What investors can teach politicians

Why governments must let the car industry die and save the reef.

There was news this week that the health of the Great Barrier Reef had been downgraded to ‘poor’ by UNESCO and runs the risk of being denoted a “World Heritage Site In Danger”, while the federal government significantly lengthened deadlines for actions that would stave off further damage.

That it comes on the heels of the closure of manufacturing sites across the country – most recently the decision by US car maker Ford to cease production in 2016 – should provide a strong contrast for policy makers in particular and Australians in general.

A winning formula

You see, investors have known for decades that one of the best attributes a company can have is a sustainable competitive advantage. Possession of such an attribute provides a critical edge for a business – it’s something you have that no one else has, and which can be maintained over time, allowing a business to grow and flourish.

The most obvious competitive advantage is a brand – think Coca-Cola, Vegemite and Band-Aid, for example. The aspirational power of generations of Coke advertising has left the company head and shoulders above the competition. The inherent Australian-ness of Vegemite means the company’s advertising jingle is running through your head as you read this, and my guess is that only 2% of Australians ask for the generic ‘sticking plaster’ when they cut themselves or their children graze their knees… the rest of us look for a Band-Aid.

There are other competitive advantages, too. The supermarket duopoly of Woolworths (ASX: WOW) and the Wesfarmers (ASX: WES) owned Coles have store networks that almost completely lock out the prospect of a new competitor arriving in Australia, so-called ‘network effects’ make Seek’s employment website a must-have part of any employer’s recruitment arsenal and Google’s search engine benefits from the sheer number of queries it handles – making itself iteratively smarter over time, and therefore its search results ever more relevant.

Fighting a losing battle

So what does this all have to do with the reef and Australian manufacturing?

The answer is pretty simple. In the rapidly globalising world, Australia simply has no place in commoditised manufacturing, where the low cost of labour elsewhere gives those countries a competitive advantage.

Not only do employees in other countries work for less, but global products are built in their factories, giving overseas manufacturers both lower hourly wage costs and the benefits of scale. If you’re producing a car for much of Europe, the US and Asia, the sheer number of cars you make allow for lower per car costs.

That’s not an issue just for auto manufacturing, but for any significantly mass-produced consumer product that has a potentially worldwide market. That means everything from razors and canned tomatoes to consumer electronics and white goods.

In short, if the ‘Made in Australia’ label doesn’t allow the maker to charge a higher price, there’s little hope for that’s product’s longevity while it’s made here.

Focus on your strengths

Which takes us back nicely to the Great Barrier Reef. If Australia was a company, an investor would want the CEO to sit his executive team down and ask ‘what can our company do that others can’t and which allows us to enjoy rising profits over time?’

No one around that hypothetical table would suggest manufacturing. Some would suggest mining – and there’s some validity there. It’s a one-off activity – you can’t dig up the same ore twice – but we do have an impressive natural resource base that is disproportionately abundant here.

Sooner or later, lightbulbs would go on above the heads in that room. Australia’s competitive advantage is, well, Australia. Call it the ‘shrimp on the barbie’ factor – the things about our country that are unique are our physical and cultural attributes that make Australia appealing to visitors.

Our laid back attitude, indigenous culture, natural flora and fauna, beautiful beaches, rivers, harbours and outback are just some of the reasons international tourists flock to our shores. And, yes, the Great Barrier Reef.

These are the things that define ‘brand Australia’ – things that only we can offer, or that can’t be easily copied by the presence of scale or lower cost workers elsewhere.

Backing winners

Now, I’m not suggesting that we become a one-industry economy – that would be ridiculous. But while we argue over subsidies to car companies and steel businesses, we’re allowing the Great Barrier Reef to become degraded.

If we took the millions of dollars currently being spent to prop up manufacturing industries that will be forever at a competitive disadvantage, and invested that money where it could deliver long-term gains, the returns could be multi-generational. For example, we could protect the Great Barrier Reef, improve multi-lingual signage in tourism hotspots, make our airport arrival and customs experience the envy of the world, and provide free trams in Melbourne and ferries in Sydney and Brisbane.

We could put marketing power behind Australian wines, education and agriculture and much more – supporting things that are uniquely Australian and for which demand can be increased and higher prices charged. That’s how we improve our living standards in the face of low-cost competition in commodity industries.

Foolish takeaway

As it stands, our country is like an old-fashioned industrial conglomerate. We’re trying to do everything at once, and management time, attention and money is being taken up by a couple of loss-making divisions that are sentimental favourites, while other profitable and sustainable businesses are being starved of the capital that can help them flourish – and with them, the whole company.

Investors would demand that a company take decisive action to back the right horses. It’s time that our manager-politicians of all political persuasions refocussed our national efforts on those things that have the best chance of delivering its investor-citizens the biggest possible economic pie, raising our standard of living in the process.

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Motley Fool investment advisor Scott Phillips owns shares in Woolworths and loves seeing the red desert sand from an aeroplane. 

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