A questionable Holden tune-up

The $275 million question raised by today's announcement of an injection of federal and state taxpayers' funds into GM Holden's car manufacturing operations is whether it is a straight subsidy or a catalyst for significant change in the nature of the business.

If it is a straight subsidy it will simply defer the inevitable, at considerable cost. With the Australian dollar is likely to remain at elevated levels for some years to come, and the size of the domestic market for Australian-made cars sub-scale relative to competing producer nations, it would be a wasteful use of such a substantial amount of taxpayer dollars if it were only a hand-out to buy time and subsidise jobs.

The fact that other countries protect and subsidise their car industries – and GMH's Mike Devereux has been quite candid about the fact that General Motors takes advantage of the willingness of countries to compete on the basis of subsidies – is largely irrelevant.

The thrust of car industry policy in this country since the Button car plan was developed in the mid-1980s has been to create an industry capable of standing on its own feet by improving the quality of its product and developing niches within a consolidated and globalised industry.

Until the global financial crisis and the soaring Australian dollar, the industry – both the car manufacturers and their suppliers – had done a fair job of securing niches within the global industry and their parents' global sourcing and supply chains. The crisis and the dollar, however, have quite abruptly and brutally changed the context in which they are operating.

One could make a case that some government assistance to give the companies time to adapt to the new circumstances is justifiable. One could also argue that protecting the significant intellectual property held within the industry – there are very few countries with the skill base required to design, engineer and manufacture entire cars from scratch – is also worthwhile.

Those cases hold, however, only if the taxpayer funding – and if GM Holden has gained $275 million, Ford (again) and Toyota would be entitled to expect something similar if they put sufficient pressure on the Gillard government – ensures the industry makes a transition to something quite different to what it is today. It can't be just about buying jobs.

Those funds need to secure a new and more secure niche within the global industry, otherwise it would cost a lot less than the $275 million (and a further $35 million directed at component manufacturers) to provide incentives for the industry's engineers and skilled workers to shift to the resource states, where there is a significant shortage of engineers and skilled workers.

GMH says it will directly invest over $1 billion itself in a 10-year program to develop and make two all-new vehicles at its Elizabeth plant in South Australia. It describes the subsidy as "co-investment" and says the return on the taxpayers' investment will be an injection of $4 billion of economic benefit into the Australian economy over the next decade.

Apart from shifting its production to more relevant product, both for this market and elsewhere, one would hope that the scale of its commitment causes the government to look at the other issues affecting the industry – notably Toyota's recent complaints about the culture of its Australian workforce.

The dollar's strength adds to the urgency of lifting productivity, not just in the car industry and its supply chain, but manufacturing industry generally and while workforce productivity is only one element of what needs to occur it is an important one.

The Button plan was an holistic one within a clear long term vision for a radically different industry to the one that pre-dated it. It was interventionist but, in a global industry that is corrupted by tariffs and subsidies, government intervention and direction and the use of incentives to encourage change was justifiable and was ultimately justified.

Circumstances have changed again, probably permanently but certainly for some sustained period. The global industry is even more consolidated, the local market even more fragmented and competitive and economic conditions here and offshore aren't helpful and are unlikely to be for some time.

If the $275 million given to GM Holden, the $35 million that will flow to suppliers and whatever cheques the government might write to Ford and Toyota buy time for the status quo, it will be a waste of taxpayer money.

If, however, it does help create a sustainably viable domestic car industry that is competitive, that is properly plugged into the global automotive industry platforms and that has some form of competitive edge, the decision to make the "co-investment" might ultimately be validated.