Car industry is not the productivity knuckle dragger it is made out to be
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Version 0 of 1. The report last week that Holden may be planning to stop manufacturing here in 2016 coincided with the release of the national accounts and a productivity commission working paper. These showed that manufacturing continues to decline in overall importance but that also the car industry is not the productivity sloth it is often portrayed. The manufacturing industry has now been declining for 40 years. Back in 1974 (when the ABS began measuring gross value added by each industry) manufacturing accounted for 15% of our GDP, and was more than double the size of the mining and construction industries which were tied for second biggest: Link to view graphic on mobile Now mining, construction, and financial services are all bigger than manufacturing. The health care and social services industry and the professional, scientific and technical services industry are now effectively the same size as the manufacturing industry. The decline in the share of GDP has been accompanied by a decline in its share of the labour market. Where once it was easily the biggest employer, now it is only the 5th biggest. Since 1984 the number of males employed full-time in the manufacturing industry has gone from one in five to about one in eight. The national accounts also show that the industry was hit harder by the GFC than any other in Australia. From 2000 until the GFC in June 2008, manufacturing contributed an above average 1.8 percentage points to GDP growth. Since June 2008 however, the industry has actually been a drag on GDP growth. Link to view graphic on mobile This decline in total manufacturing growth was noted by the Australian Industry Group (AIG) in its submission to the productivity commission’s review of the automobile industry. It noted that as of June 2013, total manufacturing output (value added) was 9.8% lower than at its last peak in June 2008, and just 0.9% higher than during the GFC trough in Q3 2009. Among the reasons for the decline in manufacturing output are the worldwide decline in demand for manufactured products since the GFC, a downturn in the construction industry (and thus a drop in local demand for manufactured products) and (as ever) the high Australian dollar. AIG suggested that the current weak conditions of the manufacturing industry would mean it “does not appear to be readily able to ‘absorb’ tens of thousands of workers who might be displaced from the automotive sector, should automotive production be reduced or removed from Australia by changes to industry policy.” The argument that we should save the car industry because the rest of the manufacturing sector is not doing well is pretty weak. What might be a better point to argue is that far from being an unproductive sector of the economy, the automotive industry has outperformed the rest of the manufacturing industry. Link to view graphic on mobile The productivity commission’s working paper on productivity in the manufacturing industry found that the machinery and equipment sub-section – a large part of which represents car manufacture – has continually outperformed the rest of the manufacturing industry over the past 25 years: Link to view graphic on mobile The commission’s report also highlighted just how difficult it is to nail down a reason for the decline of productivity growth – even at the industry level, let alone for the whole of the economy. It noted that the decline in manufacturing multi-factor productivity (MFP) from 2003 to 2011 was the longest such decline since 1985. But the commission was at a bit of a loss as to why this had occurred. It was however able to attribute two thirds of the decline to three sub-sectors: petroleum, coal, chemical and rubber products; food, beverage and tobacco products; and metal products. It failed to find any connection between productivity and profitability as is the case with the mining sector where increased profitability increased work in less productive activities. It failed to find a link between falling productivity and decline in research and development as “there was no significant fall in R&D expenditure in the period preceding [the decline].” The most likely culprit was a decline in capital utilisation – ie capital/equipment wasn’t being used to its full potential. This was clearly shown in the latest MFP data released on Friday: Link to view graph on mobile None of this will be likely to save the car industry. That will in the end come down to General Motors maximising its global profits. But if it does go, it won’t be because of below par labour productivity. It will also be somewhat ironic for a government which places such store on improving productivity, that should the car industry depart under its watch, it will likely hurt the manufacturing industry’s overall productivity growth. Our editors' picks for the day's top news and commentary delivered to your inbox each morning. |