The end of the Australian car industry

I thought I had said all I really wanted to say about the car industry, but Toyota’s pulling out has prompted a wave of semi-hysteria about jobs and the wickedness of the Abbott Government in ignoring the needs of workers. Arguments fly backwards and forwards: every country protects its car industry, say some; Australia does more of it, say others. I remember the Gillard Government’s pumping a lot of money into Toyota to produce the hybrid Camry in Melbourne. Indeed Toyota made it pretty clear in 2008 that it wouldn’t produce the hybrid engine here unless the Federal and State Governments came to the party with subsidies, and Prime Ministrer Gillard duly opened the factory at the end of 2012. How much were the subsidies to the car-makers? Heaven knows. As you’ll see below,  Toyota seems to have received nearly $500 million from the taxpayer over the last four years.

I am of the view, as I said last time, that the time has come to accept that with our high cost-structure we simply can’t afford to make cars competitively here unless there are subsidies and a high tariff wall. I’m not much in favour of either measure. Other countries can make vehicles at least as well, and much cheaper, than we can. But I thought that Judith Sloan nailed the issue in a piece she wrote in the Australian a few days ago (12 February). Figures have been bandied around that suggest that the Australian automotive industry is receiving only $US17 per capita compared with $US265 per capita in the US. Take it from me, these figures look wrong.

She went off to the Productivity Commission’s recent report on the automotive industry. It turns out the dodgy estimates are based on a number of faulty premises. First, a highly atypical year is selected — 2009, during the global financial crisis. Second, different types of government assistance — loan guarantees, cash handouts, general industry assistance measures — are simply lumped together and added up. Third, the figures are presented in per capita terms, an approach that makes no sense at all. The only sensible measure is in terms of per vehicle produced.

 And it looks like this:

auto-industry-assist

And what happens when you do that? Australia has subsidised the manufacturing of vehicles to an extraordinary extent — $US1885 per vehicle, compared with Sweden ($US297), Germany ($US206) and the US ($US166). In other words, Australia has the highest rate of budgetary assistance of the seven first-world countries listed.

So this [calculation] puts paid to this argument. The Australian government as well as state government have bent over backwards to bribe the foreign multinationals to continue to produce cars in this country. We now know that Toyota Australia has received nearly $500 million in the past four years. Given that there are some 2500 Toyota employees, this works out at $50,000 a worker a year

Some think that Toyota was going to go anyway, even before Ford and Holden make their own decisions, and Ford at least had flagged that possibility some years ago. Maybe they were, and maybe they weren’t. But surely the end was always in sight. There were once seven manufacturers producing cars in our country. The Rootes Group (I once had a Humber) merged with Chrysler in 1965 and no more Rootes Group cars were produced after 1973. Chrysler then merged with Mitsubishi, and the last Chrysler Valiant was produced in 1981. Mitsubishi stopped making its own cars in 2008.

My Dad had an Austin 6 from 1934, and the Austin Motor Company built a state-of-the-art factory in Sydney in 1950. In 1954 Austin had gone, merged into the British Motor Corporation, which then disappeared into British Leyland in 1969, which had itself gone by 1975. The Button Plan of the 1990s was intended to keep the four remaining manufacturers going, but to gently phase out subsidies. If you look back at it all, the car business didn’t ever seem to make anyone lots of money, but it did create jobs.

The car-makers are dismantling themselves, and have done so in the past whenever the returns just didn’t add up, and no one was prepared to sweeten their situation. What was the right time to phase Australian-made cars out? In my view there never was such a time, and politically you couldn’t declare that the industry would be gone in, say, ten years, and that arrangements would be made to retrain workers. The opposition, from unions, workers, cities and state governments would have been enormous.

The way it has happened is, I think, the way it had to happen. One day recently, the cost of keeping the industry going just got to be too much, and the Federal Government spat the dummy. It was probably easier for a Coalition Government to do it than a Labor Government, but even the latter would finally have had to say, ‘Enough is enough’.

Now we are bailing out farmers in drought-stricken Wherever, though Prime Minister Abbott seems to have the drought-breaking skills of Bob Hawke, who did that very shortly after he took office in 1983. I wonder what Cabinet-room arguments there will be about this undertaking, given what has happened to Toyota and SPC-Ardmona. I’ll write a piece about it in due course.

Join the discussion 12 Comments

  • Alister McFarquhar says:

    “Figures have been bandied around that suggest that the Australian automotive
    industry is receiving only $US17 per capita compared with $US265 per
    capita in the US. Take it from me, these figures look wrong.”

    So what would look right?

    Can any level ofsubsidy be justified

  • David says:

    Agree.

    And while we are at it lets stop subsiding farmers as well.

  • Walter Starck says:

    Re: subsiding farmers-

    Farmers have been burdened with ever increasing demands, restrictions and fees imposed by government. They also face a tax regime which severely impairs their ability to set aside profits in good yeas. They must then borrow heavily to get through bad years and most are now saddled with high debt. Their numbers have decreased to about a quarter of those a few decades ago. A recent survey found Australia had the highest rise in food prices over the previous seven years of any OECD nation. It was double the average rate of increase.

    Without subsidies to farmers our already crippling food price increases would only accelerate. Perhaps this isn’t such a bad idea. A food crisis would certainly wake up the electorate to what we have been doing to our primary producers. If nothing else it should serve admirably to demonstrate to the inner city ecologists their place in the food chain and the impact of ill-informed environmentalism on their own ecology.

  • DaveW says:

    Don,

    You seem to view the automotive industry strictly as a consumer industry. In that case, I do agree that subsidies would be difficult to rationalise. However, I think an argument can be made that maintaining the machinery and skilled worker base to produce motor vehicles in Australia also has a national security component and in that case subsidies seem more relevant. I would argue the same for help to the farming sector – food independence should be a national defence priority.

    One could argue that no country is actually self-sufficient in automobile production given the complexity of modern cars. For example, even in the USA the rare metals for those hybrid batteries and the silicon chips for the computers probably come from elsewhere. However, having the basic skills and infrastructure in Australia should act as a buffer for a range of potential international crises, so I hope the people making these decisions are thinking out side of the box.

    Cheers,

  • Peter Donnan says:

    The automotive industry is on the slippery dip in Australia. Imported cars, with no subsidy, seems the future.

    The real question now is what sort of industries and occupations represent the best for the future. Some say education: invest in high quality education and training; others are interested in alternative energy manufacturing (a definite high point on this blog site); others in agriculture; coal seam gas etc.; hospitality.

    Given that we are not a low-wage economy and will lose out in a competitive sense to more cheaply produced goods and services from overseas, how do we grow our industries etc. Up-market, innovative, boutique? I would have thought IT firms might represent good value on the ASX but a firm such as SMS Management and Technology – with low debt and a good customer base – is going through a sluggish cyclical phase and so are many others.

    Where is your crystal ball, Don? The automotive industry is moribund but where to now?

  • GenghisCunn says:

    Don, it was obvious many years ago that Australia could support, at most two car firms. If
    support had been withdrawn, the industry would have rationalised, and we might today have two viable firms than three disappearing ones. This isn’t said with hindsight, I argued this more than twenty years ago.

    Peter Donnan, who knows where the jobs will come from? What we do know, is that when resources are withdrawn from nonviable activities, opportunities open up. Government’s role is not to identify what they will be, but to provide an environment in which it is easy to start and expand businesses, by removing onerous regulation and taxation and barriers to
    entry.

    DaveW, without the over-the-top wages and conditions of the car industry, many more would have been employed in other skilled industries, the possibility of which was crowded out by the heavily subsidised, wage-leading car firms. In terms of national security, a faster growing economy resulting from removal of protection from moribund funds will provide more resources to apply to issues of security. As for food security, we
    export about 60% of what we grow – we don’t need to prioritise “food independence,”
    we have more food per capita than any other country.

    Cat on keyboard, tea spilt – more later!

    • DaveW says:

      Hi Genghis,

      I’m not exactly disagreeing with your main premise, but my impression is that Australia has been very poor at promoting value-added industries, so I don’t accept your overly rosy picture of where that money might have gone. More likely Labor would have wasted it on something else. The problem isn’t really per se subsidies, it’s how to use the money to promote National goals without creating inefficiencies like the auto industry, wool, etc.

      We may export 60% of what we grow now (why don’t we process more of it before we export it?), but that may not be always the case. A few new wheat diseases, more drought, and stronger foreign (subsidized) competition could change all of that and the trend is definitely away from productive farms and into service jobs in the city. I’m watching dairy farmers in Queensland between a rock and a hard place at the moment with the artificially low prices in the supermarket, drought and rising energy costs pushing many dairy farmers to the brink. I’m sure that New Zealand milk is fine, but I’d rather have it locally produced and in the long term I think that is best for Australia.

      Cheers

    • Peter Donnan says:

      Hullo GenghisCunn,

      Your philosophy is being endorsed by the present LNP government but it will be interesting to see what unfolds with Quantas and with farmers in drought afflicted areas. A pure free-market approach would leave them to their own devices if the government provides the right environment, with removal of superfluous regulation, and they still can’t make a go of it.

      Onerous taxes? I still like to see Google, Apple et al., chip in some meaningful tax contributions to the locals where they do business.

  • GenghisCunn says:

    Don, you might recall that about twenty years ago, the abominable industry minister John Moore halved a long-planned cut in tariffs because the car manufacturers pleaded that they would not be able to compete with imports. The firms then immediately put wages up by 20%+, putting pressure on other employers to give non-viable wage increases. I was due to meet Moore (in a venture capital context) immediately after this, I was so angry I decided that I had better stay away!

    Walter, subsidies for farmers? No, the same issues apply as with any
    subsidies. I sent a pertinent letter to The Australian recently, which they didn’t print: “There is a simple rule for government bailouts – “Just say no!” (“Hockey ‘dragged kicking and screaming’ to bailout rules,” 14/2). If the government imposes rules which make one company face higher costs, change the rules. If other governments support their firms,
    fine, we’ll pay less for their goods and services, our costs and wage pressures
    will be lower. Is the business fundamental to the economy? If so, someone will surely meet the demand if it is viable to do so. It doesn’t have to be the existing mendicant, they can cut their losses and sell, the newcomer will have lower capital costs and will, if we have sensible industrial relations legislation, employ people on terms and conditions which allow it to make a profit.”

    Almost all of the profits in the agricultural sector come from a small proportion of the firms. Most farms are below a viable size. As with the car industry, without support, rationalisation would have ccurred years ago, and agriculture would be far more productive and profitable. Here are two more recent unpublished letters: “Industry Minister Ian
    Macfarlane is a slow learner. He is considering cash grants to induce firms to make investments which they would not otherwise undertake (“Unions seeking ‘over-the-top’ worker payouts,” 20/1). Where there are viable opportunities, with returns exceeding any alternatives, firms will take them. If they will only move with government funding, then the
    projects are not viable. The car industry is only one example of the woes which arise from governments diverting industrial development into non-viable activity. Such policies can only damage the economy.”

    “The worst aspect of Bill Carmichael’s argument for opening up our domestic markets is that it has to be made at all (“Progress in international trade begins at home,” 31/1). The case was made by Carmichael and others more than 30 years ago, and has been continually reinforced since by the success of market-opening measures. John Howard had a chance to educate the public on this, and blew it with the fatuous remark that “We have to let foreigners sell into our markets so that they will accept our exports.”
    How much better if he had explained that our prosperity depends on international trade, that we sell overseas in order to be able to buy the vast range of cheaper and superior products on offer globally, and that openness to trade spurs Australian firms to be more innovative, customer-responsive and productive. I think that Howard actually understood that. Let’s hope that Tony Abbott both understands and acts on that understanding.”

    I’ve seen pleas for assistance from many industries, all claiming “special circumstances” of the particular industry. There were never any such circumstances.

    (If you read The Australian’s letter page, you’ll know me as Michael Cunningham, West End, Qld.)

  • Don Aitkin says:

    There is a lot of infesting stuff in the comments, for which many thanks. I don’t have solutions, and indeed have become suspicious of proposed solutions. My guess is that the skilled workers will find work fairly easily, while the production-line workers won’t. As I said in my piece, we didn’t proceed to produce more aeroplanes when the crunch came. Has Australia suffered?

  • Don Aitkin says:

    Read ‘interesting stuff’ for ‘infesting stuff’!

  • […] short time ago I foreshadowed a post on the Government’s possible rescue package for farmers and farming communities suffering […]

Leave a Reply to Don Aitkin Cancel Reply