Do we need a car industry?

FTAs with China, Japan, Korea and India would close the local auto industry immediately, but beyond that price deflation and car manufacturing remain incompatible. Australia has a choice to make.

What follows is not the bleating of a protectionist: I am in favour of free trade. I am also in favour of not being stupid or deluded.

Yesterday Toyota Australia announced 100 redundancies because exports are falling. Australia’s car manufacturing industry is on the brink of collapse. Ford has announced its closure; Holden and Toyota will soon follow without further cash subsidies from taxpayers and negotiations are underway with the new government to agree on the amount.

Toyota is mainly an export business – to the Middle East, which also happens to be the only region in the world without its own car manufacturing industry, which means it’s the only place importers get to compete on price.

The only country with a car manufacturing industry to which you can export cars successfully, and compete on price, is Australia. The effective average tariff here is 3.5 per cent – 5 per cent on cars from countries with which we don’t have a Free Trade Agreement and zero from countries with which we do have one. There are no other barriers apart from the luxury car tax of 33 per cent above about $60,000.

In 2008 local manufacturers sold 160,000 cars out of total Australian sales of 1.1 million, or 22 per cent. In 2012 local manufacture was 138,000, or 12 per cent of the market. Year to date 2013 this is down to 10 per cent, which is to say 90 per cent of cars are imported.

In 2008 160,000 cars were exported, mostly to the Middle East; in 2012 it was down to 87,000, of which 72,000 came from Toyota and the rest from Holden.

In other words Australian manufacturers’ share of the local market has fallen from a fifth to a tenth in five years and exports have declined by almost half, which is why the industry is on life support, dying.

It’s partly because they don’t make enough small cars and SUVs, which are now the most popular cars, but it’s mainly because of price. Australian cars are too expensive, which has been exacerbated by the high exchange rate.

By the way, it makes little difference to exports whether we have a free trade agreement with another country or not, although it does cut 5 per cent from the cars imported from that country into Australia.

Australia has an FTA with Thailand. The Ford Territory, which costs between $39,990 and $62,740 in Australia, costs around $100,000 in Thailand. The equivalent locally made car in Thailand costs $35,000.

The main reason for the difference is an internal excise tax which gets around the FTA. There’s also a tax rebate for first car buyers that only applies to cars built in Thailand.

Australia also has an FTA with Malaysia, but Australian manufacturers report they have no hope of selling cars in Malaysia because of arbitrary customs valuations and local content tax incentives.

The Primer Minister Tony Abbott has put a deadline of 12 months on negotiating an FTA with China, the world’s largest car market. Sales in China about to top 20 million a year.

But if he thinks we’ll be exporting cars to China after the FTA is signed, he is deluded.

According to the China Association of Automobile Manufacturers, 1,935,800 units were sold in September, of which 1,926,600 were made in China. China’s tariff on cars is 25 per cent and on components it’s 10 per cent.

Thailand and Malaysia have “free trade” with China through the China-Asean FTA, but they are not selling too many cars there, either because of non-tariff barriers like the ones Thailand and Malaysia themselves impose on car imports, or because they’re not cheap enough.

In either case, Australia will be in the same boat, times two, once an Australia-China FTA comes into effect. With sales to rich Arabs declining in the only truly free market for cars (apart from Australia), it’s unlikely Toyota and Holden will do any good in China, with or without barriers.

And if FTAs are ever signed with China, Japan, Korea and India, which are the ones currently being negotiated, then the Australian car industry will close immediately. Those countries will increase sales into Australia with a 5 per cent price cut; Toyota and Holden will not sell any cars in those countries.

Do we need a car industry? Well, that is the question, and I really don’t know.

Obviously successive state and federal governments think so because they keep giving the carmakers cash, albeit not quite enough to stop them gradually going out of business.

Without local car production, Australian manufacturing would have to rely almost entirely on exports, which might be fine except Australian costs are high and other countries have tariff and non-tariff barriers on manufactured imports.

They are more than happy to buy our resources tariff-free, from which to make their own manufactures, but manufactures are usually protected.

That raises the cost of manufactured products. After all Australians have greatly benefitted from cheaper cars, as well as TVs, household appliances and mobile phones.

So there are three options:

1.     Price deflation and no manufacturing industry

2.     Price deflation plus a manufacturing industry plus cash subsidies

3.     Less price deflation plus manufacturing industry

Can we have No. 4 – price deflation plus manufacturing industry and no cash subsidies? Only with much lower costs, and that’s not a problem for the car industry alone.

In the ABC’s The Drum this week, Philip Toner of the University of Sydney wrote that productivity in the car industry (value added per worker) was $100,000 per worker compared with $85,000 across the economy.

So it doesn’t seem that motor industry productivity is lower than elsewhere and that wages are out of line, or that car industry workers are living the high life.

It’s a problem of Australian costs generally – they are too high. That comes down to land and construction costs, which underlie all other costs.

I guess we’ll just have to keep subsidising the car industry to death.