Industry policy must not second guess markets

Recent redundancies at Holden have sparked debate over the need for a revised “industry policy”: but is this really the way forward? AAP/Andrew Brownbill

The recent GM-Holden redundancies have provoked much comment, in many cases appealing for both state and federal governments to find solutions. But can government solve this dilemma, or is it a (big) part of the problem? I suggest the answer is self-evident.

Governments of all political persuasions have a long history of relatively interventionist policies often packaged as “industry policy”. In recent years much of the current government’s focus has been on providing explicit financial support to sustain certain types of manufacturing, with the car industry a prominent example.

Of course there are many other dimensions to so-called “industry policy’, designed to encourage certain types of economic behaviour. For example, "innovation” is at the forefront of much current policy, although it is hard to imagine why any business operating in a competitive environment doesn’t have an incentive to “innovate” to the extent that is economically sensible. This just highlights the way in which much of this sort of policy is really created in opposition to what end-user markets are saying. In this respect, the car industry is a perfect example.

Over time, state and federal governments have handed large sums of money to major car manufacturers under a variety of schemes, some results-based and others perhaps less so. But to what end? Has such largesse resulted in the development (and ultimately the manufacture) of vehicles that people actually want to buy? No!

It is stating the obvious to say that the demand for vehicles such as the Holden Commodore and (especially) the Ford Falcon have diminished greatly. But this didn’t happen overnight – it reflects a clear, steady movement away from these vehicles to other types of vehicles (such as compact SUVs and small front wheel drive city cars) that Australian manufacturers are ill-suited to provide.

Yet this is not news to the manufacturers – as evidenced by the vehicles they manufacture in other parts of the world! So why build a car in Australia, with a total population of 24 million or so, when it can be done much more efficiently elsewhere, and so sold in a competitive market-place for less than otherwise? The answer, of course, is continuing government subsidy to enable some further return on what is largely an historic investment.

Yet government industry policy over the last 15 years at least appears determined to ignore the inescapable fact that at some point demand for what has historically been an Australian manufactured car (i.e, large so-called “family” sedans) simply declined to the point where no amount of generous support can compensate. Recall the way Mitsubishi eventually folded their cards – with government support the Mitsubishi 380 was engineered (a significant feat of stretching and widening an overseas model) and locally produced – a unique vehicle so to speak in among Mitsubishi’s world-wide product range.

But sadly, corners were cut – for example, at a time when the full suite of six airbags was becoming increasingly standard, here was a vehicle where money simply ran out to engineer curtain air-bags – a classic case of immediately having a product that, in what many would see as an important aspect, was off the pace to begin with.

Now we watch the slow death of Ford as a manufacturer and also see Holden reducing employment yet again. But let’s be clear on the cause – it is not because of the high dollar, it is not because of Thai (or other) free trade agreements, fundamentally because the product they make, even if it is a genuinely good one, simply isn’t what people want any more.

Why do governments refuse to accept the verdict of consumer markets? Supporting the manufacture of small volume vehicles without a viable market is silly enough, but then buying them as well is surely the epitome of bad policy (witness support for manufacture of Toyota’s hybrid Camry – a staple now of government fleets!).

Government subsidies to basically prop-up the manufacture of non-viable products must surely stop, absent some vital national interests (such as security) or a clear and substantial benefit such as the enabling of related products and services which themselves have viable markets.

But even then, when do such outcomes occur? Shouldn’t any service or industry reach a point where government subsidy is no longer required? Isn’t it the job of business to compete and meet the needs of consumers, rather than rely on government subsidy? When should support stop? GM-Holden’s latest round of lay-offs surely indicate that time has arrived for Australian motor vehicle manufacturing. The history of “industry policy” as applied to Australian car manufacturing is tragic – a tragedy that is for the taxpayer.