Time to scrap Australian car making

It would be desirable, no it’s essential, that in five to 10 years Australia is no longer manufacturing cars.

The announcement from Holden to further scale back its operations, which follows similar moves last year from Ford and Toyota, is further evidence that the local auto sector just cannot compete with cheaper and better cars that are made overseas. It is just a question of how quickly the industry will wind back and how the fall out will be managed by the government and accepted by the general public.

There are a couple of critical issues why the Australian car industry might go the way of our television manufacturing sector – we are not particularly good at it. Australian consumers have an overwhelming preference not to drive Australian made cars and there is a better use for government funding than propping up inefficient car manufacturers that not many people want to drive. Without a car industry, the tariff can be cut to zero which would of course make cars cheaper. 

Workers currently employed in the car industry can no doubt be better employed in more productive, globally competitive industries. With the economy solid and creating jobs at a decent pace, the scope for re-employment is favourable for these workers.

No one, other than probably a few in the loonie left, bemoans the fact that Australia does not make computers or complex machinery and the like. It is to Australia’s economic advantage for us to specialise in the things we do well and with the money we earn from these activities, pay someone else for laptops, mobile phones, bulldozers and cranes. 

It should be the same for cars. All cars. Certainly consumer behaviour and preferences are moving rapidly that way. Sales of locally made cars remain low and are falling while our desire to buy foreign cars is growing. Were it not for our local producers selling cars to the government sector and taxis fleets, they would be in even more trouble.

There is a legitimate and important question of transitioning out of making cars. It is an issue that will require a deft touch from the government. Going cold turkey on subsidies and cutting them abruptly is not the answer. It would be better to announce a phasing out of such subsidies and use the money saved to for retaining the workers.

In other words, economic policy makers in a decent society need to manage the transition away from local production whilst keeping those impacted engaged and available for work elsewhere in the economy. This inevitably means providing a safety net of support, retraining and reskilling the people formerly employed in the car industry. Making sure that when they lose their jobs in car manufacturing and assembly, they can quickly and relatively easily find employment elsewhere in a decent well paying job. This support structure is already in place so it is likely that those impacted by the Holden sackings announced yesterday and that will inevitably lose their jobs in futures, will find new work.

There is the macroeconomic side of policy making that is vital too. The government needs to have policy settings pitched at growth and this means having an internationally competitive tax environment and making it as easy as possible for the private sector to invest, expand and employ.

Given the performance of the economy for the past decade, the government has been doing well. In other words, private sector jobs are being created at a solid pace and while there is more that should be done on tax policy and internal efficiency, Australia’s economic management is good.

Similar arguments can be made for industry assistance for farmers who only stay on marginal land due to subsidies, drought relief and the like. As has been written before, this is inefficient and costly. So too with money allocated to first home buyers. While nice in theory, in terms of boosting housing construction and access to housing for young people, it is costly and demonstrably useless policy in terms of getting people into the owner-occupied hosting market. Using that money, for example, to build infrastructure for new housing land and building low cost affordable housing would win any cost benefit analysis by a long way.

In the not too distant future, we can hopefully look back and be pleased that we no longer manufacture cars and that our children work in an economy with employment in high income and high skill jobs, not ones propped up by government subsidies.

I have written before that the government needs to let go of the car industry in the same way it treats job losses in banking or small business or real estate or the public service or construction. Let it happen but have in place a generous and well targeted retraining scheme, facilitate relocation to the strong parts of the country and leave in place an environment that allows for sustained solid economic growth that takes up the workers lost from the industries that will inevitably decline.