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.

Advertisement

An intersection of international issues

This short article from the Australian newspaper on the car industry highlights a whole range of core international business issues.

Competitive advantage: “in industries such as carmaking, Australia could not compete with low-cost producers in Asia or with high-value-added manufacturers in Europe.” This is the typical generic business strategy choice set.

Comparative advantage: See above quote. It is not clear that Australia has any advantages to offer in acting as a location for car manufacture. Perhaps we would be better advised to focus on activities we are much better at doing (like mining, education, food prcoessing, and more complex manufacturing)? That is what trade theory tells us.

Foreign direct investment decisions: The firms that manufacture cars in Australia (Ford, GMH, Toyota) are all multinationals who made decisions to enter Australia several decades ago. Why did they come here? They were market seeking. Australia has rich consumers in need of private vehicles to travel across our vast distances.

Governments trying to affect trade: The article’s main revelation is the enormous subsidies offered by government to the car industry. These were introduced to compensate the big car companies when tarriff barriers began to fall in the mid 1970s (and more noticeably in the 1980s) and to stop them from fleeing to cheaper (or more efficient) production locations. The high tariff barriers had been the original reason why the multinationals had to manufacture here rather than import. The managers of the Australian subsidiaries have lobbied the government (at both Federal and State levels) for more and more funds, with the big threat being an exit from Australian production. This demonstrates an excellent grasp of our political system.

Strategic choices, logistics and configuration: The managers of the Australian subsidiaries are part of a bigger structure however, and are finding that their respective headquarters would rather adopt a more integrated strategy (as opposed to multidomestic), and undertake greater production elsewhere and import more final product into Australia. While market-seking is still a motivation, integration pressures are stronger, and efficiency seeking FDI is winning out. It remains to be seen what contribution the Australian subsidiaries will make within this value chain. Perhaps the only thing keeping them here is the location-boundedness and firm-specific nature of their assets (this issue is one I have written about in work with Elizabeth Maitland – see an early draft of this work here).

Globalisation: The pressures at play here are reflective of the typical globalisation pressures. Trade (i.e. importing cars into Australia from other subsidiaries) has become much easier for these firms due to reduced barriers (in terms of tarriffs, shipping costs, coordination and monitoring costs). It may mean that the efforts by the Australian governments are futile. We can also see big impacts of all this on Australian manufacturers of inputs for car production. Although they may not be multinationals they are still affected by the globalisation aspects (as their main buyer might exit, and they will then have to cut jobs etc).