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Australia’s choice: pay for a car industry, or live with the consequences

Ford’s announcement on Tuesday of 440 job cuts is the culmination of almost 40 years of automotive industry policy failure. Ford will slash 15% of its workforce and cut production by 29%, as the industry…

Ford Australia has announced it will cut 440 Victorian jobs by November this year. AAP

Ford’s announcement on Tuesday of 440 job cuts is the culmination of almost 40 years of automotive industry policy failure.

Ford will slash 15% of its workforce and cut production by 29%, as the industry struggles to cope with the dual pressures of a strong Australian dollar and declining large-car sales.

In some respects, it is surprising that Ford is still operating in Australia. The “Ford 2000” strategy, formulated in 1996 at Ford’s worldwide headquarters in Dearborn, envisaged a number of regional production centres. Originally, Australia was not one of them.

That changed when the boy from Broadmeadows, Jac Nasser, moved to Dearborn as CEO of Ford Motor Corp in 1999. Nasser had previously headed Ford Australia and Ford Europe. An aggressive cost-cutter, Nasser nevertheless saw a future for Ford automotive manufacturing in Australia, although this would require substantial government subsidies and the maintenance of protective tariffs.

Tariffs. Protection. Subsidies. The three watch words of the Australian car industry. But how did we get here? And what pot holes lie on the road ahead?

De-industrialising Australia

The shift away from labour-intensive forms of production in Australian industry has essentially resulted in a phase of “de-industrialisation”. In 1982, Barry Bluestone and Bennett Harrison defined deindustrialisation as “a widespread, systematic disinvestment in the nation’s basic productive capacity … the way capital – in the forms of financial resources and of real plant and equipment – has been diverted from productive investment in basic national industries into unproductive speculation, mergers and acquisitions, and foreign investment”.

Foreign industries in Australia have only existed historically for one reason: to bypass the high levels of protection which characterised post-Federation Australia. The abrupt shift away from these policies, beginning in the 1970s, and accelerated in the 1980s, coincide with the rapid de-industrialisation of the Australian landscape. But it is no coincidence that correlations may be drawn between the elimination of protection and the failure of local industries to adapt and restructure within the highly-competitive pressures brought to bear by global industries.

In the 1950s and 1960s, the Australian auto industry expanded dramatically, with wholly-owned foreign subsidiaries Holden, Ford and Chrysler making large, national investments aimed at almost exclusively at supplying the Australian market. Exports to New Zealand and other Commonwealth countries were negligible. Smaller, local assemblers included Renault and VW (Heidelberg, Melbourne) and manufacturers such as British Leyland (Zetland, Sydney).

Political support for protection of the Australian automotive industry has been largely bipartisan, with two noteworthy exceptions. In 1973, the Whitlam Government announced a 25% across-the-board slashing of tariffs. In an attempt at flagrant political blackmail, Holden immediately announced 5,000 sackings. Ironically, it was Bob Hawke, then-ACTU leader, who led the combined industry-union campaign against the federal government’s cuts. A compromise was produced which resulted in an 85% local industry production plan, and an agreement that Holden would re-hire the retrenched workers.

The Button Plan

The oil crisis, import penetration (despite protection) and poor productivity produced Australian auto industry crises in the 1980s. Holden closed Pagewood (NSW) and Acacia Ridge (Queensland), while Chrysler sold its remaining equity to Mitsubishi, including its Tonsley Park (South Australia) plant, in 1980.

Although the Fraser government increased tariff protection, Industry Minister Philip Lynch developed a gradualist approach to reductions in protection in 1981. These proposals were amended and fast-tracked by John Button, Hawke’s new industry minister, in 1983. Button’s approach was reformist, but corporatist. He envisaged bureaucratic regulation (establishing the Automotive Industry Authority); phased tariff reductions (2.5% per annum); export credits schemes; minimum annual model production (40,000 vehicles per model); joint ventures, model-sharing and R&D cost sharing; fewer separate manufacturing facilities; and fewer domestic manufacturers.

Subsidies persisted under the Button car plan. The Commonwealth helped fund both Falcon and Commodore in the late 1980s, as Ford and Holden developed new models. But industry rationalisation meant further plant closures were inevitable. In 1992, Nissan withdrew from Australian manufacturing, while Ford ceased local Laser production in 1994 with Homebush (NSW) closing its doors.

Despite these closures, Toyota Australia made a substantial $AUD500 million investment commitment in 1992. Behind closed doors, Bob Johnston and Paul Keating negotiated Australia’s first single union agreement – without which, Toyota would build the plant in Malaysia.

It was at this point that the second political disjuncture on car industry policy came in the form of John Hewson’s election to the Liberal Party leadership in 1990. Coalition policy throughout 1990-93 under Hewson envisaged a zero-tariff regime by 2000, a position that was vigorously opposed by industry leaders, who publicly derided such proposals.

Hewson’s position was further undermined by his confrontationist approach towards the Federated Chamber of Automobile Industries (FCAI). Bob Johnston (Toyota) recalled him striding into an FCAI meeting and saying: “Make no mistake. When I become prime minister, you’ll get zero tariffs.”

The shocked response of Ford’s Jac Nasser was: “You’ve got to be joking. Don’t you want a car industry?”

Hewson replied: “If you need tariffs and subsidies to survive, then, no, I don’t want an automotive industry.”

The Hewson position exemplified the “flat earth” and “level-playing field” approach to industry policy that the Federal Coalition advanced throughout the 1990-93 period. The FCAI warned of the decimation of the car industry under a Hewson-led government. It was an unusual excursion into Federal politics by industry leaders, and it was highly influential – certainly in Victoria – in contributing to Keating’s narrow 1993 election victory.

Hewson thought – incorrectly – that industry leaders were crying wolf and had sheltered for too long behind tariff walls. He was wrong on two counts: first, the level of protection had decreased substantially since Whitlam’s first cuts in 1973. Second, the level of investment required to develop a car purely for the Australian market did not justify the risk in a zero-tariff regime. The threat made by Jac Nasser – that Ford would cease manufacturing in Australia – was very real.

Ghost towns

Make no mistake: the Australian car industry persists only because of industry protection and government subsidies. Both sides of politics recognise this.

What is often overlooked is the downstream automotive components industry, which hosts both local and international firms. As the Federation of Automotive Product Manufacturers notes, this sector provides 45,000 jobs, some 5% of national manufacturing employment, with almost $49 billion in turnover. Indirectly, the job head count this industry supports is even higher. The multiplier effect of this sector’s investment and turnover upon Australia’s economy is significant.

Dandenong, Victoria, has long been the centre of this manufacturing belt; almost half the components industry jobs are located in Victoria. If Australia’s domestic car industry downsizes markedly, Dandenong, together with Elizabeth (SA), Altona, Broadmeadows, Fishermans Bend and Geelong (Victoria) would become ghost towns. Just as Homebush (until resuscitated by the 2000 Olympics) and Acacia Ridge became rustbelt monuments to industry failure, plants in Victoria and South Australia face similar dangers. Nissan has gone. Mitsubishi has gone. Ford may be next.

As The Economist noted last year, there are 30 million units of surplus production in the global car manufacturing system. Unfortunately, it is fanciful to believe that Australia can exist as an automotive oasis, building as few as 250,000 vehicles per annum and survive without protection. Even in its peak years in the last decade, 400,000 vehicles does not even make Australia a “mass market manufacturer” in global terms. Typically, one manufacturer building over 500,000 vehicles per annum defines a “mass market” car maker.

An essential skills base

Fact: No country has ever become a developed industrial economy without an auto industry. Not even Switzerland. From Belgium, to the Netherlands, to China, the employment, skills and export potentialities associated with car production are enormous. That’s why South Korea under Park Chung-hee in the 1970s invested heavily in auto production. South Korean car imports surpassed Japanese imports in Australia in the 2000s. That’s also why Indonesia and Malaysia in the 1990s sought to build and develop their own car industries. It’s also why China places so much emphasis upon its own auto industry as an avenue for employment growth, foreign joint ventures, direct investment and technology transfer.

Consequently, car industries develop and maintain the essential skills base that drives any modern industrial economy. In the 1960s and 1970s, Australian mechanical engineering graduates could choose between several jobs, even before they sat their final B.E. (Mech.) exams.

But federal governments continually erred by appointing bureaucrats and ex-politicians to regulate the industry. Hawke appointed Tony Cole, former Treasury Secretary, to head the Automotive Industry Authority; Cole had no knowledge of manufacturing or the auto industry. Two decades later, Industry Minister Kim Carr appointed former Victorian premier Steve Bracks as an “Automotive envoy”, following Bracks’ chairmanship of a car industry report in 2008. Like Cole, Bracks had zero experience and no apparent prior interest in the automotive manufacturing sector.

Australia is one of only 13 countries that can manufacture a car from the ground up. This industry generates a skills base, comprising mechanical, process and materials engineering, fluid mechanics, CAD/CAM designers, welders and fitters & turners, alongside specialisations in chassis systems and lubrication products. There are also significant spillover effects of this skills base into critical elements of the mining, aerospace and defence sectors.

Myopia Unlimited

Both sides of politics have engaged in myopic auto industry policies for several decades. Neither the ALP nor the Coalition has a strategic vision for the future of car manufacturing; their only concern is not presiding over complete industry collapse.

Gillard’s “cash-for-clunkers” scheme disappeared without a trace. Federal and state governments’ relatively small investments only partially offset the enormous investments made by vehicle manufacturers.

Rudd announced over $6 billion in subsidies when he became prime minister. Gillard’s “clunkers” scheme added $400 million. But these figures are peanuts compared with other countries’ subsidies.

Since 2008, the Bush and Obama administrations have thrown tens of billions into the auto industry, saving GM and Chrysler from bankruptcy. Billions more in subsidies have been directed at the US industry in the form of sales tax relief, and even car purchase partial tax deductibility (yes). Japan subsidises green auto technologies and has employed myriad non-tariff barriers to make foreign market entry into Japan’s auto sector unviable.

China only does joint ventures - although they welcome German imports. And don’t even get me started on the complexity of the state aids system utilised by the European Union to subsidise automotive firms throughout its 27 member countries.

The road ahead

The prevailing wisdom held by global automotive firms is this: the Australian market is “too small for manufacturing; too prosperous to ignore.” In the face of declining foreign investment, falling exports and slowing sales of locally-produced products, it is scarcely surprising that state and federal governments have been compelled to engage in industry intervention. But for the squawking geese in Canberra, with the noteworthy exception of John Button, simply throwing money at the problem has always been the solution.

Want governments to intervene seriously in the local industry and spur local sales? Fine. Here are just a few ideas:

Remove or cut GST on locally-made vehicles; reduce registration costs for locally-made vehicles exclusively; increase R&D tax credits for local car manufacturers and automotive components firms; and introduce significant tax credits for exports and technology licensing.

If Australians want an auto industry, they must be prepared to pay for it – as ever – through the tax system. If they don’t, then they must also shoulder the consequences: a depleted skills base; a hollowed-out manufacturing sector; major job losses in every Australian state; and the decimation of a large number of regional and urban towns.

Welcome to Ghost Town. Manufacturing population: 0.