Back to picking losers – the current woes of the car industry

Herewith – somewhat late owing to my being out of the country – is my second column for the Age and the SMH in Ross Gittins’ place while he goes on hols. It seems there is further news – that we’re disgorging some more money to the mendicant car companies. I am not close enough to things to know all the details, but it certainly looks like it conforms to the kinds of things we did with Mitsubishi – which was to chase them with money while they slowly withdrew from production.

Next week governments with an interest in Australia’s auto industry – from Victoria, South Australia and Canberra close in on Detroit, cap in hand, wallets open begging Ford and GM to keep manufacturing in Australia.

They should look around. Having once housed nearly 2 million souls, Detroit is now down to about 700,000. Large parts of Detroit remain like Mad Max sets come to life. Criminal homicides are down to just 300 a year, a big improvement on the past, but still over 3 times America’s average levels and 20 times Australia’s!

Just as Rome’s invaders and then its inhabitants feasted on the eternal city – scavenging marble and bronze from its buildings, smashing statues for souvenir cameos – today Detroit’s gangs squat in long deserted buildings scavenging the very materials from which they’re built. Barring a fatal fall, or knife fight over the spoils, a day’s work stripping copper from a tenth floor roof gable might reward its new owner with a few hundred dollars on the scrap markets.

Custodians of the industry that built Detroit’s great wealth and transformed our world have been feasting on that industry’s body – now carcase – for generations. Top executives got huge salaries, private jets and internal promotion over outsiders despite continuously disastrous results.

Having bid their workers’ wages and conditions to uncompetitive levels, the aristocracy of the American labour movement, the United Auto Workers (UAW) used their industrial muscle to ameliorate the niggardly American safety net – at least for their own workers. And so their great automotive benefactors remain weighed down with crippling pension obligations.

As surging Japanese imports illustrated their new-found uncompetitiveness in the early 1980s, Detroit’s ‘leaders’ got Washington to pass their costs onto American consumers by capping Japanese imports. So the Japanese continued their onslaught from new plants in America. Having once copied Ford, they’d taken Henry Ford’s ideas about mass production and eliminating of waste much further.

They’d fashioned a production system which endlessly optimised the vast complexity of car manufacture by cultivating high morale, high skill and highly co-operative relationships among everyone in the process. Rather than bark orders at isolated and insecure workers who were under surveillance to prevent shirking, they arranged workers into teams, gave them more autonomy, security and (literally) ten times the training the Americans provided and helped them measure and so optimise their own collective performance.

Likewise with their suppliers. Where American firms immediately sought lower prices from suppliers to reflect any cost reductions they’d achieved, the Japanese involved their suppliers more intimately in new product design – encouraging their unique expertise – and helped them improve quality and cut costs and let them keep their gains for several years until the next major price negotiation. This encouraged trust and co-operation and strengthened their incentives to keep investing and improving.

Normally specialised industrial cities just keep growing as competitor cities can’t match their scale and expertise. But those feasting on the body of the Great Wealth Making Machine of Detroit had so gorged themselves that the new Japanese auto plants headed elsewhere, particularly to the South where ‘right to work’ anti-strike legislation broke union power.

Detroit declined apace. It eventually had some success copying Japanese production methods. As an iconic American advisor to the Japanese, Edwards Deming, put it, the Americans kept trying to copy the Japanese, but they didn’t know what to copy. They’d imitate tokens of the system, but not the whole system or its ethos – the relentless elimination of waste and respect for all those in the production system, workers and suppliers, as collaborators.

Our own industry has often resembled the American one, though mostly without the extremes of abuse. And it’s had particular Australian characteristics. Since the 1940s it’s housed strong pockets of competitive strength in large car design and manufacture, but foreign owners never cultivated those strengths as integral to their global strategy.

A tenacious industrial cringe arose from a coalescence of three very different ideologies and interests. Manufacturers and unions’ lobbied to continue their comfortable life behind import protection. Then they battled each other in wage negotiations that determined how they shared the spoils.  And even when economists belled the cat on this racket from the ‘70s on, they focused on smoothing the pillow of the most uncompetitive activities (like assembling others’ vehicles) rather than playing to our strengths.

In fact we were the perfect complement to Japan’s car industry during its rise. But only one prominent local economist – Peter Drysdale – turned his mind to crafting trade policy options to permit our respective industries to specialise with Japan exporting smaller cars to us whilst importing our larger cars and limousines. And in the absence of the requisite intellectual leadership we retreated into blocking imports and encouraging local assembly at sub-economic scale.

Today we have one more – probably our last – chance to get this right. Ford or GM’s Australian assets would strongly bolster the design and engineering capability of China or India’s emerging auto giants. So if such firms had a stake in our auto assets they’d have the incentive to invest and find a valued place for them in their global supply chain as VW has invested in Skoda – that is as an integral and valued part of its global footprint. Right now the emerging firms of Asia are cranking up their export of small and medium sized cars for global markets, making Australia hard to beat as a source of larger cars to fill out their global offering.

Our automotive assets can never aspire to more than back office status whilst owned by the American auto companies. Personally I’d rather the industry closed than limp along devouring billions of our dollars in assistance, with our politicians begging and bribing the clapped out, cash strapped, bailed out auto manufacturers of a once great – indeed still great – power now bent on its own decline for a stay of execution.

Instead, we could have a ‘beauty contest’ in which access to those billions would only be available to those that could demonstrate an investment plan and ownership structure that gave Australia a worthwhile place in their global division of automotive labour. That wouldn’t be possible for the American firms without joint venturing with, or selling out to the rising Asian giants. At least that way our billions just might buy us a seat at the grown ups’ table.


Postscript: Here the extended interview of the column (mp3).

 

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26 Responses to Back to picking losers – the current woes of the car industry

  1. Pedro says:

    I see John Q is relaxed about it. Why shouldn’t the carmakers get some dough when the minining companies receive the massive subsidy of a reduced and more limited minining tax?

  2. Pedro says:

    PS, great piece

  3. Roger Wegener says:

    Brilliant – many will read it and nod sagely – but none will act on it.

  4. Tony says:

    Robocop was set in Detroit. “Your move, creep.”

  5. Patrick says:

    Pedro, iirc John Q’s problem seemed to be that the miners were being subsidized by not being taxed. Indeed iirc t was a pretty poor column.

    The fin should have published this one instead, NG actually has something to say beyond partisan crap. And something quite interesting and sensible in this case to boot.

  6. Tel says:

    The Japanese Zaibatsu system is kind of like modern Feudalism, but it does seem to be highly efficient. However, I don’t think you can legitimately claim that Japan is a notable success story in the automotive industry… rather more Detroit and Australia are notable failure stories.

    After all, Germany makes cars, and they are structured completely differently to Japan. India and China are rapidly breaking into the industry (proving that the concept of “just keep growing as competitor cities can’t match their scale and expertise” is wrong — latecomers with guts and determination can certainly compete). Korea is perhaps a little bit similar to Japan, but not the same either and their automotive industry is going OK. Even France and Italy are hanging in there (against all odds) and they operate differently again.

    Even countries like Brazil are growing their auto industries, using ethanol for fuel and factory machines left over from Volkswagen’s original designs, sure it’s laughable, but they have a real industry there, something we don’t have. They also have a serious air and defense industry — search for the Embraer Super Tucano.

  7. Patrick says:

    I guess if I was stretched to find a common denominator in those countries Tel it would be a population at least three times (and really in the EU era we can just say at least 5 times) that of Australia.

  8. fxh says:

    I heard a car industry spokesman on radio today say, that no country in the world had a viable car manufacturing industry without government support/subsidy.

    This is an extraordinary statement. Is it true or a stupid Gerry Harvey type self serving mis truth?

  9. Dan says:

    If the government gives me millions upon millions of dollars I solemnly undertake to employ some people.

  10. Pedro says:

    Death metal band subsidies Dan?

    fxh, I don’t know if that is true, and I dare say a bit of gilt is being sprayed in a lily direction, but it is conceivably true when you think about the twin attack of big unions and big business on the public purse.

  11. Tel says:

    I could employ myself many times over, once as Financial Controller, again as Excuses Manager, again as Chief Safety Inspector, the list is long.

    … no country in the world had a viable car manufacturing industry without government support/subsidy

    Hmmm, Germany had a bunch of car manufacturers before the war, got into the industry early and they also had a coal industry, a steel industry, a chemical industry, an electrical industry… all of it was taken over by government planning departments during the war (with a few nominally private owners who either followed orders or lost everything, thus providing a bit of anti-communist propaganda).

    Does that imply ALL of those German industries really needed the government? Somehow I find that difficult to believe.

    On the other hand, the Australian car industry has already had plenty of government assistance, pretty much continuously since the 1950’s, and here we are 60 years later they still sit there asking for handouts.

  12. paul frijters says:

    “we could have a ‘beauty contest’ in which access to those billions would only be available to those that could demonstrate an investment plan and ownership structure that gave Australia a worthwhile place in their global division of automotive labour.”

    why keep pouring any public money at all into an industry we clearly do not have a comparative advantage in? Why should government, indeed, run any beauty contest? We dont run beauty contests for coal, financial services, or tourism.

    For all the eloquence in this post, it is still a call for government handouts to the car industry. Perhaps smarter handouts than the current ones, perhaps not.

  13. Rob says:

    Tel (5:26pm): one of the key reasons the Germans can keep making cars is that the Euro acts as a currency deflater for them. If Germany stood alone the Mark would be so much stronger that any cars built there would be significantly more expensive. Add to that the fact that most BMWs are made in either China or South Africa by low paid labour and you start to see how flawed your argument is.

  14. derrida derider says:

    The Australian car industry has never made economic sense, and never will. Just possibly a single specialised manufacturer could get by, but three is ridiculous. How many small (say <30million) countries keep 3 manufacturers, even with subsidies?

    It looks like the yanks have, once more, suckered us into handing over substantial amounts of our money to maintain our privilege of consuming big, antiquated, totally unsuitable cars. They really have seen us coming.

    The net employment effects in the short run of closing Ford would be extremely small compared with the number of jobs that are routinely destroyed every year in Australia, while the long run effects on jobs would be positive. And next time we whinge about such things as the lack of government infrastructure investment, the pathetically low rate of the dole, an underfunded health system, etc just remember where the money went.

  15. Tel says:

    Rob, you a drawing a long bow to try and say the existence of a common currency is really a government subsidy. If exchange rates are reasonably stable then how can it make a difference which denomination is used to perform a transaction?

    A few hundred years ago Europe used a common currency which was silver and gold, so was that also a government subsidy? Where was this supposed subsidy coming from? Surely a government subsidy can only work by transfer of wealth from one group of people to another group of people… unless you believe that the magic of paper currency causes wealth to pop into existence.

  16. murph the surf. says:

    Isn’t this argument tied to why the ALP needs to reform it’s internal processes?
    I would guess that the Liberal Party opted into the bipartisan support to gain access to corporate handouts but then maybe I’m too cynical?

  17. Nicholas Gruen says:

    Paul,

    Columns are difficult forums in which to convey fine gradations of meaning. I am simply seeking to compare the way we’re using assistance to how we could use it, not argue that if we had not budgeted assistance for the industry we should start doing it now.

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  20. derrida derider says:

    You may or may not be right that a niche Australian car export industry fitting in with Japanese, rather than American, company strategy would have been viable. Personally I have my doubts – for a start radically reorienting the industry structure, ownership and direction would have been every bit as electorally difficult as shutting it down. For a second realistically you could only do it with one manufacturer, not three.

    But regardless of arguments over possible past opportunities, it is plain as a pikestaff that in 2012 we do not have a viable industry, and have very little prospect of creating one. Shut the bloody monster down and let Aussies get cheap high quality cars.

  21. Patrick says:

    And books.

  22. Nicholas Gruen says:

    DD, I don’t really know what you’re talking about. Do you?

    The Bladen plan (IIRC in 1965) introduced into the Canadian car plan – which was like ours a big ugly ‘local content’ plan – a provision that enabled car and component makers to count exports to the US as local content. That permitted specialisation within the industries and within the two countries which hugely reduced the ridiculous cost of local content plans.

    This matured into a bi-lateral automotive NAFTA which predated the full blown NAFTA by a decade or so. The industries have co-evolved ever since with happy results for the Canadians – even despite mining booms. The same kind of arrangement was discussed by Peter Elkin – a NZer – in I think 1965 and by Peter Drysdale in around 1969. But no-one discussed it. The protectionist component suppliers were rightly terrified of the swathes it would cut through their ranks. And the economists? Well why show any curiosity when you can go into auto-drive about rent seekers. Anyway, if you haven’t listened to the podcast, you may find it of interest.

    So I have no idea what you’re talking about regarding equity structures and the necessity for one manufacturer.

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