Car company hands will be out again

I always felt like a bit of a fraud when I covered the automotive sector for BRW from about 2001 to 2004. I wasn’t a petrol head, I knew little about torque or revs and I couldn’t even drive a manual vehicle.

But it wasn’t too hard to see that this was an industry that faced an uphill battle for survival, even during a period when the Australian economy was performing well. Even then, this was an industry that loved to perpetuate the idea that it would live or die based on decisions made by parent companies in Detroit and Tokyo, and those decisions would depend on the level of “commitment” Australian governments were prepared to make to the sector.

Yesterday’s announcement that the Federal and Victorian Governments would hand Ford Australia $32 million shows nothing has changed. In the coming days, the South Australian and Federal Government are expected to announce as much as $100 million in funding for Holden.

These handouts (the Federal Government likes to call them “co-investments”) will shore up the production of Ford’s current vehicles, the Falcon and the Territory, but only until 2016. The Commodore will also stay in production until 2016, although Holden can’t commit to the model beyond that at this stage.

That means you can almost guarantee that in three year’s time, Holden and Ford will again start making noises about their viability and the need for support.

John Conomis, the former boss of Toyota Australia who is now the Federal Government’s automotive envoy, said yesterday that the Government wants the industry to be competitive without government assistance by 2020, but surely history suggests this is unlikely. Indeed, the Federal Government made it clear it has a further $3.5 billion to spend on the industry over the next decade.

The politics of this is pretty obvious. The automotive industry claims to directly employ 60,000 people, support a further 400,000 jobs and include more than 200 companies. The state of the industry is politically sensitive, particularly in Victoria where about 60% of vehicles are produced.

For the Federal and Victorian Governments, this assistance is a no-brainer. In a quiet news period what could be better than getting good old Kim Carr on the front page (yes, the same Kim Carr who was brutally dumped as Industry Minister in Julia Gillard’s pre-Christmas reshuffle) talking about saving jobs?

But the big question hasn’t gone away: How long can the Government continue to support the automotive sector?

Labor MP Darren Cheeseman, whose seat is in the Ford stronghold of Geelong, inadvertently raised an interesting point when he said that while Australian could not compete with low-cost manufacturing centres in Asia, “we have to compete on innovation and technology”.

But how successful has the car industry been at doing that? Looking at the bald sales figures, it could be argued that the Australian industry is focused on large family cars that a decreasing number of Australians want.

Sales of locally produced cars fell from 264,946 in 1996 to 209,796 in 2001 and 141,939 last year. More tellingly, the percentage of total car sales held by locally-produced cars has fallen from 53.8% to just 14.1% over the past 15 years, although tariffs on imported vehicles have fallen during this period.

Sales of the Falcon, which has now been saved until 2016, fell a staggering 36.5% last year to just 18,741 units. Sales of the Commodore were down 11.6%, while Toyota’s local production fell more than 20%, due in no small part to supply problems caused by the Japanese tsunami.

Ford’s other Australian vehicle did better. The Territory sports utility vehicle, which is based on the Falcon platform, saw its sales rise 20%, but at 13,866 sales it remains well outside the top 10 vehicles sold.

Holden did well with its locally-produced small car the Cruze, which sold 33,784 units and helped boost output from the Holden factory by 30%. But it’s hard to argue this vehicle does a lot to help Australia “compete on innovation and technology,” as Cheeseman said, given it is a globally designed car and largely based on a vehicle from the Daewoo factory in Korea.

The government funds handed to Ford are to be used to reduce the carbon footprint of the vehicle by 5% from 2014, through better fuel efficiency and changes to tyres, transmissions and aerodynamics. All important stuff, but it’s hardly a great shift to hybrid or electric vehicles. Ford will still be making the same Falcon that the market appears to want less and less.

In The Australian today, economists Warren McKibbin and Henry Ergas have called for the Productivity Commission to assess the viability of the car industry and examine the social and economic costs of continued government support.

That sounds reasonable. Let’s test the importance of the “innovation and technology” that is coming out of the Australian car sector. Let’s test the social and economic impacts of cutting off government funding.

The last time the Commission looked at the sector was in 2002. A lot has changed since then – but nothing that suggests the car industry in Australia will do anything but continue to limp along.