The Name of the Game

Holden Cruze assembly plant in Adelaide (Image from: CarAdvice.com.au)

The cat is out of the bag. An interview by Allan Kohler of the show Inside Business with General Motors Holden Managing Director Michael Devereux revealed the real purpose of government hand-outs to car manufacturers. It is not as is widely held to prop up failing industries, but to attract annual investments in R&D that have substantial multiplier effects throughout the economy.

Here is an excerpt from that interview:

ALAN KOHLER: So Australia should provide GM assistance in Australia not to help you to become profitable but because of a contest between us and other countries for the money?

We're engaged in a competition, is that correct?

MIKE DEVEREUX: Every country in the world is engaged I think in a competition to attract new, high-tech, highly capital-intensive investments - whether it's Brazil with tariffs, whether it's the UK with regional development funds, whether it's other countries with less obvious forms of either currency manipulation, or things like if you buy a car and you want to get it insured if it's an imported car it costs twice as much to insure as a domestic car [emphasis added].

So there's lots of different ways that countries play the game. The co-investment path is I think the most appropriate one for Australia and, yes, Australia does need to compete with other countries.

ALAN KOHLER: Right so but another way to look at that is the company that is playing the game is General Motors and the other manufacturers. You're actually playing off these countries against each other to improve your profitability by making them compete with assistance money?

MIKE DEVEREUX: Well, what happens around the world is GM is an about $150 billion company and we're looking to spend about 10 per cent of our total revenues on both engineering and capital [emphasis added].

And frankly, as that capital is deployed around the world, we try to deploy it in the way that returns the best return to our shareholders. And that is the purpose of business.

So every country on the planet competes for auto investment because of the multiplier effect that it has in the economy - from R and D jobs to actually capital equipment investments, to transportation and logistics.

It's got a huge multiplier effect. In terms of jobs, it's got about a five or six to one - so five to one multiplier effect.

So it's a large business enterprise. It has I think far reaching benefits into a lot of different sectors of the economy, so it's obviously why countries do that.

ALAN KOHLER: Can you can (sic) see why somebody would see that as fairly cynical - you know, the way that a company like yours would...

MIKE DEVEREUX: I can.

ALAN KOHLER: You know, just trying to get the best you can out of each country and you know, play them off?

MIKE DEVEREUX: I think a lot of people wish that the world was flat and that everybody played by the same rules but countries aggressively compete for what Australia has.
Australia is one of 13 places in the world - 13 - that can design, engineer and manufacture a car and a lot of countries want that same kind of capability [emphasis added].

Devereux then goes on to hint that GM Australia would be asking for about $300 million a year in co-investment funds from the Australian Federal government to invest in two facilities or car plants. The trade-off is that they would then have to guarantee that these projects would follow certain milestones in terms of the number and timing of jobs created.

This quite candid conversation reveals a couple of things. One, developing countries like Brazil and China (which was not named but alluded to) which have limited fiscal capacity to provide industry support in the form of co-investments can still compete through other policy instruments like tariffs and currency manipulation. Two, developed countries which preach free trade and open competition like the UK and Australia, actually engage in very interventionist policies to attract investments in high-tech and green manufacturing. 

In other words, the demise of industry policy has been greatly exaggerated in the West, since it has been resurrected in other forms under the banner of "innovation" and "climate change". In the past, opposition to taxpayer funded subsidies to the auto industry has been founded on the argument that this creates a "dead weight loss" by creating encouraging activities that an economy is not competitive in. 

Here we are seeing that it is actually creating public benefits through multiplier effects and a healthy return on public dollars invested that allow a nation to specialize in activities that it is well-suited for. A country such as Australia may not be able to export cars because of its strong currency resulting from the mining boom, but its mature domestic market can still support a profitable car industry within it. This strikes me as a good balance.