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Is Australia following the General Motors strategy?

By Ben McNeil - posted Wednesday, 3 June 2009


It’s official, the reign of the Hummer, that unnecessarily enormous petrol-guzzling SUV is over. It’s American car-maker, General Motors, is eliminating it from production as President Barack Obama takes control of the near-bankrupt American car giant. But don’t think these dire economic circumstances were caused solely by the global financial crisis. All American car-makers were hemorrhaging money in the boom years well before the global financial crisis. The death of the Hummer sends an ominous economic warning to Australian leaders if they want to rely on relics of the past to grow our economy in the future.

The disastrous strategy of US car-makers started in the early 1990s, after the first Gulf War. During that decade oil was sloshing around the global economy at historically low prices (about US$10-15 a barrel). It was easy to believe that oil would be this cheap and plentiful for decades to come. Coupled with cheap oil, the United States has by far the lowest petrol tax of the western world. Any hint of a government raising fuel tax or vehicle fuel efficiency standards, like those proposed by President Bill Clinton in 1993, would get the vitriol of a powerful industry lobby including oil companies, car-makers and auto-unions. For decades the industry lobby has pushed the line that imposing better environmental standards would devastate their industry.

Due to these factors American fuel-efficiency standards got worse and worse for decades and cars built in the US had the worst fuel economy of any vehicle fleet in the world. Following on from this lack of environmental regulation, the “Hummer strategy” of developing larger, more petrol guzzling and polluting vehicles materialised. Quite amazing that the US auto-makers could not envision a world where people actually wanted fuel efficiency. The Hummer strategy seemed to be working for a while in the early millennium - because oil prices were still low.

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Then 2004 hit and from that moment on, the American car-makers were in terminal decline despite a booming global economy. The oil price was rapidly rising, with dwindling oil production, a booming economy and the Iraq War helping prices surge from US$30 to nearly US$150 a barrel in 2008. The Hummer strategy was failing miserably with consumers shifting to fuel-efficient vehicles.

Across the Pacific in Japan a completely different strategy among car-makers was taking place. In the 1990s with high government fuel-efficiency standards and government support, and despite the cheap oil, the big Japanese car-makers like Toyota and Honda invested massively in research and development into fuel efficient vehicle technology. So while Toyota was developing the ultra-efficient Prius, General Motors was developing the gas-guzzling Hummer.

As the oil price started to bite, from 2003 onwards, the Japanese car-makers with a more fuel-efficient line of cars were boosting sales and surpassing their US counterparts in every respect. This was particularly evident in the year before the global financial crisis hit.

In that year, 2007, Ford reported a loss of US$1.4 billion while General Motors reported one of the biggest corporate losses in history, at US$39 billion. Remember - this was during 2007 when the global economy was still in boom times. Meanwhile, Toyota reported a profit of US$17 billion and Honda $5 billion in 2007 - both rising sharply from the preceding years. By 2007, Toyota overtook Ford and General Motors to be the world’s largest car-maker.

The Japanese fuel efficiency strategy was paying massive economic dividends. As it happens, less pollution meant more profits: this will be a catchry in the coming century for all industries.

But you can’t help blame the poor CEO’s of the US car-makers in making this huge strategic error - it was helped along by a weak set of politicians unwilling to make the politically unfavourable decisions. Ironically, just like it was in the financial crisis, it was a lack of regulation (in this case environmental regulation) that caused the terminal decline of the American car industry.

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Australia is currently in a similar position to where General Motors was in the 1990s, but instead of cars it is a different relic of the old industrial revolution: coal. We are as dependent on coal as General Motors was dependent on the gas-guzzling SUV. Nearly 80 per cent of domestic energy sources come from coal and we export more than 200 million tonnes globally earning $22 billion annually, making it our most lucrative commodity.

General Motors banked on continuing sales in inefficient, polluting SUVs. Australia is relying on the world to buy its most carbon intensive commodity in a global age of carbon constraint. In a world short on oil and high on carbon, the 21st century is moving towards a lean, clean industrial revolution. Old coal can’t compete with low carbon forms of energy like natural gas, hydro, geothermal, solar, wind, wave, tidal, biomass and nuclear.

Like for the Japanese car-makers, deep emission cuts for Australia are imperative to inspire low carbon innovation that will give Australian industry a comparative advantage for the new clean industrial revolution this century. If Australia doesn’t pursue a low-carbon economy, our biggest export commodity today will become our biggest liability in the future: just ask General Motors.

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This is an extended version of an article that appeared in the Australian Financial Review on May 5, 2009.



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About the Author

Dr Ben McNeil is a climate scientist and economist from the University of NSW and author of The Clean Industrial Revolution: Growing Australian Prosperity in a Greenhouse Age.

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