What Happened at Ford?

The Ford Motor Company announced yesterday that in 2016 it will cease motor vehicle production in Australia. Thousands of jobs will be lost, not just the ones at the Ford plants but also jobs in the supplier and retail industries that depend directly and indirectly on the Ford plants. What happened?

Well, the standard answer is that Ford simply lost in the race against its competitors: consumers simply don’t want to buy Ford vehicles in commercial quantities anymore; they prefer the alternatives on offer from the competition. Why? Standard economic theory will say that Ford prices were too high and/or their quality was too low, and their prices were too high because their costs were too high: costs consisting of wages, parts and components, low production volumes, lower government subsidies; staged reductions in tariffs and quotas since the 1980s, and a host of other factors such as exchange rates, interest rates and availability of credit.

These same factors affect Ford’s competitors of course but somehow their competitors must have been better at managing them. If so, then the quality of Ford management is another factor to be taken into account.

So, economic theory has an explanation for the Ford closure. Should we worry? Not according to the theory. What happened at Ford, however unfortunate, is just the market mechanism at work. And while it may be sad to see so much hardship among workers, their families and their communities, the result will be better cars at lower prices and that has to be a good thing – doesn’t it? This is what the market does, this is its job: weeding out the weak and rewarding the strong, and the result is lower prices and better quality for everyone. As for the workers and their families, well the government if need be can step in to assist them through the hard times.

Government assistance usually consists of retraining and relocation programs, but for many it means early and forced retirement as well as accepting lower paid jobs with poorer working conditions, while often being forced to leave one’s trade and one’s trade union. But isn’t this just stick-in-the-mud whingeing because they are being forced to move with the times? Overall, the theory paints a rosy picture: everybody wins and there are no real losers.

Coherent, but is it true?

It’s a coherent story. The parts of it fit together nicely and it persuades a lot of people: people who should know better. So what’s wrong with it? The primary problem is that it ignores the bigger historical picture. What happened at Ford happened in the context of institutional, organisational and economic structures. Had these structures been different, then the outcomes at Ford (and a thousand other companies) might have also been very different. How so? To answer this we need a bit of recent Australian economic history.

All economies have a sector structure – primary, secondary and tertiary, which is just shorthand for

• primary: agriculture, minerals and energy
• secondary: manufacturing
• tertiary: government, information          

Australia, until the end of WWII, traditionally depended on agriculture mostly wheat and wool which they exported to the rest of the world – especially Britain. But these commodities were in long-term decline in world trade – both by value (relative prices) and by volume. At the end of the war, Australian policymakers recognized the urgent need to shift Australia away from dependence on these traditional unstable and declining agricultural commodities and focus instead on the development of manufacturing – cars, textiles, steel, and chemicals and so on. To achieve this, a wide range of immigration, industry and regional assistance programs were implemented – investment subsidies, tariffs and quotas on imports, depreciation allowances, relocation assistance, import offsets and training programs.

For several decades (until the mid-1970s) all went well with this program. Australia experienced unprecedented growth in population, employment and GDP. A significant shift toward manufacturing occurred, and the economy was protected from continuing agricultural declines. But there were problems.

The rise of the so-called Asian-Tigers (Taiwan, South Korea, Singapore and Hong Kong, as well as Japan) meant the growing availability on world markets of cheap goods kept out of Australia by high import tariffs which raised prices for Australian consumers. But, at the same time, these rapidly growing economies bought increasing quantities of Australian minerals and energy products (coal, iron ore, natural gas) to underpin their rapid economic growth. Australia ran major trade surpluses with most of these economies throughout the 1950-60s, but the exchange rate was managed by the government which kept the rate of currency appreciation under control.

However, throughout the 1960s, Australian consumers became increasingly aware of how cheap things would be with access to imports at low Asian prices; consequently tariffs became increasingly unpopular. At the same time, Australian minerals and energy producers who had been rapidly increasing their exports had begun to claim that minerals and energy products – not manufacturing - should be the basis of the Australian economic development strategy.

By the mid-1970s, this alternative position had gained some traction in the Canberra bureaucracy and senior levels of the Australian Labor Party – especially the Whitlam faction. As a result of Australia’s post-war manufacturing policies, employment had achieved unprecedented highs, the trade balance was positive and a reduction in tariffs would lower Australian consumer prices thereby helping Australian workers. To Whitlam, the signs were good and in 1973, he instituted a 24% across the board tariff cut.

At the time, Bob Hawke, the then ACTU President was outraged, claiming he had not been consulted by Whitlam and that the cuts would cost jobs. But Whitlam’s timing had been carefully chosen and the then overfull labour market readily absorbed the cuts.

An Alternative Left Economic Strategy

Of course, all was not well with Australia’s post-war manufacturing development strategy. Domestic growth had been fostered in large measure by subsidiaries of foreign multinationals operating in Australia and enjoying monopoly profits while sitting comfortably behind high tariff walls. This was not an optimal growth strategy. The multinational inter-industry linkages to the rest of Australia were weak with demand for industrial supplies and capital equipment largely flowing overseas via pre-existing multinational supply networks. Australia lost income and taxes via multinational transfer pricing (inflating the prices of imported supplies in order to transfer profits to the overseas parent). And the Australian multinational subsidiaries were denied access to the global export markets of their parent companies. Consequently the post-war manufacturing development strategy introduced a very one-sided import replacement strategy (the imported goods the subsidiaries were themselves now producing were replaced and protected, but not the industrial supplies and capital equipment needed by the subsidiaries), and failed completely on the export front.

What the incoming 1983 Labor Government needed to do, then, was to renegotiate the arrangements with the Australian-based multinational subsidiaries to a) ensure that Australia industry got a larger share of the multinational industrial supplies and capital goods markets, b) that the subsidiaries abandoned their transfer pricing behaviour and paid their fair share of taxes, and c) that the overseas parents gave increasing export access to their Australian subsidiaries, and last but not least, d) a significant proportion of the monopoly profits earned behind high tariff walls be progressively turned into price and tariff reductions so that Australian consumers could enjoy prices more nearly the same as those that prevailed in international trade. This was a lot to swallow in one go, but, because of the high tariff walls, multinational profits were virtually guaranteed in Australia and it could easily have been achieved over the medium term.

The Right Alternative

But despite some lukewarm hand waving in this direction at the 1983 election, a different strategy prevailed. Paul Keating, having spent several years as Shadow Minerals and Energy Minister, was persuaded by the mining lobby that any future development strategy lay with minerals and energy. So, in the 1980-90s, Bob Hawke (PM) and Paul Keating (Treasurer) aided very effectively by Bill Kelty, then ACTU Secretary, finished what Whitlam had started.

For more than a decade, this trio instituted a wholesale winding back of Australia’s post-war manufacturing development. Investment subsidies and allowances were abolished, and regional and locational incentives abandoned. Government abolished control over exchange rates, over interest rates and over foreign banking. Tariffs and quotas were abolished or progressively but rapidly reduced. The underlying economic philosophy was neoliberal – according to the then US President Reagan – governments can’t solve the problem, governments are the problem. So government must be wound back; government enterprises must be privatised and governments must balance their budgets even while income taxes are being cut. The then Australian Labor Government agreed, as did subsequent Coalition governments.  

The result was an immediate cessation of public sector and manufacturing growth and development in Australia with the clothing and textile industries virtually wiped out within a decade. Steel and chemicals were soon to follow. Cars, because of their locational sensitivities have taken a bit longer, but the car component industry went long ago. This then is the real story of Ford and it should be seen in the context of Australia’s development strategy over the last thirty years. It’s not over yet.

Nothing of course ever goes completely to plan. Almost as soon as the Keating reforms were implemented, the Asian-Tigers lost their bite. Japan has been economically comatose for practically two decades. Nevertheless, the Keating plan appeared to succeed. So what has taken the Tigers place? As the Tigers declined, China grew. It was the People’s Republic of China that stepped up to the plate and ‘rescued’ Keating’s plan, thereby putting a completely different political twist on Australia’s development strategy. Politically, our international alliances are with the USA and Europe; economically on the other hand we are now almost entirely in the pocket of the Chinese Chamber of Commerce (aka the Chinese Communist Party), a few home-grown and very greedy resource billionaires, and the major US investment banks (Goldman-Sachs et. al.) that gave us the ongoing 2008 Global Financial Crisis.

Mr Keating is happy to take credit for the specious ‘success’ of his strategy, but he persistently fails to explain how we are going to get out of the present hole - or should that be quarry - that his policies have got us into.

This, then, in very simplified form, is the story of what happened at Ford. And it is not at all like the rosy picture that orthodox economic theory would have us believe. Neoliberalism lies at the heart of what happened at Ford and as noted it's not over yet, not even close to being over. Ford is a victim of the anti-manufacturing, counter revolution in Australia's economic development strategy which kicked-off in 1980s. The Australian economy and all successive governments since the early 1980s have abandoned manufacturing and the mixed economy, opting instead for a deregulated, privatized, resource based growth strategy. The result? Australia is now structurally weaker than it has ever been.