The automotive industry – the column

Like Steve Jobs says “you can’t connect the dots of your life looking forward “you can only connect them looking backwards.” So after I’d got myself obsessed with Australian policy supporting the manufacture of cars, I realised that when I was an adolescent I had cut cars out of magazines and stuck them all over my wall. From one car obsession to another. These days I drive a white Holden Commodore Acclaim, not the sort of car that went up on that adolescent’s wall. But I remain interested in automotive industry policy ever since I jumped into it for a very intense year between 1983 and 84.

I got involved in it working for John Button. In the wake of mass sackings by all and sundry in the industry in the early 1980s – but particuarly GMH (as it then was) which had taken the wrong punt with a small car that was mediocre a much hyped medium sized car that was a bit of a lemon (The Camira) and a large car that was too small and which lost sales to the Camira – the ALP had promised a review without knowing what the hell it would do.

It was a great adventure to try to put together the pieces. I had a strong economic intuition having had the economics and politics of protection policy discussed at the kitchen table while I grew up. I knew that Button wanted to move in the right direction but didn’t know how. And I gradually came to understand that the Department of Industry and Commerce didn’t really know anything and didn’t really want anything, other than to be left alone to run the ridiculously complex car plan that had built up from the accretions of decades of ad hoc changes like the outside shell of an oyster. All ugly and intractable.

I didn’t expect to find a pearl, but hoped I could work towards some synthesis of the economic imperatives (most notably lower protection) and the various political, industrial and bureaucratic interests arrayed before me.

When I turned to the IAC whose analysis I had previously revered, I discovered to my dismay that it was not very helpful. In 1974 it had argued that the car plan should be converted into a 25% tariff only regime but, as the economy went down the gurgler, it hadn’t a hope of getting it’s recommendation to stick.

By 1981 it was embroiled in a battle to frustrate in whatever way it could Malcolm Fraser’s baby – export faciiltation. Now Malcolm never did have much economic intuition. He still doesn’t. But in the right context exoprt facilitation was a sensible policy. One only needed to see the squeals of the extraordinarily protectionist component manufacturers to realise that it wasn’t all bad. (Export facilitation – first proposed in Australia by GM to facilitate it’s ‘world car’ projects, involved granting local content status to exports. This meant that GM could either buy local components, or import them to the extent that it exported components. ) Any bunny with an understanding of the importance of economies of scale and for reducing the economic rent earned by component suppliers under a local content plan can see that this has something going for it.

Indeed, those reformers trying to think of a politically pragmatic way through the situation – particularly people like Ed Visboard, Neville Stevens and John Spasojevic (from memory Dep Sec, FAS and AS of PM&C respectively in 1983) could see a sensible role for export facilitation in the context of (or leading the process of) reduced protection. So could Ross Garnaut in the PM’s office who kept in close touch.

The IAC simply branded the policy ‘protectionist’. It was protectionist and it was also liberalising – it just depended how you looked at it. (Though it’s had many worthy triumphs, it has had few triumphs either in the quality of its policy advice or in getting good advice accepted in the area of automotive industry policy.)

One day I should write more about all this, if only because I’ve seen one or two writeups of the process and most of them work from the press release. The press release, written by John Button’s press secretary, Tony Ferguson (Tim’s Dad) a few hours before the announcement was made, was extemporised by him. He hated my press release as it was too egg headed and so he threw it away. (I’m sure his judgement was correct. My head was full of theories and of explanations of what a great micro-economic package it was and why). I recall he wanted four points and he fired them at me to see if he could put them in.

They were (again from memory) motherhood points like

  • Secure Jobs
  • Cheaper cars
  • Better quality
  • Regional development

When I saw them quoted back in some political scientist’s writeup of the Button Plan I nearly choked on my weeties. But it is all fair enough – a good illustration of the accidental way in which history is build up from accretions of representations on the record.

So I really should write it all up, and I’ve made a start here. But it’s all just an intro to this week’s column which is about car policy – again in the news with around 3,000 jobs in the process of disappearing from the industry.

Football, Meat Pies, Kangaroos and . . . Imported Cars

Our car manufacturers are feeling the pinch. And I’m getting deja vu. In the wake of soaring petrol prices, demand is swinging to smaller, more fuel efficient cars.

South Australia will be hardest hit with Holden having cancelled its third shift and Mitsubishi closing its engine plant. These decisions together costing around 2,400 jobs, both Mitsubishi and Ford (in Victoria) are each shedding another 250 odd jobs.

So what’s the future of the industry, and what should we be doing about it?

In the medium term the industry seems secure. Oscar Wilde’s Lady Bracknell said that to lose one parent could be described as misfortune whilst losing both looked like carelessness. Likewise we’ve never to lost a car plant from the misfortune of it merely losing money, but only from the carelessness of doing so while their global parent is in strife as occurred when Leyland, Chrysler and Nissan shut up shop in Australia.

Though their American parents are in dire straits, Holden and Ford are profitable in Australia, so they’re safe for now. Toyota is expanding here and elsewhere: a miraculous corporate feast in a famine. But Mitsubishi looks decidedly shaky with its parent restructuring and production of its new 380 being revised down to around 27,000 a year around a fifth of Holden’s and Toyota’s planned output.

In the mid 1970s things were similar. A rising exchange rate, soaring wages and petrol prices and the Japanese automotive miracle saw contraction on a grander scale.

Our response then could hardly have been worse.

We should have focused on securing our base in the (temporarily depressed) part of the market at which we still excelled (Commodore and Falcon sized cars). Instead we tried assembling small cars at volumes of twenty odd thousand a year compared with Japan’s millions.

The story gets worse. Holden and Ford could import 15 per cent of the cars they made tariff free under an 85 per cent local content scheme. In fact they could competitively manufacture Holdens and Falcons at 95 per cent local content giving them ‘excess content’. That enabled them to import nearly complete component packs from Japan and assemble them into small cars like Lasers and Geminis.

But the new Japanese ‘just-in-time’ production system was so integrated with Japanese assembly that it cost more to import all the components for a car than it cost to just import the assembled vehicles!

The protectionists the manufactures and the unions and the reformers simply talked past one another. The reformers were dead right in wanting protection slashed, but slapdash in proposing how to do so. The policies they proposed involved continued duty free concessions inadvertently perpetuating the economic idiocy of vehicle assembly from imported components.

Things are much better today. Falling tariffs have improved industry productivity and jacking up protection won’t be countenanced. But there are eerie resemblances to the earlier failures.

The industry and the unions are out in force seeking special deals for the car industry. And despite their rhetoric of establishing ‘world competitive’ industry, guess where they want the loot to go? To the company that looks least competitive at the time.

Meanwhile the reformers are still cutting corners. Various economists (including me!) explained the ‘optimal tariff argument’ at the 2002 Productivity Commission (PC) inquiry.

Reducing tariffs below their current level (ten per cent) will probably make us poorer. Why? First, though there are large economic gains from cutting tariffs when they’re high, they diminish sharply as tariffs approach zero.

Second cutting tariffs increases economic efficiency by improving the economy’s access to imports. But to pay for the imports you must boost exports. And in some important commodities like wool, wheat, LNG and coal, we already have sufficient regional or global market share that we can only expand exports by cutting our prices.

Remarkably this argument was vindicated by the PC’s own modelling which was summarised in the following econospeak. “[I]mprovements in resource allocation . . . from the reduction in the tariff to 5 per cent would be offset by a decline in Australia’s terms of trade”.

In English, what we’d gain on the swing of giving our economy access to cheaper imports we’d lose on the roundabout of falling export prices. So, although no-one respectable is suggesting we prop up failing car firms, further tariff cuts just produce pain without gain.

Yet the PC recommended two billion dollars of special subsidies to the industry and cutting tariffs to five per cent – roughly the opposite of what the textbook says.

Why? Because it was trying to keep its messages on tariffs simple (even to itself?) and it wanted its recommendations accepted by the Government.

Having implemented the package, the Government is now locked in. And the few Opposition figures who understand the issue fear being branded protectionists, nay dinosaurs.

One day someone perhaps some laid off auto workers will have the naivete to notice the emperor’s new naked nether-regions.

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Tony Harris
Tony Harris(@tony-harris)
15 years ago

Nice column Nicholas. I was prepared to read it twice, but three times….?

Ken Parish
Admin
Ken Parish(@ken-parish)
15 years ago

Fixed.

Ian
Ian
15 years ago

Thanks for the great link to Jobs’ speech, Nicholas.
ps BTW; top column too :-)

Tony Harris
Tony Harris(@tony-harris)
15 years ago

Thanks (x3).

Santa is Greek Orthodox?
Ho Ho Ho!

And seriously, I would really like to see more of this kind of analysis of tricky policy issues informed by a combination of high theory and streetsmarts.

Bill Hutt was good on the responsibility of economists in this respect, see comment under a post on The Austrian Economists
http://austrianeconomists.typepad.com/weblog/2006/02/is_europe_ready.html#comment-13588076

derrida derider
derrida derider
15 years ago

Its true that, tariffs being low, the direct benefits of eliminating them are also low. But then so are the costs. So why the $%^* don’t we get rid of them, along with all those dodgy non-tariff protectionist measures (the idiosyncratic design rules, the effective ban on importing late-model secondhand cars, our outrageous “anti-dumping” system, etc), and give consumers a choice? It might even give us a bit of sorely needed credibility in future trade talks.

After all, even using the lump of labour fallacy we’re not talking sheep stations here – Canberra lost 30K jobs in 1996 in a city of 300k, so Adelaide (a much larger city) will hardly miss 2.4k.

Australia has the lowest population density of any developed countries. Surely the national interest is best served by making transport as cheap as possible, not by forcing Australians to travel in overpriced rubbish. We should rue the day the first FC Holden rolled off the assembly line.

c8to
c8to
15 years ago

i wonder what the second round effects of falling export prices might be. (were they modelled?)

growing market share and even greater competitiveness might result, leading to an overall higher growth rate in the longer term. (this is complete economic speculation…the sum total of my 14 weeks macroeconomic training)