Yesterday, Australians experienced not one, but two examples of policy failure.
First, the Reserve Bank admitted that it had not kept inflation in check and it increased interest rates.
Second, industry policy failed to save Mitsubishi Motors Australia. The federal and South Australian governments have spent years attempting to keep Mitsubishi Australia operating and solvent. Those attempts have failed. Despite the overwhelming evidence that the company is unsustainable in this country, there are still some who want to construct yet another "rescue package" for Mitsubishi.
There is no indication that any new rescue packages would be more successful. Put simply, the problem for Mitsubishi here and internationally is that there are too many car makers. The consequences of this excess capacity are the same in the car industry as they are in any other industry. Some producers must exit.
Adding to these competitive pressures is the reality of declining tariff protection (scheduled to be 5% in 2010) and competition from lower-cost economies.
Mitsubishi Australia was not profitable and was never likely to be. In a market economy, profit is a signal of consumer satisfaction. Despite the best efforts and intentions of government -- including grants and assistance of almost $100 million -- Mitsubishi could not succeed. Mitsubishi must be allowed to fail. There seems little point in the company continuing in Australia until 2010. There is no reason to continue hemorrhaging money and resources. Throwing good money after bad is poor public policy and serves no purpose.
The closure of the Mitsubishi plant in South Australia will have a devastating impact on the local economy. More than 900 people will lose their jobs.
Unemployment in South Australia is already at 5% -- above the national average. There will be follow-on effects for suppliers and component makers. The cost structure of the entire Australian car-making industry might rise.
Politically, the loss of highly unionised jobs will be an embarrassment for the South Australian and federal Labor governments.
Within a few months of coming to office, the Rudd Government will have presided over its first major factory closure.
Federal Industry Minister Kim Carr is especially attracted to the car industry. A high-profile failure early in his tenure could serve as a reminder of the limitations of government intervention and industry policy.
The company needs to accept the failure of its Australian operations. Mitsubishi nearly shut its South Australian plants in 2004. In retrospect, it should have. It introduced a model, the 380, into Australia, continued operations and entered into many long-term commitments -- all of which will either be broken or paid out. The closure of the plant will involve a further loss of reputation and goodwill, not to mention the direct costs of retrenching the workforce and mothballing the facilities.
All up, this would not have been an easy decision, nor one made lightly.
Mitsubishi's failure is not entirely due to its own efforts, or those of government. Ultimately, it is due to consumer behaviour and preferences. Market economies are consumer democracies. It is consumers who decide what is to be produced, and sold, and by whom.
Nobody is suggesting that overall demand for cars has fallen, but sales of the locally made Mitsubishi 380 are insufficient to justify local production. There is nothing Mitsubishi or government can do to change that fact.
To be fair, Mitsubishi Australia was stuck in a vicious circle. To survive, it had to trade out of difficulty but consumers were reluctant to buy because the company was in difficulty.
That is the biggest problem for industry policy. Every company believes that consumers will beat a path to their door and every government believes that, this time, it will be able to pick winners. Yet most new products fail and government has an appalling record of picking winners.
In the end, consumer sovereignty always prevails. Delaying the inevitable simply leads to further costs and the unsuitable allocation of resources.
Industry policy in Australia should be focused on ensuring greater flexibility for companies and the workforce.
Creating barriers to exit only exacerbates the economic costs of failure. Companies that are not profitable, and are never likely to be profitable, should not be encouraged to continue. Everyone is a loser from this episode. Millions of shareholder and taxpayer dollars have been lost. Workers have remained at non-viable jobs. Unfortunately, it seems that this is a lesson that government will have to learn and relearn many times.
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