If we seriously embrace the economic revolution taking place among the emerging economies which surround us, Australia is poised for a spectacular few decades, and more.
Let me share a story with you. Last week in Mumbai, I met Anand Mahindra, Chairman of the Mahindra Group, a $16 billion enterprise.
Anand told me about his investment in Gippsland Aeronautics. Founded by two Latrobe Valley entrepreneurs proud of the fact that in Australia you can start from nothing, but with energy, vision and some luck create a business that employed 140 people making the GA-8 Airvan.
But in 2008 their luck ran out. In three short months of the global financial crisis they went from healthy sales to nothing. Their options were limited. Industry experts told them to pack up and move to America.
They decided to find an international partner and settled on Mahindra. Mahindra loved the Airvan, a high-wing design with big opening doors, which could take a forklift pallet straight into the cabin, applications such as police surveillance, mail runs or emergency medical work from the outback in Australia, to the snowfields of Alaska.
Mahindra invested in the business and introduced the company to a marketing network around the world. Out of adversity has come opportunity.
This and other opportunities within emerging countries, is a big part of our future.
Yet, so many in our community are seemingly oblivious to the rich vein on offer, much less the steps needed to be taken if we are to capture these chances.
We are surrounded by the large emerging economies that have transformed the world over the last 20 years; and that process has only just begun.
For 18 of the last 20 centuries China and India were part of the global centre of economic and political gravity. After two centuries in the global wilderness, they are returning inexorably.
The developed world now accounts for less than 50 per cent of global production, and the emerging economies have been responsible for nearly all global growth this century.
As a consequence, global poverty has been already reduced by hundreds of millions of people.
Over 2 billion more people are expected to come out of poverty during the next 30 to 40 years – a humanitarian miracle.
Greater openness to trade and foreign investment is a key driver of this growth in wealth and jobs.
Developed World Response
The response of most advanced economies to this economic revolution in many parts of the developing world has been to put their heads in the sand; to assume that they could preserve the status quo in the face of this massive structural change.
Instead of looking how to adjust their economies to take advantage of this economic phenomena, much of the developed world looked to protect vulnerable industries with expensive subsides, and protect growth and jobs generally with debt fuelled government spending.
Australia faced the same pressures from the emerging economies as other developed countries but avoided much of the earlier structural shock because we produce the resources and energy required to drive the growth of these emerging countries. It was exports to China that saved our bacon.
But now that the commodity boom has ended, and its proceeds more than spent, Australia joins the rest of the developed world in needing to adjust our economy to respond to the challenges, and the many opportunities, presented by the emerging economies.
Resisting change is not an option. Australia can no longer afford industry welfare.
Borrowing and spending to artificially maintain community spending levels is a failed option. The Australian Government already pays $ 1 billion every month in interest payments on our public debt.
Our remaining choice is simple. We either free up our economy so that capital and people can far more readily move into those areas we are good at, where we have comparative advantages. Or we accept decades of high unemployment and poor growth.
This means that as well as living within our means by fixing our debt and deficit problems, our policy emphasis must promote enterprise, risk-taking, innovation and competition so that Australia can compete and participate in the economic phenomena that is unfolding.
The Good News
The good news is that we are uniquely placed to capture immediate and sustainable opportunities given our geographical positioning within the same time zone, given our knowledge based economy and the complementary nature of so many of our nations strengths.
Our comparative advantages are much sought after by emerging nations. In particular, resources and energy, agriculture and agribusiness, higher and vocational education, healthcare/aged care/medical research, and tourism and hospitality, and all the many services and high-end manufacturing that cluster around them.
Our services brand is gold standard particularly in our region - our financial, environmental management, project management, healthcare, education, design, architecture, construction, aged care, tourism, legal, sports related services and so many more.
But to take advantage we need to be competitive, and we need to position our products and services at the premium end of the market, the end which attracts high-value and high margins; because Australia is a high cost country.
With billions of people moving into the middle class, the premium end of emerging markets will take all that we can ever produce or provide in services, and much more. What will look to us like mass markets will in fact be niche markets.
Last year I opened ServCorp’s newest office in Saudi Arabia. ServCorp is a great Australian success story. The company, led by Alf Moufarrige, provides virtual offices and business services for small, medium and start-up firms. They offer a premium product. They established their first virtual office space in 1980 in Sydney and have since expanded their business to Singapore, France, Japan, South East Asia, Belgium, the Middle East, China, India and New Zealand.
If we are to capture many more of these opportunities, there is no time to be lost in undertaking the micro-economic reforms which will replace the growing and debilitating culture of entitlement, and restore a sense of enterprise, risk-taking, innovation and competition.
And, we must not be afraid to pursue big ideas.
Things like further developing and populating Northern Australia, or options for high-speed rail down our east coast with fast freight on the same line.
Government’s primary role is to get the policy settings right; not to be the primary financier and developer. This is not well understood.
High-speed rail for example can be predominantly funded not by government borrowing tens-of-billions-of-dollars, but by the private sector fully capturing the value of the adjoining land.
My point is the opportunities won’t just fall into our laps. The emerging countries would get by without us, and the rest of the world is eyeing off the opportunities.
But if we fix what must be fixed – our system of taxation, our welfare state mentality, our federal/state relations, our workplace relations and our fiscal position – I have no doubt that the opportunities are there to set Australia up for the 21st century and beyond.
International Trade and Investment
And just as international trade and investment has been a key driver of the emerging world’s growth in wealth and jobs, the same is true for Australia.
But, again, it requires Australian businesses, large and small, to adjust to the changes in the world trading environment – changes driven by the rapid and profound emergence of these economies, but changes also of a magnitude not seen since the industrial revolution, changes driven by the arrival of the digital age.
Global and Regional Supply Chains
One extraordinary development driven by the digital age is the emergence of global and regional supply chains.
In 1990, just 25 years ago, 20 per cent of all goods and services exported from any country in the world ended up as intermediate goods, that is, inputs into other goods and services.
Today, the OECD estimates that figure is close to 75 per cent.
Goods and services can now cross borders three, four and five times before ending up a finished product. This means that every country must now pay as much attention to the tariffs they apply to their own imports, as they do to tariffs applied to their exports.
The major significance of this development is that SME’s can now cost effectively directly access global markets.
Some months ago, I took a group of 20 CEO’s involved in the aerospace industry to Singapore to explore the export opportunities.
All the Australian companies were SME’s, most with a background in the manufacture of car components. With the exodus of car manufacturers in 2017, these companies were looking to broaden their product mix to the aerospace industry, while retaining a role in global or regional value chains for car componentry for which they remained internationally competitive.
When visiting the manufacturers of the major aircraft engines – such as Rolls Royce and Pratt Industries – we learned that these aircraft engines have around 21,000 components, sourced from over 100 countries.
Furthermore, we learned that unlike just 15 years ago, today these manufacturers are able to deal one-on-one with SME’s as part of the global supply chain because of the digital revolution.
We learned that a small Melbourne based company with 10 to 12 engineers has captured the global market with the production of one particular component among the 21,000 components in each engine.
We were told that this company continued to invest in research and development so that it was the preferred supplier for all the world’s aircraft engine manufacturers.
The digital revolution, and the opportunities presented by the demands of the emerging economies, has opened the world to Australian SME’s through these global and regional supply chains.
As an aside, a $200 million contract was recently signed with a major aerospace company as a result of that business delegation, along with a series of the other relationships being formed. Market development does work.
Connectivity is fundamental
About eighteen months ago Qantas signed a strategic alliance with Emirates Airlines, at much the same as Virgin Australia reached a similar deal with Etihad Airlines.
As a consequence, the number of flights going through the United Arab Emirates, via Dubai or Abu Dhabi, have increased from 40 flights a week to around 150 flights a week.
In the subsequent 12 months this has led to an 18 to 20 per cent increase in the export of goods and services, not just to the UAE, but also to all the Gulf States, and a number of countries in the broader Middle East.
The belly of the huge A380 aircraft carry very significant quantities of goods. For example, over the last 12 months 170,000 lamb and mutton carcasses, or nearly 500 a day, have been airfreighted to the Middle East.
Fruit and vegetables picked on a Monday morning in Victoria can find their way onto Gulf States’ supermarket shelves before midday on Tuesday. It’s also a little known fact that 14,000 litres of fresh milk is flown out of Avalon airport each morning into Asia. This proves the power of connectivity.
Following the recent Free Trade Agreements with China, we negotiated a tripling in airline seats from 22,000 seats a week to 67,000 seats, and access to all the major city airports across mainland China.
This is a stunning result for Australia’s tourism industry, but it also sets the foundation for significant exports of agricultural products and services from major regional centres across Australia.
This enhanced level of airline connectivity needs to be repeated across all major emerging markets.
The Importance of Services Exports
Another fundamental element of Australia capturing critical opportunities of the emerging country revolution is services.
Australian services across the Asia Pacific are viewed as gold standard.
This holds true across dozens and dozens of major services. In eighteen months of endless contact with the region, the most frequent point of conversation is the availability of a myriad of Australian services.
All these emerging countries are keenly focused on services because that is where the jobs are, for example 9 out of 10 jobs in Australia are in services. And all the emerging economies are facing a relentless exodus from the rural areas to the cities, by the millions.
Prime Minister Modi told me that an average of 30 people are leaving rural areas of India every minute of every day of every week, and that this will continue for at least two more decades.
This explains our principal emphasis on services in the free trade agreements with China and India.
For example, India doesn’t need cheaper lettuces. It needs our know-how to increase the average dairy cow production of 5 litres of milk a day to something approaching the Australian average of 25 to 30 litres.
The free trade agreement with China is rich with services concessions, not yet provided to other countries.
We are trying to repeat this with India in our current negotiations
To capitalise on these golden opportunities will require a fundamental shift in business attitudes towards establishing a presence in off-shore markets.
Just 25 years ago a company in Melbourne, or Sydney or Brisbane would agonise over expanding their presence interstate.
Today, in the wake of the digital and emerging country revolution, it is not Melbourne, Sydney or Brisbane – but Shanghai or Chengdu, Tokyo or Osaka, Seoul or Bussan, Mumbai or Bangalore, that needs to be considered.
In April last year, I joined ANZ CEO, Mike Smith at a loud and colourful opening of ANZ’s first sub-branch in the Shanghai Pilot Free Trade Zone.
The Pilot FTZ is laying the foundations for China’s next round of economic reforms.
Surrounded by dancing dragons and beating drums, Mike Smith told me how ANZ is positioned to offer trade finance, foreign exchange, commodity finance and cash management as a part of China’s financial market deregulation.
A recent survey of 1,600 exporters found that when asked about the challenges of doing business overseas, the biggest percentage identified a lack of information on local culture and business practices as the major challenge.
Australian businesses need to come to grips with the fact that establishing a presence, no matter how small, in these emerging economies is fundamental to success. Established relationships in place on the ground are critical to getting product and services to the right place. Not to simply adopt a “ship and send” attitude.
Australian businesses, large and small, need to realise that Australia is seen in the region as a super-power when it comes to services.
Even India, which is focused on developing a 2000km long industrial corridor, involving 8 to 10 new cities over the next decade, recognise that these manufacturing enterprises will require a plethora of services.
Every proposed manufacturing plant will require financial, legal, accounting, transport, maintenance, IT, leasing, insurance, marketing, packaging, storage, health and safety and possibly many more services.
The huge scope for Australian business to play a part is highlighted, for example, by the fact Indians currently have one per cent insurance coverage, while Australians have an average of 75 per cent coverage.
Free Trade Agreements
Finally, let me make one or two comments on the importance of bi-lateral free trade agreements.
All solid relationships in life are based on trust. The three free trade agreements concluded by the Australian Government in 2014 – with South Korea, Japan and China – fundamentally increase the trust between Australia and these three countries.
The agreements have delivered immediate results to those who have their eye on the game.
Take, for instance, Tim Reid of Reid Fruits in Tasmania. Tim has been trying to get a toe hold in the Korean cherry market for five years.
However, because of the pre-existing 25 per cent tariff, the best he has achieved in five years is the sale of 7 tonnes of cherries to Korea.
However, the Korean Free Trade Agreement entered into force on the 15 December, 2014. As a result the 25 per cent tariff on cherries was eliminated, and Tim got 183 tonnes of cherries into South Korea in January, with a cheque for $3 million.
When the Japan FTA entered into force in mid-January, the price of Japanese motor vehicles dropped by between $1,000 and $7,600 per vehicle.
The China FTA will enter into force this year following all the necessary processes. This agreement is high quality and very comprehensive, not only with products, but especially with the services opportunities.
Let me conclude by repeating my assessment of Australia’s prospects over the next 10, 20, 30 years and beyond.
We have a clear choice – we can seek to preserve the status quo and grapple for decades with high unemployment and poor growth, or embrace the economic revolution taking place around us.
However, such an outcome must see us get the fundamentals I mentioned earlier in the best shape possible.
As well, our businesses, large and small must work to engage the emerging economies. This will take many outside their comfort zone. If not, the future will pass us by.
Our destiny is in our hands, we can make our own luck.
- Trade Minister's Office: (02) 6277 7420
- DFAT Media Liaison: (02) 6261 1555