In spreading prognostic viruses about what the future of coronavirus should look like, there is a virtual unanimity about the need for the state to have a stock of important items ready for crisis. To be sure, US technology companies have started ‘decouple ’ Their supply chain is from China, but the shortage of global medical supplies, from masks to ventilators, has strengthened concerns about continuing business as usual.
I don’t know because I’m worried that China can exploiting its status as a virtual monopoly supplier, or concern that the just-in-time supply chain which is a feature of modern global trade cannot overcome the surge in demand in a crisis, there are broad calls for diversification of suppliers and, if necessary, returning manufacturing on land.
The last one doesn’t have to be easy. The recent history of the Australian defense industry illustrates the challenge of trying ‘important manufacturing’ on land ‘when faced with a relatively small amount in a highly competitive global market.
The government released a statement on the defense industry’s policy in early 2016 as part of a defense white paper. The aim is to increase the delivery of defense capabilities, especially in high priority areas where ensuring supply and thus sovereign capability is very important. Since then, the policy has been driven by a variety of measures, including a willingness to pay more for local manufacturing to improve the capabilities and content of the Australian industry.
But while there are individual success stories, especially in advanced technology, at the macro level there is almost no improvement (table 3.6) in the ratio of defense costs spent locally to those going abroad.
There is a reason for this. Modern military equipment is very complex and therefore difficult and expensive to develop. Australia does not have the ability to design and build military aircraft, for example, so they must be purchased overseas. That will not change. But even the equipment built here still relies on high-value imported subsystems. For example, at least four of the five main subsystems for future submarines will be provided by overseas suppliers. This is most likely a similar situation in other sectors such as complex medical equipment, although Australia can build a rich history of medical technology innovation.
Dependence on the supply chain can cause disruption. Although it was designed and built in Australia, Hawkei-protected vehicles recently experienced a production delay of almost a year when the Austrian engine supplier went bankrupt. This is the type of risk that the US attempts to separate from China try to overcome, but it will be more difficult for an economy the size of Australia with a much smaller industrial base.
In addition, even if we can produce to meet normal demand, there are additional costs in maintaining unused surge capacity. Australian National Audit Office reported that from 1999 to 2015, the Department of Defense paid $ 526 million for ammunition produced by facilities in Mulwala and Benalla, but spent $ 1.9 billion on buildings, operating and maintaining facilities to keep industrial capabilities ready for possible war.
The main lesson from the defense industry is that we cannot do everything. But deciding what should be prioritized and how to work with industry to ensure local supply is difficult. It took two years after the initial defense industry policy statement for the department to identify 10 priority areas for the defense industry, and two years later it was released detailed implementation plan only for these two areas. Defense is probably not the only government department that needs to rebuild its ability to do industrial planning.
In some ways, the challenges in the defense industry are simpler than in the broader economy. In the defense sector a monopsonymonopoly relationship rules (or near monopoly), where a customer works with a small number of suppliers. As a single customer, the government can decide to pay a premium to ensure that priority capabilities are given.
The model can be neatly mapped to the health sector for high-value equipment, such as ventilators, if the government can decide that all hospitals must take it locally from identified suppliers. But it is not possible for goods with a broader market. How long will Australians buy face masks made in Australia if they can get them at a fraction of the price from an overseas manufacturer? While Australians might expect their government to buy locally, they generally apply criteria of value other than just ‘made in Australia’ when it comes to their own money. So it’s possible that local face mask manufacturers, hand sanitizers and surgical gloves that were established immediately after the Covid-19 crisis will follow the trajectory of the Australian car industry.
Of course, domestic manufacturers are not the only way to overcome the problem, but other solutions are also not sure of the improvement. Supply diversification can reduce the risk of monopoly suppliers abusing their power, but not addressing lean, timely supply chain problems; producers in India or Southeast Asia no longer have an incentive to keep large stockpiles ready for rainy days in the future than China does.
Landfilling will require a change of mindset. The Australian Government in general does not like to pay for large stocks of important supplies that are not used, even if they are important for national security. For example, because of the high cost of modern guided ammunition, Defense supplies will not last for several days from conventional warfare. And despite repeated warnings from our parlous country fuel reserves far below the International Energy Agency’s benchmarks, the government has shown little willingness to invest in infrastructure to store increased reserves on land, preferring to sign an agreement with Washington granting access to US reserves. Whether such arrangements will be strong enough in future crises remains to be seen – in the current crisis, with countries themselves struggling for access to national reserves, the US has not been able to provide medical supplies to other countries.
That does not mean there is no hope. That fourth industrial revolution offers hope for small but technologically advanced countries like Australia. But the defense industry example shows that if Australia wants a more resilient supply chain that can be guaranteed to provide essential goods when the next crisis hits, it will require planning, prioritizing and continuing will from governments, the private sector and the community to survive. higher costs. That would be a significant deviation from the business model as usual today and requires commitments that must last far beyond the current crisis shocks.
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