Good money after bad for Australia’s car industry: Thomson

This morning, Prime Minister Kevin Rudd and Federal Industry Minister Kim Carr have announced the Government will hand the Australian automotive industry $6.2 billion in the form of a 13-year assistance package called the New Car Plan for a Greener Future

The world’s financial markets in chaos, global economies are hurtling towards recession, and the Federal Government’s budget revenues have taken a $40 billion hit.

In a crazy mixed-up world, it’s good to have one slice of certainty – the Government’s unwavering willingness to spend billions to underwrite the car industry.

There are four planks to the plan:

An expansion of the previously-proposed Green Car Innovation Fund from $500 million to $1.3 billion over the next 10 years. The fund, which is designed to encourage car markers to build vehicles with improved fuel efficiency and lower emissions, will have a one-to-three investment ratio (for every $1 Government invests, industry will be required to invest $3).
A $3.4 billion Automotive Transformation Scheme that will run for 13 years and invest in R&D on a one-to-two basis and on new equipment purchases on a one-to-seven basis.
A $116 million structural adjustment program to help parts companies consolidate and pay for redundancies.
A reduction on import tariffs from 10% to 5% in 2010.

Former Victorian premier Steve Bracks, who conducted a review into the industry on behalf of Rudd and Carr earlier this year, had only recommended a $2.5 billion industry assistance package, including doubling the Government’s green car fund from $500 million to $1 billion and setting up a special $60 million fund to help component makers.

Rudd and Carr have decided to go much, much further than that.

This morning the pair made no effort to hide the fact the automotive plan is designed to secure the jobs of the 65,000 workers directly employed by the automotive industry and the 200,000 indirectly employed.

“This is a first-class industry that demands support,” Rudd declared today.

But convincing taxpayers of the fact will not be easy, despite the rhetoric about building a new green wonder-industry.

The fact is the Australian automotive industry is in deep, deep trouble, mainly because Australian consumers do not want to buy the family-sized cars that Australia’s car makers – Ford Australia, GM Holden and Toyota – have pumped out for the best part of five decades.

Competition from importers and rising materials costs have smashed profit margins (local car makers lost around $400 million last year) and led to widespread job losses.

To make matters worse, the parent companies of the local car makers are struggling, with General Motors and Ford Motor Company posting disastrous third quarter losses ($US2.5 billion and $US2.75 billion respectively) and openly talking about the prospects of bankruptcy.

The local car makers are largely reliant on funding support from their parent companies – how Rudd and Carr expect these car markers to fund investment at all in the short-term is not clear. Ford and GM may not even exist in 12 months, which would put the future of their local subsidies under a huge cloud.

Rudd and Carr’s plan to encourage Australia’s car industry to transform its practices and concentrate on greener, smaller and more fuel efficient cars is fine in theory. But implementing the plan requires billions of dollars that Australia’s car industry just does not have in the current environment.

Taxpayers have a right to ask whether their cash is really being spent wisely in these difficult economic times.

Kevin Rudd says the $6.2 billion of investment will generate $16 billion of investment. It’s an impressive-sounding amount, but it’s not that great a return.

Does a struggling automotive industry facing an uncertain future really deserve that level of assistance?

What do you think about the $6.2 billion automotive package? Send your thoughts to feedback@smartcompany.com.au