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The trouble with our car industry

By Nicholas Gruen - posted Tuesday, 22 August 2006


In economics as in life, problems seem to come in waves. Right now for the car industry, things aren't so good. Real wages keep rising, powerful new competitors loom to our north and we are releasing a new crop of bold, big cars - all planned when petrol cost about half what it does now.

It is all eerily similar to the mid-1970s. Then minerals and wages booms massively undermined the industry's economics - just after it had released its largest, most gas guzzling cars ever. Then the powerful new competitor was Japan. Now it is China and India.

Then our response could hardly have been worse. We closed four fifths of our car market off to imports. And so-called non-reversion rules required manufacturers to get government permission to switch from local to imported components, typically withheld if the local component supplier was unhappy.

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Economic reformers were right in trying to end this madness. But they mistakenly took the whole industry to be a basket case, when large car manufacture was (as it still is) pretty competitive. During the lengthy reduction of protection they favoured tariffs, instruments well suited to containing the cost of protection but that nevertheless prevented competitive manufacturers using their protection to help defend and build export markets.

For a disastrous decade we turned our energies to stopping Corollas getting into the country so we could make them here. Costs rose, exports collapsed and we made Corollas and their competitors, Holden Geminis and Ford Lasers, at near infinite rates of protection.

We will not do anything so stupid this time. Still as Mark Twain observed, history might not repeat but it does rhyme. Then, as now, there is a high and a low road. Focusing on mere survival, we avert our gaze from the high road.

Virtually the whole industry is in survival mode, hanging on to what it can. We have been to America and Japan begging the car manufacturers to buy more local components.

Meanwhile the industry honoured its bargain with the Government to let tariffs fall from 15 per cent to 10, pending its fall to 5 per cent at decade's end. None of this makes any sense, but not for the reasons you are thinking. Of course it will harm the industry, but that would normally help the economy move resources into more efficient industries.

But below some level, cutting tariffs makes little sense. Why? Because cutting tariffs increases imports, which must be paid for by increased exports. And for some exports - such as wool, wheat and coal - we cannot increase them without cutting their prices.

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So, as the Productivity Commission's modelling illustrates, the economic gains from shrinking the industry are outweighed by losses from export price falls.

But all of this pales into insignificance compared with how Australia's and Asia's car industries are integrated. In the 1970s our approach to Japan should have been similar to the Canadians' approach to the US. Just when we were closing off our markets with local content plans, the Canadians had a simple message for the Americans. You can export your little heads off into our market, so long as we're assured a place in the production chain.

It was the most successful piece of automotive industry policy, from which the Canadian industry has grown to four times the size of ours and 10 times the profitability.

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First published in The Age and the Advertiser on August 4, 2006.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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