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Australia Fights to Keep Its Cars

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

Australia's car industry is under pressure with speculation about the future closure of Ford Australia as the global industry realigns itself to reflect comparative advantages in production.

There are signs of industry policy becoming a topic of political conversation after being absent from the policy stage for many years. The recent loss of jobs at car maker Ford Australia has helped reopen the debate about the payback from government subsidies.

The industry policy debate reached its most voluble in Australia in the aftermath of Gough Whitlam's 25% tariff cut in 1973. Subsequently, the employment effects of tariffs, the impact on consumer welfare and the management of structural change were major ongoing debates.

John Howard, in one of his earliest forays into national prominence, declared during the 1977 election campaign that Australian industry should get the protection it needed as he toured regional Australia and tried to put a wedge between the Australian Labor Party and its traditional working class constituency.

Some members of the Whitlam government had openly conceded that jobs would be lost in some industries as they tried to refocus the debate on adjustment policy and away from attempts to save unviable businesses.

But John Howard eventually lost the appetite for this political fight and industry policy became a largely bipartisan area as both major parties steered clear.

Over the years, industry policy became a residual variable: it was the policy left over after labour market reform, floating exchange rates and progressively lower tariffs. Governments found it easier to avoid talking about specific industries in favour of these broader policy initiatives.

Motor vehicle manufacturing has been the occasional exception. Attempts to shore up the local industry have punctuated policymaking for the past 30 years. In the late 1970s, governments were panicking over the possibility of imported motor vehicles accounting for more than 20% of the Australian market. The policies at this time were designed to guarantee the local industry an 80% share, as best as the government could and without actually making the purchase of a foreign car illegal.

John Button updated the plan in the mid 1980s by encouraging rebadging of common models to create scale. Industry minister Kim Carr added incentives to keep production going in 2008. But the local industry continues to shrink. Now, Australian car manufacturers would be grateful if imports could be limited to just 80%. Retaining 80% for themselves is a world away.

Australian buyers apparently see little merit in reserving a substantial proportion of the local market for Australian based manufacturers despite the frequently repeated claim that continued local motor vehicle production is an essential part of Australia's national security. Apparently, Australian consumers just do not make the connection.

Part of the problem is how difficult product differentiation has become. While motor vehicle production is supposed to be a hub for advancing national technological know-how, buyers find it hard to see the technological differences in what they see displayed in the car showroom.

Apple and Samsung can litigate over patents that permit one computer tablet to look or feel different to another but such distinctions are less likely to dominate the motor vehicle purchase. While significant design differences may exist temporarily, choices are more frequently dominated by how many features can be accommodated within a buyer's budget constraint.

The variations around four wheels and a steering column are growing larger every year as fuel options create more choices for those already battling to decide on the optimum number of cup holders.

Buyers may express strong personal preferences about makes and models but those preferences may have become so personal that no single manufacturer ends up with a large enough share to survive in the Australian market. Market fragmentation has meant that none of the existing producers can capture the economies of scale that would allow them to compete effectively against imports.

Since design features can be copied easily, tooling up for new models becomes the biggest economic and technological constraint on production. This was a topic in ATC e-mail number 314 in November 2008. My article then observed that a new generation of car producers was emerging at the expense of traditional manufacturing locations.

The article referred to a study which had projected China, Mexico, Brazil, Russia, Iran, Thailand and Indonesia as countries with the attributes on which to build a car making industry and significant motor vehicle export potential. They were likely to pick up share at the expense of the USA, Europe, Japan and Korea.

The November 2008 article suggested that producers in traditional locations, not just Australia, were at risk of losing their comparative advantage if they did not boost their research and development spending because emerging countries were displaying technological capabilities much closer to those of the traditional producers.

These tendencies continue and point to worldwide changes. Since the pressures on the industry are not peculiar to Australia, propping up a local industry is only likely to be successful if it enables the industry to take the battle to emerging producers on their own turf.

Australian subsidiaries may lack the autonomy to pursue this course so that the worst might still be ahead when low cost Indonesian cars join those from China, Thailand and Malaysia to take further share from local manufacturers.

Who will buy an Indonesian car? Probably the children and grandchildren of people who said they would never buy one from Japan or Korea.

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