Choosing your parents

Here’s today’s column in the Fin.

They say you should choose your parents wisely. Right now that makes me think of our car makers. Its so easy to put off upgrading your car, that just the anticipation of hard times can devastate new car sales. And this time its serious because two of our car manufacturers have chosen parents that were already teetering on the edge of bankruptcy even before the GFI the Great Financial Implosion.

Should we be terrified that GM and Ford could go broke? As ever, were focused on containing the downside. If the industry and policy makers could focus more constructively on the upside, it could be the beginning of a beautiful friendship.

Our industry cant prosper without a healthy place in the global division of labour. In the 1960s Australia and Canada had similar industries both heavily derivative of investment from the U.S, both misshapen by ill-advised local content plans. But Canada twigged that its protectionism should permit automotive trade and specialisation with the U.S. so it counted exports to the U.S. as local content.

This small stroke of the pen transformed Canadian protectionism redirecting protection and industry energy towards specialisation and export. This also undermined uncompetitive Canadian production (because Canadian exports to the U.S. earned rights to duty free component imports from the U.S.).

Lacking a similar outlet for trade and specialisation, our own local content plan strangled our car industry imposing progressively higher component costs onto relatively efficient production. Even the dismantling of protection was hogtied by a sterile standoff between protectionists and economic reformers the former increasingly desperate to cling to their place in the industrys frozen structure, the latter aware of the costs of protection but dismissive of the importance of exports.

In 1981 the economists recommend 50 percent tariffs 50 percent! a decade hence which would have underwritten small runs of locally assembled Lasers and Geminis (remember them?). But they opposed export facilitation the same rule tweak that enabled Canada to redirect industry energies from such production to more competitive exports. Since then, Canadas auto manufacturers have enjoyed around ten times the profits of ours, whilst moving towards full free trade with the U.S.

With car tariffs falling to five percent, the policy details from this historical vignette have limited significance to todays challenges or the industrys future. But they show how the trenches into which we reflexively arrange ourselves to debate policy can turn our eye from the main chance. Were doing it again. Were so focused on the downside that were ignoring the real opportunities.

Holden has built an impressive operation headquartering various regional endeavors, exporting design services and building large, Australian designed, rear wheel drive cars for the world. But its a rare success within the feckless, disaster prone behemoth which ultimately governs its destiny.

Ford Australia still retains the capability to design and manufacture unique vehicles. But like Mitsubishi, it is now in a death spiral though the end will take many more years. Bagging plenty of government cash, it has kept face-lifting its Falcon and indeed engineered it into the enterprising Ford Territory. It even plans to assemble the smaller Ford Focus. But its shy of committing to any given Focus production volume or investing sufficiently to allow local suppliers to adapt their own production to its needs.

And it has the parents from hell. Fords Michigan headquarters refuse to give Australia any serious role in its global supply plans. Unlike Holden and Toyota, Ford Australia has no serious export plans. Like Mitsubishi, Ford prefers panhandling in Canberra.

Meanwhile just to our North a global automotive leviathan looms China. It wont turn its factories to large car production for at least a decade probably two or three (Even now Australia remains competitive including with Japan in the manufacture of large, inexpensive, rear wheel drive cars).

Chinese auto manufacturers need to import the technology to design and build a complete car something Ford Australias assets could help it with and Holdens even more. Whilst selling their own small and medium sized world cars globally, a Chinese automaker could re-badge large Australian designed and built cars to fill out their product range. Cut adrift from the slough of their current parents despond, Australian assets might secure a whole new lease of life from a cash rich, investment ready, entrepreneurial owner with global growth on its mind a Chinese owner that is.

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2 Responses to Choosing your parents

  1. derrida derider says:

    Nic, I think any Chinese investment in Australia is gonna be focused on ensuring a cheap and reliable supply of resources to them. We’ll see more Rio Tinto acquisitions than Ford ones. Why would the Chinese need expertise in building large rearwheel drive cars anyway? Given how crowded their cities are surely the European design shops would be of much more use to them.

    The worldwide car indutry had problems with massive overcapacity even before the GFC – that’s why there was not the same level of boom in Chinese car factories as there were in other factories. There is now no chance for survival of the least efficient plants of the least efficient companies, producing cars with overlarge engines of ancient design. Taxpayer funds can be put to much better use than a vain attempt to prolong the life of this terminally ill mendicant.

    As for the “export specialisation” bit, there’s a big difference between being on the other side of a lake from Detroit and on the other side of the world.

  2. DD,

    I agree that our money could (probably) be better spent. Trouble is, I’m speaking of a situation in which the govt has just committed $6 odd billion to the cause. Now I could say that’s not wise. I have implied as much in the column. But that’s what they’ve done, just like the last government did, and just as the PC recommended in 2002 when the Howard Government asked them to recommend it.

    So it’s too easy to say the assistance is not a good investment. It probably isn’t. The question is, given that the money is being spent on the industry, how can it be best spent. I know it could be better spent, by spending it on something that might end up being competitive, than being spent on assembling Ford Focus.

    On export specialisation, your point is again right, but not particularly helpful. Yes it’s true that the Canadians, sitting right next to the U.S. had more to gain from intra-industry specialisation and trade, than we did. Or probably did as we never actually know. But so what? There were still substantial gains from intra-industry trade – which the protectionists of the FAPM and the free traders of the IAC were at one in shutting down.

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