Volvo to head East?

A fascinating prospect has emerged from the drawn-out demise of Ford’s international network of operations (and perhaps the firm itself). It seems they may sell their Volvo business to a Chinese suitor.

In an auto world where consolidation is the buzz word for all, a major international play from the overpopulated Chinese manufacturing sector was only a matter of time. This would give Geely a huge boost in size. They will more than double in size immediately.

Picking up Volvo for a pittance is surely attractive, especially given the Swedish firm’s competencies in safety and design. It will allow Geely to learn very quickly about exporting vehicles into developed markets (something which is still pretty rare for Chinese auto manufacturers).

The huge challenge will be extracting the Volvo manaufacturing out of Sweden, untangling labour relations and trying to transplant what is surely a very advanced production facility into an unfamiliar environment.

This takeover is being compared with Tata’s acquisition of Rover. The big difference is that Geely is unlikely to be paying substantially over the money for the assets. This is yet more evidence of businesses going cheapin the current crisis.

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Following up on cars and caring

Further to two posts from last week (on the Australian auto industry subsidy package and on the collapse of childcare giant ABC Learning), two relevant articles have popped up in the business press.

This piece in The Economist provides valuable insights into the growth of car manufacturing in emerging markets, in particular the BRICs (Brazil, Russia, India & China). It does highlight the huge pull towards these markets for the major global car manufacturers, and also the limited scope to truly globally integrate their operations. The attraction of untapped consumer markets have pulled the firms into each market. Trade barriers and the need for product adaptation have played a major role in these MNEs manufacturing in each of these countries also. The output levels (and more importantly the growth rates) talked about here far swamp those in Australia (around 2.5m cars per year in Brazil, 6m in China, 1.5m, 2m in Russia compared with 1m in sales in Australia, but only about 300,000 vehicles produced).

And on the ABC Learning front, every journalist worth their salt is now calling on their immense powers of hindsight to demonstrate why the firm was bound to fail. This article makes a couple of interesting points regarding the failure of the childcare firm to achieve any economies of scale from consolidation, and the illusory nature of growth generated via acquisitions.

I’m not so convinced that firm wasn’t able to lower some of it labour costs or “achieve economies of scale in purchasing power or marketing power”. I also struggle to take any journo seriously who tries to use this downright fallacious argument to support his case: “Corporate farming has never overtaken family-run operations because a family will run their business on a much tighter budget and will endure leaner returns than any corporation just to ensure their survival.” Not sure what his definition of overtaken is, but corporate farming (and childcare) has certainly been growing at a faster rate that family-run operations in Australia for quite a while now.

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.