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Choosing your parents wisely

By Nicholas Gruen - posted Friday, 27 February 2009


They say you should choose your parents wisely. Right now that makes me think of our car makers. It’s so easy to put off upgrading your car, that just the anticipation of hard times can devastate new car sales. And this time it’s 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, we’re 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 can’t 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 US, both misshapen by ill-advised “local content plans”. But Canada twigged that its protectionism should permit automotive trade and specialisation with the US so it counted exports to the US as “local content”.

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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 US earned rights to duty free component imports from the US).

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 industry’s frozen structure, the latter aware of the costs of protection but dismissive of the importance of exports.

In 1981 the economists recommend 50 per cent tariffs - 50 per cent! - 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, Canada’s auto manufacturers have enjoyed around ten times the profits of ours, while moving towards full free trade with the US.

With car tariffs falling to 5 per cent, the policy details from this historical vignette have limited significance to today’s challenges or the industry’s future. But they show how the trenches into which we reflexively arrange ourselves to debate policy can turn our eye from the main chance. We’re doing it again. We’re so focused on the downside that we’re ignoring the real opportunities.

Holden has built an impressive operation headquartering various regional endeavours, exporting design services and building large, Australian designed, rear wheel drive cars for the world. But it’s 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 it’s shy of committing to any given Focus production volume or investing sufficiently to allow local suppliers to adapt their own production to its needs.

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And it has the parents from hell. Ford’s 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 won’t 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 Australia’s assets could help it with and Holden’s even more. While 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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First published in the Australian Financial Review on February 23, 2009.



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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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