Scott Sumner  

Australia's auto industry collapses as America's booms

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From the Economist:

Toyota's announcement on February 10th that it would join Ford and Holden in pulling out of carmaking in Australia, closing its assembly line in 2017, was greeted with commensurate dismay. Yet beneath the obligatory political blame-mongering was an acceptance that everything has turned against carmaking in Australia.

The departure of the last big carmaker is as inevitable as an argument at a barbecue over the merits of a Ford versus a Holden. Mitsubishi closed its plant in Adelaide six years ago. The latest exodus began last May, when Ford said it would go in 2016. Holden, part of General Motors, said just before Christmas that it would quit in 2017.

The industry has been in decline for years. A decade ago Australia produced 400,000 cars a year; in 2013 it churned out just over 200,000.

You might wonder why the Australian government didn't do something about this situation. After all, in a country of 23 million people an industry making 400,000 cars per year is equivalent to a 6,000,000 cars per year industry in the US, Here's why:

Decades of generous state handouts have "forestalled but not prevented" the car industry's problems, concluded a recent report by the government's Productivity Commission. Since it came to power last September, the conservative administration led by Tony Abbott has declined to prop up struggling firms. It refused Holden's plea for more subsidies in December. Last month it rejected an A$25m ($22.5m) bail-out for SPC Ardmona, a fruit-canning business that Australians regard with a sentimentality matched only by that for Holden. Mr Abbott says the role of creating jobs belongs to business, not government.

One commentator lamented that Australia will join Saudi Arabia as the only G20 countries without a car industry. But carmaking is a small and unprofitable part of a shrinking manufacturing sector, employing relatively few, in an economy dominated by services and resources. The main damage caused by the carmakers' departure is to Australians' self-esteem.

It's interesting to contrast Australia with the US, where car and truck output is booming. Our government refused to let Chrysler and GM go bankrupt, or perhaps I should say they prevented the most disruptive type of bankruptcy. Enough money was injected to keep the US carmakers operating.

At the time Americans were told that bankruptcy would be a disaster, costing lots of jobs. I was skeptical of that claim, because unlike Australia, the US does have a comparative advantage in making cars and trucks. There is a huge market for the cars made by GM and Chrysler. Most likely the GM and Chrysler assets and workers that were useful would have been picked up by other automakers, perhaps Chinese firms looking for a toehold in the US market, and access to US technology. Autoworkers probably would have had to accept deep pay cuts. (Some argued the bailout was of the UAW, not the companies.)

Although the US does have a comparative advantage in making cars and trucks, it's not obvious to me that we have a comparative advantage in managing auto production facilities in the US. Over time a larger and larger share of the US auto industry is being managed by foreign forms. Today only GM and Ford remain American-owned. Without the bailout only Ford would have remained US-owned. American workers are quite good at making cars, as long as they are not in US managed and UAW organized facilities.

PS. In a recent post I discussed the growing importance of "sandy countries" such as Australia and Saudi Arabia. The Aussies are smart to recognize that their comparative advantage lies in services and mining. Too bad the US government doesn't understand that America's comparative advantage lies in making cars in non-union factories run by European and Asian management teams.

PPS. Australia is the only major developed country to avoid a recession in 2008-09. Their last recession was in 1991. Between 1996 and 2006 Australia's NGDP grew at 6.5%/year. Between 2006 and 2012 Australia's NGDP again grew at 6.5%/year. Good macro policy leads to good micro policies, and vice versa.

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COMMENTS (17 to date)
MikeP writes:

Australia is the only major developed country to avoid a recession in 2008-09... Good macro policy leads to good micro policies, and vice versa.

As an example of good micro policy, here's the Chairman of the Productivity Commission in 2002:

This turned out to be an important advantage, as we were among the first countries to act on the recognition that a country gains most of all from reducing its own trade barriers, regardless of what other countries do.

Australia’s achievements in this respect have been substantial, with average effective manufacturing tariffs falling from 36 to 5 per cent over the past three decades. These reductions have brought their own gains in efficiency and consumer welfare, but they also created competitive pressure for the reform of other sources of inefficiency within the economy, including in public utilities and other economic infrastructure and in labour markets.

The upshot has been an economy characterised since the early 1990s by historically strong productivity and income growth -- and an unprecedented capacity to withstand external shocks.

Vangel writes:

The US auto industry is booming? I take it that you are ignoring the reckless loans and the huge inventory build that is keeping GM from admitting that it is running into serious trouble yet again. Why is it that smart people are so often oblivious about reality when it is so obvious to anyone not sleepwalking through life?

JJ writes:

Australia only avoided recession because of China, not from "good macro policy". Monetary policy is internationally linked - local banks borrow abroad and foreign investors get finance from their banks - and Australia is prime target for such loose money to flow given the quantity of primary resources.

If anything the injection of overseas capital resulting from QE, China's stimulus etc., has distorted the capital structure to the point where when these are tapered the restructuring in Oz will be much, much harder (just look at Western Australia where there's nothing but mining, housing, and coffee shops).

Cantillon effects abound; policy makers have been able to ignore important microeconomic reform because of the temporary effects of the "good macro policy" you love so much.

BC writes:

"Today only GM and Ford remain American-owned....America's comparative advantage lies in making cars in non-union factories run by European and Asian management teams."

What does it mean for a (public) company to be "American owned" given that Americans, and I assume foreigners, can buy GM, Ford, and Toyota stock (symbols: GM, F, TM)? What does it mean for a management team to be American, European, or Asian given that executives can and are recruited globally? Jacques Nasser, Ford CEO from 1998-2001, was born in Lebanon and grew up in Australia. Was Ford a Lebanese-Australian company for three years? Carlos Ghosn, CEO of Renault-Nissan, was born in Brazil, secondary-school educated in Lebanon, and university-educated in France. Does that make Nissan a Brazilian or Lebanese company?

Shane L writes:

Good for Australia! Although I also had thought a lot of their recent success was down to mining exports to China. Perhaps this could conceal problems developing in the management of the economy, problems that governments have been forced to confront in countries that have been hit by recession?

mike davis writes:

BC raises an interesting question, but I'm not quite as sure as he appears to be in thinking that the national identity of a multinational company doesn't much matter. True, most of the leaders of such companies are not tied to any one place. It may even be true that corporate culture is defined much more by the norms of the places where buying, selling and building gets done rather than the place where the Board meets. But the rules and culture actually regulating the corporation--things like accounting and corporate governance--depend on the domicile of the corporation. I wonder if the U.S. judicial/regulatory system helps explain the seeming rise of non-U.S. corporations in the U.S.

Andrew_FL writes:

@Vangel-The US auto industry =/= GM.

Nathan Ashby writes:

Australia is also currently experiencing a sharp uptick in unemployment; now higher than during the gfc. The central bank has done a sort of negative forward guidance by declaring that they won't ease further any time soon. Inflation is at about 2.7 and the treasury is projecting ngdp growth of about 4% over the next two years. Not exactly sure what's happening but it looks a bit like the rba has mistaken supply side inflation for demand side inflation and has not done what is necessary to maintain trend ngdp growth.

Julie Novak writes:

A couple of observations about Australia, if I may:

(i) I'm not convinced that many Australians do appreciate that its comparative advantages lie in mining, services and (you omit) agriculture. Plenty of calls in mainstream media for government to "do something" in the face of prospective auto manufacturing closures. This ordinarily means that taxpayers foot the bill for additional corporate welfare subsidies and, until recently, this conduct persisted for a very long time. Left-wing politicians pander to these sentiments by proclaiming a country that doesn't "make things" isn't a country worth living in, and promising to throw more taxpayers' money towards crony corporate interests (note, Caplan's make-work biases in full flight here). Finally, I note aforementioned politicians criticise Australian mining comparative advantage, on the basis that "digging up rocks" is not sufficiently value-adding, for some reason.

(ii) An important feature of the Australian GFC experience included the relatively less regulated labour market arrangements of the time (since 2009, Australia has returned to the "bad old days" of heavy industrial relations regulation, such as powerful judicial-style tribunals, union right of entry into workplaces, etc.). Employees and employers were more readily able, during the GFC, to swiftly rearrange labour market agreements in the face of rapid slowdown in economic growth. These rearrangements included wage freezes, reduction in working hours (but not outright retrenchments), and the like, and was an important feature of the Australian experience. The national minimum wage setting body also froze minimum wage levels during peak of GFC panic.

(iii) Australian governments invoked Keynesian-stimulus measures, as in most other countries. The spending may have been judiciously timed to ensure that two consecutive quarters of negative GDP growth did not ensue, but the price of this agenda has been substantial. Significant government directed malinvestments in building school infrastructure, and so on. Outstanding budgetary record pre-GFC (budget surpluses, no net public debt) has been smashed, with most governments (federal and state) now dealing with the stimulus legacy of persistent budget deficits and large debts (putting, among other things, upward pressure on Australian dollar, affecting export performance of highly tradeable industries). Economic growth in Australia post-GFC has been well below its potential, which is what you would expect, regrettably, under a Keynesian policy stance.

Scott Sumner writes:

Vangel, I think you missed the point of the post, I was criticizing those subsidies.

JJ, Australia hasn't had a recession since 1991. They didn't have one when East Asia tanked in 1998. It's macro policy, not capital flows.

Nathan, I agree they should focus on NGDP, not inflation.

I agree with many of the other comments.

JJ writes:


There are so many more reasons why Australia did not fall with the Asian nations in 1998 than simple "macro policy" (which is one of many). The lack of recession has been the result of two decades of reform beginning in the 1980s.

Since around 2000, that stopped and Australia has been riding the wave that is cheap capital and China's thirst for raw commodities, neglecting any meaningful microeconomic reform and in fact going in the opposite direction. It will come back to bite her.

FYI, Australia blew $30bn from 1998 - today trying to save the auto industry. I don't have to "wonder why the Australian government didn't do something about this situation"; they tried.

There's so much more to the story than the oversimplified "macro policy" GDP-obsessed one.

Lorenzo from Oz writes:

JJ: The effect of China was to keep the $A high (after its initial dramatic drop). Without China's boom, it would have been like the 1997 Asian crisis -- the exchange rate would have taken the shock. As, indeed, it did briefly when commodity prices tumbled:
But it would have been an entirely external shock, monetary policy wasn't making things worse.

Lorenzo from Oz writes:

JJ: Actually, one can sort-of blame China's boom for the demise of the Oz auto industry -- that high $A is not good for Australian manufacturing exports, or even trying to compete with imports. The so-called Gregory Effect aka the Dutch disease:

Scott Freelander writes:


I would point out that one reason so many companies make cars in the US is that US law puts a limit on auto imports. This has been the case since the 80s, when Reagan signed the relevant bill.

JJ writes:


Manufacturing's share of total output has fallen consistently since 1980, from about 14% to the 6-7% we see today (about 10% in 2000). The dollar fell with along with it until it started appreciating again just after 2000 (AUD:USD fell ~60% from 1980 - 2000).

If that thesis had any merit, why didn't the weaker dollar save manufacturing during the 20 years of simultaneous currency depreciation and manufacturing decline?

Lorenzo from Oz writes:

JJ: Manufacturing is in long term decline because that is not where Australia's comparative advantage is and we have increasingly become a free trade country. My point was more about why now? And that the China boom has had mixed effects.

KPres writes:


PPS. Australia is the only major developed country to avoid a recession in 2008-09. Their last recession was in 1991. Between 1996 and 2006 Australia's NGDP grew at 6.5%/year. Between 2006 and 2012 Australia's NGDP again grew at 6.5%/year. Good macro policy leads to good micro policies, and vice versa.

But they have a massive housing bubble that hasn't burst yet.

Or do you think those housing indexes represent the fundamental value? Maybe their "good macro policy" has just staved off the inevitable.

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