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The Car Industry Predicament: Nothing's ChangedThe Essential SMSF Guide 2012-13
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The Car Industry Predicament: Nothing's Changed

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

The following is an unmodified repetition of an AllthingsConsidered commentary from November 2008 highlighting the likely course of the Australian car industry. The postscript is my only additional thought on the predicament faced by governments in attracting motor vehicle manufacturing or, for that matter, any globally oriented industry.

In 2008...
Car producers in emerging markets are set to swamp developed country manufacturers.
Currently contemplated subsidies in the USA and Australia might do little to avert the challenge. They will only work in the unlikely event traditional producers can take the battle to emerging producers on their own turf.

Policymakers in the USA and Australia are confronting a similar dilemma over their local car industries. Each contributes significantly to the industrial and employment infrastructure of the two economies but has failed consistently to attract new buyers for its products.

The financial support now being contemplated presupposes that they have the potential to overcome at least some of their prior failings. Recent research suggests that this could be wishful thinking as the global car industry is going through a far more dynamic restructuring than policymakers appear to understand with the possibility of emerging market economies taking up a still larger share of the global motor vehicle market at the expense of the USA, Europe, Japan and Korea.

The share of the traditional producers has been declining over a lengthy period of time. Between 1996 and 2006, it has fallen further from 83% to 69%. Japan's share has dropped from 20% to 161/2%. The share of the USA has gone from 22% to 16%.

Meanwhile, the combined shares of China, India and South Africa have risen from 4.7% to 16.2%.

Nicolas J. Peridy and Javad Abedini (P&A) in "The Growing Influence of Emerging Countries in the World Car Industry: An Estimation of Export Potentials in a World Trade Model" (Global Economy Journal, Volume 8, Issue 3, 2008) have concluded that a range of emerging countries have achieved sufficient critical mass that they "are now ready to conquer international markets".

The authors have modelled the factors that have historically been associated with export performance. Through their modelling, they identify those countries whose current export activity is running below its potential and the extent to which exports from these countries could grow in the years ahead.

The key countries they identify as having significant export potential are China, Mexico, Brazil, Russia, Iran, Thailand and Indonesia.

In the context of the current policy debate about the role of the motor vehicle industry, this analysis offers some mixed messages for U.S. and Australian policymakers. On the one hand, the analysis suggests that emerging country production is likely to swamp production from the traditional producers exacerbating their loss of market share and, consequently, their financial condition.

On the other hand, the research suggests that the industry in the USA, Canada and Australia has underperformed its export potential. P&A write that "given their size, their economic development and their technology levels, the USA, Canada and Australia to a lesser extent also exhibit significant export potential".

The research highlights the critical role of research and development. It suggests that traditional producers risk losing their comparative advantage if they do not boost spending as many emerging countries show technological levels close to those in traditional producing countries. Production costs are also likely to be critical with a move toward low price vehicles on a global basis. For developed country producers to be competitive, they will need to transform their cost structures.

This suggests that policies designed to raise exports might give the industry a glimmer of hope in the USA and Australia but that continuing support for a domestically oriented industry might simply confirm its demise.

In 2014...
Much like the football or cricket world cup, Olympic Games or any major sporting event, motor vehicle manufacturing can be located anywhere someone has a mind to do it.

Motor vehicle manufacturers know they have something to offer. The industry will relocate to the home of the highest bidder. General Motors has said as much. That is now the nature of the industry.

Just like the annual Formula One race in Melbourne, at a price it makes sense to keep it. At another price it does not. In buying its presence, however, Melbourne knows its grip on the race can be lost by more aggressive bidding from elsewhere. So, too, with global manufacturers.

Buying the presence of companies prevented from exporting by the strategies of offshore parents is a proposition doomed to long term failure. This is true of car manufacturers as much as biscuit makers.

The question here for Australian policy makers is how to foster industries capable of standing on their own feet. In doing so, they will also have to understand that success will attract global predators. Once bought, the most successful Australian companies will become subject to global strategies in which Australia's national interests are relegated to minor importance.

A continuing flow of fresh business ideas and management talent to maintain the growth potential of the Australian economy is needed. The policy challenge will be never ending.

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