16th January 2012: Australia’s Car Industry & Lost Lean Opportunities

New Matilda’s Ben Eltham writes about Australia’s car industry:


All this sounds like a hymn to the efficiency of the open market, and to some extent it is. There is an unavoidably difficult truth to face when we discuss local manufacturing, which is that the high Australian dollar and the small size of our local market makes many aspects of Australian manufacturing uncompetitive. Fairfax’s Ian Verrender outlined the uncomfortable verities last week when he pointed out the obvious: making cars in Australia was never particularly sustainable, and has only been so in the long-term with massive government subsidies. “While we’re at it,” Verrender continued, “let’s be brutally honest. There is no such thing as an Australian car industry. It is an American and Japanese car industry with a couple of plants here.”


In the early, 1990s, the International Motor Vehicle Program (IMVP) at the Massachusetts Institute of Technology reached a similar conclusion on Australia’s car industry and the trade-offs of the ‘make or buy’ decision. In their book The Machine That Changed The World: The Story of Lean Production (New York: HarperPerenniel, 1991), authors James Womack, Daniel Jones and Daniel Roos examined Australia’s car industry (pp. 270-272): the role of foreign producers, the $US/$A currency cross-rates, attempts to follow South Korea’s manufacturing model, and an export focus on North America and Europe.


Womack, Jones and Roos suggested that Australia’s car industry follow a different strategy:


The logical path for Australia would be to reorient its industry toward the Oceanic regional market including Indonesia, Singapore, and the Philippines. Each country within this region might balance its motor-vehicle trade, but, collectively, by permitting cross-shipment of finished units and parts, they could gain the scale needed to reduce costs and let lean production flourish. Australia, as the most advanced country in the region, presumably could concentrate its own production on complex luxury vehicles, while Indonesia at the other extreme, would make cheap, entry-level products. (p. 271).


Womack, Jones and Roos observed that this realignment was unlikely for Australia due to two reasons: (1) its focus on northern hemisphere export markets; and (2) cultural and foreign policy barriers to greater involvement in the Association of Southeast Asian Nations (ASEAN).


Eltham notes that Australia’s tariffs policy has played a detrimental role in preventing the transition to a lean industry:


You need not be a rabid libertarian to note the negative economic impacts associated with car industry assistance. Tariffs are a device to transfer wealth from consumers, who pay more, to producers, who receive direct and indirect subsidies. Those subsidies support local jobs in the manufacturing industry, but at a price. The Productivity Commission estimates the total subsidy is something like $23,500 per worker. Yes, you can take issue with modelling and the econometrics and quibble with the numbers and so on. But there’s no doubt that, in the end, we all pay for the pleasure of sustaining a local car industry.


University of Wollongong’s Henry Ergas observes in The Conversation:


This is an industry that was born from very high levels of protection and has depended throughout its existence on the continuation of high levels of assistance. None of that makes me hopeful for the long-term prospects of the industry.


What lean manufacturing opportunities have Australian policymakers missed? For several decades the GM/Toyota joint collaboration New United Motor Manufacturing, Inc (NUMMI) was highlighted as a success story of United States-led lean manufacturing. But NUMMI closed in 2010. Tesla Motors reopened the former NUMMI factory in 2011 as the Tesla Factory to manufacture the Tesla S sedan car. Meanwhile, Honda plans to increase its United States production. Once again, Australia’s policies on car industry assistance appear to leave it behind global innovation and lean manufacturing.