Category: Australia & NZ

By Houses and Holes — cross-posted from Macrobusiness.com.au

It’s fascinating to watch the exit of Ford shake up commentary alliances and ideology.

The loon pond that dominates Australian business media is out in force with soothing words that Australian car manufacturing needs to be let go gently into that good night.

Bill Scales appears at the AFR to argue:

…..while it will be tempting to see this as a sign of the demise of Australian automotive manufacturing, it’s not. This decision is a direct result of the well-recognised, well-understood and deliberate decisions by Ford in Australia and the US.

However it does have important implications for public policy in Australia. This is a good example why governments should not provide company or industry- specific assistance. Governments and bureaucrats can never understand the strategic or commercial imperatives of individual businesses. So they cannot hope to successfully design company or industry-specific assistance programs that make any fundamental difference to the underlying economics of that company or industry. If the strategic direction or intent of a government policy for any company or any industry is not consistent with the strategic or operational direction of that company or industry, and it rarely is, then money provided to them by governments is likely to be wasted.

High priestess of the pond, Jennifer Hewitt, wants outright liquidation:

The national sympathy and attention given to 1200 Ford workers who will be out of a job in three years’ time shouldn’t obscure economic reality. Car manufacturing in Australia has been living on borrowed time – and permanently borrowed tax-payer money for far too long.

That can never be solved by additional government assistance or new industry plans or emotive rhetoric about how car manufacturing in Australia is so special. This only delays the inevitable.

But the response is part of the national semi-panic about the future of manufacturing in Australia. Both Julia Gillard and Tony Abbott stress the need for Australia to be a place that continues to “make” things. Just what new things should be made remains elusive. What is clear is it is will not be cars long term. That is despite the billions of dollars in government subsidies.

…the end of Ford manufacturing shouldn’t in itself be the sort of national crisis suggested by the massive reaction to the company’s announcement.

The Ford Falcon is an iconic loss rather than an economic one, a dream of the past rather than the future.

The AFR editorial and Judith Sloan at The Australian, card carrying members of the pond, are also happy to see Ford go. However, some of the more sane commentators are as well. Alan Mitchell at the AFR, John Durie at The Australian and Bernard Keane at Business Spectator are all for it.

What is missing, as usual, is the only thing that actually matters to the reader and the nation: context.

In 2009, the US faced an analogous decision about whether to let one of its big three auto-makers go to the wall (there were many differences as well). As the GFC tore its GDP to pieces, the government stepped into the breach and saved Chrysler, bankrupted the company, broke its union contracts, reorganised its cost base, sold much of it to FIAT and the company relaunched. Why did the global home of “free market capitalism” bother?

The cheap answer is to save jobs. But there is more to it than that. It is about productivity and not in the way you might think.

We all know that productivity is the key to national standards of living. Only through productivity growth do we sustainably increase our competitive advantage, capital formation, incomes and employment. But, I hear you ask, propping up dud car companies is bad for productivity, right?

Wrong, or at least, overly simplistic.

The issue is this. Manufacturing accounts for a huge slice of productivity potential in all economies. Without it, any economy will struggle to generate long term high productivity growth. Mechanisation, improved processes, innovation and technical progress are the bread and butter of productivity growth. They simply do not exist to the same extent in services, nor, for the most part, in mining (though the runoff in the boom will be good for the next few years). The following chart from McKinsey makes the point. Manufacturing contributes disproportionately to productivity, innovation and exports:

This is the first question that Ford’s departure raises about Australia’s long term economic context. The car industry may or may not survive the shakeout but Australian manufacturing has already declined to only 7% of GDP and is clearly set to plunge further as capex expectations run at levels first seen in the 1980s.

Of the thirty developed economies in the world comprising the OECD, this level of contribution to GDP is last, tied with the tax haven of Luxembourg.

Our elite – the government, mining magnates and the media – have decided that manufacturing will be let go and we will instead rely entirely upon highly priced dirt and houses. Australia’s elite policy makers are engaged in a gigantic experiment that flies in the face of economic history.

The second question is more immediate. What our elite forget or ignore is that selling dirt is a highly cyclical business. Put simply, they never expected the current cycle to end. But it is. Right now. And is about to become a MASSIVE drag on the economy:

Manufacturing is supposed to be one of those sectors picking up the slack along with other exports and more houses. Obviously the departure of Ford will damage any upside for a manufacturing bounce and it will also put a sizable dent in consumer confidence, making it harder for other sectors to rebound as well.

Short term and long, cyclically and structurally, this is a crisis, a crisis of our elite’s own making.