A car (industry) in search of direction?

So the Australian government has delivered its latest pile of assistance for the car industry. The new package looks like delivering $6.2b in assistance over the next 13 years. This is $3.4b more than previously allocated. That is certainly a large sum. As discussed in an earlier post, the auto industry is a wonderful case study in the dynamics of government-business interaction in the face of globalisation pressures.

So is this a case of greater trade barriers, and thus a retreat from globalisation?

This is not as easy question as it might first seem. Certainly, this is a huge package of subsidies. Any aspects that reduce the costs of producing a car in Australia (such as significant topping up by the government of the firms’ R&D spending) are distorting the allocation of resources away from free market outcomes where comparative advantage can play out.

On the flipside, Australia continues to reduce tarriff levels on imported vehicles. This is an unequivocal move towards freer trade.

So we are left trying to weigh up the globalising versus distorting dimensions of the package. Or put differently, we might want to look at the rationale for the distortions. Australia does not make these decisions in isolation. Other Western nations, from the US to Europe are also looking at ways to salvage the auto industry. The industry itself attracts disproportionate amounts of policy-makers’ attentions and cash due to the prestige and visibility of the products, the noisy labour market ramifications of any downsizing, and the much discussed flow-on effects on local suppliers.

Multinationals are increasingly able to pick and choose between locations with regards to availability of subsidies. Australia could be seen as just trying to compete with its Western rivals in this market. It is a perverse form of trying to build comparative advantage, but its the political reality.

Meanwhile, the real story is the ongoing success and growth of Asian automobile manufacturing and assembly. As I said in my earlier post, the sad part of the story is the lack of consideration of where this $6.2b could be more effectviely spent (tertiary education anyone?). I am also not alone in fearing that this level of industry pandering might spread.

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8 Responses to “A car (industry) in search of direction?”

  1. Ami Says:

    Andre this is a very complex issue. The article you provided a link to “Stop the Bail Outs Now” raises some very topical issues. Primarily, what is the cost of NOT providing bail outs? For instance in Australia, the auto-motive industry employs approximately 66,000 people. A majority of these are largely blue collar workers and, as such, are highly unskilled. Whilst the likes of GM Holden and Ford do provide pay-outs what are the odds of these people being employed elsewhere – I assume very unlikely. However, the automotive industry is not alone with this issue so is it fair to play favourites?

    Further, something that was also raised in the article – what about the devastating impact the automotive companies wreak on our environment? Even now many automotive companies are arrogant in this respect i.e. bringing the Hummer to Australia. When will they step up and take the plunge to pledge their allegiance to fighting global warming? The automotive companies could do a lot more to help reduce GHG emissions world wide – the fact that they aren’t I regard as highly socially irresponsible. I think that rather than the government providing cash injections to merely continue with current productions they should be forcing the auto manufacturers to invest more heavily in alternative fuel research (oh and produce cars that people actually want!). Further, the government should be looking at ways to up skill and educate our current blue collar workers in this industry in order to redeploy them.

    Let’s face it… do we really think that the Aussie auto manufactures will be able to compete in 5-10 years time?

  2. Shaun Says:

    Isn’t a major part of the bailout aimed at funding research and development into a ‘greener’ car industry for the future and providing incentives for car manufacturers to take the plunge now while they have government assistance/subsidies and a potential advantage over other countries attempting to further/create the ‘green’ car market?

    Listening to a speech from K Rudd yesterday, he seemed very concerned about the issues you raised Ami, with the prime focus being the environment. My take on it was that this initiative, and some (perhaps at $500m not enough) of the $6.2bn was going towards making Australia one of the key players in green auto manufacturing (mainly because, as you say, Australia has basically no chance of keeping up with the U.S and Japan now, and will have little chance in the future).

    Another issue he raised was around skilling and educating such blue-collar, un-skilled workers in ‘green’ production, leading to higher wages and perhaps better working conditions (of course I have to integrate HR in somewhere). Economically, this would be great for the market, but the fruits of such an investment (bailout?) will not be seen for quite some time I suspect; could the money be spent better elsewhere? Create more jobs NOW in the transport industry by improving and extending train, bus and other services?

  3. charles Says:

    Subsidies is often seen as a desperate (or last resort) measures to keep an unsubstantiated industry alive. Utilising some of the economics concept we have learnt, any form of market intervention (such as subsidies or tariffs) will result in some form of dead weight loss (DWL). How is this optimal for the society?

    Of course, it helps to prevent the displacement of these manufacturing workers. But is it the best scenario for Australia?

    By producing in Australia, which is a less competitive market than vietnam (where a significant proportion of cars available for SEA are made there), consumers are less well off because these subsidies could be put to much better use. Subsidies is definitely not a long-term strategy and if the government dread making the difficult decision of displacing the industry now, they would not do that in future. Just see how long the US have been subsidising the wheat production. When people get comfy with the subsidies because they know the government will take care of them, it is the new comfort zone and the reliance on government to provide subsidies will stay.

    Well, it is not a decision that will often go well with the voters, but it might be one that will be better for the country. but wait! what about those being displaced. Re-skilling and Re-training definitely sounds like the new buzz word in the political realm. Not sure how it works out in Australia, but in Singapore, the government provides an outlet for those out-of-job to learn and acquire new skills, and providing them assistance by recommending them new jobs. This would not have been an easy task but it may be one that the government need to make.

    Put it this way, how important is the automobile industry to Australia? Is it really critical for the country to keep this industry afloat when the money could be put to much better use? Would they be better off if they use this money in skilling up these going-to-be-displaced employees, and help in their transition into other industry. How about using part of this money in attracting more foreign investors to come and create jobs?

  4. Steve Sammartino Says:

    Industry bailouts are a waste of time. Saving jobs is a awaste of time. Structual unemployment and adjustements are a fact of life. Investment by government should be on building adjacent industrys from which existing industries can benefit through cross fertilization & resources and technology. It’s clear the government has two policies which contradict each other.

    A great example is the Tesla car which runs on computer technology where the batteries which run the car are the exact same technology used in laptop batteries.

  5. Andre Sammartino Says:

    A crude estimate of the costings of all this support is insightful. $6.2b to save 66000 jobs = more than $90,000 per job. That would buy a hell of a lot of re-training (and that’s based on the very crude assumption that all 66000 jobs are in manufacturing, which they are not – many of the jobs in sales, service and specialised parts design and manufacturing would survive any retreat by the big three assemblers to a more efficient location offshore).

    As I posted, the package is pulling in a variety of directions. Throw that much money around and some of it is bound to hit a winner (sort of like backing half the horses in the Melbourne Cup and than bragging that you picked the winner). Money for “green” projects sounds wonderful on paper, but what assurances do we have that these firms will be backing the right technologies? And, as the big carmakers have the government over a barrel on this anyway, why should expect them to genuinely pursue these ends?

    Thanks for the great comments folks – keep ’em coming!

  6. Sheryl Says:

    It seems like the government really only has 2 choices. To let the car manufacturing industry die off, because that it is the reality of free markets, and consequentially, face negative flak by the media and potentially destroy consumer confidence which could further devastate the impact of the current crisis, or throw $6.2 billion at the car manufacturers in the hope that they’ll figure something out. It might seem like a cop out, but I think its the best solution for now.

    and as an aside, I saw on Mythbusters a couple of weeks ago, where they ran a car on filtered, used fat from a deepfryer. haha…maybe that is our solution to non-renewable resources.

  7. Ami Says:

    Ah it feels like the good old times in our strategy class!

  8. auta ze szwecji Says:

    Very interesting article, i bookmarked your blog
    Best regards

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