19 Dec 2011

Wherever there is great wealth, there is great poverty, evidenced by the cheap cost of labour and the exclusive super wealthy class that are all pervasive across the society they dominate. While manufacturing has received a death sentence from many Australian leaders, I predict that service industries in Australia will face the same destiny in the next 20 years.

The result will be that Australia will emerge as the new India, an Australian nation with an exclusive wealth class and significant structural poverty and unemployment. 

This outcome is emerging as business services such as accounting and bookkeeping, IT development, architectural and design services, can all be carried out in cost efficient English speaking regimes like India and the Philippines.

So what has changed to make this major transfer of services provision a reality?

Firstly, the internationalization of learning through remote web based learning centres. You don’t need to build a factory to tool up service delivery - just deliver the knowledge and train the staff.

Secondly, the rapid advance of technology and more specifically, cloud-based computing and rapid reliable data transfer with vastly improved communications has replaced the tyranny of distance.
I believe that Australians will soon be battling for service jobs that will be transferred overseas, just like manufacturing. Business leaders taking a shareholder first approach will naturally seek these remedies to address rising labour engagement costs and productivity issues. (We have record low productivity in Australia.)

The end result is the creation of an expanded jobless and poverty stricken class that will be irreversible, until Australians accept lower wages and conditions. Even acceptance may give the unemployed a job, but it won’t dent the numbers in the new poverty class.

How is this possible, given our nation’s distinct development?

We have evolved from a nation relying on the sheep’s back to selling commodities that we dig out from the ground. Various governments since 1972 have decided to remove any vestige of protection and allow manufacturing to die, in the expectation that we will grow services and sell minerals to Asia.

This strategic decision has delivered many positive results. Indeed, services make up over 70% of our GDP while the mining boom continues unabated (for now). Standards of living have risen with consumers taking advantage of imported goods at relatively low prices. The cost has been the closure of numerous factories and businesses in the manufacturing industry sector over the last 40 years.

Recently, I attended a seminar where a CEO of a major retailer, in response to my question about his failure to mention the words ‘Australian made’, said “there is no future for Australian manufacturing”. The next day I attended a discussion group of bank industry economists who all expressed the view that “manufacturing should be left to die”.

When a factory closes and moves to China, sadly, the local expertise dies with it and cannot readily be revived. We should be learning from the USA experience. Aside from the apparent structural hopelessness of the USA’s national debt, substituting USA GDP from goods making to services provision has delivered economic power to China and India and major unemployment woes to the USA.

When over the last 20 years, the icons of the Australian retail industry decided to reject quality Australian made products for cheaper imports and as a result, help put Australian manufacturers out of business, they never dreamed that their businesses could also become obsolete due to a new form of sales channeling.

It really hit home when the Federal Government introduced GST-free consumer direct imports to the value of $1000.  The savvy Alphabet Generation (x’s and y’s) soon adapted to direct buying via the mobile phone and internet, receiving  from overseas door to door goods delivery at discounts of 50% over the equivalent item purchased from an Australian shop retailer. This change of behaviour has cut out the shop retailer, a trend which is evidenced by the recent financial results of Australia Post for its parcel delivery.

These icons of business and economics (and in my view our politicians), have failed to consider the following question: What happens if service business delivery is transferred to English speaking India?  Until recently, off-shore outsourcing has been limited to major companies establishing call centres and back office operations, but the world is changing fast and the opportunity is opening up to all businesses across all service delivery functions.

Can’t happen, you say, because of the never ending mining boom that will pay for everything?

Look to Europe and some of the “P.I.G.S” – in particular; Greece, Spain, Portugal, Ireland and Italy and see who is bearing the brunt of austerity measures.

David Mond - Managing Director