Grim reflections: the slow death of an industry

In the mid-1960s, when Australia's trade minister Sir John McEwen was urging Holden and Ford to seek export markets in Asia, the leader of one of Asia's poorest countries decided his country needed a car industry. Defying the advice of economists, he ordered the country's biggest company to start making cars - with Ford's assistance.

The country was South Korea. Its leader was Park Chung-hee, one of the authoritarian economic visionaries who was to transform Asia. The company was Hyundai.

Today, Australia's car industry is on the brink of collapse. Ford will stop manufacturing here in 2016. Holden and Toyota are persevering for now, but running up big losses. If their sales, and our dollar, remain at current levels, they too will be unviable.

The car parts manufacturers are thinning month by month. A manufacturing sector that employs 50,000 workers, produces 221,000 cars a year, and generates $3.7 billion of exports and $5 billion of value-added output is in real danger of closing down.

South Korea, by contrast, is now the fifth biggest centre of car production in the world, behind only China, the US, Japan and Germany. Hyundai is now the world's fourth biggest car manufacturer; it overtook Ford several years ago.

Australians now buy more Korean-made cars than Australian-made cars. They buy twice as many Thai cars, and almost four times as many Japanese cars. There are many reasons why the Australian car industry is dying, but one is inescapable: Australians are no longer buying the cars our manufacturers make.

Why is car manufacturing here in danger of collapse, while South Korea has become a world leader?

There were some factors specific to Ford in Thursday's decision (which was no shock; Fairfax Media foreshadowed it last July). But there were other factors specific to the car industry, which are doing similar damage to Holden and Toyota. And there were factors common to all sectors of advanced manufacturing and services in which Australia competes with the world.

Three reasons stand out. Ford never gave its Australian arm a viable long-term strategy. Australians no longer buy Australian-made cars. And the higher dollar has made Australia globally uncompetitive as a place to produce.

Australia developed its car industry the easy way: it imposed high tariffs on imported cars, forcing global manufacturers to set up plants here if they wanted big Australian sales.

When cheap Asian cars started climbing over the tariff wall, we ran up a second wall, imposing quotas that restricted imports to 20 per cent of the Australian market. And local manufacturers were allowed to import cheaply the models they didn't make here.

It worked fine when our tastes were simple, and Holden and Falcon had the market to themselves. In 1964 Holden sold 100,000 EH sedans, station wagons and utes, Falcon was not far behind, and both were exporting into Asia.

But as two manufacturers grew to five, the global car industry widened its range of models, we widened our range of tastes, Australia came under pressure to cut protection, and Japanese and Korean manufacturers built plants producing up to 10 times as many cars as our plants, the industry became globally uncompetitive: a small-scale relic that survived only due to its protection.

The Koreans, by contrast, built their own car industry. They erected even higher protective walls, which shut out all imports. But from the start, they aimed to build globally competitive manufacturers, and export to the world.

They started by assembling foreign cars, and slowly learnt how to make them. Hyundai's first car was a Ford Cortina. By the mid-'70s it had developed its own car, and began exporting it.

As Korea grew richer, Hyundai built up its scale of production, holding down costs. It worked relentlessly to improve quality, and to innovate. And Korean governments kept the currency low, and gave the industry every help it needed - such as cheap electricity - to make exports viable.

In the mid-'80s, the Hyundai Excel hit global markets as a world-class car, selling below world prices. It was a huge success. The Korean car industry went from strength to strength. And when Korea was forced to open up to car imports, the government reinforced the buy-Korean mentality by making it known that if you were seen driving a foreign car, you risked a tax audit.

Korea has changed a lot since, but it remains dedicated to being a global force in car-making. Imports usually take less than 10 per cent of the Korean market; in Australia, they now have 91 per cent. In March, after imports inched up to 12 per cent of the market, Korean competition regulators raided the offices of BMW, Mercedes-Benz, Volkswagen and Toyota - the four biggest importers - alleging price collusion.

In Korea, manufacturing is seen as a national mission. In Australia, it is seen as a costly diversion from the nation's real strength in ripping out minerals.

The Australian government and Reserve Bank have allowed the Aussie dollar to soar, making local producers globally uncompetitive. Korea, by contrast, has amassed huge foreign exchange reserves to keep its currency low and its exports competitive.

The International Monetary Fund estimates that Australia is now the third most expensive country in the advanced world in which to produce goods and services, behind Norway and Switzerland. Korea is rated the fourth cheapest, behind Taiwan, the Czech Republic and Hong Kong.

Goods and services are now twice as expensive to produce in Australia as in Korea. A decade ago, when the dollar was low, they were almost identical.

The high dollar is one reason why the Australian car industry now stands on the brink of collapse. Since 2011, it has oscillated around $US1.05, 50 per cent above its pre-mining boom average of US70¢.

That has made our exports far more expensive, costing them sales in the Middle East and elsewhere. And with the liberalisation that has slashed tariffs from 57.5per cent in the 1980s to 5 per cent now, it has made imports here far cheaper.

The Australian Bureau of Statistics estimates that new car prices peaked in December 1995, and have fallen since by 25 per cent.

Relative to other prices, cars today cost less than half as much as in 1995. Even since 2003, car prices have fallen by a third relative to other prices. How could Ford, Holden and Toyota reduce their prices by 25 per cent since 1995 to match the fall in import prices when average costs in Australia have risen by 55 per cent in that time? And average weekly earnings have risen 107 per cent?

It was impossible, and those who blame the car makers don't understand the business. The cost equations have shifted dramatically. A range of factors has changed consumer preferences. And their market share has slumped, and as their production has fallen, their unit costs have soared.

Even among passenger cars, the local producers' share has slumped from 61per cent in 1994 to 41 per cent in 2003, and to 14 per cent now.

Australians have moved away from the big family cars produced here to either smaller cheap vehicles such as the Mazda 3, now our top-selling car, or to four-wheel drives. And the market has become fragmented, with more than 350 models competing for 1.1 million sales.

Toyota and Holden had a buffer because their head offices allocated Australia valuable markets in the Middle East. When Australian production peaked in 2004 at 407,537 units, Toyota was exporting two-thirds of its output, and Holden a third. By contrast, Ford Australia was allowed to have only minor export sales.

But as the dollar has soared, those export markets too have shrunk by half. Australia is no longer a competitive place to produce cars. To save what is left of the industry will require both the dollar and consumer preferences to shift back to where they were. It's a big ask.