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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.

Join the conversation

38 Comments sorted by

  1. Rodger Kensen

    Systems Analyst

    A sound set of arguments, and knowing many people across all levels of the car & parts manufacturing industry I support reasonable spending to ensure we keep this skills and capabilities in Australia. Particularly since the issue of competing internationally is because all of the competition are effectively propped up as well.

    Also isn't part of the logic behind retaining a car manufacturing industry for defensive purposes? In case of war, gear up car manufacturing towards military vehicles. Considering our geographical isolation of our country and the propensity of the human race to go to war - I rather support that kind of insurance.

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    1. John Coochey

      Mr

      In reply to Rodger Kensen

      I worked for both the IAC and Defense and I assure you that there are no military or economic circumstances which justify protection to an inefficient and uncompetitive industry which has received billions in subsidies via direct grants and protection. I have not seen the figures for PMV (incidentally most of the large Australian produced cars were bought by car fleets not by individual consumers) but in the seventies the subsidy equivalent for the bed linen industry per worker was greater than the average wage in that industry so it would have been cheaper to send everyone home on a pension and tell them never to work again.

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    2. Colin MacGillivray

      Architect, retired, Sarawak

      In reply to Rodger Kensen

      Rodger
      There will not be another (world) war so it's no reason for a car industry.
      There will be a few nasty civil and mini-wars- Syria etc perhaps.
      So says "The Better Angels or Our Nature" by Steven Pinker - 696 pages of small print but totally convincing.

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    3. Thomas Campbell

      Investor

      In reply to John Coochey

      John, I fully agree, however any industry that can stand on its own is worth having and we don't actually know the profitability of the Australian car industry, as each brand is simply a branch of a non-Australian parent entity. This coupled with unbelievable levels of price protection, has provided no incentive for local players to be globally competitive and certainly not cutting edge. Further, the changes in automotive technology and more so the changes in consumer tastes, have created opportunities…

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  2. David Arthur

    resistance gnome

    Instead of handouts, how about the Government just buys some cars off them.

    They could put in orders for 300 Australian-built Ford Focus Electric Vehicles, 300 Australian-built Nissan Leafs, 300 Australian-built Holden Volts, 300 Australian-built Misubishi MiEVs, and 300 Australian-built Toyota RAV4 EV.

    If a manufacturer declines their purchase order, then the remaining manufacturers build 375 vehicles, if two manufacturers decline their purchase orders the remaining manufacturers build 500 vehicles, and so on. If only one manufacturer takes it on, they build 1500 vehicles, and if no manufacturers accept the order goes to Thales Australia (manufacturer of Bushmaster Protected Mobility Vehicles in Bendigo) to do a design and build of an EV.

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    1. Mark Amey

      logged in via Facebook

      In reply to David Arthur

      'Instead of handouts, how about the Government just buys some cars off them.'

      I think the various state and Federal governments already do.

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    2. David Arthur

      resistance gnome

      In reply to Mark Amey

      Thanks Mark, I'll try again.

      Instead of handouts, how about the Government only buys 100% electric cars off them? The rest of the comment then follows as I've already outlined above (the bit which must be sufficiently self-evident as to not require further discussion).

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    3. Mark Amey

      logged in via Facebook

      In reply to David Arthur

      Sorry, mate, I agree. I guess my point is that the government not only hands out money to Australian car makers to makes cars, but is the main customer, hence two levels of government assistance.

      I agree, electric vehicles need the sort of foot up that you've suggested.

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    1. Stephen Riden

      Research and Information Manager, DSICA

      In reply to Chris Tikellis

      If we did remove the GST on locally manufactured cars, what services would you think could cut to match the lost revenue, or what tax should we increase to match the shortfall.

      Also, GST goes to the states, so the ACT, NT and Tasmania would get less revenue to prop up an essentially Victorian industry.

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  3. Lincoln Fung

    Economist

    While the choice is obvious either providing subsidies or leaving without the auto industry, and it is also correct there are better ways to get make the subsidies more economical, there should be credible and independent studies and analysis of the costs and benefits of each options, with a relatively long time horizon. Otherwise, simple debates without a really reliable costs and benefits analysis won't be rational and won't be justifiable, whether they are done within the political domain or the academic domain.

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    1. Tim Tim

      student

      In reply to Lincoln Fung

      Lincoin you miss the point the owners of these companies are making profits their just not making a big enough profit. Nothing is going to change that when our neighbors have a source of cheap labor and their governments pursue protectionist policy's.

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  4. John Coochey

    Mr

    Well actually I am amazed that someone getting paid as a Professor of Economics could write such an article.

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    1. Norm Stone

      Farmer

      In reply to David Briggs

      Risible drivel is not harsh enough by half. What crappy logic! Everyone else is subsidising the wealthy and the powerful so we should also! None of the skills mentioned need to be lost in a connected world. Do the mechanical, process and materials engineers, fluid mechanics and CAD/CAM designers have to be in the same country as the cars are manufactured? Are we really not capable of retraining and redirecting welders, fitters and turners? If Remy is so impressed with Park Chung He I suggest he look at some of his other "interesting" policies including academic freedom. The global manufacturing and resource giants have learned some very valuable(to them) lessons. We cannot continue with welfare for these companies whilst schools, hospitals and social welfare go so seriously under funded.

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  5. James Jenkin

    EFL Teacher Trainer

    Remi Davison's makes a compelling argument for a domestic car industry. I just think several statements are more complex than they first appear.

    'Fact: No country has ever become a developed industrial economy without an auto industry.' Does this show cause and effect? Does it even matter? After all, every industrialised economy also produces books, clothing and processed food.

    'This industry generates a skills base.' If we need, say, mechanical engineers, won't they be generated by the industry we need them for - just like they were by the auto industry?

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  6. Simon Goudkamp

    logged in via Twitter

    So much focus on the generation of new everything. This is completely unsustainable and quite wasteful really, and represents consumer capitalism at its worst. I propose a possible solution to at least partly save local jobs. Retro-fitting cars that are currently on the road and near retirement, fixing them up, making them more green through replacement of the engines with new more efficient technology. Manufacturing would focus on recycling, and repairing and we would have a heap of bad ass older looking cars on the road.

    Note that I dont know much about cars at all, and this probably shows in my comments, but in a sustainability sense recycling what we have with the least amount of energy input is paramount.

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    1. Colin MacGillivray

      Architect, retired, Sarawak

      In reply to Simon Goudkamp

      Great concept Simon
      Australia could design and manufacture all components of a sustainable car (S-car) in which every bit could be easily repaired or replaced, including the coachwork so it could look like a new model. So the chassis and frame never change and other bits do. (Think Cuba but with built in longevity) I bet small manufacturers would emerge just doing a variety of types of one element of the S-car.
      And being unique it could be exported.

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  7. Gil Hardwick

    anthropologist, historian, novelist, editor and publisher at eBooks West

    There will always be cars on the road in Australia. There will always be an automotive industry in Australia.

    What is being discussed here is the end of government subsidies, and with it the end of the big centralised assembly plants. Cars are built globally, parts and components sourced from everywhere. All we are talking about here, apart from Ford's 6-cylnder engine plant, are assembly lines.

    What has not been discussed is that with all that, what we will see is the demise of centralised…

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    1. Peter Ormonde
      Peter Ormonde is a Friend of The Conversation.

      Farmer

      In reply to Gil Hardwick

      Gil,

      Recalls are not - NOT - caused by dodgy workmanship - at least not of the type you suggest. A product-wide recall is caused by either poor design or a failing component. Someone on a high salary is responsible for that. They probably live in New York or Deeetroyt.

      Dodgy workmanship shows up in a bad example of an otherwise good model. And rigid quality control and the involvement of robotics has pretty well eliminated defective workmanship. But we don't have "good models". The Button Plan gave us the Capri. (The what????) A beautifully made pile of junk.

      As for being able to do the magic with modern complex computerised turbo injected piles of disposable parts that constitute modern motoring, we're talking PhD territory for mechanics. Makes one wonder if all that silly complexity is really worth the nuisance I reckon - certainly in the bush.

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    2. Paul Richards

      integral operating system

      In reply to Peter Ormonde

      Peter O. said ; ".... Button Plan gave us the Capri."
      For those born late eighties and nineties Peter meant the exported to US as Mercury / [Ford au] Capri Convertible Production run from 1989–1994 Assembled in Campbellfield, Victoria, Australia.
      The Button Plan was full of promises based on Neo-Liberal principles something Paul Keating fostered and some members of both parties still believe in. Particularly the leader of the opposition. Why else would successive governments, led by both parties…

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    3. Peter Ormonde
      Peter Ormonde is a Friend of The Conversation.

      Farmer

      In reply to Paul Richards

      Not sure I'd be categorising these hand-outs as neo-liberal... nothing neo about them at all. At least not in the laissez faire dog-eat-dog, uber-market clap trap spouted by your proper neo-liberals.

      Rather this is some sort of socialism for the corporate sector - or, more precisely, a form of socialism in which the corporate sector serves as the shop-front agency distributing the assistance to workers offered by taxpayers - like Centrelink middle-men. And it leaks something shocking.

      Australia…

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    4. Paul Richards

      integral operating system

      In reply to Peter Ormonde

      Peter O. said " Not sure I'd be categorising these hand-outs as neo-liberal" Neoliberalism it is true means different things to different people.
      The overarching principe I was referring to in comments was that of theory of political economic practice that builds framework characterised by the role of the state to preserve an institutional framework to promote free enterprise in this case international enterprise.

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    5. Tim Tim

      student

      In reply to Gil Hardwick

      "...There will always be an automotive industry in Australia. ..."

      Gil your kidding yourself once these plants close down they are gone. The profits to be made in the Australian market are not big enough.

      "..All we are talking about here, apart from Ford's 6-cylnder engine plant, are assembly lines."
      no we are not we are talking about contractors who make the parts in Australia and employ thousands of people.

      The parts have to be made close to where the cars are assembled otherwise the cost of transport would be too high and the margins are already paper thin as it is.

      Car factory's only work because of the economies of scale your a profit comes because you can make cars in their hundreds.

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  8. Anthony Nolan

    logged in via email @hotmail.com

    "Fact: No country has ever become a developed industrial economy without an auto industry"

    What, WWI was a pre-industrial war? France, Germany, England, North America and all the nations of the Commonwealth sent their troops to the industrial slaughterhouse of WWI when none of them could be said to have had an "auto industry".

    Claiming that an auto industry is a necessary prerequisite of being a fully industrialised nation is mysticism. It is also a deeply and absurdly gendered argument the…

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    1. Tim Tim

      student

      In reply to Anthony Nolan

      "Fact: No country has ever become a developed industrial economy without an auto industry"

      Anthony he is correct your using war to trivialize the argument and discount what he is saying doesn't change it.

      We need industry otherwise we will lose all the skills and service jobs that come with it.

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  9. David Leigh

    logged in via Facebook

    Ford is paying the price for complacency. We live in a changing world, with oil reserves expiring and customer demand turning green. The day of the 6 - 8 cylinder gas guzzler is over. Holden, that other American Icon, has at least announced the Holden Volt. It is a start but by no means the complete answere. In Canada and the UK, cars are now being constructed using hemp composites, lighter, stronger and they don't rust. These cars are often run on hemp bio-fuels (renewable energy). Every European…

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  10. Carol Chenco

    Research Officer

    See today's Age newspaper section 'comment and debate' article on 'Staying on the Assembly Line' by Ian Porter who is an industry and policy analyst. http://www.theage.com.au/opinion/politics/staying-on-the-assembly-line-20120718-22ajq.html
    I have heard similar sentiments before from manufacturing industry experts - the car manufacturing industry has major spinoffs for the manufacturing industry generally and supports many other companies who continually improve processes to increase efficiency. These smaller enterprises then expand into non-automotive areas and apply their 'state-of-the-art' skills to other products. We have more to lose than just cars if we let the industry go. As Ian Porter says - the resources boom won't last forever.

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  11. George Naumovski

    Online Political Activist

    When the US bailed out their car industry, they actually paid for shares in the companies which also the Australian government should have done when they gave money to Ford/GMH/Toyota and to have a representative in each board meeting so to keep them not cutting jobs.

    Ford wants to leave Australia and have just 1 type of large car platform/engine worldwide and so GM and Toyota wants the same thing, it is all about massive profits as their cars a way expensive and they can’t figure out why people don’t buy, if they sell their cars for a realistic price people will buy but I think they are trying to price themselves out of the market and cry poor so they can leave Australia.

    The Australian government has to stop this and buy into the companies as to stop them from destroying an industry in Australia and to keep jobs.

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  12. Wolf feldmuller

    Retired

    Yes all you commentators,what cars do you drive?
    What do the unions expect if even their members drive foreign cars.
    What is wrong with Holden or Ford cars.We sell the iron ore and buy the crs from them.I think we did the same with just about everything else.
    Dont be surprised with rising unemployment as our quarries do not need many workers.I drive Holden and Ford products all my life and they are ok.
    What do you drive?

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  13. Tim Mazzarol

    Winthrop Professor, Entrepreneurship, Innovation, Marketing and Strategy at University of Western Australia

    Good article Remy,

    Australia's subsidies for its car industry are not really that much different from the way most other countries support their automotive sectors. The automotive industry is globally over producing and had already reached that point by the end of the 1990s.

    We should expect to see a better return for our taxpayer's dollars than what has emerged recently from the green car initiative or cash for clunkers. However, we cannot risk losing our entire car industry and still expect to have a viable manufacturing sector over the longer term.

    The car industry is currently at a tipping point for the type of vehicles it makes. New environmentally friendly cars with electric or hybrid drives made from composites are emerging and they are likely to challenge the current paradigm for how cars are built. Australia is not in this space in any significant degree, but a national industry policy of the "Button Plan" type might be worth considering.

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