Is the automobile industry the driver for 21st Century economic growth?
One of the key drivers of Twentieth Century industrialisation was the motor industry. Today it’s an industry plagued by over production, distorted by government subsidies and increasingly dominated by a small group of major players.
In Australia, the Productivity Commission examined how the motor industry was evolving and its preliminary report (PDF) is a good snapshot of the current state of play in the global automobile sector.
Chronic worldwide overcapacity is what stands out most starkly in the report with most of the world’s manufacturers operating at less than the 80% production break even point that’s assumed in the industry.
Australia is a good example of how the motor industry was held as being essential to a country’s development. Like most of the world, the early Twentieth Century saw dozens of small automobile manufacturers pop up in the backyards of enthusiastic tinkerers – it’s like the surge in smartphone apps today.
Eventually only a handful survived the industry shakeout following the Great Depression and by the end of World War II the industry was largely dominated by US, British and European manufacturers, today that consolidation has increased with East Asian producers replacing the UK carmakers.
The lessons of World War II
One of the lessons from World War II was that having a strong domestic manufacturing industry was a nation’s strategic advantage. So governments around the world protected and subsidised their automobile industries along with other factories.
For Australia, bringing in the required labour to run those manufacturing industries was a seen as a key to the nation’s post World War II growth and it was one of the contributors to the country’s ethnic diversity that started to flower in the late 1970s.
Today the echoes of those policies remain with governments around the world still subsidising their motor industries despite the economic and strategic military benefits of automobile manufacturing being dubious at best.
Australia’s failure
In Australia the modest incentives provided by governments hasn’t been enough to keep local car plants operating, which was the reason for the Productivity Commission’s report into the future of the industry.
The report’s message is stark for Australia, as a high cost nation that hasn’t invested in skills or capital equipment there’s little reason for the world to buy Australian technology as there’s little being built that the world wants or needs.
With the nation’s advantages in agriculture and mining – not to mention solar power – Australia should be leading in technologies that exploit these advantages but instead the nation is a net technology importer in all three of those sectors.
To be fair to Australian industrialists, they responded rationally to government policies that favour property and share speculation over productive investment. Coupled with the drive to create duopolies in almost every sector of the Aussie economy, it didn’t make sense to invest when they could exploit domestic markets rather than invest in new technologies.
Becoming high cost economies
For nations moving up the value chain such as China, Thailand and Brazil; Australia’s failure to develop high tech manufacturing and inability in adapting to being a high cost economy is a powerful lesson in the importance of framing sensible long term economic policies.
The Australian Productivity Commission report illustrates how the motor industry does have a role in helping countries move into being industrial powerhouses, but once a nation becomes a high cost economy it takes more than dumb subsidies to maintain a competitive advantage.
Germany and the US illustrate this, and the fact both countries’ motor industries are running at greater than 80% capacity shows how their automotive sectors are evolving. It’s no co-incidence that electric car manufacturer Tesla Motor’s plant in Fremont, California was a former GM-Toyota joint venture factory.
As motor vehicles become increasingly clever so too are their manufacturers; unless car builders and governments are prepared to invest in the brains of their workers and modern technology then they have little future in the 21st Century.
For nations, the question is whether the Twentieth Century model of building a car industry is relevant in this century. It may well be that other industries will drive the successful economies of the next hundred years.
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