Holden us hostage? Not quite, but we could have been smarter

Australian politicians on both sides will continue to subsidise the car industry - but how smart have we been been about it? AAP

Psst! Want to buy an Australian-made car? You better be quick.

Holden is reportedly requesting a further $265 million in subsidies from the federal government in order to retain its manufacturing operations in Victoria and South Australia.

Holden has not commented, but South Australian industry minister, Tom Kenyon, is concerned that the rumour of the Elizabeth plant’s closure may become reality.

Federal industry minister Kim Carr confirmed that negotiations with Holden are in train, but refused to elaborate on the details.

Holden was granted $275 million in subsidies in 2012 to ensure it retained its local manufacturing operations until at least 2022.

But Holden’s future depends largely upon its ability to wrest manufacturing contracts from other General Motors regional production centres, even as its Commodore production declines. For example, if Captiva 4WD production were to be shifted from South Korea to Elizabeth, it could make the South Australian plant sustainable.

Stockholm syndrome: learning to love captivity

The Captiva is an apt metaphor for the relationship between the federal government and the car industry: captor and hostage.

Imagine you are a state or federal industry minister, staring down the barrel of not one, but two major car industry shutdown announcements within the space of seven weeks. Would you really pull the trigger? Call the bluff? Axe the subsidies?

Of course you wouldn’t. Governments aren’t in the business of Russian roulette. What’s another $265 million, compared with the political fallout your party would suffer? After all, it’s not your money; it’s the public’s. And the plaintive squawks from the zero-tariff, zero-subsidy zealots aren’t the stuff of headlines.

But ripping the ladder out from under working men and women absolutely guarantees a crisis front page in every metropolitan and regional daily throughout the country. Not good optics.

A 2012 report by the University of Adelaide’s Professor Barry Burgan estimated closing Holden’s Elizabeth plant would result in South Australian tax revenue losses of between $25 and $80 million; $133 million in wage losses; and serious employment losses amongst auto industry suppliers. Holden is estimated to contribute directly and indirectly up to 16,000 jobs in South Australia, and up to A$1.5 billion in state GDP.

If you’re a betting person, you can lay odds that gun-shy Rudd and Carr will pay virtually any price to shore up their fragile political position. For a start, Rudd can scarcely afford to look even less competent than Gillard at managing industry policy.

Labour pains

Holden is also reportedly attempting to negotiate wage cuts of up to $200 per week for its workers. Average car industry assembly workers make about $54,000 per annum. To place that figure in perspective, your average BA in Humanities scored $50,000 as a starting salary in 2011 as a graduate with the Commonwealth public service.

The issue here is wage disparity. Why should prospective employees seek out low-paid jobs in a declining – and disappearing – manufacturing sector? Without subsidies, the auto industry could not even pay these relatively low wages. By contrast, the bloated federal and state bureaucracies and their pay scales provide a structural incentive to anyone seeking relatively high-wage employment, as opposed to the vagaries of manufacturing employment. The relative worth of graduates in the public service versus manufacturing employees? That’s another debate for another time.

Give me subsidy or give me death

Let’s be clear here: every country with a vehicle manufacturing industry subsidises it to the hilt. Germany spends $US90 per capita; the US spends $US96; and Australia spends $18.

But Germany does produce over 5.5 million cars per annum, meaning the subsidy amounts to $US1,303 per vehicle, while each Australian car cost taxpayers $US1,966.

That’s more a measure of relative productivity and factor input costs. And Germany also protects its automotive industries — as well as its banks, the post office and insurance companies — from foreign takeovers.

Holden, Ford and Toyota clearly see wages as the central determinant of their cost structure. When announcing Ford’s cessation of local manufacturing in May, Ford Australia CEO Bob Graziano noted that the cost of the Australian operation was twice that of Ford’s European plants and four times those in Asia.

France is also directing billions of euro in subsidies to emerging electric and hybrid production, as Peugeot-Citroën and Renault record significant financial losses, output falls and serious challenges from imports.

America is no different. Both the Bush and Obama administrations partially nationalised General Motors and Chrysler, at least temporarily, to save them from disastrous bankruptcies and the unravelling of an entire industry. Which only goes to show that, at the end of the day, both Republicans and Democrats are interventionists, not laissez-faire econocrats.

Strategic trade

Forget free trade and economic liberalisation; go hunt for unicorns instead. The name of the game is strategic trade. Strategic trade means selective industry intervention, picking “winners” and subsidising them, directly or indirectly. This is how Japan rose from the ashes of World War II to become the globe’s third-biggest economy by 1970.

The problem is that subsidies, while they can benefit efficient, export-oriented industries, quickly become the target of rent-seekers in pursuit of industry sheltering.

Airbus. Boeing. The US Farm Bill. The EU’s Common Agricultural Policy. The US defence industry. The Australian mining industry. Me. You. Especially You.

Rent-seeking means getting something for nothing. Without improving productivity. Without making any efficiency gains. Ignoring innovation. Sheltering behind heavily-regulated markets or direct subsidies and tax breaks. Anything, in fact, to place other players in the market at a competitive disadvantage.

Ask the counterfactual, whatever industry you’re in: how would you be placed if the government didn’t shelter you from global competition?

Housing construction industry? Relax. Federal and state government spray first-home-buyer subsidies around like a cat on heat. That keeps the tradies happy. Plus negative gearing to keep the baby boomers liquid, the housing bubble buoyant and the renters, er, renting.

Education? Now you’re talking. In my neck of the woods, the feds pay top dollar for my pontificating pedagogy in front of a crowd of students. But it’s not efficient; why not pauperise the industry by employing low-paid contract workers by the hour to put all course materials on the interwebs. Sack all the lecturers. Keep the change. That’s the ultimate objective of MOOCs. Shh. Don’t tell anybody about this. Keep it to yourself.

The bottom line is that all governments run complex systems of corporate and public subsidy. That’s why we pay taxes. But it’s how governments choose to disburse these subsidies that determines whether they result in positive or negative economic outcomes.

Dumb and dumber

Positive subsidies boost productivity, efficiency and innovation. They have clear aims and objectives. Also known as “smart” subsidies, they target outcomes such as increased agricultural production by subsidising, say, the use of seeds and fertilisers. Or subsidising solar and other renewables, instead of using coal-fired electrical generators.

Negative subsidies tend to be universal; their objectives are opaque because all the players in an industry receive them. For instance, small firms can benefit from Australia’s R&D tax incentive, as it offsets the cost of investment in new research or products, which they could not otherwise bring to market.

However, universal subsidies such as these can also prove negative, as they are rorted by large firms that claim most of their activities constitute “R&D”.

In return for subsidies, smart governments demand mergers and export performance (Japan); require their loans back with interest (US); or create green/renewable energy targets (Germany/France).

Dumb governments implement universal subsidies by writing cheques without demanding contractual obligations (Australia).

Potholes ahead

Fact: irrespective of the way you vote in the upcoming election, you will get car industry subsidies. The ALP, Liberals and Greens are all committed to underwriting the industry. The differences will be on the fringes, rather than in substance, although Tony Abbott has already committed to $500 million in subsidy cuts.

Looks like you’ve already voted with your wallet: you bought a Hyundai.