Tuesday, May 28, 2013

Insane obsession:  Australia's auto industry waste

In his foreword to the 2008 A New Car Plan for a Greener Future, Kevin Rudd observed that half a century had lapsed between the first demonstration of a horseless carriage in South Australia and the debut of the Holden FX in 1948 — the first truly Australian car.

Rudd was trying to say that the car industry is worth saving.

But anybody familiar with Australian protectionism in the 20th century would have recognised in Rudd's observation less a story of triumph and more a long story of failure.

Ford is leaving Australian shores in 2016.  It's time to write the car industry's obituary.

When we first started protecting the automotive industry against foreign competition, cars were a luxury item.

In August 1917, prime minister Billy Hughes announced an absolute prohibition on selected luxury imports.  Car bodies were on the list, beside fur apparel, jewellery and (strangely enough) biscuits.

In part the government said this prohibition would keep currency from being sent overseas during the war, and would free up space on cargo ships that was being wasted on bulky and unnecessary imports.

But most of all Hughes wanted to encourage Australia's existing horse-drawn carriage manufacturers (and their 7,000 or so employees) to make car bodies instead.

Cars were a luxury, but they were a high-tech sort of luxury.  Founding a car industry in Australia was to politicians of the early 20th century as founding a ''Silicon Valley'' is to politicians of the 21st.

The Hughes prohibition on car body imports was immediately controversial.  Now Australians wanting a car would have to order a chassis from overseas, and then, once it arrived, wait a few months for the body to be built domestically.

Industrial delegations filed into the office of the Minister for Trade and Customs.  The importers and traders protested that cars would be more expensive.  Furthermore, there was no way the domestic industry could fill orders already on the way.  Their delegation was closely followed by an alliance of leatherworkers, sheet metal workers, glass bevellers, and parts makers who urged the government to stick to the embargo.

The importers and traders lost.  After the war, the ban on car body imports was converted into a very high tariff.

For the next century, the car industry would be governed by ministers rather than markets.  Even deep in the era of protection-all-round, cars were a special case.  Both Labor and non-Labor parties fell over each other to support the car industry.

Protectionism distorted our automotive sector in all sorts of perverse ways.

The modern American car industry was really born in the 1930s.  It abandoned its cottage manufacturing roots and became the large-scale, industrial enterprise that it is today.

But as the United States was taking advantage of economies of scale brought about by industry consolidations, the tariff kept Australian car companies sheltered and small.  In the late 1930s, the average automotive parts company employed just 11 people.

And the tariff slowed the introduction of new technology.  Closed-body and all-steel body cars were only available in Australia a decade after they were available in the United States.

In 1938 the Tariff Board — hardly a bastion of free market thought — concluded it was ''unwise'' to encourage Australian manufacturers to produce an all-Australian car.

This advice didn't bother Ben Chifley.  Chifley wanted a native Australian car to be the lynchpin of Australian manufacturing after World War II.

That car ended up being the Holden FX, launched in 1948.  Henry Holden was one of those horse-drawn carriage makers who'd taken advantage of Billy Hughes' ban on car body imports.

Australians tend to be pretty nostalgic about the early Holdens.  But they couldn't have been built without government assistance.  They were never competitive in their own right.  Holden still receives government subsidies.  It wants even more.

We've been trying to spark a self-sustaining car industry for a century now.  Every side of politics has tried their little hearts out.  Low tariffs with high subsidies.  High tariffs with low subsidies.  Every side has failed.  Every side tries again.

On Sunday the Coalition's industry spokesperson, Sophie Mirabella, was talking up ''strategic investments'' on the Bolt Report, and calling for the Productivity Commission to provide a ''clear path for a viable industry going forward''.

The next time you hear that it is markets which are irrational, recall the definition of insanity:  doing the same thing over and over again and expecting a different result.

Not even Ford — the world's most historically prestigious car company — closing down its Australian operation can apparently break this insane obsession.

But then again, Ford had to be enticed to come to Australia in the first place.  Only after government negotiators promised the company assistance did Ford set up shop in Geelong in 1925.  Since then it has been protected by a tariff that has gone as high as 57.5 per cent.  Australian consumers have paid for that tariff in higher car prices.  And the company has received around $1 billion in direct taxpayer subsidies over the last decade.

Yet after all that, the supposed party of free markets still can't recognise automotive protectionism for the waste of money that it is.

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