Car manufacturing and Australia: Nothing ventured, nothing gained

What might have been, had we had a crack.

Herewith a piece commissioned by Sam Roggeveen and appearing previously at the Lowy Institute’s blog, now for the delectation of the cognoscenti here at Troppo.

Clayton Christensen’s 1997 book The Innovator’s Dilemma provides a series of compelling examples of companies ignoring or dismissing the disruptive potential of immature technologies until it’s too late, only for their upstart competitors to consign them to the dustbin of history. This same diagnosis applied to Australia’s car manufacturers, who endlessly escalated demands for trade protection only to be overtaken. But strangely enough, the same affliction came to trouble the reformers themselves.

Like the plays of David Williamson (who, incidentally, started his professional life as a draftsman at Holden), the economic reformers were a new broom helping Australia throw off its cultural cringe from the 1950s. But the reformers became a new establishment with surprising speed, with their agenda morphing from a critique of policy mediocrity into a reductive formula which displaced careful attention to the merits of each situation. In the end, they had more in common with the protectionists’ industrial cringe than they realised. Both knew – just knew – that Australian manufacturing couldn’t hack it against global competition.

In 1974, Gough Whitlam’s new Industries Assistance Commission (now the Productivity Commission) proposed replacing the absurdly complex and costly local content schemes with a 25% tariff. But with the economy cooling and the industry in paroxysms of retrenchment, the report was a dead letter. Even the “non-reversion” rule, which prevented manufacturers importing any component they had ever sourced locally, survived – on a caucus motion seconded by ambitious young backbencher, Paul Keating.

But the models in the heads of economists suggested that rapidly increasing import penetration meant that Australia’s automotive industry was uncompetitive – as its clothing industry was. But far more importantly, Australian demand was swinging towards smaller, more fuel-efficient vehicles that Australia had never produced efficiently.

In 1974, even in the teeth of soaring costs, Australian large cars retained their historic 95% share of the domestic market and Holden exported over 20% of its Kingswood/Statesman production, mainly to Asia but also to Europe – all weighed down by the cost of 95% local content as required by regulation.

During the Hawke government in the 1980s, the Commission and Treasury continued to propose tariff only protection. But tariffs lavish all their assistance on import replacement. A more pragmatic faction of reformers – including me in the office of Industry Minister John Button, and Ross Garnaut in the Prime Minister’s Office, and the Prime Minister’s Department – won the day. Our proposal made better economics and politics: assistance should be reduced as fast as politically possible, but the exports on which the industry’s eventual global competitiveness rested should be assisted alongside import replacement.

The early 2000s gave us one last chance to learn from our mistakes. As economist Peter Drysdale had suggested way back in 1969, Australia’s trade diplomacy might have pursued mutual accommodation with Japan, opening our market to their small cars if they opened theirs to our large cars. (Yes, Holden exports to Japan were a thing.)

But Australia would have to think bigger, as big as Ben Chifley’s generation did to begin manufacturing Australian cars in 1948. In the 1970s and 80s, Ford and General Motors Australian production assets were Asia-Pacific regional hubs in their parents’ global strategies. By the 2000s, Holden was a plucky curiosity within GM, picking up occasional export contracts but never thought important enough to win its parent’s full buy-in. As they pared investment back to subsistence levels, Ford and Mitsubishi’s Australian operations became little more than bric-a-brac to their parents. But as uninterested as their parents were, Holden and Ford Australia would have powerfully augmented the capability of China and India’s emerging auto giants – in design, engineering and production, particularly in large cars.

Meanwhile, from the late 1990s, the Productivity Commission’s highest priority was further tariff reduction, even though its own model said that – outside agreements with other countries – cutting tariffs below about 15% generated more costs than benefits. (In response, rather than tweaking its advice, the Commission tweaked its model). In a bid to secure continued tariff cuts, its reports backed production and investment subsidies.

The aim of such subsidies should have been to ensure that Australia’s automotive production assets found a strategic role in the global supply chain via joint ventures and acquisitions – as VW’s acquisition of Skoda had ensured for the Czech Republic. Doing this would have required a strategic finance facility a little like today’s Clean Energy Finance Corporation, looking to place well considered but energetic bets on possible futures.

Had Australia done so, the “Tata Statesman” and the “Great Wall Territory” might now be niche “world cars” – just like Skodas. I can’t prove it, but I think the odds were good, and we’d have had a crack.

I’m not arguing that subsidies were a good idea. That decision was taken by governments and legitimated in successive Commission reports. As a country, we’ve disgorged over $7 billion since 2000. But it was disgorged in demure, desultory dribs and drabs according to statutory criteria – including to Mitsubishi and Ford. Everyone got a prize.

So, like Clay Christensen’s now-defunct firms overrun by disruptive innovation, in cleaving to well-worn formulas rather than imaginatively meeting the merits of a new situation, we were left with ashes.

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6 Responses to Car manufacturing and Australia: Nothing ventured, nothing gained

  1. Conrad says:

    “Holden and Ford Australia would have powerfully augmented the capability of China and India’s emerging auto giants – in design, engineering and production, particularly in large cars.”

    I don’t really get your reasoning behind this — Why wouldn’t those countries just do it themselves, especially given Australia’s rather poor level of investment in technology across the board?

  2. Nicholas Gruen says:

    Thanks Conrad,

    It’s almost guaranteed that the intuitions in the ordinary economic discourse of informed people underestimate the scope for intra-industry trade in complex products. Everyone asked these sorts of questions at the time trade was freed up in Europe within the EEC in the 1960s and 70s – expecting there to be major consolidation of production of cars. But most relatively competitive investments survived and many thrived with specialisation.

    I watched for decades as people said that Japan would get better than us at building Holden Commodore sized cars. It led the world comfortably in small cars from 1970, did so by a huge margin by 1980, but hadn’t become a leader in large cars twenty years later and arguably doesn’t really have it now. This is certainly true if you define the niche as rear-wheel drive – which is important in Australia (as the failed replacement of Holden’s large car suggests).

    It takes a long time to build all the resources you need, especially when you’re working in your area of competitive advantage which will likely be smaller cars for rising countries. The reason intra-industry trade has taken off in sophisticated manufactures is that indivisibilities are everywhere. They’re most obvious in the fixed costs of manufacturing, but they apply more generally to skills which take a long time to build up.

    (I was surprised that, once we undercut the economics of producing Holden Geminis, Ford Lasers and Telstars and Mitsubish Colts in mid-1984, so that it was cheaper to import them built up rather than import the parts and assemble them here, it took more than three years for that to occur. This was often a change of around 20-30,000 units p.a – less with a Japanese industry with runs of several hundreds of thousands.)

    There’s also quite a lot of corporate geopolitics involved which produces additional indivisibilities which may be quite strong – but difficult to understand or predict well. In this regard, the rising countries will have heavy exposures to the majors of Japan and Korea. They’ll be importing their designs, components etc and have technology and design licensing agreements with them.

    They have an interest in diversifying their sources of technology and design and bringing what they can in in those circumstances. Australia is already an exporter of automotive design and engineering services (though it’s been subsidised and complementary to local production, so it’s a little unclear how competitive it is in today’s circumstances.)

  3. paul frijters says:

    I am with Conrad, I dont believe any of this “we could have had a great car industry” stuff. Not even the innovation bit. My reasoning is macro: the resource curse applied as soon as Australia started exporting vast amounts of minerals. It just increases local prices too much to have a viable innovative large manufacturing sector that is not tied to those mining exports. Australia has now specialised in two essential resource-selling activities: its minerals and its tax-haven-citizenship. The two of them bring in so much money that nothing else major can bit for the intermediary resources and be competitive.
    So the car industry was dead in the water by about 2000. No matter what the policies were or could have been.

  4. Nicholas Gruen says:

    Thanks Paul,

    What’s “its tax-haven-citizenship”

    On the macro-stuff, the currency is volatile and was overvalued for five or more years during the biggest mining boom in decades. It then goes through long periods of not being overvalued and some periods of being undervalued.

    Had the industry stuck around through the mining boom, it would now be making (moderate) profits. And the dollar will fall a fair way further if the world economy tanks.

  5. Kim Rennick says:

    Nicholas Gruen’s essay on the disappearance of the Australian motor industry deserves some further comment, starting with his allusion to Clayton Christiansen’s The Innovator’s Dilemma. This is not wholly appropriate, as the automotive industry has always, for very sound reasons of cost, reliability and safety, been a prudent deployer of new technologies. The issue was much more one of relative scale. As we explain in our new book (National Policy, Global Players – How Australia Built and Lost its Automotive Industry, published by Cambridge University Press), the world automotive industry evolved by consolidation from local craft pioneers to a set of global oligopolies, driven by the minimization of costs through the maximization of scale. Australian production volumes simply got left behind. It vehicle manufacturers, apart from Toyota, were left stuck in a dying product segment, that of large rear-wheel-drive saloons and their derivatives.

    Australia’s desire to be more than an exporter of commodities is as valid today as it was in 1945. Government has a real role to play in this regard. But policy formulation must start with a realistic understanding of the structures, economics and competitive dynamics of individual sectors, rather than over-arching macroeconomic ideologies – a point that Gruen makes. With the benefit of hindsight, Australia picked the wrong sector in volume cars. It also ended up with the wrong partners, as the American manufacturers have been retreating from the global passenger car market since they were forced by the US government into downsizing their products in the 1980s. This gave the Japanese manufacturers their unique opportunity to enter the US market. The Americans were, of course, the only ones left standing in 1945, so there wasn’t much of a choice at the time.

    As Gruen points out, the automotive industry policies of successive Australian governments were confused and led to a fragmented industry with too many manufacturers and assemblers. The imposition of high national content levels also led to an isolated and sub-scale component supplier sector – and the suppliers today provide 80% of a car, together with much of its technological content. This was a major problem in countries such as Turkey and Franco-era Spain but was circumvented by their integration into the Western European economic space, with the manufacturers freed up to make their own choices of sourcing locations.

    The Button Plan, which Gruen was instrumental in devising, was a step in the right direction, of rationalizing the Australian automotive industry. But this needed to be taken much further in order to succeed. The idea of some kind of unique national manufacturer is not a new one and we unsuccessfully refloated it with the Bracks Commission in 2008-10. It would have needed something even more powerful and interventionist than Gruen’s suggested strategic finance authority, able to impose a thorough-going rationalization and repositioning of the industry. Some form of an Australian Range Rover, designing and producing up-market SUVs in tune with domestic market demand and exportable, might have made sense but would have had to cope with the problem of distribution channels in overseas markets, which are completely controlled by the incumbent manufacturers, through the industry’s peculiar system of franchised dealerships.

    The world automotive industry is based on interlocking sets of scale-driven global oligopolies. It is tightly controlled by an established group of vehicle manufacturers, European, American (decreasingly), Japanese and a single Korean. There have been no major new entrants, other than the Japanese and Koreans. The Japanese innovation was not technological but organizational – lean production, which gave them a significant edge on cost and reliability. As our analyses show, there is a huge Chinese automotive industry but no Chinese-owned manufacturers or component suppliers of consequence. India is no more independent in this respect. Both are satellite industries. Nowhere is this control tighter than in the upmarket sector, which is almost wholly German-dominated. The idea of a Great Wall Territory or a Tata Statesman is an illusion, as much as that of Proton becoming an Asian BMW, once dishonestly peddled by a leading management consultancy. A number of countries have felt themselves called to create an automotive industry but few indeed have been chosen for it to survive. Australia made a brave attempt but it was ultimately doomed to fail.

  6. John Wormald says:

    My co-author Kim Rennick pointed out that new technologies have been deployed with caution in the automotive industry and so were not responsible for Australia’s exit from it. Let me add that this could change. Internet-enabled communication, shopping, learning and distance working have had a minor impact on demand for motorized mobility. Uber and other internet-based access systems can enable a limited shift from driving to public transport. Electric drive in current cars makes them more expensive and less convenient – more dissuasive than disruptive. The huge latent threat is automatic driving. If and when this really happens, we shall no longer need heavy crash-proofed cars. Passenger-km can be delivered with far smaller and lighter pods, i.e. far less movement of dead weight. This would create a third land transport revolution (after the steam locomotive and the car as we know it) and upend the existing automotive industry. Australia is one of the world’s most motorized countries and faces a huge challenge over sustainable mobility. This could be an opportunity to take a lead, based on IT, AI and innovative applications, rather than on churning out masses of hardware. Losing its traditional automotive industry might turn out to be a liberation.

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