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Can Australia's car manufacturing industry be viable?

By John Cadogan - posted Tuesday, 10 December 2013


Australia's car manufacturing industry is a textbook example of long-term government welfare gone awry. In 1970, Australia had a thriving car industry, which manufactured 475,000 cars. The locally made brands included Mini, Leyland, Valiant, Chrysler, Nissan, Renault, and Volkswagen – as well as Holden, Ford and Toyota.

In the 1980s tariffs were cut, ultimately from 57 per cent to five per cent. (Or zero, in the case of our free-trade agreement with Thailand.) Fast-forward to 2011 – just 224,000 cars were made here, and the number of brands shrunk to just three (Holden, Ford and Toyota). Today, local car making is at its lowest level since 1957. We buy more cars from Japan, South Korea and Thailand than cars built in our own backyard.

In the past 12 years, the Australian taxpayer has contributed about $4 billion to the Australian car industry. Holden has received the lion's share – about $2.18 billion, while Ford and Toyota have each received about half that amount.

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The terms and conditions that go hand-in-hand with these grants are not publicly oxygenated. Car manufacturers claim they are commercially confidential – in other words, were they public, competitors, they say, might take unfair advantage. The taxpayer remains in the dark about what guarantees – if any – are contingent upon ongoing government support.

Certainly the manufacturing jobs themselves are not guaranteed. In the early 2000s, Holden employed roughly 7000 workers in its manufacturing workforce. Today, that number is more like 1700, and there is no guarantee of ongoing employment beyond 2016. Job cut announcements have routinely followed government funding commitments in recent years. (As I write this, media speculation is rife that Holden will announce its withdrawal from Australian manufacturing in coming days – most probably withdrawing from local production alongside Ford in 2016, or in 2017.)

Despite considerable taxpayer support, Ford announced on May 28 this year that it would wind up its local manufacturing operations by 2016. (Ironically this announcement was made on the same day Holden launched the VF Commodore.) In the past decade, Falcon sales fell from a high 54,629 in 2003 to just 14,036 in 2012 – a massive drop of 74 per cent. (Falcon's sales peak was 81,366 in 1995.)

Three months after the announcement of the decision to withdraw from manufacturing in Australia, Ford threw a two-hour party at Fox Studios in Sydney at a cost of $4 million. Its sole objective was to talk up the future to VIPs and attending media.

Holden Commodore sales are also suffering a steep decline. A total of 88,478 Commodores rolled off the lot in 2003. By 2012, however, Commodore sales had dropped 66 per cent to 30,532. Commodore sales peaked in 1998, at 94,642 units.

The Holden Cruze, a hastily adapted Commodore 'Mini-me' first built at the former Daewoo plant in South Korea (which is now called GM Korea) is now manufactured alongside the Commodore at Holden's manufacturing plant in Elizabeth in South Australia. The Cruze has been plagued by product safety recalls and quality problems, and although it is a direct competitor to the likes of the Toyota Corolla and Mazda3 (two of Australia's most popular cars) the imported pair manage to outsell the Cruze, each by a factor of three-for-two.

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Despite significant, multi-thousand-dollar price cuts across Commodore and Cruze, and also a 0.9 per cent sub-vented finance offer this year, sales of locally made Holdens continue to fall. Shaun McGowan from www.carloans.com.au says enquiry rates have fallen in line with sales – despite incentives. "We expected to see a blip in enquiry rates in line with lower pricing and other incentives," he says. "It made almost no difference, at least that we could see." Cruze sales have fallen almost 16 per cent this year, and Commodore sales are down by 11 per cent.

The key question is: is taxpayer funding of the Australian car industry a mechanism that turns the beneficiaries into a lazy and quasi-protected species, or is it a smart way to maintain engineering skills onshore, and significantly boost the economy?

Proponents of funding say the real cost is 'just' $18 per head, per annum – compared with the USA ($96 per head), and Germany ($90 per head). This, though true, ignores the simple truth that without car manufacturing the German economy would collapse, and America's would take a massive hit. Australia's would not. Canada, France and the UK all subsidise their car industries much more heavily, per capita, than we do.

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 32nd 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.

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About the Author

John Cadogan has worked for the past 20 years as an automotive journalist in print, TV and radio.

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