Australia's ailing car industry in desperate need of a saviour

Government support for local manufacturing brings positive spinoffs for the economy, or so the argument goes. But now critics are asking if the cost is too high. Gareth Hutchens reports.

If you had the power to pull the plug on Australia's car industry, would you do it? That question became a live one this week after the country's biggest car maker, General Motors Holden, shocked everyone when it announced it was shedding an eighth of its local workforce.

It said it planned to cut 400 jobs from its assembly plant in Adelaide and 100 jobs from its Melbourne design operations. It has a total workforce of 4000.

Holden managing director Mike Devereux blamed the decision on falling domestic car sales, a consequence of the stubbornly high dollar and cheap imports.

"The Australian automotive industry is heavily trade exposed, that is no secret - the appreciation of the Australian currency means that making things in this country is 60 per cent more expensive than it was 10 years ago," he said.

The announcement came a year after the company received $275 million in state and federal government help, prompting Opposition Leader Tony Abbott to say that, if elected, he would scrap the system of government subsidies and refer the matter to the Productivity Commission.

He was not alone. Former Reserve Bank board member Warwick McKibbin said that the Productivity Commission ought to consider if the so-called positive spinoffs from the industry - such as design and engineering skills and knowledge - could be better found elsewhere.

The big problem, according to economists, is that no matter what our governments do, the industry cannot generate profits without billions of dollars of help.

The issue has them asking: how much are those positive spinoffs really costing the economy?

The car industry employs more than 47,000 people, which accounts for 5 per cent of the total manufacturing sector in Australia, according to the Bureau of Statistics. That number does not include repairers and maintenance workers, retailers and wholesalers.

The country's three car makers - Holden, Ford and Toyota - are the beneficiaries of the federal government's New Car Plan, an assistance package that will provide $5.4 billion to the industry between 2008-09 and 2020-21.

A spokesman for Industry Minister Greg Combet said the government's $5.4 billion was supporting about a quarter of a million jobs, directly and indirectly. But critics point out

that although the industry is producing cars for the domestic market, consumers just aren't buying them.

So what's all the support for?

It is not that Australians aren't buying new cars. Over the year to February 2013, a record 1,125,174 new vehicles were sold. But sales of cars built locally for domestic consumers have fallen from their peak of 286,000 units in 2003 to just 148,000 in 2011.

Holden surprised everyone last week when it made public the amount of government help it has received over the past 12 years. Since 2001, it has had nearly $2 billion in federal incentives and subsidies, including tax breaks. The figure was higher than expected.

It was an unusual thing to do, given the lengths to which governments have gone in the past to keep those figures secret. But it also raised questions about the future of the $4.5 billion industry.

Matt Hobbs, Holden's director of government affairs, said the amount was justified by the tens of billions of dollars Holden had invested in Australia. He said that money would have gone elsewhere if Australia hadn't paid.

Speaking after Holden's announcement that 500 jobs would go, the former global head of Ford, Jac Nasser, challenged the perception that the industry had enjoyed large amounts of support from state and federal governments. But he said news of the job cuts was ominous, and despaired for the lack of national pride in the industry.

"The signs aren't good, and particularly when the car industry is reducing the number of engineers they have in the workforce, that's a leading indicator of a reduction in future programs and future technology," Nasser said.

The exit of just one company from Australia could trigger the demise of the industry, he said.

"Let's assume one of the three decides to exit Australia in terms of manufacturing, then you end up potentially with a sub-scale supplier infrastructure and once that happens I think it's a domino effect," he said. "It would be a very sad day for Australia but unfortunately it looks like it could be inevitable."

BusinessDay asked several economists if they believed we ought to let the industry die.

Most said we should, even though they were aware of what a difficult decision it would be.

"I don't think that the government ought to be providing significant support for the motor vehicle industry," said Paul Bloxham, HSBC Australia's chief economist. "If it's not profitable on its own, I don't think it's something that the public ought to be subsidising.

"We ought to accept the price signal that's given to us from the rest of the world, rather than think that the government is better at deciding which industries are ones that the economy ought to have."

Saul Eslake, the chief economist from Bank of America Merrill Lynch in Australia, said it was time to be asking "hard questions".

"The reality is that, however technically proficient Australia might be at making cars ... it's very difficult for a country as small as Australia is by way of population, and as far from markets as it is, to be a competitive manufacturer of cars, almost under any circumstances," Eslake said. "But especially when the currency is as strong as ours is now, relative to other car markers' currencies."

According to Eslake when Australians were given the choice to buy cheaper cars, thanks to the gradual reduction in tariffs and quotas, they began to do so.

"It's true, as the car makers say, that virtually every government in the world gives financial assistance to its car industry. And it probably is true that if we want to have a car industry then we have to do the same thing," he said.

"But the question that has never really been put to the people, as distinct from government departments, is whether that's a choice we'd actually want to make."

One economist who has spent time on the factory floor is Tim Harcourt, the former chief economist of the Australian Trade Commission.

Harcourt worked with former Victorian premier Steve Bracks on his review of the car industry. They recommended in July 2008 - after visiting car industries in Thailand, India, China, South Africa and the US - that the government provide millions of dollars in help to Australia's car industry in return for a reduction in tariffs.

"People on the right of the economics profession hate the car industry because it did have high tariffs for too long, so it's a bit of a legacy issue for them," Harcourt said. "They always want to ask how much taxpayers pay for the car industry ... [but] they don't talk about private healthcare getting subsidies from the government, or private schools.

"I don't agree with everything the car industry does, but I think there is a view [among orthodox economists] that the car industry is something you should always target."

Harcourt said there was no doubt elements of the car industry provided "positive spill-overs" for the rest of the economy in terms of labour skills and design.

The Bracks review found that the car industry was a big investor in innovation, accounting for nearly 17 per cent of manufacturing business expenditure on research and development.

It said this was a key element to sustaining an internationally competitive industry based on high skills and high-wage jobs.

"Australia is one of only 15 countries with the capability to take a car from concept all the way to full production," the review said.

Warwick McKibbin said he did not think Australia ought to abandon the industry just yet, but we needed to start doing things differently. "There is a serious debate about some of the spinoffs of having high-end technology being produced on an economy, but that can be assessed," he said.

"Are we paying too much for that spinoff? At the moment it appears we are."

But Harcourt said the Productivity Commission had done a good job in the past to reduce tariffs to get the industry more competitive and export oriented.

"But the debate's not about tariffs now," he said. "The debate is about how to fit into global supply chains, what the best comparative advantage could be for Australia in the global car industry. Holden says we have the best design in the world, so they wouldn't care what the tariff is - it's the labour market design skills that matter here."

Eslake said he understood that if the industry were allowed to die it would still hurt people.

"The other thing to remember is that while I'm inclined to think that the benefits of abolishing these subsidies would outweigh the costs, it's also undeniable that the benefits would be thinly spread over most of the population, while the losses would be heavily concentrated on a relatively small number of people in a few areas."