BETWEEN FOUR WORLDS: CHINA, RUSSIA, JAPAN AND AUSTRALIA.
BETWEEN FOUR CAREERS and FOUR LANGUAGES

En Route to Australia, via Southeast Asia

1. An Unusual Research Technique
2. The Thai Car Industry Model
3. A Model of the Rest of the World
4. The Market as a Factor of Production
5. The Australian Car Industry Disaster

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The year allowed for PhD fieldwork in Japan over, it was time for me to return to Canberra.

The scholarship generously allowed me to do some more fieldwork en route through Southeast Asia.

Here that book listing Japanese direct investments overseas which my Japan mentor, Professor Kojima, had got for me years back proved invaluable.

1. An Unusual Research Technique 

Normally a non-Japanese researcher seeking inside information on Japanese firms in Southeast Asian would not even know where, and how, to start.

With only a few days available in each country our researcher would have been in even more trouble.

I was more fortunate. 

The Kojima book listed all the investment projects approved for each country.

The local Japanese embassy was helpful, providing addresses of each of those Japanese firms listed in the Kojima book.

Arriving at the address and holding the Kojima book, I would normally be able to get to see the man in charge by saying I was trying to confirm the data in the book (my fear that Japan firms would not want to talk to foreigners was unfounded). 

I would then open the Kojima book at the page where his firm was listed, together with the reasons given there for its investment (a key point in my research).

Surprised that I already knew something about his investment, the man in charge would then be happy to give extra details to fill out the picture, particularly reasons for the investment.

Looking back I should have been much more grateful to Kojima. That  book was the make or break for my thesis.

I was well on my way to doing some serious PhD research.

…

But it was not till I got to Thailand that I really hit the jackpot.

It is one of my great regrets that I never got it written up properly.

…

Normally, a country like Thailand seeking to industrialise has only one path – concentrate on creating low-tech industries able to take advantage of low labour or raw material costs.

It is a miserably slow existence, especially since there are dozens of other backward economies in the world all trying to do the same thing. 

It is made worse by our free trade fanatics.

For when you finally have arrived at a reasonable level of domestic production for a mid-tech product, they insist you open your market to the same product produced more cheaply by others.

Little wonder development becomes very difficult.

…   

Given these problems, the idea of going from close to zero to the level of being able to create a car industry able to export around the world is almost fantasy.

Yet Thailand was able to do this.

How it was able to do this deserves much more study than it gets. 

It provides a model that can lift much of the developing world from poverty to industrial prosperity.  Which is probably why it is not studied.

Too many actors have a vested interest in maintaining the status quo.  

2. The Thai Car Industry Model

The car industry in Asia in the sixties was in a mess.

The Japanese, the American, the European car makers, all determined to gain footholds in  emerging markets with potential, had all set up operations for the sale of imported complete vehicles – sometimes with some local assembly operation. 

Governments would then impose tariffs on imported complete vehicles in the initial hope this would encourage new or expanded local assembly operations and then a local vehicle industry based on locally produced or imported parts and materials.

But the leap from local assembly to local vehicle production was a leap too far. Who was going to produce the array of mid to high tech parts needed for an efficient, competitive vehicle industry? Even if they could be largely imported the industry would still not be competitive. 

The result was what we see so often – a high tariff, low volume assembly industry competing with continuing imports of still competitive complete vehicles.  Lacking scale economies there was little chance to lower the cost of most locally produced parts and materials. The result was a high cost vehicle industry relying on subsidies, as in Malaysia.

The Thai approach was different. Tariffs cut imports of complete vehicles and encouraged a low cost assembly industry with all parts and materials imported, mainly from the parent company and often at cost or less. 

Then as local assembly grew in scale the government began to impose high tariffs on selected parts and materials imports whose local production was seen as lost cost or desirable – vehicle springs or tyres using locally produced rubber in the Thai example. 

But other parts and materials could continue to be imported freely. So costs remained low and local sales continued to expand especially as US and European producers began to balk at the cost of locally producing the parts and materials hit with the selective tariffs and decided to pull out. 

Japanese vehicle producers decided otherwise. Either because of their stronger survival instinct (they could further cut costs of parts and materials from the parent company or hope to increase sales as competitors pulled out), or a cooperative willingness to take output from a single facility locally producing the selectively targeted parts or materials, they would decide to bite the bullet and continue local operation.

This in turn encouraged the authorities to impose more selective tariffs on imported parts and materials which could be produced locally at low cost.  By this time higher sales were producing scale economies. The incentive for the foreign (now almost exclusively Japanese) to go into local production of formerly imported parts or materials would increase

And so in this organic way Thailand began to gain the full range of efficient parts and materials industries needed for reasonably competitive domestic vehicle industry.  It remained only for the government to provide normal export subsidies for the industry to gain the scale economies needed for international competitiveness. 

More thoughts on the Thai model

As I continued my slow voyage across I began to realise how the Thai model of industrialisation could be used elsewhere.

In the first place it had to have a name. My choice would be the Thai blackmail model of industrialisation.  Blackmail because the foreign firms were being blackmailed into investing.  Originally they would have been quite happy to have a simple assembly operation to give them market share. But if they did not respond to the Thai demand for greater local content they risked losing their total investment.  They were being ‘blackmailed’ into producing locally.   

Secondly it did not have to be vehicles.   There is any number of mid-tech products – TVs, refrigerators, motorbikes – which the developing nations would like to produce. And it did not have to be Thailand. Granted that Thailand had certain advantages – a large domestic market,  an Overseas Chinese minority keen to move into managerial and technical positions. 

But developing nations could merge their markets and decide among themselves which nation would produce which product. Very large economies of scale could result. There is any number of potential or existing trade blocs looking for products to produce.  

Finally there is the problem of choosing investors. But under my other idea – the auction tariff scheme (floated but ignored when Australia was trying to reindustrialise*) – the selection would be almost automatic. Imagine nation A wants to start producing TVs. All it has to do is announce it is accepting bids for a semi-exclusive right to produce for a large share of the national market.   

Even with the help of subsidies the cost of locally produced cars was too high to allow scale economies.   So the temptation was to rely on imported parts and materials. But that in turn killed the original plans to develp  

Existing importers of complete cars then had a choice: 1. continue to import complete cars and pay the high tariffs, or 2. switch to local assembly of parts and materials. 

But because of the cost of domestic assembly and lack of scale economies the domestic industry could only compete with firms continuing to import complete vehicles if the tariff on the imported vehicle was extremely high.

On the face of things Thailand seemed to be making the same mistake as many other developing nations – creating a high-cost vehicle industry with no hope of gaining the scale economies needed to reduce the cost of locally assembled cars without high subsidies (as in Malaysia).

But the Thai planners had gone out of their way to encourage the building of local assembly plants by allowing all parts and materials free entry. The only high tariffs were on complete cars.

Only the very rich in Thailand could afford the cost of a completed imported car. Other buyers would have to settle for the cheaper car assembled in Thailand with imported parts and materials.

And while the assembled car may have been less attractive for the buyer, it was providing training to a hitherto raw work force and their supervisors.

Staff from the head company in Japan were helping provide the all-important transfer of skills.

Then when the assembly plants were up and running the Thailand began to impose selective high tariffs on some of the  parts and materials being imported.

For example, the planners would impose a high tariff on imported shock absorbers.

The vehicle assemblers would then have to choose 1.whether to go through the trouble of producing their own shock absorbers, or 2. persuading a producer of shock absorbers to set up a Thai factory to supply them (the Japanese chose the latter course). 

Failing that, and foreseeing more high tariffs on imported parts and materials, the foreign car producer could give up on Thailand completely and sell off the investment in the assembly plant.  

Or else they could, of course, continue to import  complete vehicles, with the expensive assembly plant reduced to repair and maintenance operations. But that high tariff on complete vehicles would greatly reduce their domestic sales. 

…

Most US and European assemblers would dislike these choices, and decide to pull out.

But if they were Japanese they would tell themselves that any sacrifice was worth making to get that foothold in the Thai market.

(The Japanese survival – ikinokori –  instinct when it comes to foothold investing should be the topic of another PhD thesis.)

And so with the progressive imposition on  tariffs on imported parts and materials Thailand forced (or encouraged) the now mainly Japanese car makers in Thailand to provide the machines, technical aid etc. needed to produce locally many of the parts and materials formerly imported.

This in turn, and combined with the development of other industries taking advantage of low Thai labour costs, saw the gradual emergence not just of a car industry but of an industrial base also.

As in many Western economies, the establishment of a car industry did much to help creation of that industrial base.

…

The Thai car tariff policy was a form of blackmail –  either you cooperate by  producing locally parts and material formerly imported, or you go out of business, lose your existing assembly plant and lose your Thai market  foothold.

It was crude, but it worked. 

European and US makers, especially those without links into Thailand’s sinicised society (Thai economy has a strong Chinese-related presence), gradually folded their tents and left.

…

Next move was subsidies for exports. This gave the producers the export volume allowing them the scale economies to be competitive in world markets.

And so in the space to around thirty years Thailand transformed itself into not just a competitive car maker but a maker of many other goods, some using the industrial base created by the automobile industry.

3. A Model for the Rest of the World

I only saw part of this remarkable development. 

But what I saw was enough to impress me:

1.  Japanese technicians brought in for special projects working side by side with Thai workers, making sure skills were transferred.

2. Thai workers gradually rising to technician and overseer status.

3.  The beginnings of the all-important industrial base beginning to emerge.

From start to finish it was an organic process, with supporting industries gradually emerging and with the Japanese parent company promoting the output of the Thai factory almost as their own as the finished product moved onto world markets. 

The Japanese parent company would also provide the high-tech products needed for global sales. 

At the maximum Thailand was exporting around two million vehicles a year, reduced now to one million as markets sag and competition grows.

But meanwhile the industry is also supplying a rapidly growing domestic market as income levels rose.

4. The Market as a Factor of Production

The Thai experience should force a revision of economic theory.  

The textbooks tell us the standard factors of production – finance, skills, labour, materials – are needed for economic development.

Without these factors, production cannot happen.

Well-meaning donor countries often try to provide these factors, without success.  They blame lack of success on the so-called transfer problem.

But what Thailand shows is that the domestic market is also a factor of production.

Provided there is a domestic market big enough to attract foothold-seeking foreign investment, then with smart tariff policies almost anyone can trigger the process of efficient production, even without the other factors.

True, in this Thai model, a market big enough to encourage foothold investment is the key factor, since sales at first will have to be restricted to the domestic market.

But anyone who has a domestic market big enough to attract that investment can with the right tariff policies eventually gain the technology-intensive investment and products usually available only in  advanced economies.

…

True, car buyers in the initially protected domestic market will have to pay more than if that market was unprotected. 

This upsets our laissez-faire market advocates.  

What they do not realise is that the extra price car buyers pay is, in reality, a very effective and temporary subsidy for the creation of an efficient car industry, able in the future to provide them with better and cheaper cars, and able even to export. 

And that industry in turn encourages the emergence of many ancillary industries. 

Even the industry needed to produce the glossy pamphlets needed to sell the cars can be considered as one of these ancillary industries.

Handled properly, higher tariffs on imported vehicles is a very small price to pay for creating a major industry in a formerly backward nation.  

…

Today the industrialised North is overwhelmed by problem of economic refugees from Latin American and African countries. 

If those countries could be persuaded, or allowed, to follow the Thai model the problem would gradually disappear.

If lacking market size, these countries need only to combine with adjacent economies in a customs union to create a market big enough to attract the number of foothold-seeking foreign investors needed to get the model working.

All they would then need are the planners to handle the tariff policies needed to make the plan work. 

That should not be too difficult, especially if the goal is an end to global poverty and under-development. 

…

But do not expect to see any of this in the textbooks.

Industry policies have been taken over by laissez-faire purists, or by politicians using tariffs indiscriminately to support industry favourites or industry zombies. 

The idea of using tariffs from the start to guide industrial development seems beyond comprehension, except in Thailand.

But it would have been front and centre in my ANU thesis, if it had not been for the many obstacles in my life at the time.

5. The Australian Car Industry Disaster 

Later working in the Australian government I saw precisely how a car industry should NOT be developed.

Canberra got the first step right – a high tariff on completed vehicles to encourage local assembly.

But parts and materials also ended up being imported at high tariffs or being produced by inefficient firms in Australia with tariff protection.

The result was not only a high cost product. Many consumers, doubting the quality of the domestic product, preferred to continue to buy imported complete cars, despite the high tariff.

Combined with rising wage costs, and lacking complementaries, the system collapsed – to the point where even the former successful postwar maker of the Holden car went out of business.

Weeds now grow profusely in the area near Adelaide set aside as the car-manufacturing industrial zone of the future.

Ancillary industries hoping to serve the  promised car producing business have disappeared.

…

Working in the government I had to close my eyes to the unfolding disaster. 

And yet Australia would have been the ideal nation in which to take advantage of foothold manufacturing investment – though as I explain later, with restrictions and other conditions imposed on those allowed to gain that foothold. 

Canberra now has the bizarre illusion it can restore Australia’s industrial base by making nuclear submarines.

Meanwhile we now have a situation where a former backward economy (Thailand) can export cars to Australia.