Monday, 13 October 2014

Three strikes, and you're - still going....

In a previous post I mentioned that Australia's Competition Policy Review had put a torpedo into the side of 'national champions' - requiring or allowing mass consolidation of an industry to produce what will supposedly be a more internationally competitive player.

And last week, I'm pleased to say, the drifting hulk took another blow as Australia's Productivity Commission got it amidships with another one.

The occasion was the Commission's report on dairy manufacturing (pdf) - the latest in an industry series on 'Relative Costs of Doing Business in Australia'. There's lot of interesting stuff in the report, including the short but informative Appendix B down the back on 'Economics of dairy markets',  but for me the highlights were the bits where the Commission responded to submitters arguing that Australia should go the Fonterra route (these are all on p3):
the Australian dairy industry is a price taker on global markets and has no capacity to alter this, irrespective of the structure of the industry. A belief that any single Australian dairy company could exert market power is not consistent with market realities
the emergence of a dominant manufacturer is not a prerequisite for developing distinctive Australian branding for dairy products
there are potential risks associated with highly concentrated industry structures if the overall performance of the industry is linked with one company
Fonterra-like arrangements are not necessary to ensure that scale benefits at the plant level are realised — indeed, there is considerable evidence that Australian dairy manufacturers are taking advantage of scale benefits where it is profitable
And the Commission wrapped it up on p8 with this:
...industry participants are best placed to balance the various tradeoffs and commercial considerations they face (such as between scale and transport costs). Other than where legitimate competition concerns are relevant...the most beneficial dairy industry structure for Australia will be determined by the market place. Attempts by governments to ‘second guess’ market outcomes to achieve a particular industry structure are fraught with difficulty, and likely to impose net costs on the industry and the community more generally. It does not require much imagination — or experience with price setting by government — to envisage highly problematic judgements in setting an Australian price (or prices) for guaranteed domestic milk supply, as occurs today in New Zealand.
The Commission also quoted (pp115-6) from a recent speech by Rod Sims, the head of the ACCC, where he said:
We are seeing a return to calls for ‘national champions’ in Australia. It is, of course, terrific when companies out compete their rivals and take on the world. The concern is when they call for restrictions on competition at home so they can better compete on the world stage. The argument is a contradiction: if you cannot beat your rivals at home how can you hope to do so overseas? Firms involved in cosy oligopolies or oligopolies in Australia are unlikely to succeed on the world stage.
So it looks as if the old rustbucket SS National Champion has now taken three hits in a row. Unfortunately, if past experience is any guide, it will manage to struggle back to port, get patched up, and in due course set out again on another hopeful journey.

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