MANUFACTURING: by Craig MilneNews Weekly
Car-making could be our flagship industry
, April 26, 2008
Australia's shrinking automotive industry is in dire trouble. However, if the right strategic changes were made, Australia could have an important, scale-efficient, high-quality automotive industry two or three times its current size, argues Craig Milne.
Despite record sales of new vehicles, Australian automotive manufacturing is in trouble. Evidence is provided by the spectacular rise in imports, from a quota and tariff-restricted 20 per cent market share 25 years ago to more than 80 per cent today.
The declining share of Australian production in the domestic market has placed the continuation of local manufacturing in doubt.
Apart from obvious threats from established and emerging foreign competitors, a number of factors are working against the survival of the local industry.
These include defects in industry structure, past deficiencies in technical and operational practice, a strategic orientation that does not serve our national interest, and the effects of industry policy failure.
These defects have prevented the industry from achieving its optimal size, composition, technical capability and productivity, and will ensure its demise if not addressed.Discontinued
The Australian automotive industry faces many problems. The most obvious is that it builds only large cars. Small car production was discontinued as protection levels fell. Without locally-built small or medium-sized cars — and with large cars now accounting for less than 20 per cent of domestic sales — most of the national market has been handed to imports.
Exports of Australian large cars have risen, but not by enough to offset imports. There are few markets available for large non-premium vehicles of the type built here, and access to the most important of these markets, the United States, is closely regulated by GM and prevented by Ford.
Local firms are often criticised for their dogged attachment to large cars. A couple of points should be made here. First, the products offered today were decided upon many years ago, when oil was much less expensive. Second, local firms do not have the freedom to build whatever they wish.
As subsidiaries of global businesses that build small and medium cars in other parts of the world, local firms must source most of their product range from elsewhere.
Another problem is that Holden and Ford, the only local firms able to design unique models, were slow to match emergent paradigm shifts by their Japanese and European competitors.
Local firms persisted with obsolete technology and with low-quality American-style build-standards for too long. As a result, customers drifted away from their products, not only because these became too large for their needs, but also because imports offered better value.
Although striking progress towards industry best practice is evident in the latest Australian products, the local firms may have missed the boat. The inferiority of Australian cars was obvious decades ago, and a more timely and energetic response to the import challenge was needed.
In the meantime, a large cohort of Australian buyers moved on. It will be hard to win them back. Assiduous efforts to improve technology, quality and productivity will be needed if the lost market share is to be regained.
The most difficult problem for the Australian industry has already been alluded to: it is that the principal firms are all foreign-owned. Despite the obvious financial, technological, product range and scale benefits that accrue to a subsidiary of a global business, these benefits are negated by the fact that global businesses have no compelling interest in continuing with Australian manufacturing operations.
The problem is that foreign firms, with tariffs effectively gone, see greener fields in Asia, Eastern Europe and Latin America. Apart from not wanting to be here in the first place, these firms see Australia as a small, mature market, a long way from anywhere, with high labour costs, too much regulation and a volatile currency. It is not a good place to build motor cars.
There may be a bit of local knowledge, but equal or better is available elsewhere. All that keeps these firms here is the fear of market shrinkage that might attend the closure of manufacturing, and a steady trickle of public money.
So long as government hands over money, these firms will stay. And government is handing over quite a lot. Under the current Automotive Competitiveness and Investment Scheme (ACIS), more than $7 billion has been earmarked for the industry, and about half has already been spent.
It is a staggering amount of money to have produced so little. These are sums large enough to purchase outright some of the world's major car companies, although their application here has failed to even secure a long-term commitment to the maintenance of tiny local manufacturing operations.
Of greater concern is that the current policy seems to embody a willingness to fail. Australian economic policy is driven by a free trade mindset that attaches little importance to manufacturing. The mainstream tendency has chosen "mining and services" as its shining path. From this purview, automotive industry assistance is seen as palliative care — a balm to the suffering of a dying industry, a pillow to quieten its wasting away.
Manufacturing is much more important than this. It provides our technical depth and a ground for innovation, it diversifies and secures our economic life, it places us in the company of the advanced nations, it affirms our intelligence and our organisational ability, and it advances our national culture.
Car-making should be our flagship manufacturing industry. If the strategic fundamentals were properly addressed, it could be. Australia could have an important, scale-efficient, high-quality automotive industry two or three times its current size, but it will not happen if we continue with what we are doing.— Craig Milne is executive director of the Australian Productivity Council, a private consultancy.