Abbott must dodge an auto explosion

A unified voice from the Coalition on auto subsidies is desperately needed or the party's policy engine could blow up before the next election.

The Coalition's decision to apply conventional market-based thinking to the automotive industry is starting to look like an illegal bottle of nitrous oxide in a street hot-rod – rather than help win the drag race to the 2013 election, it threatens to blow up the Liberal Party's policy engine.

Less than a week after the leaking of some details of the Mirabella/Macfarlane review of the Coalition's auto industry plans – namely, its commitment to trim $500 million from the existing Automotive Transformation Scheme – Tony Abbott's policy unit is under growing pressure to continue subsidising the industry at current levels.

Two senior Liberal voices joined the pro-assistance lobby yesterday – Victorian Premier Ted Baillieu and South Australian Liberal Treasury spokesman Iain Evans both urged the federal opposition to remember the importance of auto manufacturing to their states.

While Labor remains publicly united in favour of assistance, the issue is opening deep divisions within the Coalition. Shadow Treasurer Joe Hockey is the most prominent federal figure opposing any change to policy, with Barnaby Joyce so far being the most outspoken proponent of continued industry assistance.

At the heart of the conflict are some major disagreements about what fallout the 'cutting loose' of the auto manufacturing industry would produce. Former Victorian Premier Jeff Kennett has played down the political impact of cutting assistance, saying over the weekend that plant closures would be of concern to "enthusiasts" and "those who lose their jobs."

How quickly we forget – the same Jeff Kennett argued strongly while in government in the late 90s that assistance should remain in place until international trade barriers came down. And they haven't – manufacturing minister Kim Carr points out that import tariffs are 10 per cent in the EU, 25 per cent in China and up to 100 per cent in India.

Carr is also making much of the fact that our subsidies are very low on a per capita basis by global standards – about $17 per person per annum. Spread across approximately 50,000 workers directly employed in auto manufacturing, that's about $7,500 per worker per annum.

Carr would spread that figure further – around 200,000 workers are employed in allied industries, so that would bring the per-worker subsidy down to about $1,500 – probably not far off the value of, say, your average public servant's extra tea-and-biscuit breaks.

The polarising of positions within the Coalition shows no sign of weakening. On the one hand are the free marketeers led by the likes of Hockey and the Society of Modest Members (A cat among the Coalition's pigeons, July 8 2011). On the other are pragmatists including Abbott himself, Ian Macfarlane and Barnaby Joyce, who critics attack for protectionist 'Barnaby-omics'.

Joyce points out that no car in the world is manufactured without some form of subsidy and that taking a pure line on free markets would close down our industry to achieve nothing more than theoretical market purity.

The problem for the Coalition is that muddy thinking abounds – assistance is being confused with subsidy, and dying industries are being mistaken for growth industries.

As EV manufacturer Ross Blade argues today (Why large EVs may cook the planet, January 17), the very face of Australian automotive transport is changing not only to favour smaller vehicles, but to favour electric vehicles (a point Alan Kohler also argued last week – Carr's chance to rev the EV engine, January 12).

Viewed through this lens, the government's Automotive Transformation Scheme isn't really transforming anything at all – the $34 million contribution to Ford's Falcon and Territory production investment is at the other end of the spectrum from the Hyundai Getz vehicles that Ross Blade's company has been retrofitting with electric drive trains.

His company, Blade Electric Vehicles, is about to seek $2.5 million in a capital raising on the Australian Small Scale Offerings Board – chicken-feed compared with the scale of the ATS budget, but part of a growth industry based around lower energy use and carbon emissions.

So perhaps the Coalition’s warring factions could agree that it's not assistance per se that is the root of all evil, but where that assistance is directed. And Falcons and Territorys would seem to be the wrong place. As former foreign minister Alexander Downer wrote over the weekend, "Middle-class consumers would rather pay more for a Volkswagen Golf or a 3 series BMW than buy a Commodore or a Falcon ... if those products were so great, you'd buy them without subsidies. And so would the world."

The other area in which the Coalition needs to rethink the punch-up over free market economics is to look more closely at what a collapsing car industry would mean for the taxpayer.

Dr Chris Wright, a researcher at Macquarie University who spent years studying the collapsed manufacturing heartlands of Britain, tells me that there are two looming costs for the taxpayer if auto manufacturing suddenly falls.

Firstly, the retrenched workers effectively become the government's responsibility – you cannot simply relocate, say, Geelong's auto workers, and the local economies that feed off them, overnight. Geelong would become a depressed Newcastle of Sheffield, to draw UK analogies.

The second cost would be in the gargantuan task of rebuilding a sophisticated manufacturing base when the current resources boom ends (that is, when manufacturers regain some competitive traction as the dollar falls).

Wright argues that it would take decades to recover what we currently have – as Kim Carr points out, only 13 nations in the world can manufacture cars with the level of sophistication seen in Australia.

In Wright's view, therefore, the assistance given to even the large vehicle end of the market is an insurance policy – a way of preserving a hugely valuable asset that we may end up needing sooner than expected if commodity markets falter.

In short, the Coalition must find a unified voice on this issue well in advance of the election. There are strong grounds to argue that the ATS funds are being misspent and that the 'sophisticated' manufacturing sector of the future (whether it be automotive or in 'retooling' to produce other high-end manufactured products) is simply not being built fast enough.

Such a well crafted message could stop the Coalition's policy engine exploding halfway to the next election, and help create a smart Australia that goes on 'making things' beyond piles of iron ore and coal.