The failing auto industry gets a final reality check

Forget the last-minute brinkmanship over the blame game and the political argy-bargy that has erupted as a result. General Motors, in the absence of a taxpayer blank cheque that the Coalition government was never going to give it, was destined to stop making cars in Australia. It arguably should have done so some time ago.

In fact, it would have, if governments – federal and state – had not thrown billions of dollars of taxpayer funds at the industry. It was a futile attempt to address the impossible structural disadvantages the local car manufacturing sector faced, with its disadvantages exacerbated by the post-financial crisis strength of the Australian dollar and the financial condition of its offshore parents.

General Motors is pulling out of Australia in 2017, as a manufacturer at least, after hundreds of millions of dollars a year of government support over the past decade.

While the Coalition had cut Labor’s promised future funding up to 2015 of $1.5 billion by $500 million, the underlying reality is that whether it was $1 billion, $1.5 billion or $3 billion (the original commitment was $5.4 billion out to 2020-21), there was no guarantee that it would be enough to secure the future of the industry.

The reality of the domestic industry is that it doesn’t have sufficient scale and is uncompetitive on costs with the imports that now dominate sales.

The three local manufacturers (Ford doesn’t cease local manufacturing until 2016) have experienced a continuously declining share of the 1.1 million-vehicle local market, producing a little more than 200,000 vehicles between them. There are individual car plants in our region producing more than that.

Not only are they grossly sub-scale relative to competitors, but they are also uncompetitive on costs. In announcing Ford’s decision earlier this year, Ford’s Bob Graziano said that it cost about four times as much to produce a car in Australia as it does in Asia and twice as much as it does in Europe.

Labour costs and practices are part of that lack of competitiveness, and the strength of the dollar has worsened the relativities. As General Motors’ Mike Devereux said today, at its peak of US$1.10, the dollar meant making things in Australia was 65 per cent more expensive than a decade earlier.

The dollar also cut off the one lifeline the industry could have had to try to escape the inevitable consequences of the size of this market.

The Button plan of the mid-1980s was predicated on the local manufacturers and their suppliers plugging into the global industry and gaining access to scale through exports. While General Motor and Toyota had some success with exports, the strength of the dollar has essentially shut down that option.

Without scale and with high costs, the only way the industry could have survived in its present form was with a blank cheque from taxpayers, where the sums being written in would inevitably have kept spiralling as the local volumes shrank.

Given the fiscal challenges confronting the Coalition after a decade of federal profligacy, that option was a course of action that rationally could not have been pursued. It was a difficult decision, given the political, economic and social consequences that will flow from it.

With General Motors and Ford having announced the closure of their local plants, the spotlight will now turn to Toyota, which is in the midst of an attempt to convince its employees to change their work practices to try to narrow the $3800 per unit difference in the cost of a locally-produced Camry (which has been successfully exported) with the cost of similar vehicles built in Asia. The Australian Manufacturing Workers’ Union is urging them to reject the proposal.

BHP Billiton’s chairman and former chief executive of Ford globally, Jac Nasser, talked about the ‘’domino effect’’ as the carmakers stopped local manufacturing in the wake of the Ford announcement in May.

He argued that with the loss of one carmaker there was a loss of scale for component suppliers, which then undermined the viability of the remaining manufacturers. The loss of two of the three will clearly have a very major impact on the component makers – and will flow through to Toyota.

The Abbott government has commissioned a Productivity Commission report on the industry, with an interim report due before Christmas and a final report in March next year.

It will come too late for General Motors. Unless the government was prepared to give the company the guarantee of indefinite life support – regardless of the cost – the findings and recommendations of the Commission would have been irrelevant because of the structurally uneconomic settings of the sector and the lack of any policy levers to fundamentally change them.

The demise of the local industry does mean the economy will lose a centre for high value-added manufacturing and the concentration of engineering and manufacturing skills that it has provided.

There is a policy challenge in trying to ensure those skills aren’t lost, but redeployed. This might be best addressed by a broader focus on lifting productivity across the Australian economy so that the capital and skills devoted to internationally uncompetitive activities can flow to segments/niches of value-added activity where we can compete.

The Coalition will probably cop some criticism (and in fact already has) for flushing out the General Motors’ decision by making it clear it wasn’t going to increase its proposed level of assistance and by urging it to announce its plans. That’s politics.

The reality is that General Motors has known for some time what it would do if the government didn’t blink and commit to pouring more taxpayer money into the bottomless pit. Today, it simply confirmed the inevitable.