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2 Lifting the hood on the car
industry By Chan Akya
From both the emotional and economic
perspectives, perhaps no industry comes close to
automobiles in generating its share of
controversies and opinions. Admittedly, banks are
pretty high up on the list too, but most lay
people do not even pretend to understand the inner
workings of banks as much as they pretend to do
about cars. For reasons that are partly economic
and partly environmental (and hence economic
eventually), current palpitations in the car
industry bear watching for Asian
policymakers as well as
industry executives.
This week's purchase
of Chrysler, a former US Big Three auto maker that
had merged with Germany's Daimler-Benz, by
private-equity firm Cerberus Capital Management
[1] brings into question the correct
industrial-financial model for the automotive
sector, as well as the role of governments in
fostering or dooming their local talent. While it
is possible that local governments and union
leaders would attempt to prevent such acquisitions
in Asia, such moves would be ill-advised in what
is in essence the first among global industries.
Rule 1 for governments: Try not to
help An old Buddhist tale concerns a king
whose best friend is a simpleton. After many
embarrassments, the tale's denouement involves the
simpleton cutting off the king's nose when he
attempts to kill a mosquito that has landed on the
royal person.
This notion of an
intelligent enemy being less dangerous than a
foolish friend is apparently lost on most
governments. The decline of the US car industry
has been much discussed; indeed, in a previous
article [2] I cited the decline of
automotive-engineering capabilities in the United
States as evidence of that country's overall
decline in industry and education.
The
decline in the share prices of US car makers has
much to do with government assistance. After
tightening safety and fuel standards on
automobiles because of litigation and public
demand during the 1980s, the US government allowed
domestic manufacturers to use larger truck
platforms for making passenger vehicles, and these
were exempt from both fuel and safety standards.
The "foolish friend" made two important
assumptions - first that the time provided to
improve their cars would be used by US
manufacturers actually to achieve that, and second
that Japanese car makers could not catch up with
America's lead in making obscenely large
automobiles. Both assumptions proved disastrously
wrong.
In much the same way, the Malaysian
government has been trying to protect its domestic
car makers by imposing punitive duties on imports
since the 1980s. The measures have worked to keep
the companies going, but have hardly broadened
their engineering capabilities, as the failure of
Malaysian brands in penetrating other markets
shows. The companies in essence assemble older
models of their partners for domestic consumption,
and unlike Chinese or Indian counterparts have
spent precious little on developing their own
product lines.
Perhaps the biggest lesson
for policymakers, though, comes from India, where
the government's mollycoddling of a limited number
of car makers ensured that no significant advances
in engineering or design were made for decades.
The country slipped to being a non-entity in
automobile manufacturing in spite of possessing
all the required raw materials in abundance,
including the most important one - excellent
engineering talent.
The liberalization of
the Indian economy starting in the 1990s has
helped to broaden the appeal of the market for
foreign car makers, who have now started using the
country as a production base for both local and
export sales. Overall employment in the sector, as
well as related products, has more than tripled in
the past 10 years - a feat that no socialist
government could achieve for the previous 50
years.
Rule 2 for governments: Embrace
Wimbledon The more vexing question for
policymakers has often enough, and predictably,
been about ownership.
In the aftermath of
World War II, the direct involvement of Japan's
government was required to kick-start the
country's industrial re-emergence. To ensure
optimal usage of scarce savings, the government
took upon itself the task of ensuring that
investments
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