Decision on Holden still in neutral

Holden chief executive Mike Devereux didn't confirm that his company was quitting manufacturing in Australia when he appeared before the Productivity Commission on Tuesday, but he did make one thing clear.

Holden chief executive Mike Devereux didn't confirm that his company was quitting manufacturing in Australia when he appeared before the Productivity Commission on Tuesday, but he did make one thing clear.

Spending more taxpayer money won't maintain the status quo. If Holden's parent General Motors is paid to stay, it will still be configuring its business here differently, and opening up Australian suppliers to international competition.

The group sources about half of the components for its Commodore range from Australian companies. Its Cruze mid-sized car is only about 25 per cent local, however, and Devereux says that is the template.

Local component manufacturers will sell less to GM even if it stays, unless they win orders from other parts of GM's production network. And like Holden, they shoulder relatively high production costs, remoteness from key overseas markets and the impact of a strong Australian dollar. Half a dozen or more GM operations around the world are potential customers, but they already have supplier relationships.

Local suppliers nevertheless would have a better chance with GM or Toyota than they had with Ford, which more than a decade before this year's decision to end Australian manufacturing in 2016 isolated the Australian operation from the global production platform, virtually ensuring its death.

There's not much point denouncing the use of taxpayer money for "industry assistance" or "job subsidies," by the way. Governments spend taxpayer money in ways that create jobs all the time. A strong jobs market is a key performance indicator for them, and since the global crisis, a key performance indicator for central banks, too.

Governments create jobs by running healthy economies. They employ people directly, and create employment indirectly by contracting work out to the private sector.

The Victorian government is this year, for example, paying $2 billion to the companies that operate its rail, tram and bus network. MTM, the metropolitan train operator, gets just over $1 billion and employs about 4300 people. That's about $232,000 per employee. Another $628 million goes to bus operators who employ more than 5000 drivers. That's about $125,000 per employee. The Australian vehicle industry has been getting subsidies of about $550 million a year. Holden's share amounts to about $50,000 per manufacturing employee.

Public transport is, of course, an essential service. MTM carried almost half a billion passengers around Melbourne in its trains in 2012-13. There's no question about whether or not that should continue. The focus instead is on striking a balance between outlays and service, usually by specifying and enforcing minimum service levels, and running "Dutch auctions" that award contracts to the company that accepts the lowest subsidy.

Industries that offer a compelling case for taxpayer funding also attract support. The Labor government believed low-carbon energy companies were candidates. Many believe the vehicle industry is another, because of its importance as an employer and manufacturing industry centrepiece.

Logic suggests, however, that the most compelling industries are the ones that have strong growth prospects. Australia's shrinking vehicle industry does not qualify on that score.

Work by the Grattan Institute meanwhile shows that while Australian manufacturing's share of the economy has been shrinking, absolute manufacturing output has held up, and shifted heavily towards high-technology production.

Vehicle manufacturing is a hybrid. Cars are mass produced in processes that involve metal-bashing, but they also contain large and growing amounts of technology.

A report prepared for the Bracks review of the industry in 2008 concluded, however, that the industry was not a major technology incubator. Large technology "spillovers" were limited, it decided.

Might support be necessary anyway, to prevent an economic implosion and a jobless tsunami? The answer to that is yes and no: regional shocks in Melbourne and Adelaide would be severe, the national impact would be absorbed.

University of Adelaide Professor Andrew Beer interviewed 314 workers laid off by Mitsubishi in 2004 as it began to retreat from local manufacturing, and found that only 13.4 per cent of them were not employed between 12 and 18 months later.

Three-quarters of them were earning less, however. Government retraining programs were not up to the task then. They will have to be if the government bows to the inevitable and lets our sub-economic car manufacturing industry go.

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