When Chinese counterfeiters copied Codan's metal detector five years ago and sales to Africa plunged, the Adelaide company tried to enforce its legal rights.
"We tried to stop them in the market by going out there and doing raids and so on, and it was just like playing whack-a-mole," chief executive Donald McGurk said.
So Codan reinvented its metal detector and brought in engineers from its radiocommunications unit to encrypt the intellectual property. Sales and profits bounced back.
"The only way to stop them is to out-innovate and outsmart and out-compete them in the market," Mr McGurk said.
Codan is the kind of high tech firm the nation needs to cultivate if it is to have a future in manufacturing, but there are too few such firms.
A report from the Turnbull government's Advanced Manufacturing Growth Centre finds that most Australian manufacturing firms do not have the chops to compete at this level.
The findings are a blow to the government's $1.1 billion innovation agenda, which aims to create engines of economic growth beyond mining and finance.
"The majority of Australian companies do not report characteristics such as R&D; collaboration; the introduction of new goods, services or processes; the use of science, technology, engineering and maths – or STEM – skills; supply of overseas markets; or increasing IT expenditure," the AMGC's Sector Competitiveness Plan says.
Lagging in R&D;
There are huge knowledge gaps in fields vital to 21st century manufacturing: robotics and automated production processes; advanced materials and composites; digital design and rapid prototyping; 3D manufacturing; sensors and data analysis; bio-manufacturing; nano-manufacturing, micro-manufacturing and precision manufacturing; and virtual reality systems.
Australian firms do much less R&D; than their counterparts in top manufacturing nations such as America, Japan and Germany, management is weak and manufacturing labour productivity is only 60-65 per cent of international benchmarks.
Still, the report says there is a prize for Australian manufacturers willing to put in the hard yards and move up the value chain - a potential 25-35 per cent increase in value for the $100 billion sector over the next decade.
Australian firms have one big advantage over their American and other foreign counterparts - skilled workers in medical devices and aerospace are 38-40 per cent cheaper to employ than their US counterparts.
Employing more skilled workers - engineers, designers, professional marketing and sales staff - is one of the ways in which the AMGC says Australian manufacturers can move up the value chain and overcome the overall 7-15 per cent "Australia tax" - the cost of doing business here.
The others include doing more innovation, R&D; and collaboration with research agencies and other firms to increase their technical leadership and value-adding services, targeting untapped markets and global value chains, and boosting scale and management quality.
Firms exhibiting these attributes include Resmed, which spends more than $100 million a year on R&D; and has 40 per cent of the global sleep aids market, Quickstep, which has developed new ways of curing carbon fibre resins for automotive, aerospace and defence by working with Deakin University near Geelong, Textron Systems Australia and Cablex - which make drones and short-run aircraft cables for global markets.
Codan is using its radio and defence know-how to move into defence electronics, with an eye on top defence contractors like BAE Systems and Lockheed Martin.
"You have got to be internationally relevant in Australia to be able to gain some critical mass - or all you are going to be doing is defending your own patch when competitors come to Australia," Mr McGurk said.
