Why governments shouldn't let go of the Australian car industry

Funding cuts reignite debate about taxpayer support of local car games  manufacturing

Comment

Now you see it, now you don't. Chilling before-and-after shots of cyclone and flood damage help illustrate the devastation from natural disasters that have swept our nation in recent weeks. But 60,000 auto workers who live nowhere near the storm-affected areas may also feel in the impact -- several years from now.

In the wake of mother nature's fury the Federal Government moved swiftly -- axing the Green Car Fund without a moment's notice to help pay for the reconstruction of ravaged communities.

There is no doubt the government had to take drastic action in these extraordinary times. But the aftermath of the cyclones and floods nevertheless sent shockwaves to the global headquarters of the three local car makers -- Holden, Ford and Toyota -- who are each about to make critical decisions in the next six months about vehicles they may or may not build here from 2016 onwards.

Some sections of the Australian community were overjoyed by the announcement of funding cuts to an industry they believe is getting fat off the taxpayer -- while the hearts of 60,000 auto workers skipped a beat as they wondered how it would affect them.

Now, after a tumultuous fortnight, the Federal Government has reassured Australian car makers that the worst of its funding cuts are over.

On late Wednesday afternoon last week, the Prime Minister Julia Gillard and industry minister, Senator Kim Carr, had a meeting in Canberra with the chief executive of the Federal Chamber of Automotive Industries, Andrew McKellar, and Holden boss Mike Devereux, who is also chairman of the FCAI.

The industry executives called for the crisis meeting to seek assurance that no further cuts were imminent after the Gillard Government halted the Green Car Innovation Fund to help pay for disaster-relief efforts.

"In an attempt to recover from a natural disaster there was a risk of creating a man-made disaster," the chief executive of the Federal Chamber of Automotive Industries had warned.

After Wednesday's meeting Senator Carr's office issued a statement under the heading "Keeping Our Industry Strong", which said in part:

"The recent floods and other natural disasters across our nation represent an extraordinary and unprecedented set of circumstances. This has required some tough budget cutbacks, including savings in the Federal Government's New Car Plan, so that funds can be redirected into the rebuilding of roads, bridges, rail lines and public facilities in flood ravaged communities.

"But the Government understands the need for certainty and the long lead times for investment in the highly competitive automotive industry. The Prime Minister and Minister Carr have confirmed to the automotive industry that all other parts of the New Car Plan ... will be retained.

"The New Car Plan helped see Australia through the worst economic crisis faced by manufacturing since the Great Depression and the changes will help ensure its future. What we are making is a commitment to all other elements of the New Car Plan."

In 2007 the Federal Government pledged $5.4 billion of financial support to the local car making industry and its suppliers through to 2020 -- and called it the New Car Plan. In 2008 this figure grew to $6.2 billion with the addition of the Green Car Innovation Fund -- and the name changed to New Car Plan for a Greener Future.

The extra GCIF funding, however, was short-lived. It was cut twice in the lead-up to the 2010 Federal election -- $200 million was cut to the supplier base and a further $200 million was cut to vehicle manufacturers. Following the disasters in January, the remaining GCIF funds were frozen -- but funding already pledged was secure.

Holden received $149 million from the GCIF and another $30 million from the South Australian government to go towards its new Cruze small car, which will be made at its Elizabeth factory from next month.

Ford received $42 million from the GCIF and an undisclosed amount from the Victorian Government to go towards a diesel Ford Territory and the four-cylinder Falcon.

Toyota received $35 million from the GCIF and an undisclosed amount from the Victorian government to go towards the hybrid Camry program.

The Victorian government chose not to reveal exact funding figures on these occasions but the amount is well into the millions in both cases.

All this sounds like a vast sum of money -- and it is -- but it is no different to what other governments in other parts of the world do to attract car makers.

Dozens of states in North America offer incentives in the form of lower tax rates or rebates in return for setting up factories. That's why brands such as Toyota, Nissan, Hyundai, Kia, BMW, Mercedes-Benz and Volkswagen (among others) have established green-field car-making facilities there. Indeed, one of the reasons the three North American domestic makers (General Motors, Ford and Chrysler) have struggled to compete on their home turf is because of the high level of assistance offered to foreign companies to establish car factories -- and create thousands of jobs.

Government assistance is happening on Australia's doorstep, too. The Thailand government has been offering incentives to foreign makers to establish factories there for more than a decade. And guess what? Honda, Toyota, Nissan, Ford and Mazda now make cars or utes there in globally significant numbers.

Why is it that other countries want to save or create jobs in the car industry -- but a broad section of Australians don't? Is it because they don't realise the ramifications of not having a car industry?

Clearly most Australians aren't living in fear of losing their jobs. More than 1 million people treated themselves to a new car last year -- the second-best on record -- although 90 per cent of the cars were imported.

Some senior executives in Australia who represent imported car brands question the level of taxpayer assistance offered to our three local carmakers. Some of these executives offer these opinions to journalists off the record, as background, so they can still mingle guilt-free with their friends from local car makers at motor shows.

Others, such as Suzuki Australia general manager Tony Devers, are happier to put their name to their views. Devers told the Carsales Network last year that Australia should switch its efforts to building more relevant cars -- or become a hub for research and engineering.

By his estimation "Ford would make more money importing cars from Thailand than making them in Australia". He would know. Suzuki is about to join other Japanese brands and establish a car factory there in a couple of years -- thanks to assistance from the Thai government.

Incidentally, the Carsales Network has since been told that Ford Australia contributes 40 per cent of total profit to Ford's Asia-Pacific operations -- and local carmaking is a "significant proportion" of that.

Devers also calculated that $6.2 billion of Australian government funding roughly equates to $100,000 per car industry employee -- if the figure of 60,000 workers spread across the three carmakers and their suppliers is accurate.

"Nobody's really done the sums, have they?" Devers said, suggesting that the government was blinded by "an overriding idealism that we need [a manufacturing] industry".

But spread over the 13 years of the program, the $6.2 billion equates to $7700 per person per year. There's a fair chance the Federal Government will get more than that back from each worker in income tax -- and GST from goods and services they purchase.

What is also conveniently overlooked by detractors is the estimated $16 billion the car industry (that is, vehicle manufacturers and suppliers) will invest as a result of government contributions. That $16 billion does not include wages, incidentally.

In the outline for the GCIF in 2008 the government said: "Manufacturing is the mainstay of families and the lifeblood of communities around the country. We can't have a balanced economy without it -- and we can't have a just society without it either.

"The automotive industry makes a huge contribution -- both direct and indirect -- to Australian output, jobs, exports, innovation and skills. Its latent significance to national security -- as a storehouse of industrial know-how and capability -- is immeasurable."

In 2007-08, the report said, Australia exported $5.6 billion worth of vehicles and vehicle components. That's more than Australia earned from exports of wool, wheat, beef or wine.

The government acknowledged the shift in demand to more economical vehicles. "The world is changing and Australia's automotive industry must change with it. Our choices are simple -- our industry must either adapt to the new environment, or face extinction," the report said bluntly.

"Adaptation will require significant investment in new technologies. [And] we will only get that investment if people believe the industry has a future and are certain of the Australian Government's commitment."

It is interesting to revisit the original GCIF document in the wake of having the rug pulled a fortnight ago. The reality is that the same principles -- and threats -- still apply to the car industry today as they did in 2008.

While the three local carmakers have calmed down now after being reassured there will be no further cuts, they had a tense lead-up to last Wednesday's meeting, especially after the Federal Opposition threatened to make further cuts to car industry funding if it wins power at the next election.

Presumably to make sure the Federal Government's commitment to the car industry remained on public record, the FCAI issuing a statement that said in part:

"It was good to meet with the Prime Minister and have the opportunity to reinforce the commitments the Government had previously made to the industry as well as highlight the need for certainty in the future," FCAI exec McKellar said.

"Public private partnerships underpin the industry in every automotive manufacturing economy and this co-investment has developed an industry that directly employs more than 50,000 people with the capability to design and engineer world-class vehicles for Australia and global markets.

"The vehicle manufacturers and component suppliers can be reassured by the confirmation from the Australian Government that no further policy changes will be made."

The talk of funding cuts struck at a critical time for the three local carmakers because each is vulnerable for a different reason.

In the next six months Ford and Holden will decide what type of cars they will build from 2016 onwards -- and whether or not they will be built here.

Ford Australia built just 45,000 vehicles at its Broadmeadows factory last year -- including fewer than 30,000 Falcons -- and the parent company in Detroit has announced there will be no more one-off vehicles such as the Falcon and Territory for individual countries.

This means that Ford Australia must make a business case to Detroit as to why future Falcon- and Territory-type vehicles should be made in low numbers in Australia, when their equivalent US models will be made more cost-effectively in the hundreds of thousands in North American factories -- and could be imported with a zero tariff under the free trade agreement Australia has with the USA.

In January this year, Holden pledged its intentions to continue making the Commodore locally well into the 2020s -- but it would not be viable without government assistance.

Holden says its factory -- and any car factory for that matter -- must produce at least 100,000 vehicles per year to turn a profit. But last year its Adelaide plant built fewer than 60,000 vehicles.

Holden's parent company General Motors could potentially shift Commodore production to one of its under-utilised plants in North America, or elsewhere in the Asia-Pacific region. Holden already assembles the Caprice in China, while the majority of its small cars come from factories in Korea and Thailand.

Toyota built in excess of 120,000 vehicles (most of which were exported) last year but, despite producing by far the most number of vehicles, it is possibly the most vulnerable of the three local makers. The strong Australian currency has meant that Toyota Australia has been losing money on every Camry it exports.

In the next 12 months Toyota will make a decision on whether or not to build the 2017 Camry in Australia -- or import an identical vehicle from its Thailand factory with a zero tariff because of a free trade agreement Australia has with that country.

All this explains why the FCAI issued the following warning after the GCIF was axed: "The decision to abolish the Green Car Innovation Fund comes as an unwelcome surprise and it sends an adverse signal to international investors responsible for future investment in the Australian industry.

"We urge the Government not to renege on the clear policy framework which it has implemented to secure new investment and jobs in the industry.  We urge the Government to re-think this decision.

"The program was originally put in place in response to the 2008 review of the automotive industry, after extensive consultation with the industry and other stakeholders and it is a key element of the Government's New Car Plan."

The boss of Jaguar and Land Rover in Australia, David Blackhall, has a unique perspective on the dilemma facing Australian car manufacturers.

Before he took charge of the prestige brands locally seven years ago, he spent the majority of his automotive career -- more than 22 years -- with Ford Australia and has an intimate understanding of the local car industry. He was also formerly the marketing director of Ford in Taiwan.

As of January 1, he is responsible for Jaguar and Land Rover in the Asia-Pacific region and has just returned from a whistle-stop tour of his new territory. He is also on the FCAI executive committee.

"I think it's a worrying time for the three local manufacturers," he told the Carsales Network.

"[The industry] is in an extreme state of flux right now and there'll be some very important decisions made in the next six to 12 months about where companies place investment bets. That's not good news if you're looking at the big picture in Australia."

Blackhall is concerned that the lack of warning about the axing of the Green Car Fund will spook the global bosses of Ford, General Motors and Toyota.

"The most unnerving thing [about the Federal Government's funding cuts] is the without-warning change," he said.

"What [car] companies need is stability and certainty, to enable them to plan for the future. When you have something in place, you make big investment decisions based on that being in place -- but when that changes overnight, that changes the situation dramatically.

"If you're the boss of a car company sitting in Detroit or Japan and you're looking at the sudden without-warning move the Australian government has made, that does not instill you with confidence about making investment decisions here. [This is] especially [the case] when other governments -- some of them neighbouring countries to Australia -- are bending over backwards to encourage vehicle manufacturing to create jobs in those countries."

Blackhall said a reduction in -- or removal of -- financial support "alters the economic sums significantly".

"I'm not saying Julia Gillard could do anything else in the wake of floods and cyclones but when the policy changes overnight it changes the business case dramatically."

He said one of the biggest hurdles facing the local car industry was non-tariff trade barriers.

"Australia has signed Free Trade Agreements with some of its neighbours, and that's all well and good, but there hasn't been enough attention paid to the non-tariff barriers."

In Thailand, some cars attract a registration fee that is up to 200 per cent of the cost of the car because of the vehicle's engine size -- and Australian cars happen to fall into that category. In Singapore there is a modest import tariff, but the registration fee is equivalent to 100 per cent of the cost of the car.

"Successive Australian governments have talked about the level playing field and Australia's commitment to free trade... But what I've been surprised by in my first few weeks of looking at the Asian markets are the non-tariff barriers in countries such as Korea, Thailand and Malaysia," Blackhall said.

"There can be administrative barriers and bureaucratic processes that frankly are sometimes more difficult to negotiate that even figuring out what the price should be.

"A lot of effort goes into creating the perception of a level playing field by various governments around the region, but there ought to be an opportunity for those governments to sit down together and say ‘hey, are we really serious about this?'.

"I think Australia's attitude has been trying to do the right thing and what's best for world trade. No-one wants to go back to the 1930s when import tariffs were 60 and 70 per cent. But Australia has definitely led the field [in terms of free trade] and there are other countries with more nationalistic views that perhaps aren't coming along quite as easily."

He said a return to higher import tariffs was not the answer in Australia.

"Raising our import tariffs would be the wrong thing to do. Instead, real energy needs to be applied to have dialogue in ASEAN and other forums."

But even with non-tariff barriers removed, would Australian-made cars find wide appeal in our neighbouring countries? Small cars and body-on-frame utilities (such as the Toyota HiLux) dominate Asian-Pacific car sales. Large cars are even out of vogue in North America, as buyers shift to compact vehicles and SUVs.

Thailand is the world's capital for building body-on-frame (workhorse) utilities; they build them better and cheaper than any other country in the world so it is unlikely Australian factories could compete with them.

As Ford and Holden have proved, building small cars in Australia is not viable without government assistance. Ford halted plans to build the new Focus at Broadmeadows at the 11th hour because of a lack of government funding at the time. Holden got the Cruze hatch over the line because of government funding.

The inconvenient truth is that all these factors combine to create a grim outlook for local carmakers -- unless there is taxpayer support.

Basically, Australia needs to decide if it wants a car manufacturing industry -- and get behind it, or get out of the business.

Before you decide, just ask yourself what the 60,000 displaced workers are going to do and who is going to pay for their employment benefits, because there aren't that many research and engineering jobs to go around if the shop shuts on manufacturing.

Indeed, 60,000 jobless people would likely leave a black hole far greater than any cyclone or flood damage. Now you see them, now you don't.