The Age published a piece of mine on the car industry today. It appears in the link just provided, and also – in case the link is broken in future and because it’s slightly edited in The Age – in its original form beneath the fold.
Some ideas for the car industry
In economics as in life, problems seem to come in waves. Right now for the car industry things aren’t so good. Real wages keep rising, powerful new competitors loom to our north and we’re releasing a new crop of bold new big cars all planned when petrol cost about half what it does now.
It’s all eerily similar to the mid 1970s. Then, minerals and wages booms massively undermined the industry’s economics – just after it had released its largest, most gas guzzling cars ever. The P76 was the most famous like the Titanic taking its maiden voyage straight to sea floor and into cautionary legend.
Then the powerful new competitor was Japan. Now it’s China and India.
Then our response could hardly have been worse. We closed four fifths of our local car market off to imports. And, on the motion of a young back-bencher from Bankstown, Paul Keating, so called ‘non-reversion rules’ required manufacturers to get government permission to switch from local to imported components which was typically withheld if the local component supplier wasn’t happy.
Economic reformers were right in trying to end this madness. But they mistakenly took the whole industry to be a basket case when large car manufacture was (as it still is) pretty competitive. And during the lengthy phasedown of protection they favoured tariffs, instruments well suited to containing the cost of protection, but which nevertheless prevented competitive manufacturers using their protection to help defend and build export markets.
For a disastrous decade we turned our energies to stopping Corollas get into the country so we could make them here. Costs rose, exports collapsed and we made Corolla’s and their competitors Holden Geminis and Ford Lasers at near infinite rates of protection!
We won’t do anything so stupid this time. Still as Mark Twain observed, history might not repeat, but it does rhyme. Then, as now, there’s a high and a low road. Then as now, focusing on mere survival we avert our gaze from the high road.
Virtually the whole industry is in survival mode hanging on to what it can. We’ve been to America and Japan begging the car manufacturers to buy more local components.
Meanwhile the industry honoured its bargain with the Government to let tariffs fall from 15 per cent to 10, pending its fall to 5 per cent at decade’s end. None of this makes any sense but not for the reasons you’re thinking. Of course it will harm the industry, but that would normally help the economy move resources into more efficient industries.
But below some level, cutting tariffs actually makes little sense like some economic advice followed during the depression, the pain appeals to our sense of virtue but it’s just pain. Why? Because cutting tariffs increases imports which must be paid for by increased exports. And for some exports like wool and wheat and coal we can’t increase them without cutting their price.
So, as the Productivity Commission’s modelling illustrates, the economic gains from shrinking the industry a little are outweighed by losses from export price falls. The argument is actually stronger than this, but the industry hasn’t funded the necessary work to demonstrate it.
But all of this pales into insignificance next to the question of how Australia’s and Asia’s car industries are integrated. Back in the 1970s our approach to Japan should have been similar to the Canadians’ approach to America. Just when we were closing off our markets with local content plans the Canadians had a simple message for the Americans. You can export your little heads off into our market, so long as we’re assured a place in the production chain.
It was the most successful piece of automotive industry policy in history from which the Canadian industry has grown to around four times the size of ours and ten times the profitability.
In fact in automotive manufacturing we are an almost perfect fit with China and India we can completely design and build well styled, well made vehicles. They can’t not yet anyway. They have no shortage of investment capital, low labour costs and burgeoning domestic markets. They’ll make good cheap cars, we’ll make good large rear wheel drive ones. So the potential is there.
But as we explore a free trade agreement with China these thoughts are far from our minds. Yes, vehicle exports to China rate a mention, but as ever both political structures and our picture of ourselves as a primary producer means that we see our main task as negotiating access to Asian markets for primary produce.
Of course better access for our farmers should be a high priority. But we must also build our trade diplomacy around a proposition countries with different economic structures to our own grasped long ago that trade within industries is becoming progressively more important than trade between them with each passing year.
When you’re hanging on, white knuckled, trying to survive it’s not easy to think of the bigger picture how to build towards a prosperous place in the regional division of automotive labour. Then again, industry executives fighting their way through the hand to mouth existence they’re now leading know that we’ve been here on and off since the 1970s.
And they might reflect that while most auto industries in developed countries are going through hard times, Australia’s has never cracked $1 billion in profits. It made just over $100 million in 2004. Meanwhile in Canada their profits are down to around $5 billion after a string of years making $10 billion in the late nineties. But they’re expected to recover.
They took the high road. We can too. All it takes is a little imagination.