No future for Australian car assembly?

Peter Martin has a good article on troubles in the Australian car industry. I'll comment on a few points.

Australians have traditionally had a liking for large medium cars. This was the market segment where our manufacturers had a comparative advantage. We then imported small cars and exported, with for a time growing success, larger cars. I assume the local preference for large gas-guzzlers has fallen with the current, seemingly permanent, escalation in petrol prices.

Peter is accurate in criticising the enormously expensive and stupid set of production subsidies that continue to be given to the Australian car assembly industry. He mentions some recent handouts but the worst part of the protectionist system is ACIS, the Automobile Competitiveness and Investment Scheme, which is an expensive way of keeping Mitsubishi afloat. ACIS subsidises output not exports and, because the subsidies are subject to binding caps, amounts to a set of lump-sum handouts to foreign multinationals. The fallacious arguments for retaining low levels of tariff protection might offer some short-term palliative for the industry at the expense of local consumers but, increasingly, are an irrelevancy as cheap labour costs and economies of scale in emerging NICs swamp any possibility for the local industry to survive with anything less than towering levels of tariff support.

By the way in assessing performance of some players declared profits are poor guides. For example, one must also take with a grain of salt the published profit figures of firms such as Toyota given evident proclivities to transfer price. These moves transfer taxation liabilities offshore and provides local offshoots of international firms to bleat and threaten for further handouts from naïve State and Commonwealth Governments.

A decade ago the Button Plan looked like it might provide the Australian car assembly industry with a future. By concentrating output among a smaller number of producers and by reducing numbers of models it has certainly improved industry efficiencies and, if nothing else, delayed the industry’s local collapse. But increasingly I agree with Peter that the Australian industry probably does not have much of a future despite the concentration of relatively low-cost design skills here. In my view the shift in car design and assembly in the future will lead away from all traditional production venues to a heavy concentration in China which, by 2020, will might well be the biggest car market on earth. This is one forecast I would happy to be proved wrong about but I am pessimistic.

I generally liked Peter’s arguments though I choked a bit when I saw his support for Kevin Rudd’s plan to hand out $500 million to build a ‘green car’ locally. Why should government be involved in picking winners in this way? Where are the possible market failures here?

It frightens me that Rudd can promote populist industry policies of this type. Generally, the Labor Party’s populist ‘industry policies’ frighten me - I expect there will be more of the same in the future in a variety of manufacturing settings. Indeed as the election draws near there is the possibility of a protectionist bidding wear with the Coalition.