The Coalition's auto policy is driving on empty

The demise of car manufacturing doesn’t mean the end of Australia’s auto sector. With the Coalition’s help, it could become a globally competitive designer and supplier of high-end components.

Things look very different when you’re in government. From the safety of opposition, the Coalition pronounced it was disinclined to throw good money after bad and continue to prop up the Australian automotive industry.

Fast forward two short months and one trip to Adelaide, and Industry Minister Ian Macfarlane has bowed to GM Holden and agreed to provide a “blood transfusion” of funding to Holden in time for Christmas. The carmaker is reportedly in need of around $500 million to extend production. With further visits to Toyota and Ford planned for the next couple of days, a few more dollars are likely to be found. That is after allocations of $967 million since 2011 and billions prior, generally based on over-optimistic production forecasts.

Macfarlane swears the next government assistance package will be the last and that the industry needs to become internationally competitive. But it is hard to see how this will happen. With a stubbornly high currency and cheap imports, Australian labour costs are far higher than elsewhere in the region.  There are additional quirks, such as restrictions on using sea transport for distribution around Australia in favour of more costly road transportation. As it is, Holden workers have agreed to a three-year wage freeze.

Australians enjoy a wider range of vehicle brands in our tiny market than drivers in the US, Great Britain, or Canada, according to the Federal Chamber of Automotive Industries. We can claim the dubious right to choose from 67 brands, each with a market size of around 16,600 units.

That compares with 51 brands across the whole of the US (average market size per brand: 256,000), 53 brands in the UK and 49 in Canada (average market size per brand: 33,000 units, double that of the local market and with a population of 35 million). Where is the economic sense in that?

The supply of cars from China and India will only grow in coming years, adding to the international pressure on domestic manufacturers and their suppliers.

Ford has flagged plans to end vehicle production in 2016 (although it will maintain R&D operations), putting pressure on the automotive parts suppliers that currently depend on three main customers for scale.

Australian Bureau of Statistics figures show that total employment in auto and components manufacturing had dwindled to 45,000 in August, down from 50,300 in February  (manufacturing as a whole employs 921,000). While exact figures are hard to come by, around 70 per cent of those auto sector jobs are in the supply chain.

Richard Reilly, chief executive of the Federation of Automotive Products Manufacturers, says many of the 150 parts companies in the domestic supply chain are already trying to diversify or transition their businesses to tap into the export market.

He says the three big automakers have begun to ramp up efforts to help their suppliers. “The three major auto producers are working to assist members of the auto component sector to enter their supply chain, especially in Asia,” Reilly says.

Just because a nation or a region has historically manufactured a product does not mean it will always make sense for it to do so. In the 1930s, 75 per cent of America’s clothing was manufactured in New York’s garment district in Midtown, But it would not have made sense to maintain that level of production over firstly, cheaper production districts in the Southern sun belt and, more recently, in Asia. Instead, New York’s fashion industry evolved to become a hub for high-end designers.

The long, drawn-out, painful demise of the auto industry in Australia does not imply the end of high-tech manufacturing. Just look at the high-tech production of Boeing’s Australian military aircraft and air defence program, Germany’s Bosch, or locally listed Quickstep.

The Australian arm of German technology and service supplier Bosch Group exports around 90 per cent of its automotive component production, with Australia the sole location worldwide for diode production. The company describes Australia as its “centre for competence” for its electronic manufacturing in the Asia-Pacific — something that would be music to the ears of government.

Players such as Quickstep Holdings Ltd exemplify the small and medium-sized enterprises that are able to supply global markets. Quickstep, the country’s largest independent manufacturer of advanced composites, makes parts for the F-35 Joint Strike Fighter and is currently building carbon fibre composite car panels on a trial basis for automakers including Audi in Germany.

Perhaps the future for Australia’s auto sector is to become a designer, maker and supplier of high-end components, which would be more cost effective to export and would be able to compete in a low-tariff environment.

The best use of government money, in that scenario, would be to support the transition of designers, engineers, workers and production equipment to a more internationally competitive industry that leverages the strength of Australian expertise and design. And not, as Tony Abbott put it neatly before the election, to “run down the road after Holden, waving a blank cheque at them”.

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