Australian government policies and the balance of trade performance of the transportation...

Introduction

The purpose of this paper is to examine the impact of Australian government policies to promote the development of the domestic motor vehicle industry, particularly with respect to the balance of payments performance of the industry. The goals of the government in promoting the

growth of this industry included providing domestic employment opportunities, alleviating the recurring problem of balance of payments deficits, enhancing the development of light manufacturing industries, and ensuring the national security (Committee for Economic Development 1977, 14).

The transportation equipment industry is certainly an important part of the manufacturing sector in Australia. In the 1980s, that industry was responsible for approximately 11 percent of total manufacturing employment, nearly 12 percent of wages and salaries in manufacturing, and over 9 percent of value added as well as sales in the manufacturing sector (Year Book Australia 1989, 556). Production of passenger motor vehicles and their derivatives and components alone accounted for approximately 5 percent of value added and 6 percent of employment in the manufacturing sector.(1)

Despite its importance in the Australian economy, the motor vehicle industry has not been very dynamic over the past two decades. (See Table 1.) Both passenger vehicle production and truck production peaked in the 1970s and then trended downward. After 1984-85, truck production, which had never been very large, was abandoned. Car production increased during the late 1980s but never reached its 1971-72 record of 448,732 units. Recently, it has experienced a marked decline.

Table 1 Australian Production of Motor Vehicles

Australian Year   Total Output          Total      Total
                  Finished              Output     Output
                  and Partly Finished   Finished   Finished
                  Nontruck vehicles     and        and
                  (Units)               Partly     Partly
                                        Finished   Finished
                                        Trucks     Motor
                                        (Units)    vehicles
                                                   (Units)

1968-69              393,778             25,701     419,479
1969-70              448,485             27,730     476,215
1970-71              427,257             23,784     451,041
1971-72              448,732             22,339     471,071
1972-73              428,174             25,552     453,726
1973-74              439,685             29,729     469,414
1974-75              439,771             32,892     472,663
1975-76              419,541             30,322     449,863
1976-77              433,407             33,942     467,349
1977-78              361,703             29,018     390,721
1978-79              391,767             30,957     422,724
1979-80              429,186             25,918     455,104
1980-81              341,869             21,715     363,584
1981-82              393,090             20,773     413,863
1982-83              378,481             16,270     394,751
1983-84              341,842             10,747     352,589
1984-85              378,347             16,325     394,672
1985-86              390,496                        390,496
1986-87              322,519                        322,519
1987-88              337,735                        337,735
1988-89              359,841                        359,841
1989-90              412,000                        412,000
1990-91              329,000                        329,000
1991-92              284,000                        284,000

Source: Australian Bureau of Statistics, Year Book Australia, Canberra: Australian Bureau of Statistics, various years.

Five companies have operated motor vehicle assembly plants in Australia during the 1990s: Ford, General Motors Holden, Mitsubishi, Toyota, and Nissan.(2) All of these firms are foreign controlled, and except for Ford facilities in Sydney, all of the assembly plants are located in Melbourne and Adelaide. Some joint operations exist between these five firms. For example, in 1988, Toyota and General Motors Holden established United Australian Automotive Industries (UAAI), a partial joint venture that cooperatively produced the Corolla/Nova, Camry/Apollo, and Commodore/Lexcen. Ford and Nissan together produced the Nissan Pintara/Ford Corsair. There are approximately 500 firms, the majority of them foreign controlled with plants also concentrated in the Adelaide and Melbourne Geelong areas, that supply materials and components to the vehicle producers (Industry Commission 1990, 13).

Over 98 percent of the 1989 production of the Australian motor vehicle assembly plants was sold domestically. The primary destination of the small percentage of vehicles that were exported was New Zealand, although some vehicles were sent to Papua New Guinea and the South Pacific region. In 1990, Ford began exporting Capris to the United States. Through 1990, exports of components and knocked-down vehicle kits accounted for the major portion of exports of the automotive sector. For example, in 1989, 69 percent of automotive exports consisted of components, primarily engines, brake assemblies, and wheels (Industry Commission 1990, 13-14).

During the past 15 years, about 75 percent of the passenger vehicles sold in Australia were domestically assembled. However, all non-derivative light commercial and four-wheel drive vehicles were imported. Since 1985, the large majority (70 to 80 percent) of these automotive imports have come from Japan, with the remainder primarily originating in West Germany (7 to 10 percent), the Republic of Korea (about 6 percent), Italy, the United Kingdom, and Sweden (Industry Commission 1990, 14, 15, and 131).

Australia's trade balance in transport equipment and component parts has been consistently negative since at least 1968. This does not necessarily mean that the motor vehicle manufacturers themselves have always run balance of trade deficits, but it does suggest that the international competitiveness of the industry could be improved. Both international trade and government policies to promote the domestic motor vehicle industry are discussed in more detail in the next section.

The evolution of the Australian automotive industry is a subset of developments that have taken place over the past three decades in motor vehicle and other types of manufacturing dominated by transnational corporations (TNCs) in most of the Third World. Australian policies toward the domestic automobile industry have been similar to those of many other countries (Mexico and Brazil, for example) that have attempted to expand industrial production, first through import-substituting assembly operations, then by substitution of domestic for imported intermediate goods, and finally through export promotion.(3)

Over the past two decades, the policies imposed in Australia and in certain of the NICs achieved manufacture of motor vehicles with a large proportion of local content. However, only Brazil, Mexico, and Korea succeeded in attaining annual outputs of 500,000 units or more by 1990.(4) These three countries are currently the major NIC players in a rapidly-changing global motor vehicle industry. Nonetheless, significant production has taken place in other NICs such as Argentina, Colombia, Taiwan, and Malaysia, as well as in South Africa and some members of the former Eastern Bloc (Russia, East Germany, Czech Republic, Slovakia, Yugoslavia, Poland).(5)

The import substitution policies pursued by Australia, Brazil, and Mexico did lead to substantial, but relatively high-cost, domestic motor vehicle production.(6) For all three countries, success in achieving high levels of local content by the late 1970s to mid-1980s left little room for growth. Only expansion of domestic markets could further stimulate vehicle and parts production, unless cost-competitive exports were developed. With the resolution of foreign debt and macroeconomic problems, significant growth of domestic demand for passenger vehicles was a real possibility in Brazil and Mexico. There, success in overall economic development could bring many new consumers into the car market as expansion of family incomes and the proportion of the population in the modern sector occurred. However, average income in Australia was already high (per capita income above the European Community average in the 1980s), and only slow growth of domestic automobile demand could be expected. Thus, exports were more critical to the growth of the automobile industry in Australia than in either Brazil or Mexico.

Exports also were important for growth of the Korean industry, although for a different reason. Korean policymakers targeted export markets because they did not believe their own domestic market could support car manufacturing at volumes that would yield world-competitive costs. Accordingly, with apparent disregard for any consequences of pursuing a dumping strategy, they set out to break into the U.S. market.

In the case of Australia, then, significant growth of the domestic market in the near future appears unlikely. While motor vehicle production in Brazil still tends to be relatively inward-directed toward a large but cyclical internal market, Mexican production, like that of Korea, has recently taken on important export dimensions.(7) In the early 1980s, the Australian government also began export facilitation programs.

The following analysis focuses on the specific policies fashioned by the Australian government to move the TNC car producers from assembly, to manufacturing, to exports of both parts and finished vehicles. Section II summarizes the history of the Australian motor vehicle industry and related government policies. Section III discusses the performance of the Australian industry and some of the recent developments in the global automotive industry. In Section IV, a regression model is utilized to estimate a net export demand function for the Australian motor vehicle industry, and the results obtained are compared with export performance in other countries.

A Brief History of the Australian Motor Vehicle Industry

The Australian motor vehicle industry dates from the early part of the twentieth century with the gradual development of domestic capacity to manufacture bodies, chassis, and other components. In 1936, the primary manufacturers of car bodies were General Motors Corporation, with a plant in Adelaide, and Ford Motor Company, with a plant in Geelong (near Melbourne).

Import tariffs have been imposed on passenger vehicles and their components since the early 1900s. Between 1902 and 1958, the tariff rates ranged from 20 percent to 47.5 percent by value, depending on the time period and the country of origin. Lack of shipping capacity during World War I encouraged the development of domestic body manufacturing capacity, and between 1920 and 1921 duties on bodies and chassis increased substantially.

In 1944, the Australian government first formally stated its goal of the domestic manufacture of complete motor vehicles and invited all of the motor vehicle assembly and body manufacturing firms to respond with car manufacturing plans. Moreover, the government indicated that if the motor vehicle assemblers and components manufacturers operating in Australia did not begin to move in this direction, the government would do so itself. The 1944 government policy was implemented by (1) granting commercial loans through overdrafts at three Australian banks, and (2) allowing import licenses and duty-free parts imports to companies which undertook the manufacture of motor vehicles in Australia or increased the domestic content of their vehicles. The policy also made it possible to import three c.k.d. (completely knocked down) kits for the same amount of foreign exchange as was required to import two finished vehicles. Subsequently, in November, 1948, General Motors became the first company to design and manufacture a substantial quantity of a completely domestically produced car, the Holden. Ford and Chrysler also attempted to increase the domestic content of their vehicles, and International Harvester undertook the production of commercial vehicles (Committee for the Economic Development of Australia 1977, 8-9).

Production in the Australian motor vehicle industry proceeded under the 1944 provisions until 1964, when the first Motor Vehicle Plan was introduced by the government. This provided domestic content rules for manufacturers of complete vehicles, vehicle assemblers, and manufacturers of component parts. Plan A applied to the vehicle manufacturers and provided for a local content level of 95 percent to be achieved gradually over five years. In return, the government guaranteed plan participants duty-free entry of components during the various stages and a continuing duty free importation of 5 percent of the vehicle through December 31, 1974.

Under the 1964 Plan, the assembly plants could choose between two alternatives. Plan B1 required the domestic content of assembly operations to increase from 40 percent to 55 percent at the end of two years. In return, participants in this plan could import duty-free the components listed to achieve these percentages until they were actually purchased from local manufacturers.

Plan B2 required the initial assembly of vehicles from c.k.d. kits and provided for the duty-free import of components between the time of a commitment to purchase these parts domestically and the point at which they became available from Australian producers. One important distinction between the import duty concessions allowed under Plan A and Plans B1 and B2 was that all types of components could be imported under the former plan, but assemblers could import from a list that included only about 50 percent of the components of a vehicle, primarily on the front part of the vehicle (including engines).

Although the list of vehicles that were entered under Plan A was not made public until 1974, during much of the period it was believed to include the Holden and Torana (produced by GM Holden); the Falcon/Fairlane and Cortina (Ford); the Tasman/Kimberly/P76, 1500/Marina, and Mini (B.M.C.); Beetle 1200 and 1600 Type (Volkswagen), and the Valiant (Chrysler). By 1965, four years ahead of schedule, the Holden had achieved 95 percent domestic content (Committee for the Economic Development of Australia 1977, 9-10).

From 1965 until 1974, the only significant changes in policy were a tariff increase, from a 35 percent to a 45 percent general motor vehicle rate, and the introduction of small volume plans for both producers and assemblers intended to entice firms (especially the Japanese) to produce small, fuel-efficient vehicles with high local content.(8) Under the revisions to Plan A, the domestic content requirements for vehicle producers with an annual output of less than 25,000 units was lowered to 85 percent. However, the small volume plan for assemblers was ended because it contained loopholes that allowed producers to effectively avoid some of its constraints on imports. In November of 1974 the government announced that it intended to adopt an 85 percent weighted average system of required local content to replace the 85 percent and 95 percent provisions of Plan A. The adoption of the 85 percent domestic content requirement apparently marked the end of the government's goal of the complete manufacture of vehicles in Australia (Committee for Economic Development of Australia 1977, 12).

In January 1975, Australia imposed import quotas that restricted imports to twenty percent of the domestic market (referred to as an 80/20 market sharing arrangement). The import of passenger vehicles was limited to 90,000 for the year, and this was later extended to the end of 1976. Imports of light commercial vehicles were restricted to 1974 levels. The government further announced plans to increase duties on unassembled vehicles from 27.5 percent in 1975 to 35 percent in 1979. The import of c.k.d. kits would be limited to the 1974 level with a three percent per year growth allowance. Except for a brief period in 1977, quotas were present until 1988. In 1976, the government announced the elimination of the components manufacturers plans by 1978, and the entry of Nissan and Toyota under the vehicle manufacturers plan.(9)

In the latter part of the 1970s, the competitive position of the Australian automotive industry vis-a-vis the global industry continued to decline. In 1978, the tariff was increased to 57.5 percent, and it remained at that level until April of 1988 (Industry Commission 1990, 119). In the late 1970s, the Australian government announced that export facilitation programs would be introduced, at least partially in response to a proposal by GM Holden to build a four-cylinder engine plant in Australia. These schemes would allow vehicle manufacturers to reduce the required domestic content in return for automotive exports.

Subsequently, export facilitation plans for both vehicle producers and components manufacturers became operational in March of 1982. These programs enabled vehicle manufacturers to earn additional duty-free entitlements on the value of domestic content in their automotive exports that exceeded the value of these exports in 1979, with a limit of twenty percent of the wholesale value of production, making possible a total duty-free entitlement of 35 percent. As a practical matter, vehicle producers at times were forced to calculate whether it was cheaper to incur losses on exports or to pay the import tariff.(10)

In May 1984, a new car manufacturing plan, referred to as the Button Plan, was introduced, with the goals of making the industry more efficient, stabilizing the price of cars, providing job stability, and yet giving the producers more time to become competitive. Although many of its provisions were similar to those of the earlier plan, the Button Plan was unique in that the government placed much greater emphasis on industry structure and achieving economies of scale. Specifically, the government indicated that by 1992 it would prefer to have no more than three manufacturers producing no more than six models.(11) The import quota was set at approximately 22 percent of the anticipated passenger vehicle market, with a tariff penalty for additional imports of 100 percent, to be gradually decreased to 57.5 percent (the tariff level for imports below the limit) by 1992.(12) The 85 percent domestic content requirement was retained basically intact, access to export facilitation programs was increased, and tariff quotas were extended to four-wheel drive vehicles and certain light commercial vehicles. However, in 1990, there was no domestic production of four-wheel drive and non-derivative light commercial vehicles (Industry Commission 1990, 39 and 121-123).

Under the Button Plan, the 85 percent domestic content provision required domestic sourcing of components equal to at least 85 percent of the wholesale value of the vehicle. The penalty for non-compliance was generally a duty on any imports in excess of 15 percent that increased progressively every three months, and this schedule was such that noncompliance for any substantial length of time was prohibitive. While the opportunity to earn or purchase additional duty-free entitlements existed through the export facilitation programs, the non-compliance penalties offered a great deal of protection to the domestic components industry and reduced the incentive for those firms to increase their efficiency. Although producers could use their duty-free entitlement to import either vehicles or components, in 1989 components (primarily engines, transmissions, power steering parts, carburetors, crankshafts, air cleaners, drive shafts, and air conditioning compressors) constituted 75 percent of these imports.(13)

In 1988, as part of a general tariff reduction plan, the tariff on motor vehicles was scheduled to fall in stages from its then 45 percent level to 35 percent in 1992. In contrast, the maximum rate on manufactured goods other than motor vehicles, textiles, clothing, and footwear was to be 15 percent in 1992. The Industry Commission estimated the cost of assistance to the motor vehicle industry in 1988 to be $4,000 (Australian) per car as it left the factory. Even with the scheduled tariff reductions, the estimated cost per car in 1992 was $3,200 in 1988 Australian dollar terms. In fact, the Commission estimated that the effective rate of assistance to the industry in 1992 would still be six times higher than the average for the manufacturing sector as a whole (Industry Commission 1990, xiii and 51-53).

Performance of the Australian Automotive Industry and Global Considerations

While the policy adjustments described above affected the development path of the Australian automobile industry, the choices made by the major producers were also influenced by changes occurring in the global automobile industry. During the late 1970s and early 1980s, a number of major car producers adopted global production strategies for at least some of their output. At the outset, their idea was to produce a "world car" that would contain parts sourced in various countries and would be assembled at a variety of locations using standard, massproduction technology. The Ford Escort was the first of this breed, and GMH's proposal to build a world scale four-cylinder engine plant in Australia was another example of this plan (Industry Commission 1990, 119). This approach was particularly attractive to U.S. firms, since they had plants in many parts of the world and had discovered that certain locations provided cost advantages for production of specific parts and sub-assemblies. Japanese auto firms, frequently characterized as "reluctant transnationals," were not quick to embrace this strategy, no doubt in part because they did not have the far-flung global investments that characterized their U.S counterparts.

The world car concept was never fully realized for two reasons. First, it became evident that a single car in a given size class would not be equally attractive to consumers in different national or regional markets. More importantly, Japanese production methods, centering on flexibility of model runs, lean production, just-in-time inventory systems, enhanced supplier relationships, and continuous improvement in both product and process, led to increases in productivity, product differentiation, and quality that the U.S. producers could not match without significantly changing their global strategies.(14) These developments, when considered in the light of the NIC governments' pressures regarding both local content and export promotion, influenced the U.S. firms' views of the global industry. Most importantly, as firms turned toward leaner production systems, they began to realize that cost-effective manufacturing of both parts and finished vehicles could take place in the NICs.

Nevertheless, the Australian automotive industry has been beset by a number of problems, not all of which are directly attributable to it. Ford and Toyota provided estimates of the factors which affected the relative competitiveness of their Australian subsidiaries compared with Japanese firms. Ford indicated that the elements responsible for the relative cost disadvantage of the Australian firm consisted of people factors (40 percent); the scale of operations, technology, and capital (30 percent); and the macroeconomic environment (30 percent). Toyota attributed the relative cost disadvantage to the microeconomic environment (inefficiencies in the transportation, postal, and utilities sectors) and labor costs (21 percent), scale and general efficiency (23 percent), the macroeconomic environment (25 percent), material costs (28 percent), and other factors (3 percent) (Industry Commission 1990, 19).

A primary issue is that of economies of scale. The Industry Commission (1990, 19) asserts that "assembly volumes of 200,000 per plant (emphasis added) are generally regarded as necessary for efficient production." Similarly, a 1987 study by Booz Allen & Hamilton and INFOTEC (1987, 28) of the Mexican automobile industry states that manufacturing at internationally competitive cost levels for assembled vehicles requires an annual volume of at least 150,000 units per model. Scale economies can occur by spreading the costs of product design over larger volumes, labor and management specialization, and more efficient processes or machines suitable for high volume production. Partly as a result of their relatively small scale of operations, the automation levels of the Australian plants were quite low compared with the major international competitors (Industry Commission 1990, 136-42). Moreover, a 1989 study by the International Motor Vehicle Program (IMVP) at the Massachusetts Institute of Technology supported the hypothesis of an increasing technology gap developing in the area of flexible manufacturing between Australian and Japanese assemblers.(15)

A separate issue is the more effective utilization of current capacity, for example, more than one labor shift. In 1990, only one of the five domestic assemblers operated with more than one shift. Inefficient management and labor practices were other factors cited as contributing to the competitive disadvantage of the Australian motor vehicle industry. For example, multiple unions--eight or even more--are represented among the workers in a single plant. In addition, this sector of manufacturing apparently tends to have a disproportionate number of working days lost to work stoppages. Labor turnover and absenteeism are also high in the Australian motor vehicle industry relative to other newly industrializing economies or to Japan. Although wage rates in the Australian automobile industry are lower than those in Japan, Germany, and the United States, fringe benefits are higher. Moreover, although apparently improving, the Australian motor vehicle industry has turned in a relatively poor performance in the area of quality (measured in terms of defects per 100 vehicles) compared with other international assembly plants (Industry Commission 1990, 145-147, 150).

As indicated earlier in Table 1, the recent annual output of the Australian motor vehicle industry has not exceeded its 1969-70 level. In fact, in 1990-91 and 1991-92, the level of output declined substantially, perhaps partly in response to government efforts to decrease its level of assistance as well as to the macroeconomic climate in Australia. The exports and imports of Australian transport equipment are shown in Table 2.(16) As the net export column shows, the balance of trade deficit with respect to transport equipment was large and growing, with imports nearly five times exports in 1991-92. While in relative terms this ratio was an improvement with respect to those of many earlier years, it still reflects a large potential for further progress on the part of the Australian automotive industry.

Table 2 Australian Net Exports of Transportation Equipment(a)

Australian   Total       Total       Net
Year         Exports     Imports     Exports
             Transport   Transport   Transport
             Equipment   Equipment   Equipment
             (AECC 73,   (AICC 73,   ($A1,000)
             78, 79;     78, 79;
             $A1,000)    $A1,000)

1968-69         89,214     508,729     -419,515
1969-70        153,071     567,496     -414,425
1970-71        161,513     572,783     -411,270
1971-72        190,809     473,786     -282,977
1972-73        295,807     525,250     -229,443
1973-74        234,293     808,962     -574,669
1974-75        223,175     985,493     -762,318
1975-76        170,841   1,008,993     -838,152
1976-77        140,339   1,274,061   -1,133,722
1977-78        201,023   1,397,602   -1,196,579
1978-79        285,299   2,224,847   -1,939,548
1979-80        376,297   1,852,066   -1,475,769
1980-81        504,711   2,256,485   -1,751,774
1981-82        454,188   3,474,042   -3,019,854
1982-83        391,121   2,514,946   -2,123,825
1983-84        483,635   3,199,067   -2,715,432
1984-85        540,789   3,654,313   -3,113,524
1985-86        472,039   4,376,511   -3,904,472
1986-87      1,014,800   4,031,100   -3,016,300
1987-88        897,500   4,200,100   -3,302,600
1988-89        826,100   6,845,700   -6,019,600
1989-90      1,214,000   7,863,000   -6,649,000
1990-91      1,504,000   7,615,000   -6,111,000
1991-92      1,533,000   7,307,000   -5,774,000

(a) Australian Bureau of Statistics, Imports, Australia Annual Summary Tables, Canberra, various years; and Australian Bureau of Statistics, Year Book Australia, Canberra, various years.

Table 3 specifically details Australian exports and imports of road vehicles. Although again in absolute dollar terms the balance of trade deficit has generally continued to grow, the ratio of exports to imports was higher in the last six years than in the first six years covered by the table.

Table 3 Australian Net exports of Road Vehicles(a)

Australian   Exports     Imports     Net          Road
Year         Road        Road        Exports      Vehicle
             (AECC 78;   Vehicles    Road         Exports
             $A1,000s    (AICC 78;   Vehicles     Relative
             f.o.b.)     $A1,000s    ($A1,000s    to
                         f.o.b.)     f.o.b.)      Imports

1977-78       92,608     1,065,151     -972,543   0.087
1978-79      136,000     1,411,912   -1,275,912   0.096
1979-80      159,841     1,409,138   -1,249,297   0.113
1980-81      183,661     1,703,132   -1,519,471   0.108
1981-82      196,415     1,969,016   -1,772,601   0.100
1982-83      229,656     1,807,383   -1,577,726   0.127
1983-84      267,883     2,303,271   -2,035,388   0.116
1984-85      299,515     3,087,780   -2,788,265   0.097
1985-86      261,671     3,771,337   -3,509,666   0.069
1986-87      438,200     2,719,500   -2,281,300   0.161
1987-88      524,800     3,139,100   -2,614,300   0.167
1988-89      404,600     4,806,900   -4,402,300   0.084
1989-90      595,000     5,062,000   -4,467,000   0.118
1990-91      847,000     4,459,000   -3,612,000   0.190
1991-92      769,000     4,808,000   -4,039,000   0.160

(a) Source: Same as Table 2.

Table 4 presents data on the net exports of the Australian transport equipment industry itself (rather than transportation equipment). The data are spotty and a clear trenddoes not emerge, but one might argue that the net export performance of the industry has improved somewhat in recent years. Thus, the data in these tables provide at best only weak evidence to indicate that the assistance given the Australian motor vehicle industry has achieved any of its desired results. In the next section, statistical techniques are employed to more thoroughly investigate the impact of these policies on industry exports.

Table 4 Net exports of the Australian Transport Equipment Industry(a)

Australian   Exports of   Imports of   Net Exports   Exports
Year         Transport    Transport    Transport     Relative to
             Equipment    Equipment    Equipment     Imports
             (ASIC        (ASIC        (ASIC         Transport
             Industry     Industry     Industry      Equipment
             of Origin;   of Origin;   of Origin;    Industry
             $A1,000s     $A1,000s     $A1,000s
             f.o.b.)      f.o.b.)      f.o.b.)

1978-79        264,468    2,275,133    -2,010,665    0.116
1979-80        357,291    1,943,532    -1,586,241    0.184
1980-81        478,237    2,219,443    -1,741,206    0.215
1981-82        499,900    3,495,400    -2,995,500    0.143
1982-83        439,100    2,546,500    -2,107,400    0.172
1983-84        585,500    3,290,200    -2,704,700    0.178
1984-85        679,200    3,956,200    -3,277,000    0.172
1985-86        627,500    4,771,400    -4,143,900    0.132
1986-87      1,238,600    4,689,100    -3,450,500    0.264
1987-88      1,168,300    4,754,300    -3,586,000    0.246
1988-89      1,041,100    7,204,500    -6,163,400    0.145
1989-90      1,525,000
1990-91      1,907,000
1991-92      1,992,000

(a) Source: Same as table 2.

A Model of Net Export Demand

In this section of the paper, we utilize linear regression analysis to examine the impact of government policies on the net exports of the Australian automobile industry. Generally one would estimate separate relationships for export and import demand functions. However, as detailed in Section II of the paper, an essential feature of the export-facilitation phase of Australia's automobile industry development strategy has been the creation of an artificial demand for Australian vehicles and parts. This possibility presented itself because of the quotas and the import tariffs imposed as a penalty for violating domestic content. Thus, motor vehicle producers were placed in the position of comparing the costs of subsidizing exports with paying the import tariffs, and exports and imports were necessarily intertwined because exports reduced the tariffs due on imports of intermediate products. In this case, then, it seems appropriate to estimate a single relationship for net exports, especially given that net exports (whether of finished vehicles or component parts) of the industry was the primary variable of concern to government policymakers.

Since Japan was by far the largest source of Australian automotive imports, it seemed to reasonable to hypothesize that motor vehicle prices in Australia relative to those in Japan would be an important factor in determining Australian net automotive exports. Moreover, given that most Australian motor vehicle exports were in the past destined for New Zealand, economic theory would lead one to hypothesize that other important factors affecting net export demand were prices for motor vehicles and parts in Australia relative to those in New Zealand as well as changes in New Zealand income (real GDP). In addition, the level of Australian real gross domestic product may effect the Australian exports of motor vehicle in an adverse way since, ceteris paribus, the higher the level of income in Australian the greater the quantity demanded of automobiles in Australia. Thus, ceteris paribus, as income expands in Australia, fewer automobiles made there will be available for export and the quantity of imported vehicles will increase. In this manner, Australian GDP acts as a constraint on effective export demand. It follows that a single-equation model of net export demand would include relative prices between Australia and Japan, relative prices between Australia and New Zealand, New Zealand real GDP, Australian real GDP, and Australian government policies as independent variable. Dummy variables were employed with time series data to take into account the policy effects; more specifically, two dummy variables were selected to reflect two of the major policy changes that were made during the period under study. The first was the raising of the motor vehicle tariff in 1978 to 57.5 percent, where it remained until April of 1988, when it was returned to its previous level of 45 percent. The second was the export facilitation scheme that began in 1982 and continued through the remainder of the period under study.

Therefore, the hypothesized net export demand function can be expressed symbolically as

NX = f([P.sub.J], [P.sub.NZ], [Y.sub.NZ], [Y.sub.AU], [D.sub.1], [D.sub.2]),

where:

NX = the value of net Australian transport equipment exports in thousands of 1968-69 Australian dollars);

[P.sub.j] = the ratio of the Australian producer price index for the transport equipment industry to the Japanese consumer price index, adjusted for changes in the exchange rate by using an exchange rate index;(17)

[P.sub.NZ] = the ratio of the Australian producer price index for the transport equipment industry to the New Zealand consumer price index, adjusted for changes in the exchange rate by using an exchange rate index;

[Y.sub.NZ] = = New Zealand real GDP, measured in millions of 1985 New Zealand dollars;

[Y.sub.AU] = = Australian real GDP, measured in billions of 1985 Australian dollars;

[D.sub.1] = dummy variable for impact of the 1978 tariff increase to 57.5 percent, reduced to the previous rate of 45 percent in 1988; [D.sub.1] = 1 for 1978-87, otherwise [D.sub.1] = 0; and

[D.sub.2] = dummy variable for impact of export incentive schemes; [D.sub.2] = 1 from 1982 onward.

The following linear version of this general net export demand function was estimated:

[NX.sub.t] = [[Beta].sub.0] + [[Beta].sub.1][P.sub.Jt] + [[Beta].sub.2] [P.sub.NZt] + [[Beta].sub.3][Y.sub.NZt] + [[Beta].sub.4][Y.sub.AUt] + [[Beta].sub.5][D.sub.1t] + [[Beta].sub.6][D.sub.2t] + [[Epsilon].sub.t],

where the error terms are hypothesized to be identically and independently distributed (i.i.d.). We expected that the sign of the coefficient of both relative price variables would be negative, since, ceteris Paribus, an increase in Australian automotive prices relative to those in Japan would be expected to result in an increased quantity of Australian imports from Japan. Similarly, an increase in Australian prices relative to those of New Zealand should have an adverse effect on all Australian exports to New Zealand.(18) The sign of the coefficient of New Zealand real GDP was hypothesized to be positive, since if motor vehicles and parts are normal goods the demand for Australian exports would increase with increases in New Zealand income. As explained earlier, the coefficient of Australian GDP was expected to be negative. Finally, if the two government policies had a positive impact on the net exports of the automotive industry, the estimated coefficients of the two dummy variables should be positive. Time series data from the Australian census years of 1968-69 through 1991-92 were utilized in the study.(19)

The results of the regression analysis are presented in Table 5. All of the estimated coefficients had the hypothesized signs except for that of the dummy variable for the tariff increase in 1978 ([D.sub.1]). However, only the coefficients of the Australia/New Zealand relative price variable and Australian real GDP were significantly different from zero (one-tailed) tests at the five percent or smaller levels of significance. The coefficient of New Zealand real GDP was significantly greater than zero at the ten percent level of significance. The adjusted [R.sub.2] .71 and the Durbin-Watson statistic was 2.17. As calculated by the Shazam statistical program, the exact probability for the null hypothesis [H.sub.0] [Rho] = 0 relative to the alternative hypothesis [H.sub.1]: [Rho] [is greater than] 0 was 0.184. The lack of statistical significance with respect to the coefficient of the Australia/Japan relative price variable is not too surprising when one considers that the Australian automotive industry has not produced at costs competitive with those of Japan. In fact, Australian producers had to determine whether subsidizing exports was cheaper than paying import tariffs of up to 57.5 percent.

Table 5 Estimated Net Export Demand Function

                           (t values)
[NX.sub.t] = 1261600.03 - 20450.03[P.sub.Jt] - 170382.40[P.sub.NZt]
             (1.472)(*)   (-0.107)             (-2.001)(**)

             + 32.74[Y.sub.NZt]
               (1.349)(*)

             11012.88[Y.sub.AUt] - 80041.63[D.sub.1t]
             (-3.022)(****)        (-0.948)

             + 49919.64[D.sub.2t]
               (0.397)

             [R.sup.2] = .71 DW = 2.17

[NX.sub.t] = -1190514.38 - 174556.67[P.sub.NZt] + 33.05[Y.sub.NZt]
             (2.267)(***)  (-2.374)(***)          (1.412)(*)

             - 10813.04[Y.sub.AUt]
               (-3.556)(****)

             -74667.50[D.sub.1t] + 44819.01[D.sub.2t]
             (-1.132)              (0.396)

             [R.sup.2] = .72 DW = 2.16

(*) Significant at the ten percent level of significance.

(**) Significant at the five percent level of significance.

(***) Significant at the 2.5 percent level of significance.

(****) Significant at the one percent level of significance.

Thus, small movements in the relationship between Japanese and Australian prices probably made little difference in the Australian automotive imports from Japan. As Table 5 shows, the net export demand function was reestimated with the Australia/Japan relative price variable omitted. The adjusted [R.sup.2] was .72, the Durbin-Watson statistic was 2.16 (with associated exact probability of 0.245), and the t-statistics of the remaining variables rose somewhat.(20)

The foregoing results contrast markedly with those of a study of Mexican export demand done by the present authors (Truett and Truett 1994). In the Mexican case, with similar objectives but somewhat different policy instruments, dummy variables for export promotion schemes launched in 1977 and 1983 both displayed the appropriate sign and were significant at the one percent level. (The dependent variable was the ratio of automotive exports to automotive industry gross product).(21) In Mexico, however, there was an additional incentive to export, since the country's economic crisis caused a lapse of the domestic motor vehicle market in 1983 at about U.S.-based TNC auto producers were looking for both low-priced parts and low-wage assembly facilities to compete with the highly efficient Japanese TNCs. The convergence of policy incentives with these events lifted Mexican vehicle and parts exports to the $4 billion per year range by 1990, a quite formidable figure in comparison with Australia's 1989-90 exports of about $1.2 billion (U.S.).

While macroeconomic factors certainly played a supporting role in the growth of Mexican automotive sector exports, it seems also to be the case that Mexico's export incentive program was more successful than that of Australia in enticing the TNCs to develop activities consistent with cost-effective production for export. More specifically, Mexico offered a substantial reduction in the domestic content requirement for new vehicle lines that were primarily destined for export. In addition, the Mexicans allowed parts exports to be included in the content calculation for the export line. While this policy caused Mexican imports of parts for the exported vehicles to grow substantially, the resultant exports of finished vehicles and their related components yielded a trade surplus for the automotive sector. Nothing like this occurred in Australia, which, in fact, by 1988-89 had a deficit in automotive trade of $4.7 billion (U.S.), while Mexico's 1989 trade surplus for the sector was $1.4 billion. Perhaps the feature of the Australian approach that weighed most heavily against exports was the high local content requirement (85 percent of wholesale value of a vehicle), that was maintained even after the Button Plan was adopted. This forced the vehicle producers to purchase many high-priced components from domestic suppliers and made their finished vehicles too costly for most segments of the export market. In addition, they tended to use up their foreign exchange allotments to displace certain domestically-produced parts that they viewed as overpriced or of questionable quality.

There are apparently no export demand studies similar to those discussed here for the automotive industries of Korea and Brazil. However, Rhys Jenkins (1995) supplies some useful information about the exports and export policies of these two producers. In the Brazilian case, he reports that the government used a combination of access to the domestic market, content requirements, and foreign exchange quotas to stimulate growth of production and exports among a group of automotive TNCs that was not very interested in exporting. The incentives were available only for a short time so that firms would have to react quickly to them in order to remain in the market. In addition, there were severe financial penalties for not meeting targets. However, targets were flexible from firm to firm. The Brazilian plan is said to have succeeded early on, and Brazilian vehicle exports approached 350,000 per year in 1987. However, they have since tapered off, and the government now "lacks any `sticks' with which to oblige firms to invest for export." (Jenkins 1995, 633).

In the case of Korea, where exports reached 576,000 vehicles in 1988, the government has never seemed to either lack sticks or to be shy about employing them. Accordingly, as Jenkins observes, small-scale car assemblers were shut down and, eventually, the number of producers was reduced to two. From these two, a "national champion," Hyundai, part of one of the country's chaebols or industrial groups, was identified, and the government supported the firm's development with preferential access to foreign exchange and loan guarantees. The Korean government has been more interventionist than either Mexico or Brazil and has forced firms into mergers, changes of product line, and development of production of specific components. Moreover, it has directed firms to subsidize exports from domestic sales and dump in the international market. This heavy-handed approach has resulted in substantial production and exports, and more of both are now expected from Kia and Samsung. It is unlikely, however, that further dumping will be tolerated, especially if exports to the United States are greatly increased.

The cases of Mexico, Brazil, and Korea suggest that Australia might benefit from some alteration of its motor vehicle industry development policies. In particular, its emphasis on high content requirements, substantial vehicle tariffs, and protection of the domestic components industry has yielded very high cost final products and not much in the way of exports of either vehicles or parts. While following the heavy-handed Korean example is not a likely path for Australia, some combination of the policies that worked for Mexico and Brazil might have promise. More specifically, a substantial reduction of content requirements for export lines, as in Mexico, might stimulate production of finished vehicles for export, and it could pressure the domestic components producers to become more competitive.(22) [GATT Uruguay Round agreements on trade-related investment measures call for the eventual elimination of content requirements, in any event. See Wonnacott (1995).] The lesson that Australia might glean from the experiences of Brazil and Korea is to tailor policies to the circumstances of specific producers, subject, of course to reasonable treatment for their competitors. (As this goes to press, Australian policymakers are considering a proposal by General Motors to add a new model, because, GM claims, it will enhance possibilities for economies of scale in its Australian production.) Such policy negotiation can be applied to vehicle producers as well as to the parts industry.

Conclusions

The historical performance of the Australian automotive industry has clearly not been satisfactory from the viewpoint of the government policymakers; nearly a century of tariff and other assistance has failed to achieve an internationally competitive domestic industry. The 1990 Industry Commission Draft Report recommended that the motor vehicle tariff be gradually reduced to 15 percent by the beginning of 1996. It further recommended that the automatic duty-free entitlement be abolished and that low-volume production penalties and the specification of a target industry structure be abandoned. However, the Commission did recommend retaining the export facilitation program until the year 2005, by which time all special assistance to the automotive industry is scheduled to be eliminated (Industry Commission 1990, xiv-xv).

The Australian government is apparently moving in the direction recommended by the Commission, but at a slower pace. From a level of 35 percent in 1992, the motor vehicle tariff fell to 30 percent at the beginning of 1994 and has been scheduled to be further reduced.(23) The results of this study would be consistent with the recommendation of the Industry Commission that the special assistance programs to the automotive industry continue to be phased out.

Clearly, some of the cost disadvantages of the Australian producers are not of their making, for example the macroeconomic problems of high interest rates and overall inflation rate. Some industry representatives have argued that in addition to imposing a cost disadvantage, the high interest rates have also maintained the exchange rate at an artificially high level. Inefficiencies in all branches (road, rail, and sea) of the transport system further raise the costs of Australian producers relative to their international competitors. For example, Mitsubishi stated that shipping a car from Australia to New Zealand cost $A20 more than shipping it from Japan. In fact, the Industry Commission estimated that reforms in the areas of transportation, public utilities, and assistance to other industries would increase the output of the automotive industry by nearly 8.5 percent (Industry Commission 1990, 31-35, 36).

It might be asked why Australia, with a highly educated work force and easy access to modern technologies, has not developed an internationally competitive motor vehicle industry. Some of the problems cited earlier in this paper (inefficiencies in the services and transportation sectors, insufficient opportunities or deficient industry structures for economies of scale, and a history of labor-management problems) surely are a part of the answer. Noteworthy also is the fact that countries that have become successful automobile exporters in the post-World War II era (mainly Japan and Korea, but more recently, Mexico and Malaysia) have had two prime characteristics: sustained periods of rapid internal economic expansion, and government policies that explicitly target export markets, especially the United States market. Australia has lacked both of these, the latter perhaps owing to the fact that the Australian motor industry, prior to the entry of the Japanese producers, was largely an American-dominated industry.(24)

The American producers could see a benefit to setting up shop behind Australian tariff walls to capture the domestic market and that of New Zealand, but export markets were not their cup of tea. (Certainly, exports from Australia to the U.S. market made no sense, given the high shipping costs, and, until the recent boom, the Asia-Pacific market was relatively limited.) Outside of Canada and Latin America, exports of American cars have seldom been very significant. Furthermore, even when American firms have targeted exporting to the United States from their own plants in Europe and elsewhere, they have met with little success except, quite recently, in the area of components under world car schemes and in exports of finished vehicles from Canadian and Mexican plants.

Given its history and current status, it is unlikely that the Australian motor vehicle industry will develop into a substantial exporter in the near future. In fact, it will have to redouble its efforts to more nearly approach international levels of competitiveness just to remain a viable part of the Australian economy. New policies, perhaps learning toward the Mexican model of substantial reduction in content requirements in exchange for exports of vehicles and parts, need to be fashioned. In this process, attention to the specific circumstances of individual producers and the tailoring of policies to play to their strengths could improve overall costs and productivity. Clearly, the performance of the Australian motor vehicle industry over the past 50 years does not lend credibility to requests for continued protection, and, with the increasing productive capacity of other newly industrializing countries in the Pacific Rim, the government and the industry have little time to waste in fashioning policies that will improve their prospects for the future.(25)

Notes

(1.) Industry Commission (1990, 12). In the Australian motor vehicle industry, the term "passenger car derivatives" refers, generally, to cargo vehicles that are made from passenger car cab/chassis combinations. The ubiquitous Aussie "use" (utility), similar to the Chevrolet El Camino or Ford Ranchero made in the United States during the 1960s through 1980s, is a prime example.

(2.) By 1994 only the first four firms remained. See "Sales Slump Ages Cars," The Sydney Morning Herald, January 14, 1994, p. 33.

(3.) Malecki (1991) points out that these policies have been to some extent a double-edged sword. While they have upgraded technology and labor skills in the newly industrializing countries (NICs), what is transferred is constrained by the objectives of the TNC investors. Generally, there has been little research and development in NIC host-country subsidiaries of the TNCs.

(4.) For example, in 1991 the number of motor vehicles produced in Korea, Brazil, and Mexico were 1,498,000, 960,000, and 998,000 respectively. As shown earlier in the paper, Australia produced 329,000 motor vehicles during the 1990-91 census year. See Instituto Nacional de Estadistica, Geografia e Informatica (1993, 121), Booz Allen & Hamilton/INFOTEC (1987, Apendice A), and Year Book Australia (1992, 509).

(5.) Bennett and Sharpe (1979), Jenkins (1987), Kronish and Mericle (1984), Maxcy (1981), Shaiken and Herzenberg (1987), and Unger (1991) give overviews of the establishment of motor vehicle manufacturing in Latin America. Harwit (1993) provides an interesting review of past automotive production and prospects for change in Eastern Europe.

(6.) Korea presents a quite different case, characterized by government-guided, subsidized domestic investment, purchase or licensing of technology, and a deliberate export strategy. See Mardon and Paik (1992).

(7.) Brazilian production boomed in 1993, partly because lifting of import restrictions on parts allowed producers to both introduce new models and cut prices in real terms. However, as earlier, the output was directed mostly toward domestic markets, which were expanding significantly (see Kamm, 1994).

(8.) As an anti-inflation move, the tariff was lowered for a short time in 1973-74, but it was reinstated because of a flood of motor vehicle imports.

(9.) Committee for Economic Development of Australia (1977, 7 and 12-13); and Industry Commission (1990, 118).

(10.) These entitlements were earned on a sliding scale, beginning with a maximum of $1 of export credit for each dollar of local content in their exports. This rate was reduced as the percent of export credits accrued increased. Component producers and vehicle importers could also earn export credits, the latter by arranging exports of domestic components. Vehicle importers could use these credits to import automobiles duty-free (equal to a maximum of 25 percent of the total value of vehicles imported) or they could be sold to vehicle producers or other vehicle importers. In 1989, vehicle producers, component producers, and vehicle importers earned $410 million, $109 million, and $1.2 million, respectively, of export credits. Industry Commission (1990, 42-46, and 119).

(11.) In 1990, all imported content (up to the 15 percent maximum) of vehicle models with annual production volumes less than 20,000 were potentially subject to duties, with a rate of 72.5 percent, declining to 57.5 percent in 1992. The 1990 penalties were not actually imposed, because producers of low volume models had either ceased production of the models (Mitsubishi Colt and Nissan Skyline) or increased their output (Toyota Corolla/Nova and Nissan Pulsar and Pintara.) In 1984, the five manufacturers produced thirteen models in eight assembly plants. Since that time the number of models has been reduced to eight and the number of assembly plants to seven. However, in 1989 the average quantity produced was 40,000 of a given model and 52,000 per plant. Moreover, only two of the these models had annual volumes in excess of 40,000. See Industry Commission (1990, 47-49).

(12.) These import restrictions were rescinded in April 1988. See Industry Commission (1977, 39).

(13.) Although the tariff provided an upper bound to the protection given the components industry, it was estimated that the average cost disadvantage of locally sourced components was less than 40 percent, the level of the tariff in 1990. See Industry Commission (1990, 40-41).

(14.) Womack, et al. (1990), Shaiken (1991), and Cole and Mogab (1995) contain discussions of the Japanese-style production changes adopted by U.S. motor vehicle manufacturers.

(15.) See Industry Commission (1990, 143) and Krafcik & MacDuffie (1989).

(16.) Data on the transport equipment industry as a whole are presented first because we could not obtain a consistent data series over this entire period that included only motor vehicle exports and imports.

(17.) Ideally, we would prefer to use price indices unique to the Japanese and New Zealand transport equipment industries. Unfortunately, general consumer price indices for those countries were the only ones available for the period studied.

(18.) In the case of motor vehicles, this would be primarily due to an income effect, since New Zealand does not produce them. There might also be a substitution effect if third-country prices did not change when Australian prices did.

(19.) The data sources are Imports, Australia Annual Summary Tables (1984-1989), Year Book Australia (1970-1994), and International Financial Statistics Yearbook (1991 and 1992).

(20.) The results of the VIF COLLINOINT option in the SAS regression program were consistent with the hypothesis that multicollinearity was not a problem in either of the estimated relationships. See Freund and Littell (1986, Ch. 4).

(21.) In an earlier study (Truett and Truett 1987), the impact on exports of the 1977 Mexican policy change was found to be positive and significant.

(22.) Paul Wonnacott (1995) has suggested that permitting vehicle producers to count exports in meeting domestic content requirements and establishing a flat tariff policy for both vehicles and parts would promote efficiency by fomenting domestic production of parts that can be produced efficiently and allowing less restricted imports of those that cannot.

(23.) "What's on for 1994," The Sydney Morning Herald, January 14, 1994, p. 35.

(24.) The Committee for the Economic Development of Australia (1977, 7) states: "During the initial period [from 1907] up to 1936, the manufacture of motor bodies in Australia was largely in the hands of North American manufacturers, namely, General Motors Company and Ford Motor Company." After World War II, General Motors produced the first Australian-manufactured car, and the other primary respondents to the government's first manufacturing program were also American firms. At one time in the 1960s, Leyland had about 13 percent of the market and Volkswagen about 5.3 percent, but the Americans always dominated until the arrival of the Japanese producers.

(25.) For example, China plans to triple automobile production by the year 2000. See Business Week, July 18, 1994, pp. 48-49.

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