Managed decline to rapid demise: Abbott’s car industry gamble

Prime Minister Tony Abbott is betting the rapid demise of Australia’s automotive sector can be contained politically. Alan Porritt/AAP

For the past 30 years, Australian automotive industry policies can be characterised as managed decline. Beginning in the 1980s with the Button Plan, the aim of policy was to consolidate the industry and avoid the economic and political fallout that would accompany its rapid demise.

Managed decline was never the stated aim of automotive assistance. The goal was to create a smaller industry that could compete against imports and develop an export focus. Managed decline has been, however, an implicit part of automotive policies because the removal of protection and the continual downsizing of the industry progressively reduced the future costs of its demise.

Like a married couple trying to maintain a failing relationship, neither government nor industry could admit that there was no long-term future. Both parties were unwilling to embrace the sort of radical restructuring and interventionism that might have enabled the Australian industry to achieve scale by hooking into growing regional production structures. Instead, governments encouraged consolidation of the long-standing industry structure as a trade-off for more assistance, which, in turn, made production viable over the short-to-medium term.

The number of true believers in an automotive future waned as the industry declined. Increasingly, many Australians believed that the industry could survive only if governments committed ever more budgetary resources. In recent years, almost immediately after various governments had arranged new plans, the industry was soon demanding more assistance that took into account the new “unforeseen difficulties” the sector faced.

Managed decline can only go on for so long. Eventually the process of decline makes demise palatable and less destructive. While the Abbott government argues it is not responsible for the industry’s destruction, by refusing to engage with the industry on new funding arrangements, it has deemed that managed decline is no longer necessary.

In the short-term, the Abbott government has wagered that the political costs of moving from managed decline to rapid demise can be contained. Over the longer-term, it has gambled that other industries can cover the economic costs and that the manufacturing of cars has no wider benefits in terms of strategic capabilities or productivity.

The demise of the automotive industry and continuing decline of the wider manufacturing sector signals another victory for economic liberals who have long argued that governments should facilitate rather than fight the reallocation of economic resources from manufacturing to industries such as mining and gas in which Australia has a comparative advantage. It also signals the defeat of those interventionists who argue that Australia needs a strong manufacturing sector as an integral component of a wealthy and diverse economy.

The number of true believers in the automotive industry has waned with the industry’s decline. Joe Castro/AAP

Managed decline in practice

Since the sale of Chrysler’s plant to Mitsubishi in 1980, policymakers have slowly managed the decline of the automotive industry. The process began in earnest with the Button Plan of the Hawke Labor government, which aimed to reduce the number of models produced in Australia from thirteen to six and the number of car manufacturers from five to three.

During the Howard years, policy towards the automotive industry shifted towards political expediency and while the profit performance of the industry improved during the early 2000s, the industry went into a funk as the resources sector began to boom. The Howard government had no faith in industry policy but did not want to be the government that presided over the final demise of the industry.

The Rudd government re-badged its assistance to the industry as co-investment, but was unable to produce an automotive industry that could survive without continuing and significant monetary injections. In 2008, it announced “A New Car Plan for a Greener Future”. The initially positive mood generated by the prospective investment soon turned sour and it was not long before the industry was once again pleading for more assistance. Mitsubishi’s final closure in 2008 represented another stage in the process of managed decline.

While Rudd provided rhetorical support for the industry and his industry minister Kim Carr truly believed in its future, the global financial crisis limited the development of new forms of assistance that might have enabled the industry to restructure and survive over the longer term. For Labor the emphasis eventually became industry survival rather than development.

In February 2011, Labor cut the A$1.3 billion Green Car Fund, an integral part of the wider assistance package, to pay for flood reconstruction. With that cut, Labor revealed it had abandoned any real hope for an alternative green-focused future for the industry. In May 2013, Ford Australia confirmed it would end local vehicle production in October 2016.

The incoming Abbott government faced a choice between further assistance for Holden and Toyota and the components sector or maintaining the depleted assistance regime set up by the Rudd government. Failing to engage with Holden and Toyota to create a new plan was a gamble that significant sunk costs would mean a continuation of existing production schedules. The end result was Holden’s December announcement that it would cease production by 2017 and Toyota’s February announcement that it would too.

The fallout?

Losing a significant industry like the car industry at the same time as mining investment continues to decline will cause problems for the Australian economy and workers. The demise of the industry does not mean an end to budgetary outlays as the government will have to assist the large number of workers affected and provide funds to encourage alternative economic development.

Nevertheless, having the industry announce an end to production in the early stages of its term of office may restrict the electoral consequences for the Abbott government, as might holding an election before the end of manufacturing in 2017. However, if the economy goes into recession in 2015 because of declining Chinese demand and high household indebtedness, voters might see the “decision” to hasten the demise of the industry as an important component of economic policy indifference and incompetence.

Alternatively, it is possible that the long-running process of managed decline has instilled in the Australian population an acceptance that the demise of the industry was inevitable.