At Jo Nova’s unthreaded there is a debate going on about Australian car industry. Started up in the post war era, it is currently going through a crisis. In fact, despite large subsidies, it is collapsing. The major messages I want to get across are:-

• Learn from other countries. Britain in the 1970s for instance.
  
• When in a hole, stop digging. If the car industry is failing, throwing money at it might win a few votes, but damage the economy.
  
• Australians have the energy, and entrepreneurial skills, in abundance to create new wealth-generating opportunities.
  
• Australians (like other countries) are being crippled by the short-sighted hand of Government, who should recognize that do not have the skills, nor the incentives required to create an industrial policy that is of net benefit to the country as a whole.
  

On making a new start and learning the lessons of Brazil

To successfully start a new car company is virtually impossible in the modern world. In recent decades the successful ones have been in China, but with the help of, and by copying, established marques. Outside of China, there was Proton of Malaysia. There original car was a 1984 Mitsubishi Lancer. That end of the market you do not want to get into – high subsidies and reliant on cheap labour. The last major car company start-up was (I believe) Honda.
Then there are niche markets. McLaren is doing well in the UK, but a midget and building on its F1 base. As the majority of F1 cars are made around Silverstone, it had an advantage of a skilled labour pool and (most importantly) the engineering and design skills.
The alternative is to do what Brazil did. For years it did not allow any imports. There were four foreign car companies building in Brazil (Fiat, Ford, GM and VW). The quality was shocking, models were decades older than Europe and the the companies colluded. VW built a variant of the Ford Escort and the Beetle came off Ford production lines. In 1994, they opened up to imports, but with a 25% import tax. Very quickly 70-80% of the market was imports. So the Brazilians stuck a 70% tax. The response over a decade was for more foreign companies to open assembly plants. Then came Mercosur – the “free-trade” zone covering most of South America. Now there are plants from Renault, Mercedes (mostly the A-class), Audi and Volvo amongst others.
The major problem of taking this route is the restriction of choice. The Mercosur market (including Brazil, Argentina and Mexico) is a number of times bigger than Australia, and last time I looked, had a more limited choice and higher prices than in Europe.
Learn for Australia what the biggest businesses did in the 1980s. Stick to what you are good at. Let the market develop in Australia based on its comparative advantages. That is farming (which you have developed from low margin sheep farming to high margin wine production) and mining. Then there is tourism as well, so long as you don’t let your government tax air travel.
In the longer term there are spin-off industries. In Britain we don’t have much manufacturing, but we have some of the world’s best designers. Oil production is declining, but a disproportionate amount of global off-shore technological expertise is around Aberdeen.
The mistake of most people to associate wealth with making actual things. It is not. Wealth is about creating greater value than the inputs. Assembling everyday, easily reproducible, objects adds very little value, so is confined to the poorest countries. For instance textiles in Bangladesh, or assembly of commodity items in China. The real wealth comes from new ideas, or taking existing processes and doing them more efficiently and/or effectively than anyone else. That is staying ahead of the game.

A readable primer on the economics is Israel Kirzner’s “Competition and Entrepreneurship.”

When in a hole, stop digging. Lessons of the British Experience

Andrew McRae is torn between ending the subsidies and letting the car industry fold.

Hi Andrew,

I can see why you are torn between Government Industrial policy and letting free markets work. I finished high school and went to university during the early Thatcher years and saw both sides. In the 1970s one of the most famous British cars was the MG Midget – a tiny two seater sports car. There were huge protests when production was stopped, with each car costing twice the selling price. Like most of the cars produced in Britain it was unreliable, particularly when compared with the Japanese competition. The country subsidised many industries, spending 5-8% GDP on subsidies. We tried to get into the computers – and failed. The one bright spot was Concord, developed with the French. A phenomenal technological achievement, it cost £4bn (A$40bn+ in todays money) and the few made were virtually given away. It was a case study in how an original government project at low cost with high rewards switches to the opposite. When mooted in the mid-50s, it was to cost £80m with a market for hundreds of planes.

One thing that you must not lose sight of is the existing workers in your car industry. In Britain in the 1970s there were millions employed in manufacturing, whether the car industry, steel, shipbuilding, engineering, or technology assembly lines. Another 250,000 jobs were in coal mining. Many who were made redundant in their 50s never got jobs again. Many others only obtained lower paid unskilled work. There is still incredible bitterness towards the whole Thatcher legacy. But the fault lay not with ending “industrial policy”, with its ever-growing subsidies, but in starting it in the first place. It is the same principle as for the carbon tax. Even assuming the theoretical case was true, the people least qualified to implement the policy are the politicians. Not because they cannot hire the best experts to devise a policy. It is for business and a carbon tax to work you need to make changes, which will hurt people. In manufacturing you need to continually cut jobs and change. With an “optimal” policy to reduce CO2 emissions some jobs need to be destroyed (to get huge benefits) and people suffer hardship. Politicians who are so openly ruthless get voted out pretty quickly, even though they are doing the best for the country. The best long-term interests of the country are the biggest vote losers, if those politicians are advised think short-term and are advised by spin doctors. Yet the interests of a modern developed country are in providing the structures to enable the future wealth-creating opportunities to develop. Australia is probably the pre-eminent example of a country for this to happen, as there are many people with vision, ability and the passion to make things happen, along with the ability to take risks. The crippling disability that they need to overcome is the risk-averse dead-hand of government who cannot see beyond the next set of opinion polls.