Can Australia's car manufacturing industry be viable?

In Australia it is primary industries – agribusiness and resources – that receive the lion's share of taxpayer assistance, perhaps in proportion to the importance of the primary industry sector to our economy. This totals about $1.5 billion annually, in the forms of direct rebates and excises – with about $1 billion of that going to the mining sector.

The worst-case scenario flowing from any future failure of the Australian car manufacturing sector is probably best seen in the recent report by the Monash University Centre of Policy Studies, which was commissioned by the Federal Chamber of Automotive Industries (the Australian car industry's official lobby group). The report claims the $500 million in direct annual taxpayer cost to support the industry is offset by $21.5 billion in economic activity – the flipside of which is a $21.5 billion loss in terms of economic activity, investment and welfare cost. The report also says the industry supports as many as 200,000 local jobs.

As a proposition, 'spend $500 million, get $21.5 billion back' seems impossible to dismiss. However, the Australia Institute's Richard Denniss says the huge multiples stated in the FCAI report are at best "disingenuous" and at worst, misleading. Mr Denniss says the amount of $21.5 billion is heavily leveraged against the purported value of innovation and technology transfer to related industries, like defence. He claims real economies don't work like that.

The truth concerning the economic benefit of the automotive industry is probably somewhere in the middle ground. Nobody disputes that the failure of the automotive manufacturing sector would have a significant impact on the economies of (in particular) Melbourne and Adelaide.

Production data for the first half of 2013 from the Paris-based International Organisation of Motor Vehicle Manufacturers place Australia 32^nd among the top 40 car makers. Australian car makers built 80,370 vehicles in the first six months of 2013 – ahead of Austria, Portugal, Slovenia, Egypt, Ukraine and Serbia.

Swedenis just ahead of us. With a population of around 10 million, the Swedes built 81,163 cars in the same period, with a total government subsidy of US$334 per head – one of the heaviest per capita subsidies on earth.

Yet car making hasn't exactly worked out that well for the Swedes. Ford ditched Sweden-based Volvo as it struggled to stay afloat (successfully) during the Global Financial Crisis, and the company was subsequently acquired by the Chinese automaker Zhejiang Geely Holding Group (most probably as a strategic investment for the brand's prized safety technology). Saab, the other key Swedish brand, was progressively acquired over several years by General Motors with the stated intention of becoming a Mercedes-Benz competitor. But GM fire-saled Saab during the GFC, as GM also struggled to remain liquid (unsuccessfully). Saab subsequently went bankrupt.

On sales fundamentals, the Australian car industry is failing. The downward trend is established and steep. It has clearly been failing for at least a decade. Obviously, government/taxpayer support is not a cure. The major manufacturers are entrenched, building cars that, increasingly, fail to sell. The dollar and also Australian labour costs, remain high, reducing the viability of exports. Ford's post-2016 departure, and Holden's likely decision to do the same, will place incredible pressure on Toyota – the probable 'last man standing' among our local car makers. Toyota's decision to continue – or not – will probably be based as much on pride as it is on economic fundamentals. But ultimately, economics will prevail.

We are seeing the last days of local car making in Australia, and the economic blowback from its departure will be significant.