Sunday, December 8, 2013

The Car Industry: The Political Economy of Managed Decline

The Australian Government desires an internationally competitive and globally integrated automotive manufacturing sector and wishes to ensure that any support for the local automotive manufacturing industry is accountable, transparent and targeted at the long-term sustainability of the sector. 
Productivity Commission (2013) Review of the Australian Automotive Manufacturing Industry Issues Paper, Canberra, November. 
The range of assistance measures provided to the industry has been extraordinary. While tariffs have been a central element of policy, the industry has long been the subject of a variety of additional measures designed to create and maintain an “Australian automotive industry”, which has been a crucial aim of industry policy in this country for more than 60 years. As complements to tariff protection, granting monopoly rights for the production of crucial components and complete vehicles, production subsidies, (implicit) export subsidies and local content schemes, quotas and market sharing arrangements have all been tried. At times it has seemed the number of measures applying to the industry has only been exceeded by their complexity.
R. M. Conlon and J. A. Perkins (1995) “Automotive Industry Policy in Australia: Origins, Impact and Prospects”, Economic Papers: A Journal of Applied Economics and Policy, 14(3), p. 49. 
Labor Prime Minister Kevin Rudd began his term of office in 2007 with the catch cry that he didn’t want to be a Prime Minister of a country that didn’t make things anymore. In the final throes of his reign he stressed: "I'm at my heart of hearts an Australian economic nationalist who believes that we need manufacturing for the future”. Despite the rhetoric, he left office with the manufacturing sector accounting for a substantially smaller percentage of gross value added than when he entered. Although as the charts below show, these trends began a long time before.

Contribution to Gross Value Added 1990-2013 Percentage

Agricultural, Manufacturing and Mining Employment
Percentage of Total Employment 1984-2013

Manufacturing fell from 10.1 per cent of GVA in 2007 to 7.1 per cent in 2013. Its percentage contribution to overall employment slipped from 9.9 per cent in 2007 to 7.9 per cent in 2013. While the mining industry increased its contribution to employment, its level of direct employment is relatively low, with most Australians employed in service industries. 

The car industry – a key component of manufacturing output and employment – has struggled to adapt to structural economic change in the Australian and world economies. The high exchange rate that accompanied the mining and gas boom has added to the industry’s woes. 

The Rudd/Gillard Labor governments were caught between economic liberal critics of industry assistance and those arguing for continuing assistance to the car industry because of its strategic importance and contribution to employment. 

The Labor government rebadged its assistance to the industry as co-investment, but was unable to produce an automotive industry that could survive without continuing and significant monetary injections. For many commentators, Labor’s approach has been ineffective and costly. However, if we characterise Labor's automotive industry policies as a continuation of a 'strategy' of managed decline, then the policies can be seen as a rational political response to the economic crisis of manufacturing in Australia, rather than a complete failure. 

Obviously, managed decline has not been the explicit aim of automotive assistance policies as governments have tried to encourage manufacturers to achieve scale and increase exports to build a supposedly sustainable future. It has been, however, an implicit part of automotive policies because as the industry has lost its share of domestic sales with the abandonment of quotas, its continuing decline has been seen by many policy-makers and commentators as inevitable. 

To work properly, managed decline cannot be spoken about directly or admitted and must take on the guise of revitalisation, a narrative that becomes increasingly unpersuasive as time goes on. Even in the final play, there will be talk of building a sustainable future. 

The ultimate aim of managed decline is to get the industry to the point where its complete destruction would be less economically damaging and more politically palatable. We are not yet at this stage. This doesn't mean that there will definitely be another round of assistance that saves the industry, but if there is, expect it to be accompanied by rhetoric of building export capacity or research and development capabilities. 

The industry has never been a viable proposition without assistance and never will be. Indeed, many pro-assistance commentators justify Australian assistance because the industry is heavily assisted throughout the world. 

So the options for any rational government are continued assistance with the aim of building the industry or managed decline. Half-hearted efforts in the former category effectively equate to managed decline in practice. 

In the short-term, rapid decline does not make sense economically or politically. Sure enough an end to manufacturing might have long-term benefits if you believe that it will lead to a more efficient allocation of economic resources, but it will also lead to a less diverse economy and severe economic dislocation. 

While policy-makers from both Labor and the Coalition have supported economic liberalism in theory, most realise that exceptions have to be made to maintain employment and that major industries cannot be immediately sacrificed. Much better to do it gradually, which is what they've done. 

Managed Decline in Practice

Since the sale of Chrysler's plant to Mitsubishi in 1980, policy-makers have slowly managed the decline of the industry. The process of managed decline began in earnest with the Button Plan of the Hawke Labor government. Button’s express aim in the Motor Industry Development Plan (the Button Plan) was to reduce the number of models produced in Australia from thirteen to six and the number of car manufacturers from five to three. In other words, the industry had to decline – or preferably, consolidate – if it were to be revitalised. Earlier plans, the 1964 Plans A and B had led to a proliferation of models and reduced any possibility that the industry could increase scale to make it competitive. Government invitations to Nissan and Toyota in 1976 to become full manufacturers made things even worse, increasing the number of manufacturers to five (including Chrysler, Ford and General Motors Holden). Hawke Labor's assistance measures were accompanied by an end to quotas and gradual tariff reductions.

The measures outlined in the 1991 statement, Building a Competitive Australia, significantly cut tariffs, even in the sensitive car and textiles, clothing and footwear industries, and secured economic liberalism as the dominant element in the government’s overall economic policy stance. 

The government declared that tariff reductions were the most important reform to be undertaken because only they would ensure the adjustment of Australian industry to world economy pressures and competition. An interventionist industrial strategy, even if rigorous in terms of commitments to invest or time limits, was seen as countering state efforts to persuade industry and workers that being competitive meant being self-reliant. Hawke belittled those he called the 'new protectionists': 
We have rejected the views of the so-called ‘new protectionists’ because they are simply proposing, in effect, the same discredited policies that had isolated our national economy from the rest of the world and caused the great damage we are all working to repair.
Managed decline as a strategy has been buttressed by the faith Australia’s economic policy-makers have had in market forces and global pressures to effectively restructure Australian industry since the mid-1980s. There was a chance during the Hawke-Keating years that a more interventionist and exacting policy could have been developed, but the battle between the interventionists and the liberals was won by the latter in the early 1990s.

During the Howard years, policy shifted more unequivocally towards political expediency and while the profit performance of the industry improved during the early 2000s (see the table below), the industry went into a funk as the resources sector began to boom. The Howard government had no faith in industry policy but did not want to be the government that presided over the final destruction of the industry. 

The government continued to assist the industry with sizeable handouts and tax concessions, but without any strategic vision for the future, especially in relation to connecting Australian production into Asian production networks. The foreign ownership of the Australian industry and the accompanying inability to influence the directions set in the United States and Japan meant that a substantial strategic redirection was not possible without radical intervention, including a rejigging of ownership away from Detroit and Tokyo. Throughout the 2000s, the Coalition government (as well as state governments) continued to deliver handouts to industry. The major beneficiary was the car industry, although others, such as the TCF, magnesium, sugar and ethanol industries, received sizeable sums as well. 

In 2002, the government developed a 10-year, $4.2 billion package for the car industry (later redefined to be worth $7.3 billion.) The Automotive Competitiveness and Investment Scheme (ACIS) replaced an earlier 5-year $2 billion scheme that was to end in 2005. The new package was available to car makers and the components industry and was to run from 2005 to 2015. In May 2004, Mitsubishi announced the closure of its Lonsdale Plant and a downsizing of its Tonsley Park operations in Adelaide, resulting in the loss of 1000 jobs. 

The government legislated to lower tariffs to 10 per cent in 2005, with a further reduction to 5 per cent in 2010. The industry minister Ian Macfarlane argued that the package would create “10 years of certainty” for the car industry and suppliers. Within 18 months and before the new plan had even started, Mitsubishi announced the closure of its engine plant and soon the rest of the industry was pleading for additional assistance. The government failed to exact guarantees from the car companies about their future viability; rather the strategy was to give support and hope that it would be enough to keep the companies operational. Managed decline in practice. 

Supporters of assistance to the car industry pointed to the significant growth of automotive exports. From 1996 to 2005, exports grew at an annual average of 14 per cent, but this good news was overwhelmed by the four car makers’ loss of domestic market share. In 1988, they held 70 per cent of the local market, slipping to 43 per cent in 1996 and 20 per cent by 2006. A year into the government’s 10 year plan, the car makers asked for a tariff freeze and additional assistance.

There was no significant attempt by the Labor governments from 2007-13 to restructure the car industry or integrate it into regional or global production structures. In late 2008, Labor Industry Minister Kim Carr outlined his vision for Australian industry policy. First was a blanket rejection of tariff protectionism; second was support for innovation and the development of niche positions in international markets; and third, were efforts to foster international investment. Rudd countered concerns that the various industry reviews underway might freeze or even raise tariffs with the claim: “I am a free trader, always have been, always will be … Industry policy for us means investing in innovation”.
The government augmented the Export Market Development Grants (EMDG) scheme as a way to encourage exports. In 2009, however, it came to light that during the final year of the Howard government the EMDG was substantially underfunded, which meant that participating companies would receive less than expected. The Rudd government refused to make up the shortfall. 

Some efforts were made to build industry capacities based on research and development, but these were weak attempts to restructure the industry and provide support for the thesis of managed decline rather than undermine it. In 2008, Labor announced A New Car Plan for a Greener Future. At its launch, Rudd announced that:
At a time of global financial crisis the government today takes further decisive action to support Australian industry, to support Australian jobs. Because we believe this industry has a future and a big future in Australia’s economy of the 21st Century. We take decisive action to build an internationally-competitive, green economy for the future. Australia needs a green car industry that manufactures the fuel-efficient, low emission vehicles of the future and that creates the well-paid, highly-skilled green jobs of the future. 
The initially positive mood generated by the new plan and prospective investment soon turned sour and once again it was not long before the industry was pleading for more assistance.

Mitsubishi’s final closure in 2008 represented another stage in the process of managed decline. At this time, the political ramifications were less severe because the Rudd government was newly in office and could not be blamed for its closure (although the state government could) and most people, even in the southern suburbs of Adelaide where the factory was located, had gotten used to the idea that Mitsubishi was doomed.

Some aspects of trade policy also did not help the car industry and manufacturing generally. Free trade deals with Thailand and the United States allow cars to come into Australia tariff free, while Australia faces prohibitive tariffs in Thailand and parent-imposed limitations in the US market. 

While Rudd provided rhetorical support for the industry and his Industry Minister Kim Carr truly believed in its future, the global financial crisis limited the development of new forms of assistance that might have enabled the industry to restructure and survive over the longer-term. For Rudd and Gillard Labor the emphasis also eventually became industry survival rather than development. 

In February 2011, Labor cut the $1.3 billion Green Car Fund, an integral part of the wider assistance package, to pay for flood reconstruction. With that cut, Labor revealed that it had abandoned any real hope for an alternative green-focused future for the industry. 

In May 2013, Ford Australia confirmed it would end local vehicle production in October 2016, leading to the loss of 1200 Victorian jobs and the demise of the Ford Falcon and Territory. This leaves just two manufacturers, with Holden the most likely next to go. Another major stage in the ‘strategy’ of managed decline. 

The Abbott government now faces a stark choice between further assistance for Holden, which would help stave off destruction for a few more years, or immediate execution.
A significant strategic restructuring is unlikely. The major issue is how long the management process will continue as no government appears to want the final demise of the industry to occur during its period of office. The Abbott government, however, seems less willing than previous governments to provide additional assistance.

The Continuing Decline of the Industry

So how has the automotive industry performed in recent years. In 2007, the automotive industry accounted for 5.6 of manufacturing value-added and 0.6 per cent of Australian GDP. In 2012 value added was $5.4 billion or 5.3 per cent of manufacturing value added. In 2012, the value of components sourced from Australian Suppliers was $2.34 billion, down from $4.24 billion in 2007, a figure that was down from $4.94 billion in 2004.

According to the Department of Industry “The automotive industry is a major employer in Australia, with over 42,000 people working in the motor vehicle and parts manufacturing sector alone as at August 2013.” 

According to Key Automotive Statistics, employment in the automotive industry fell from 70, 633 employees in May 2007 to 50,370 in February 2013.

Value of Production of Locally-made PMVs and PMV Derivatives

Source: Department of Industry (2013) Key Automotive Statistics

Value of Components Sourced from Australian Suppliers

Value of Automotive Exports

Exports of PMVs and Derivatives

Value of Imports of Vehicles and Components

The peak year for Australian production was in 2004 with 407,537 cars produced. In 2007, the figure was 335,625. In 2012, Australian production fell to 221,254 units a decline of 34.1 per cent. In 2007, the industry exported 140,233 cars, which was 42 per cent of total production. In 2012, Australia exported 89,420 cars, which was 40 per cent of production. The value of Australian automotive exports was $5.8 billion in 2008. In 2012, exports were valued at $3.7 billion, with motor vehicles accounting for 2.14 billion and components $1.57 billion.

The number of cars exported has nearly halved since 2008, with the high dollar and declining international demand having a significant effect. The majority of exports in 2012 went to the Middle East (38.4 per cent), followed by North America (13.3 per cent), the ASEAN 10 (6.5 per cent), Korea (4.7 per cent), EU25 (4.2 per cent) and China (3.6 per cent). The rest of the world accounted for 27.3 per cent of exports.

In 2012, vehicle imports were valued at $26.4 billion (compared to exports of $2.14 billion leading to a deficit of $24.26 billion) and component imports were valued at $8.4 billion (compared to exports of $1.57 billion leading to a deficit of $6.83 billion). For the sector as a whole the deficit was $31.09 billion). The major sources of imports in 2012 were Japan with 30.3 per cent (34.1 per cent in 2008), EU25 with 21.8 per cent (23.3 per cent), North America with 17.0 per cent (14.0 per cent), ASEAN 10 14.6 per cent (14.8 per cent), Korea with 7.9 per cent (5.0 per cent) and China with 4.4 per cent (3.1 per cent).

While Australia’s automotive exports are down from the (pre-global financial crisis) record high of $5.8 billion in 2008, they still account for around 13 per cent of total exports of elaborately transformed manufactures (ETMs), a production category, which itself has been in decline in recent years. The industry is also a major user of other ETMs in the production process. Locally produced cars accounted for 24.7 per cent of sales in 2007, compared to 41.1 per cent in 2000 and 68.9 per cent in 1990. The local industry accounted for more than 80 per cent in the 1980s. In 2012, locals accounted for 12.7 per cent, down from 14.1 per cent in 2011. 

The declining local share represents a major component of managed decline. The large car segment declined from 13.3 per cent of total sales in 2007 to 5.7 per cent in 2012. In the small car segment, imports dominate, with the locally produced Holden Cruze accounting for 28,690 units out of small car sales of 389,773 (7.4 per cent). The tables below show the clear decline in production, sales and exports after 2008.

The government made it clear from the outset that there would be no going back to tariffs or other forms of direct protection. Car tariffs have fallen from 57.5 per cent in 1984, to 10 per cent in 2005, and 5 per cent from 2010.

In 2007 fleet sales underpinned the Australian industry, accounting for 45 per cent of total sales. Most of the large car component of fleet purchases supports local production. In 2012, fleet sales accounted for 50 per cent of total sales.

The biggest indicator of the woes of the industry in its current form is its overall profit performance. Consistent losses are obviously unsustainable even with government assistance. The Australian vehicle manufacturers last produced a combined profit in 2003, with losses in 2012 of $666 million. Cumulative losses for the manufacturers since 2003 have been $4.4 billion. Other parts of the industry have performed better, but there have still been losses in most years since 2004. Losses totaled nearly $2 billion.

PMV Manufacturing Profitability

The Australian Industry in Context

One of the major problems for the Australian car industry is that the global industry produces more cars than can be sold and is nearly everywhere protected or assisted by governments for the same reasons as in Australia. Australian levels of protection are amongst the lowest in the world. For example, tariffs are 10 per cent in the EU, 25 per cent in China, 80 per cent in Thailand and 105 per cent in India. 

The major problem, however, is a lack of scale. Australia is a low volume producer in a region of large producers. According to the Organisation Internationale des Constructeurs d'Automobiles (OICA), Australia is the 29th largest producer of cars and commercial vehicles. Australia's 200,000 production levels are minuscule when compared with China's nearly 20 million or even Thailand's 2.5 million. 

Global Production 2012

If Australia wanted a long-term future for its car industry it needed to integrate itself into the evolving regional automotive production structure, by specialising in the production of components on a large scale or pushing Australia’s strengths in rear-wheel drive, large car production. On a global or regional scale there is a market for large sedans, especially with improved fuel economy.

The danger for the Abbott government is that managed decline will turn into rapid decline if Holden abandons manufacturing by 2016 and the components industry finds it increasingly difficult to achieve scale production; then the final domino - Toyota - might fall as well. Managed decline allows the population and workers time to adjust to the possibility that there are only a limited number of bailouts to come. 

Over the next few years, losing a significant industry like the car industry at the same time as mining investment falls of a cliff, could be a disaster for the economy and for the budget. Assistance will have to be given to the large number of workers affected and the economy in general might require fiscal stimulus to avoid recession. 

While the economic consequences would be painful, letting the car industry go all at once would also be politically dangerous for the incumbent government. A deal to keep Holden manufacturing beyond 2016, would therefore provide economic benefits for the economy at a time of increased economic vulnerability and political benefits to the Abbott government. Taking time to see whether Holden will officially announce its closure after 2016 is a politically risky strategy for the Abbott government. The government would be wise to ignore the hairy chested purist economic liberalism of many commentators and continue the process of managed decline.         

Friday, November 29, 2013

Where the Jobs Were and Are: Employment Trends 1984-2013

The services sector has also long been the major source of employment in the economy. Even in early 1900, services employed over 50 per cent of the working population and it has been on an upward trend increase ever since. 

The employment trend for industry sectors show just how much manufacturing employment has declined since 1984 (and it was in decline well before then) and 
how few people mining directly employs (even if there are a wide range of indirect jobs associated with the sector). 

The following graphs and tables are from the latest ABS data (6291.0.55.003 - Labour Force, Australia, Detailed, Quarterly, Aug 2013) 

Mining directly contributed just 2.3 per cent to Australian employment in August 2013, with agriculture contributing 2.6 per cent and manufacturing 7.9 per cent (down from 16.8 per cent in 1984). 

Combined, the three sectors contributed just 12.8 per cent of employment.  

The trend in agricultural and manufacturing employment is clearly down as the chart below shows, while mining employment rose significantly until last year, albeit from a low base.

Service industries dominate employment. IN 2013, Construction contributed 9.2 per cent, Retail trade 10.5 per cent, Professional, scientific and technical services 7.9 per cent and Health care and social assistance 11.9 per cent. 

These sectors plus mining have increased their percentage of employment since the 1980s, whilst the share of employment accounted for by agriculture and manufacturing has declined. 

The two biggest sectors for employment are Health care and social assistance (11.9 per cent) and “retail trade” (10.5 per cent). 

These figures show that a slump in the retail sector probably has a greater short-term impact on employment than a boom in the mining sector. Although construction employment needs to be considered in relation to mining as well. Australia is gradually moving beyond the investment phase of the boom, which should see a decline in the level of construction employees in coming years unless the commercial and residential property sector can take up the slack. 

The major question for coming months is what the Abbott government will continue to support the automotive industry. Even if it does, it seems that the demise of the industry is inevitable over the medium-term. This will have a drastic impact on manufacturing employment.

Given the end of the mining investment boom, right now might not be the best time to let the industry fail. If they do, the flow on effects to other parts of the economy will be large.


 Agricultural, Manufacturing and Mining Employment
Percentage of Total Employment 1984-2013

Selected Services Employment
Percentage of Total Employment 1984-2013

Percentages calculated by author. 

Tuesday, November 26, 2013

Recent Charts on Globalisation, Asia and Australia

The following chart shows the extent of the "patchwork" economy in Australia. Despite the clear differences since 1990, according to the ANZ's analysis, the patchwork economy is coming to an end as WA starts to struggle and as activity picks up in NSW. Clearly, however, the other states have some work to do to catch up. (remember that the common starting point is an artificial construction and there would have been significant differences before this time).

Australia's 'real' saving rate perhaps not as high as traditional saving measure suggests if we exclude super and principal mortgage repayments. 

Home Ownership in Australia from Saul Eslake

Thirty Years of the Float 

Monday, November 25, 2013

Buy Australian?

The Abbott government is widely advertising the policy of selling Australian citizenship to rich foreigners. This stance is the opposite of its efforts to bury the outcome of recent asylum-seeking attempts.

The immigration advice site reports:
The new Australian immigration minister Scott Morrison has said that he wants to fast-track 400 wealthy visa applicants for permanent residence. The 400 have applied for subclass 888 Significant investor visas and Mr Morrison believes that, between them, they have about AUS$2bn to invest in the Australian economy. He also says that he wants to 'reboot' the Significant Investor Visa so that it creates more Australian jobs. .... So far, 28 Significant Investor visas have been granted. To qualify, applicants must have at least AUS$5m to invest in Australia. The investments must be made in investments approved by the Australian government.
I feel a little uneasy about the idea of purchased citizenship, but the policy enacted by Labor in November 2012, has been fully embraced by the Abbott government and its Immigration Minister Scott Morrison.
There is currently a nine-month waiting period before an applicant can receive an 888 visa but Mr Morrison says that he wants to cut this for fear that wealthy Chinese citizens will take their money elsewhere. 
Speaking at the Migration Institute of Australia in Sydney on Monday 21st October, Mr Morrison told his audience that he was poaching international talent 'like a recruiter for your local sports team'. He said that people who got 888 visas would 'transfer their wealth to Australia over a generation' and that their businesses would become Australian, creating jobs for Australians.

He said 'We think people who create business, people who risk capital, people who go out there every day and create jobs off their own enterprise is what we need to see more of in this country and certainly within our immigration programme'.
Compare this to recent efforts to restrict reporting on asylum-seekers.
The birth of children and clinical depression are no longer being formally reported as incidents in Australian detention centres, while self-harm events have been downgraded from critical to major, according to new guidelines from the detention service provider Serco. The new guidelines were created in March this year, when the previous Labor government was in office.
Bipartisanship on asylum-seekers was the sad reality. 

Tuesday, November 12, 2013

Recent Charts on Globalisation, Asia and Australia

Australia's dependence on China (from Australia's economic blog and general source of news MacroBusiness). Not only is Australia's dependence on China a worry but Australia's dependence on iron ore.

Coal consumption in China on the rise, which puts its renewable energy efforts into perspective.

Industrial production is stalling in developing countries, but it has clearly outperformed production in the developed world since 2007.

Friday, November 8, 2013

Electricity Generation in the Australian States: More Coal not Less

These charts put the shifts towards renewables in perspective. 

Coal usage is up across Australia, particularly in Western Australia. Wind is up but still relatively minor as a percentage of the total and other renewables including solar are also still relatively insignificant.


Thursday, October 24, 2013

Recent Charts on Globalisation, Asia and Australia

Asia-focused private equity with surplus funds looking for investment opportunities. 

Deficits on the increase in the developing world

Australia's relatively excellent economic performance ...

A much more informative graph for this would involve making the pre-crisis high the starting point for all countries. Such a graph would show that most countries have not returned to their pre-crisis levels of GDP per capita or otherwise.

Global investment from a Speech by Philip Lowe, Deputy Governor, Investment and the Australian Economy. 

Australian investment buoyed by mining but now on the way down.

Investment in other sectors flat or in decline ... 

Hope is that non-mining investment can pick up to underpin GDP growth.

This from Glenn Stevens' speech a little while ago showing trend and actual performance of household assets.

And the same for income and consumption. Clearly consumption is well below its trend from the mid 1990s to mid 2000s and is unlikely to recover soon.