Holden loss shows need for reform

A total of 2900 jobs to go at Holden, multiples of that likely to go in Australian supplier companies. Tony Abbott called last May's announcement by Ford that it would stop making cars in Australia in 2016 at a cost of 1200 jobs "a black day for Australian manufacturing". Holden's decision to stop making vehicles in 2017 could turn the car-making industry's lights out for good.

Holden builds cars in Adelaide, and engines in Melbourne where it is also headquartered. The hit the two regional economies take will not be the same, and demands different responses.

In Adelaide, all the 1600 jobs that will go are in Holden's Elizabeth car assembly plant. State and federal government support for retraining will be crucial for the job prospects of displaced workers, and it needs to be more proactive than it was in 2004 and 2008, when Mitsubishi closed its manufacturing and assembly plants in the city.

In Melbourne, about 250 workers in Holden's engine plant will lose their jobs. Just over 1000 other Melbourne employees will also go, but most of them are engineers and administrative staff who have more marketable skills.

The big unknown is the impact on component suppliers to the car makers and their suppliers. Melbourne hosts Ford, Holden and Toyota, and is most exposed.

The parts and components industry is not totally dependent on the car manufacturers. In a submission to a Productivity Commission review of the industry that is a hit-and-run victim of Holden's decision, the Australian Automotive Aftermarket Association estimates, for example, that 21,000 people are employed in about 260 companies that supply parts and accessories worth $800 million a year to car owners. They account for 36 per cent of local production, the association says. The flip side is that original equipment makers that serve the car manufacturers make up the balance.

They faced tougher times even if Holden stayed. Holden Commodores are about 50 per cent built from Australian parts, but Holden's mid-size Cruze is only about 25 per cent local, and that would have been the template for the next line of Commodores.

Their supply contracts will now end when the last Cruze and last Commodore roll off the line at the Elizabeth plant in Adelaide towards the end of 2017, and they and Toyota will then be in a period of double jeopardy.

Suppliers dedicated to Holden and Ford will probably die. Ones that also supply Toyota have a buffer while Toyota hangs in, but their revenue will probably decline. If some of them also fall over, Toyota's supply lines and perhaps its own future will be threatened - although as the last local manufacturer it should also pick up market share as local car buyers including government fleet managers switch from Ford and Holden.

Could this have been avoided? Holden boss Mike Devereux repeatedly refused to say so when he faced the media on Wednesday afternoon, but opposition industry spokesman Senator Kim Carr's earlier claim that as little as $150 million extra a year for Holden could have stayed the execution is said by insiders to be correct.

Devereux said Holden's parent, General Motors, had all the information it needed to decide that a business case for manufacturing in Australia no longer existed. That information included the fact that the Abbott government had decided against providing more financial assistance.

As the deadline for Ford and then Holden to close their assembly lines approaches we are going to discover whether that was an appalling error of judgment by the government, or a good call on the Australian economy's capacity to create jobs of equal value elsewhere as it continues a shift from basic manufacturing to higher skill manufacturing. The shift has supported manufacturing output over the past decade even as the expanding resources sector pushed down manufacturing's share of national output.

Money alone could not have bought an unconditional promise from Holden to stay, however. The Australian dollar is high, and while that might change, production costs including labour costs are also higher than in competing locations, and the domestic vehicle market is too small to shield the car makers from their loss of international price competitiveness.

Major economic reform that boosts the Australian economy's competitiveness is needed to address those issues.

What now? Retraining is crucial for affected workers, in Adelaide in particular. An attempt also needs to be made to quarantine the parts industry from the departure of Holden and Ford. It would be an end in itself, but it would also be a way to secure supply lines for Toyota, the industry's biggest exporter.

Financial support that was flowing to Holden and Ford could be redirected to the components industry as part of that process, and as part of a broader attempt to lift manufacturing productivity. Oh, and the $A needs to keep falling: that at least is on the cards.