A number of economists, including the blogosphere’s own John Quiggin and Nicholas Gruen, today released a letter in Canberra calling for a new enquiry into the financial system.  As Bernard Keane observes in Crikey, there are much more pressing issues associated with finance than can be encompassed by a ‘debt truck’ (or, to be bipartisanly sceptical, a ’saving jobs truck’). Apply for truck finance. Among the suggestions for items that should be considered by such an enquiry is the establishment of a “People’s Bank” utilising the infrastructure of Australia Post. The economists’ worry is that there is decreasing competition in the banking and finance sphere, driven in part by the consolidation of market power attendant on the GFC and facilitated by some of the policy responses of the Rudd government.

No doubt, as with most of the measures taken to increase competition in the interests of consumers and citizens, the usual suspects will find some reason to decry “government interference” or whatever. Such are the contradictions of neo-liberalism. The ideological patter is all too often a screen for a sort of dirigisme that supports the interests of big business above all others. We’ll see – surely no one could object to these important matters being canvassed in an informed and wide-ranging enquiry?

Back the debt truck up — we need big ideas like the People’s Bank

by Bernard Keane

Back at the start of the year I suggested the economic crisis had taken us into a new world where the role of government had been transformed, and hoped that our best economists should start thinking about where we go from here.

Today several of our best economic thinkers from across the ideological spectrum did exactly that, with an open letter urging a comprehensive review of the Australian financial system ?—?and how it interacts with those across the globe.

The timing couldn’t have been better, coming the day after Malcolm Turnbull revived the debt truck from the early nineties and the ALP ?—?who had evidently been waiting for just such a moment from the Coalition ?—?replied with the clunkier “Supporting Jobs Truck”, which presumably hasn’t been donated by John Grant. While our politicians mess about with trucks, there are pressing issues to deal with.

There are a couple of key issues identified by the economists that have so far not received the attention they deserve. One is that the collapse of the residential mortgage-backed securities (RMBS) market ?—?in essence, non-major bank lenders ?—?has indirectly put pressure on business lending, and particularly higher-risk business lending, because the big banks have moved to fill the gaps left by the RMBS market. This goes, as the Prime Minister would say, to the vexed issue of whether bank capital costs really have increased, as they claim.

Another is that it is not merely global capital markets that are interconnected, it is government policy that is similarly interdependent. New policies already implemented, and being now developed in other countries will have significant impacts on the Australian financial system, but we don’t as yet have any comprehension of the nature of these impacts ?—?and no process for doing so.

Above all, they worry that it may have been good luck rather than, or in addition to, good management that meant the Australian financial system was relatively safe from the sort of disasters that beset the American and European systems. How will we fare next time?

The letter raises fourteen specific questions, each of them meaty issues. There is plenty to alarm the big banks, but the most disturbing will be a suggestion that consideration be given to a basic financial service based on existing Government infrastructure such as Australia Post.

In particular, the group wonder whether there is a role for a publicly-owned entity like Kiwibank in New Zealand, which operates from post offices and participating retailers, but offers both deposit-taking and lending, including business lending.

A more minimalist option would be the establishment of a deposit-taking entity that invested in the Future Fund. That would increase competition for deposit interest rates, whereas a full Kiwibank model would challenge the big banks across most of their activities. It would require significantly greater infrastructure and expertise than a simple deposit-taking entity, but not necessarily need to replicate the full branch-based structure of the major banks.

The proposal flies in the face of what was accepted wisdom before September last year; now, however, even in Australia government is deeply enmeshed in the financial system via the bank guarantee and its own efforts to prop up the RMBS market (not to mention the stillborn ABIP proposal).

It merits serious consideration because the long-term project ?—?pursued by both sides of politics ?—?to maintain competition in lending in Australia is failing. It depended on the availability of externally-sourced capital for the RMBS market, which was fine while the world financial system was spilling over with finance but ended the moment the crisis hit ?—?especially after the bank guarantee massively strengthened the hand of the major banks over what was left of the non-bank lending sector.

Now we are left with a true oligopoly, operating in a manner indistinguishable from a cartel and unable or unwilling to reduce business lending rates.

It’s hard to see what downsides there are for the Government in conducting the sort of inquiry urged in the letter. It has handled the triage stage of the financial crisis very well. Now is the time to take a step back and consider an overarching strategy. As the Prime Minister noted in his comments overnight in Germany, managing the recovery sustainably will be as challenging as managing the crisis itself.

How long until the Government is again confronted with one of the banks unilaterally raising interest rates, particularly for business lending? The problem of Australia’s banking oligopoly needs a long-term solution.

Crikey understands that one of the Wallis Inquiry members, Prof Ian Harper, also strongly supports the idea of a new inquiry.

As Christopher Joye told Crikey, “…the financial world has changed more in the last 13 years since Wallis than it has in the last 40 years… The key message of the letter is that it would be a massive mistake for the politicians and bureaucrats to persist with the self-congratulatory hubris. The fact is Australia was very lucky to skate through the crisis unscathed. Our system is good, but also has many glaring flaws.”

Something for the politicians to think about while they’re playing with trucks.

For Tata Motors the recently unveiled World Truck is significant. Addressing the medium and heavy tonnage categories, which have long stamped the company’s identity, the new range has Tata Motors standing tall among big players. “We are t he world’s fourth largest in trucks,” Ravi Pisharody, President (Commercial Vehicles Business Unit), says. The high sales were never in dispute. What used to be glaring in that elite world was the difference in vehicles. The emerging market character of Tata with its entrapment of low price points showed in the bare design, low technology and poor comfort that graced product line-up. The ruling economics did not even approve of a dedicated bus chassis.

Following Tata Motors’ Rs 500 crore-loss in 2001 and the arrival of Ravi Kant at the helm (he is now non-executive vice-chairman of the company after Prakash Telang became managing director in June 2009), the situation changed. Ace, the mini truck, showed what a tangy combination of innovative engineering and astute marketing could do. The range of bigger trucks was partly refined in 2002 through the EX Series; Daewoo’s commercial vehicle business was acquired in 2003 bringing the Novus medium and heavy trucks aboard, dedicated bus chassis and body built buses were introduced in 2005 and finally, there was the bus joint venture with Marco Polo in 2006. Yet, despite all this, mainstream Tata trucks continued to be poor cousins compared to foreign brands which had entered the Indian market to low volumes. As ever, Tata had the dominant numbers and relevant price points well covered. What it lacked was a truly modern flagship to showcase the stature that matched its volumes.

In retrospect, the bridge product was the Novus heavy truck, selling in India since December 2005. It represented the modern Tata truck till the World Truck was unveiled in late May 2009. The new product ranges in gross capacity from 10 tonnes to 75 tonnes, straddles 150ps-560ps engine horsepower, offers high driver comfort and is modular, thus capable of over 200 models across various applications. Fit and finish have improved courtesy learning from the company’s car division. Similar car industry habits show on the component sourcing front. Looks-wise, the World Truck is reminiscent of the Iveco Stralis. Officials say this has more to do with the European studio involved in design and less to do with the Tata Motors-Iveco dialogue. The old price point obsession has been replaced by life cycle cost. In its fullness, this paradigm embraces the cost of owning, operating and maintaining the truck and juxtaposes it with the consistent revenue from a truck that stays running.

To be fair, the media would recall life cycle cost as a Volvo-promoted sales pitch in the Indian commercial vehicle market. It is not that local companies didn’t have it. Saddled with hugely expensive products to sell in India, the Swedish giant had to consciously articulate it as merit where others chose to bundle everything into price point. The big difference now is that the language of life cycle cost is being spoken by the country’s biggest truck maker with a near 65 per cent market share. “We aim to have the best life cycle cost,” Pisharody says.

Unlike foreign players with similar products, Tata brings to the table intimate knowledge of Indian market conditions, vast reach and service infrastructure. Provided quality is at par, its ability to deliver attractive life cycle cost would be stronger than that of competition. Further, even as it talks of modest sales volume for the World Truck to start with, the company knows it has a leadership position to preserve. The clearest indication of this is the gross capacity range; 75 tonnes at heavy end and into intermediate truck domain of 10 tonnes at light. There is also a choice of engine and power train for price flexibility. Thus while we may have seen a typical heavy hauler in launch photos, the World Truck is actually a concept that can track specific applications right into lower tonnages. “Three thoughts shaped the product – we wanted to service various applications; we wanted to be the market leader and we wanted to improve our performance in markets other than India,” R. Ramakrishnan, Head (Sales & Marketing – Medium and Heavy Trucks), says. The company is bound to chase volumes for it has to recoup project investment and acquire scale for the otherwise expensive World Truck. Interestingly, this need not speed up model replacement as carrying cost for older models is low. That would mean a formidable line-up across price points staring at competition. But will all this fetch sales just now?

Currently the economy is tackling a slow down and truck sales have been hit. While India’s total commercial vehicle sales dipped 21.6 per cent in 2008-09, sale of medium and heavy trucks declined by 33.16 per cent. Unlike light vehicles, sale of heavy trucks is closely linked to GDP trends, road development and infrastructure projects. The media has reported 4,000 units as FY10 sales target for the World Truck (Tata does not confirm this). It compares with the over 5,100 units in eleven years for Volvo trucks sold in India. Unlike in flashier cars, truck marketing is usually low-profile and relationship-based. Tata’s priority would be to upgrade existing customers, especially fleet operators. It is exploring financing schemes such as long-term loans and operating leases. Product price hasn’t been disclosed and the full marketing strategy was forecast to play out by 2010. “Our first priority is the domestic market,” Pisharody says.

Competition is alert. In India, Volvo has expanded to include a joint venture with Eicher; MAN has tied up with Force Motors, Navistar International has partnered M&M, Daimler, previously aligned with Hero, would now invest alone, Scania is distributed by L&T. Not to mention Ashok Leyland and AMW. As and when medium/heavy truck sales pick up, the non-Tata numbers will grow. The same logic would work favourably for Tata, abroad. In new markets it will gain, in long-standing markets it will have to fight to gain. Companies are growing tentacles everywhere. Sample this: South Africa is a major truck export market for Tata. Volkswagen’s Brazilian truck unit ships vehicles there. This unit was bought by MAN, which has equity held by Volkswagen which in turn has equity in Scania along with MAN. Both Scania and MAN face Tata in India. Nothing is simple in such an octopus world; probably why Tata never shuts the door on alliances.

By - Shashi Ashiwal &  Shyam G. Menon