R&D lagging

Amid a spate of announcements from Australian manufacturers that they are heading offshore, a KPMG survey suggests that an increase in research and development (R&D) expenditure rather than a search for low-cost labour and manufacturing facilities may be the key to survival in a global market.

The report from the Economist Intelligence Unit (EIU), commissioned by KPMG International, highlights that many Western countries are investing too little in R&D to compete on the basis of innovation and technology and to protect themselves from intense price pressures.

Australia lags behind the rest of the world with business expenditure on R&D as a percentage of gross domestic product (GDP) resting at 0.89% in 2003-04 compared to 2.36% in Japan, 1.79% in the US and 1.24% in the UK. According to KPMG, this low level of investment in R&D may leave Australian industries vulnerable to commoditisation and hence competition from low-cost centres.

The survey highlights that the Australian experience is not unique, manufacturers across the world are trying to work out how to respond to the challenges from low-cost countries.

India and China offer large numbers of engineering graduates who cost a fraction of the amount to hire than their counterparts in developed economies. The dearth of these skills in the West is likely to become of increasing concern and needs to be addressed urgently. Failure to meet this challenge may only accelerate the loss of high-value manufacturing from developed to developing economies.