Illustration: Kerrie Lieshman.

Illustration: Kerrie Lieshman.

AUSTRALIAN manufacturers are enjoying a bumpy ride on the Asian century gravy train. While mining houses are cashing in on China's insatiable demand for Pilbara red dirt and Queensland black coal, manufacturers are seeing their margins squeezed under a triple assault from the high dollar, rising wages and intense competition from Asia.

The industrial landscape is undergoing tectonic changes and within the next five years, 10 out of the 15 most competitive manufacturing countries will be Asian, according to the 2013 Global Manufacturing Competitiveness Index. China and India will take the top two spots, followed by Brazil.

Australia's competitive position has been steadily eroded since the index was launched in 2010, from 15th to 16th this year, and it is expected to drop further in the coming years.

There are clear signs China is working hard to move up the technological ladder, either through innovation or acquiring technology from foreign countries. Chinese manufacturers are on a spending spree in Europe and Japan.

A former Australian economic adviser from the Office of National Assessments - this country's top intelligence agency - said there was the prospect of China occupying the whole spectrum of manufacturing industry from high tech to knitting socks.

So is there a future for the Australian manufacturing industry in the Asian century, and what do we need to do to ensure this vital sector remains competitive?

There needs to be clear recognition of the importance of manufacturing in the economic life of our nation. Though there is a strong political appreciation of the industry - it employs a million people after all - the government's key advisers in Canberra are ambivalent about its importance.

Former Treasury secretary Ken Henry, the Prime Minister's adviser on the Asian century white paper, said repeatedly that business needed to get used to offshoring and the high dollar would be with us for a long time.

US researchers Ricardo Hausmann from Harvard and Cesar Hidalgo from MIT argue in a study that examined the economic fabric of nearly every nation over the past 60 years, that an advanced manufacturing industry is crucial to a nation's prosperity.

For a long time, Australian manufacturers have been told to look to international markets for opportunities so they can build volume and cut production costs. This is advice manufacturers can no longer ignore.

The industrial hub of east Asia, which includes three of Australia's largest trading partners, has developed an extensive production network. The Japanese automotive industry has a regionally integrated supply chain stretched across Asia, and Thailand is one of the regional hubs.

Integration into global supply chains - especially Asia - is crucial to the competitiveness of the industry, says Damon Cantwell, manufacturing partner at Deloitte. This does not mean simply supplying hard components to the global supply chain, but Australians should seek a greater role in supplying design and engineering expertise.

This point has also been recognised in the white paper. ''The capacity of Australian businesses to become fully part of regional and global value chains will heavily influence their success in the Asian century,'' it says.

An example is Melbourne-based aerospace engineering company Aerostaff Australia, which is now part of Indian industrial conglomerate Mahindra. Its chief executive, Stephen Roebuck, said he didn't know a single manufacturing company that was not struggling.

But its link with Mahindra saved it from the verge of collapse and the business was able to take advantage of the large Indian supply chain, he said.

Manufacturing industry CEOs consistently rank talent-driven innovation as the most important driver of a country's ability to compete. This is an area in which Australia has an advantage, but it should not be taken for granted.

Asian countries are investing heavily in education and research capabilities. In certain areas, China and India are racing ahead of Western competitors. Indian Institute of Technology graduates are highly sought after by global IT companies and disproportionately represented in that mecca of technological entrepreneurism, Silicon Valley.

Sri Annaswamy, a Sydney-based outsourcing expert, said the government should invest more in the ''hard skills'' of science and engineering instead of softer cultural and language skills, in order to maintain Australia's competitiveness.

Offshoring of jobs is not only just restricted to low-skill manufacturing. Increasingly, sophisticated Asian operators are eyeing opportunities where Australia enjoys a competitive advantage. Hewlett-Packard is engaging IT experts in India to undertake highly complex analytical work for it.

There needs to be a better link between Australia's world-class research institutes, such as the CSIRO, and industry. Australian research institutes should be responsive to the needs of industry and prepared to engage in more applied research.

Although Prime Minister Julia Gillard devoted ample space in the white paper to talking up the virtue of innovation and science, the Treasurer's decision to cut $1 billion of research funding is a stark reminder of the government's political imperative.