How to diversify regional economies
There is a pressing need for regional areas to take a longer-term view of their economic prospects, writes director of the Australian Centre for Business Growth Ryan Williams.
With the Australian economy still dominated by the resources sector, the need to diversify is becoming critical. Regional areas dependent on single-resource industries are vulnerable, as seen by the government’s recent moves to salvage the Whyalla steelworks. With more than 1000 workers employed at the steelworks in a regional town of 22,000, the region faces substantial challenges if its foremost industry dries up.
What can be done to support communities like Whyalla and sustain their people and businesses when their economy is at risk or in decline? With long-term planning and targeted support, we can help single-industry local economies diversify and avoid becoming ghost towns.
Consider the automotive industry in the United Kingdom’s West Midlands at the turn of the century.
The alarm bells were ringing from around 2000 that MG-Rover was in trouble and headed for closure. At the time, the region was heavily dependent on the auto sector – and had been since production began a century previously. Faced with a looming crisis, the government injected huge stimulus into the area through the Rover Task Force, reskilling the local population and assisting supply firms to continue trading in the short term, and eventually shifting to new markets and applications. When the curtains on MG-Rover finally came down in 2005, the job losses were much lower than anticipated, with as many as 10,000 to 12,000 jobs saved.
South Australia faced similar challenges with the decline of auto manufacturing – with Mitsubishi shutting its doors in 2008 and Holden in 2017. Economic forecasts predicted a $4 billion downturn for South Australia with 65,000 jobs lost because of GM closing. But with government support and private investment, people were able to move into sectors such as defence or mining. Research suggests 80 per cent of those impacted found new jobs.
These examples show that it’s possible to map a pathway for “single industry” economies to become thriving diversified regions. With these blueprints in mind, Australia’s resource sector dependent towns and cities should begin planning their own economic diversification before it becomes a crisis.
There is a pressing need for regional areas to take a longer-term view of their economic prospects. Here are some steps companies in single industry regions can take to diversify and survive economic decline:
You might like
1. Identify what to diversify
First, it’s important to identify what part of your economy to diversify. Typically, there’s either a supplier concentration or a customer concentration, which makes an organisation or a region vulnerable.
Anytime a single customer or supplier represents more than 35-40 per cent of the books, the company is potentially exposed. On the supply side, dominant suppliers have too much strength from a negotiating point of view. And on the customer side, the stakes are far higher when a big player decides to end the contract.
If you see this type of supplier or customer concentration in your business or local economy – start thinking about adjacent markets, new customer geographies and what expertise your company holds.
2. Scan your environment for opportunity
Next, scan the immediate surroundings to figure out what resources are available. What’s the shape of local geography? What infrastructure is there? What inputs and supply can a business tangibly achieve?
After taking a long, hard look at what exists in your immediate physical surroundings, be creative and consider how to pivot and transition to products and services in future demand.
Realistically, while the Australian government has a Future Made in Australia initiative, its focus is niche. We’re going find it hard to start manufacturing silicon chips or compete with the industrialised infrastructure that’s already in place in established markets.
Stay informed, daily
However, in the regions we have plenty of land, so one option could be retooling economies around housing development, helping to address a major mid-term challenge in housing demand.
For example, an area with metalworking and manufacturing capability, good transport linkages and access to timber could be ideally placed to create modular cassettes for buildings that can be used locally, nationally or even internationally for housing, schools and hospitals.
3. Consider your capabilities
Thirdly, look for innovative products or services that play to your strengths. What competencies do you have within your company? Are you a good manufacturing business or have a good sales operation? Do you have a deep balance sheet? Is there an asset base that’s portable over to another sector?
This diversification question intrinsically involves a gap analysis – is there a gap in the market you could exploit?
Take, for example, a regional business that services large trucks and equipment in the mining industry. The workshop tooling and mechanical understanding is not that far away from servicing agricultural machinery on an industrial scale, such as agricultural trucks and harvesters, or from maintaining other commercial or fleet logistics businesses. Is there an opportunity to collaborate with other businesses in the region to bring your joint capabilities to a new customer segment? Find the gap and consider how to plug it with a fresh look at products and services.
When the need to diversify a region and reshape communities is identified, there must be government support at the local, state and federal level, engaged together with industry.
Ideally, change needs to be started five to 10 years in advance, to get colleges up and running to teach the skills that are needed, to support businesses as they pivot their operations and to start building new infrastructure and capabilities in the region.
Many successful diversification projects globally, like the UK’s Rover Task Force, have been driven by state-subsidised policies. These provide either the retraining or the capital to enable people and businesses to migrate to a new direction. Most businesses can’t recapitalise their entire balance sheet alone, so look for government support to help you diversify.
The likes of the submarine project in South Australia is a good example, where workforce development and infrastructure development have already started. However, it isn’t expected to reach peak production for another twenty or thirty years, which shows the long lead times at play when diversifying an economy.
Start thinking about long-term diversification
In our experience at the Australian Centre for Business Growth, a big challenge is that most SMEs aren’t planning a year ahead, let alone five years ahead. Business owners need to start thinking more medium to long-term about their own operations and the trajectory of their local economy. In turn, policymakers should take care of other moving parts that require help from a federal and state level.
Diversification of local economies is in the national interest. If Australia can develop more robust and complex regional economies, rather than hedging its bets against regional areas’ heavy reliance on the resources sector, the entire country will prosper well into the future.
