faces cutbacks to Falcon

capacity’, 10 October, 2006

Endnotes

43

46 Victorian Government submission, op. cit., p. 2547 ibid, p. 2648 Murray Gillin, ‘International leadership through

strategic innovation: a case study of Hawker deHavilland’, paper delivered at the 2006Engineering Leadership Conference, Melbourne,August 2006

49 Tony Carolan, General Manager, BusinessDevelopment, Hawker de Havilland, interview 19October, 2006

50 Interview with Tony Malligeorgos, Director ofMarketing andBusiness Development, EricssonAustralia andNew Zealand

51 The Economist, ‘The battle for brainpower: a surveyof talent’, 7 October, 2006, p. 9

52 Victorian Government, Jobs for Tomorrow: Labor’sPlan for Jobs and Economic Development, 2002, p. 8

53 ibid.54 ibid, p. 1255 Richard Florida, The Rise of the Creative Class and

How it is Transforming Work, Leisure, Community andEveryday Life, Basic Books, 2004.

56 Richard Florida, ‘The creative spirit of Docklands’,in Waterfront Spectacular, ETNCOM Pty Ltd, 2005,foreword

57 Mark Kestigian, ‘Creative capital by the bay’, inibid, p. 168

58 Jim Fox, ‘Engineering and Australia’s future in the21st century’, ATSE Focus, no. 141, June 2006, p. 18

59 This point is thoughtfully explored in Mike Berry‘Melbourne—is there life after Florida?’ UrbanPolicy and Research, Vol. 23, no. 4, December 2005,pp. 386-387

60 Mark Kestigian, ‘Safe harbour for technology’, inWaterfront Spectacular, op. cit., p. 250

61 Victorian Government, Jobs for Tomorrow: Labor’sPlan for Jobs and Economic Development, 2003, p. 5

62 ibid.63 Allen Consulting Group, The economic impact of the

commercialisation of publicly funded R&D in Australia,Australian Institute for Commercialisation,September 2003, p. 32

64 ibid, p. 165 ibid, pp. 22–2866 Bio21 Australia Ltd, Annual Report 2005–0667 Victorian Government application for the Major

National Research Facility Program, NationalSynchrotron Facility, Victorian Proposal, May 2001(unpublished)

68 Professor Frank P. Larkins, ‘TransformingAustralian Science with the AustralianSynchrotron’, Lady Masson Memorial Lecture, 13September 2006

69 ibid.70 The Age, ‘Government denies ‘secret deal’ with

synchrotron firm’, 3 April 200671 ibid.72 As a consequence of this GST induced hick-up in

2000–01 the figures in Table 5 exaggerateemployment growth in construction because of the

artificially-low base year. However, the comparisonwith Melbourne and Sydney based on these figuresis appropriate since both cities experienced thesame GST jolt.

73 Quoted in John Stenhold, ‘The profitable road’,Business Review Weekly, 28 September–4 October,2006, p. 32

74 John O’Leary ‘The resurgence of marvelousMelbourne—trends in population distribution inVictoria 1991–1996’, People and Place, vol. 7, no. 1,pp. 33-34

75 Victorian Government, Beyond Five Million: TheVictorian Government’s Population Policy, Departmentof Premier and Cabinet, 2004, p. 3

76 Bob Birrell, Lesleyanne Hawthorne and SueRichardson, Evaluation of the General SkilledMigration Categories, DIMA, March 2006, p. 50

77 Victorian Government, A Plan for Melbourne’s GrowthAreas, Department of Sustainability andEnvironment, November 2005, p. 11

78 Urban Development Institute of Australia (NewSouth Wales), Managing Sydney’s Growth Centres,Submission to the Department of Planning,September 2005, p. 15.

79 Bob Birrell, Kevin O’Connor, Virginia Rapson andErnest Healy, Melbourne 2030: Planning RhetoricVersus Urban Reality, Monash University ePress,2005, chapter 4, pp 15–16

80 Foreword by Rob Hulls, in A Plan for Melbourne’sGrowth Areas, op. cit., p. 3

81 ibid, p. 882 ibid, p. 1383 ibid, p. l 284 Reserve Bank of Australia, Bulletin, May 2006, p. 2485 ibid, July 2006. p. S9386 A Third Wave of National Reform: A New National

Reform Initiative for COAG, op. cit., p. 3787 ibid88 The Australian, ‘ALP slammed on R&D’, July 11, p. 2

44

The 2006 election campaignWe are under no illusion that in an electioncontext, the Victorian government will take theelectorate into its confidence as to the seriouschallenges the state faces. Indeed there has beenremarkably little debate about how thechallenges of structural change that we andother observers have pointed to, including TheAge in it’s The State of Victoria publication inOctober 2006.

Not surprisingly, there is no acknowledgment ofthe recent decline in manufacturingemployment in Melbourne and what it augursfor the future. All we have in the 2006 electoralplatform is that ‘Labor is committed to thedevelopment of a new national manufacturingpolicy underpinned by industry sector plans.’1

There is no detail provided about these plans.

There is no sign of any industry planning thatmight involve significant financial assistance toexisting enterprises. We know that when pressed,the government is willing to invest heavily inindividual enterprises, as with its unproclaimedgrant of $50 million to Ford Australia early in2006. This grant is not acknowledged in thePlatform nor is there any indication as towhether it will be repeated.

The focus remains on innovation. Labor’soptimistic vision is to ‘place Victoria as a globalleader in emerging innovative industries andfrontier technologies ... and to make Victoria thecentre of manufacturing excellence in the Asia-Pacific’.2 Bio 21 and the Australian NationalSynchrotron continue to be billed as exemplarsof this strategy.

Given the government’s welcome commitmentsto enhancing the human capital of the state’sresidents and the centrality of this objective tothe innovation strategy, some commitment toprovide additional funding for research andtraining at the tertiary level might have been

expected. Instead, the platform makes it clearthat the government will not go beyond appealsto private industry and the federal governmentto expand funding for university places.3

One policy objective that the government isconsistent with, is its anxiety about continuedpopulation growth and to this end to ‘makeVictoria the most affordable state on the easternseaboard’.4 The platform makes it clear thatpopulation growth is viewed as a key driver ofeconomic activity in the state. Among otheractions, it is stated that ‘Labor will take steps tofurther increase net interstate and overseasmigration to Victoria’.5

Endnotes1 ALP 2006 Election Platform, p. 782 ibid, p. 773 ibid, pp. 31–324 media release, Victorian Government, ‘$600

million package to keep housing affordable’, 29October 2006

5 ibid. p. 70

Addendum

Documents

Melbourne’s Second Speed Economy