07/09/2011 - 10:32

Building trade bridges on weak foundations

07/09/2011 - 10:32

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Build quality is likely to become an issue in the ‘foreign versus local’ debate.

AUSTRALIA’S shell-shocked manufacturing and construction industries can be expected to crank-up their criticism of the rampant mining sector as evidence grows of serious quality and safety issues involving our biggest trading partner, China.

The attack of the manufacturers (and their attached unions) has so far focused on allegations of mining and oil companies making it hard for Australian metal fabricators and equipment suppliers to win contracts in the booming resources sector.

Criticism has included a claim that specifications for some jobs were applicable in South Korea and Japan, but not Australia.

The miners reject the assertion that they are unfair in awarding contracts. Rio Tinto Iron Ore boss Sam Walsh said there was: “a bit of a myth that mining companies are not supporting manufacturing, that’s actually not true.”

Fortescue Metals Group director of development Peter Meurs said 95 per cent of his company’s $8.4 billion expansion would feature local content.

The project singled out for the strongest criticism in the argument over ‘local versus foreign’ is the Chinese owned, and largely Chinese built, Sino Iron project in WA.

A disaster from the day construction started, the magnetite processing facility was supposed to cost around $3.5 billion but will end up costing $5.7 billion; it was supposed to have started production two years ago but is now scheduled for later this year ... maybe.

Precisely what has gone wrong at Sino Iron is a Chinese mystery because the company behind it, CITIC Pacific Mining, isn’t telling, though Australian contractors reckon the Chinese botched the design, and botched cost estimates by assuming they would get the job done at Chinese rates.

Union boss Paul Howes singled out Sino Iron for special mention last week when pushing a buy-local campaign.

 “We have seen the case of the huge Chinese-owned Sino Iron project in WA where they imported everything, even the steel mesh tracks between the buildings,” Mr Howes said. “The Americans don’t let this happen, neither should we.”

In China itself, evidence is growing that ‘build quality’ of roads, dams, railways and bridges is becoming a national disgrace, a fact that CITIC can expect to be picked up by people such as Mr Howes and applied to the Sino Iron project and other Australian projects with a high level of Chinese design or construction input.

In one recent story filed by The Times business correspondent in Asia, Leo Lewis, and reproduced in The Australian newspaper, it was noted that bridge collapses in China had reached epidemic proportions.

Over an eight-day period in July, four bridges ‘crumpled’ in different regions of China, with the blame being sheeted home to corrupt contracting practices – code for someone ordered cheap materials and then rushed the job to maximise profit.

It is not stretching the bow too far to suggest that bad habits in the Chinese construction industry could flow to countries that are recipients of Chinese investment; and while Africa is the place most likely to suffer from questionable deals and build quality, Australia would be wise to watch how Chinese jobs here stack up – or fall down, as the case may be.

Out of time

NOT far from China there is another business lesson being learned that could have worldwide knock-on consequences for all of forms business because of questions over the once-dominant management theory of ‘just-in-time manufacturing’.

In Japan – where companies such as Toyota perfected the just-in-time process by outsourcing the supply of car parts as a way of minimising inventory and effectively transferring production and storage costs to suppliers – the earthquake, tsunami and Fukushima nuclear meltdown left manufacturers dangerously exposed.

Not only could Toyota and other Japanese companies not get the parts they needed because of damaged factories and transport infrastructure, manufacturers as far away as Europe and the US suddenly found that they couldn’t get what they needed from Japan.

For a country with a dying manufacturing sector such as Australia, this might seem to be news of little consequence.

Wrong. The effect of the just-in-time theory being exposed by a natural disaster has caused a number of big companies to look closely at what they have in their own warehouses in case something similar happens again, whether a natural or man-made event that constricts supply.

The surprising bit, and this is another of those ‘lucky country’ situations, is that stocking up has been a factor in the price of important minerals and metals, such as copper, aluminium and coal, not falling in tune with the global slowdown in manufacturing, as noted last week in key performance measures such as Britain’s purchasing managers index, which fell to its lowest level in two years.

What seems to be happening is that even as manufacturers slow their factories they are re-stocking their warehouses after the Japanese experience, and because they have recognised that too much of their material comes from politically and socially unstable parts of the world, such as Africa and South America.

Megaphone diplomacy

WATCHING Gina Rinehart has become a national pastime as she powers her way up lists of the richest people and the share registers of mining and media companies; so last week’s ‘front page’ event might not be much of a surprise.

What happened is that a trade publication called Australian Resources and Investment produced its September edition with an assortment of stories on mining companies and big-topic issues such as tax.

In the top right-hand corner of the cover is a picture of Mrs Rinehart, the author of the tax rant headed ‘Tax targets backbone of prosperity’; still no surprise there.

If you look back at previous editions, however, you will find Mrs Rinehart on the front cover of the two previous issues (March and May) pushing the same economic-freedom barrow. 

Having Mrs Rinehart on one cover is fine. Twice in succession is probably just poor judgment. Three times in succession is either because the editor is in love, or because readers might be looking at the silent business partner in the magazine.

It should come as little surprise if Mrs Rinehart is, in fact, a silent partner as her father, the late Lang Hancock, supported a number of mining-trade magazines over the years. Maybe Mrs Rinehart sees a mining magazine as a useful tool for strengthening her voice.

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“So much of what we call management consists of making it difficult for people to work.”

Peter Drucker


STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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