This discussion on SBS Insight from April 24th, 2012 covers the Australian manufacturing dilemna:
There are three major costs in manufacturing: material costs, labor costs and other operating expenses. Roughly equal in size. Material costs are roughly the same, whether you are in Australia or China. Labor costs are radically different, with labor costs of $15 compared to $1 in China. But Australia also can’t compete on other operating expenses, which are far higher because of the labor cost and related benefits…….I can’t see why Australia hasn’t got the sense to turn around. We have been on this path for 30 years…
~ Peter Rodeck, Australian manufacturer EnvironData.
Aloha! I always appreciate these sorts of “boots on the ground” reality checks. When I lived in Perth, Western Australia I was 17 years old, it was 1971, and I was going to Uni. Prior to moving to Perth my family was living in Southern California, where my Father worked for Chevron as a geophysicist. It was CalTex in Australia.
I was upset when I got there that my one USD only got me $0.85AUD. I felt like the Australian government robbed my piggy bank and took 15%. My friends said it was a “Bloody Yank tax”! Yet there were more pressing issues than that as I was approaching draft age and the Vietnam War was raging on.
As I looked around Australia I realized that it costs a bloody fortune to live here. If I wanted to buy a record album(LP back then)it was $18 bloody Aussie dollars. Remember the AUD just robbed me of 15% of my savings. Back in California I could have bought the same LP for $3. Then I heard from my parents we were on a one year waiting list for a phone. Then they complained that gasoline was 8 times more expensive than in America. I was beginning to wonder if my Father made a mistake moving here because it is so expensive and backward as well. All the new movies at the theaters I had seen already six months ago in America. A new car cost gazillions more than one in America. My Father bought a Ford Fairlane and the first thing I noticed is that it was a lot smaller than the same car in America, yet it cost more. I said to my Father, “What a rip off!” That was back in the 1970s. My last trip to Australia in 2008 made me realize that Australia is even more expensive in 2008 than it was in 1971. The real estate was outrageously priced compared to Hawaii.
I figured it out though … call it Human Action, took over. I had a plan to fix things! Since it was too expensive to ring my friends back in California I wrote a letter to my high school friend proposing a business. If I sent him AUD to buy record albums at Licorice Pizza for $3 each would he mail them to me and I would sell them here in Perth and we would split the profit 50-50? He agreed and so our business was off the ground. I made up posters of photos of albums like Beatles, Elton John, Moody Blues etc, the albums I thought would sell the fastest. I posted those all over WA Uni. I advertised a price of $9 to $12 for brand new albums. I put my address on the poster, no phone because I did not want my parents involved. Within a week our house was swamped with “strangers” that I was telling my parents were not strangers but just school mates. I sold out of the first lot very quickly and I sent another letter to my SoCal connection asking for a bigger shipment. I was using the floating currency on both ends. I send AUD that when converted in Los Angeles buys more product because my partner gets $1.15USD, he then buys $3 LPs that I sell in Perth for $12AUD. Our only overhead was the cost of shipping. I was getting rich and having fun doing it! I took my profits and bought stuff in Australia and went out to dinners, to the pub buying rounds and travelling on surf trips. The currency arbitrage I was playing was being redistributed into the local economy. It all worked great until I got a letter from the Australian Postal Commission questioning these large and frequent shipments as “personal”. Then my parents were tired of all the people hanging around partying. I was getting dirty looks from neighbors as well! It seemed my dream business of playing the currency arbitrage was over. But was it really a 100% currency arbitrage?
Ah … What I haven’t told you about my story is that the reason Australians had to pay so much for LPs was there was an import tariff and a luxury tariff the government imposed that made the costs much higher. Back then the Australian government decided what was a luxury and what wasn’t.
Thanks to the wisdom of the Australian government trying to protect Aussie jobs the cost of things increased in Australia so that those who worked there had to pay more and so marginalized the average Aussie workers paycheck. The strong AUD did not benefit the Aussie Middle Class due to government intervention. And so one of the popular trips back in the day was to go to Singapore and use those strong AUD to buy duty free cameras and stereo players. That sent more AUD overseas, invested into non-Aussie manufacturing. In essence the Australian government was denying the Australian workers the fruits of their labor. In reality all the employed people and unemployed people in Australia as well as the manufacturers have this “middleman”, called “government”, skimming profits. That sounds a lot like the way the Mafia works only because it is government it is legal!
Now since that INSIGHT video interview was shot in 2012 now the complainers have gotten their wish, a lower AUD, so that must mean exports are rising and jobs are plentiful. Problem solved!
The Aussie Dollar needs to fall a lot further than to 90 US Cents for their Labor Costs to be competitive with the likes of South Korea. We also have the matter of Other Operating Costs, with relative prices more than double (1.61 compared to 0.74) that of South Korea.
so now the $A is near 88 c how low will it eventually go?
That depends on the RBAs efforts.