Car industry subsidies in perspective

ScreenHunter_26 Apr. 10 20.33

Cross-posted from The Conversation

Holden’s announcement of job cuts on Monday demonstrates the dual impacts of the strong Australian dollar and import penetration upon the beleaguered domestic automotive industry.

400 jobs will go in Adelaide, with 100 in Victoria cut as well.

A myopic view of the industry is that it is merely about vehicles. However, local manufacturers Toyota, Ford, and Holden are only one part of a much broader automotive components manufacturing industry,


Holden has received $1.8 billion in industry assistance in the last 10 years. That works out at about $8.10 for every Australian man, woman and child, assuming a population of around 22 million.

An informal poll in The Age indicates that as many as 75% of readers are opposed to the maintenance of government subsidies and bail-outs to the industry. It’s clear that any parochialism or sentimental attachment to locally made cars is a relic of the distant past.

Yes, I am fully aware of ERP, the effective rate of protection, which is a complex multiplier based upon the direct and indirect flow-through costs of tariffs and other forms of protection for a given industry sector.


However, as Kim Carr noted recently, the industry, cumulatively, received subsidies amounting to less than $18 per person over the last decade. So it cost you, the long-suffering Australian taxpayer, the princely sum of $1.80 per annum to prevent the collapse of plants like Elizabeth, Fishermans Bend, Altona, Geelong and Broadmeadows.

But the flat-earth policies of the free-trade think tanks, who opine that subsidies should be removed at all costs, invariably have no solutions to the systematic deindustrialisation and large-scale unemployment their prescriptions will inevitably bring. (A solid counter-argument to this perspective is advanced by Kalfa and Gollan here.)

These “free-traders” ignore the deep asymmetries wrought by industrial subsidies that persist throughout the rest of the world economy. They propagate the Ricardian fallacy that whatever cannot be produced efficiently locally should be imported.


Imports, in this case, of subsidised cars.

You. Are. Subsidised.

Think this $18-per-capita car subsidy is too much? Think again.

You — yes, you — subsidise the banks to the tune of $763 per annum, plus all the fees and charges they generously impose upon you. Not quite the chunk of change ($83 billion) the US government affords its banks in subsidies, but still.


And the mining industry doesn’t have clean hands either. They get at least $4 billion per annum. Queensland alone spends $1.4 billion in subsidies.

Let’s be clear about this: virtually every industry in Australia is subsidised, directly or indirectly, via government hand-outs.

We’ll try a little quiz first. Tick any box that applies to you:


Your child care.

Your private (and public) health insurance.

Your wheat. (The Australian Wheat Board runs a single desk that avoids a genuinely free market in wheat export sales. And does deals with the late-lamented Saddam, occasionally.)

Your private schools.

Your universities.

Your accountant.

Your private-sector big law firm, which would require oxygen if starved of government contracts. A Victorian government-commissioned report (by Boston Consulting) notes that, “up until now the provision of legal services has largely been an unsupervised feeding trough for law firms.” (It’s now a supervised feeding trough.)

Your National Broadband Network. (My telecoms engineering friends are still giggling with delight at the mere thought of the NBN and have all ordered new 7-Series BMWs.)


Your first home.

Your nursing home.

Your negative gearing.

Your ABC.

My salary.

Your salary.

Your superannuation tax breaks.

Actors and the arts in general (don’t me get started; I’ll end up sounding like Jack Hibberd).

Corporate welfare.


Don’t kid yourself if you’re in business. Tax breaks infiltrate every part of the scaly Australian subsidy serpent. Virtually every business input is tax deductible. For example, that “company” car you drive around at weekends? The “home office” with a chunk of the domestic mortgage on it as a business expense? If you’re not doing this, then you’re paying far too much tax.

True, sectors like dairy have very low subsidies (the second-lowest in the world). But don’t make the mistake of thinking you didn’t pay for dairy industry rationalisation: you did.

From 1995, under the National Competition Policy (NCP), taxpayers funded billions in rationalisation across a range of industry sectors. One of the objectives of the NCP was to drive Queensland dairy farmers off the land, compensate them with a fistful of dollars, and hand the dairy industry over to Victorian dairy farmers, who then have their teats sucked dry as the supermarkets screw them on milk prices to the point of bankruptcy. Good to see the ACCC doing such a fine job regulating predatory behaviour.


Unless you have no children, live in a cave, avoid Weet-Bix, The Marriage of Figaro, and Dimboola, while consuming only dairy products, You. Are. Subsidised.

No guru. No method.

I am not in any sense defending the poor business decisions by the industry, or the incompetent government policy that has prevailed since John McEwan was Trade and Industry minister. Federal and state governments locked themselves permanently into a system of auto industry subsidies and protection from 1948. Whitlam slashed tariffs across the board, but delivered no industry plan. John Button rationalised the industry, but set Soviet-style production quotas and sought no innovation. Howard, Rudd and Gillard merely trod water.


The reason the industry failed to innovate behind high tariff walls was because it catered virtually exclusively for the domestic market for the first few decades of its existence. Governments were equally to blame as they did not attach conditionality to the complex system of tariffs and subsidies that could have compelled the industry to invest in new technologies or truly innovative products.

In the 1970s, Ralph Sarich’s noteworthy Orbital engine, while lauded, never took off. Sarich nevertheless developed new engine technologies, inking licensing agreements with GM and VW. Sarich ultimately transformed Oribtal into a billion-dollar company on the New York Stock Exchange. Orbital products are now utilised by one of China’s major auto firms.

Except that Sarich didn’t achieve this in Australia. He had to go offshore. No one was interested, even though Sarich was famously parochial. In 1989, the federal government offered him $16.5 million to keep Orbital in Australia. Too little, too late.


Real jobs or McJobs?

Manufacturing provides stable wages and working conditions across a range of industry sectors (some 2009 and 2011 statistics are here and here). It also employs around 1 million workers directly, contributes almost 10% of GDP, and accounts for around one third of exports. Male workers occupy approximately 75% of manufacturing jobs. Manufacturing careers are often long-lived; workers may be employed by, say, Holden or Ford for 20 or 30 years.

But when deindustrialisation hollows out manufacturing and downsizing occurs, the following problems emerge.


First, how do you retrain and redeploy workers aged 40–55 to compete effectively in alternative labour markets? Ageism is rife throughout the Australian jobs market. And retraining – even if it works – takes real time. And time is not on some workers’ sides.

Moreover, any retraining costs invariably fall upon government, meaning taxpayers are forced to shell out in any case. Not to mention the inevitable social security costs associated with the fallout from deindustrialisation.

Second, what industries will replace labour-intensive heavy industry in Geelong, Elizabeth and other manufacturing hubs throughout Australia?


Third, Australian manufacturing employment still dwarfs mining employment, although the gap has narrowed. Mining will not take up the slack, nor is it geared to absorb the existing automotive industry skills base.

Fourth, the auto components industry manufactures parts for imported (as well as local) products. However, they achieve scale economies largely through supplying the downstream car-makers, without which it is unlikely most small and medium auto components firms would be able to derive sufficient revenue streams in the absence of volume production for particular models (Falcon, Commodore, Camry). In other words, they need local volume in order to be serious about export-geared production.

Fifth, it is inefficient to waste the considerable investments, accumulated over decades, in the skills and training regimes embedded in the automotive, materials and production engineering sectors. Dumping this skills base makes no sense; adopting adaptation strategies for an existing industry is the logical path.


The industry’s problems are not entirely of their own making. The high Australian dollar exchange rate; the free-trade agreement with Thailand in 2007; weak world demand, combined with the economics of surplus capacity in the global automotive industry, where there are over 30 million units of surplus production, have all contributed to the downsizing of the industry. Essentially, the industry has become a victim of the law of diminishing returns: despite increased subsidies, jobs in the sector have decreased in rough correlation with outputs. In other words, neither jobs nor the industry will be saved via incremental productivity gains.

Roads to somewhere?

Perhaps we should look to Beijing for guidance. After all, that’s where virtually the entire federal cabinet is currently.


China is looking at subsidizing electric and hybrid cars (while filing a case against the EU in the WTO, designed, cleverly, to stop Europe from subsidizing high-value green technologies, while China plays protectionist catch-up).

The Germans are also looking at electric car subsidies. The Germans also subsidize their car industry to the tune of about $US95 per capita. A far cry from Australia’s $AUD18. Not quite the $US260 the Americans pay per head.

Neither the Chinese nor the Germans are stupid. They know their auto industries are strategically important to their economic present and future. I won’t regurgitate the arguments concerning the security of the industrial base, the skills base and the jobs base, as I canvassed them here in 2012.


Just five years ago, the Holden engine plant at Fishermans Bend, Victora, was scheduled for closure following the cessation of Family II engine production. However, new investment and government assistance ensured the plant’s survival as it was re-geared to produce the HF V6 Alloytec engine. But a lack of local and global demand has also compelled reductions in output at the Fishermans Bend plant, leading to this week’s job cuts.

Australia has first-rate engineers and builds world-quality suspension and braking systems, develops advanced composites and innovative alloy technologies.

Australia also builds second-rate cars. It has a third-rate managerial class and fourth-rate governments.


It has the knowledge and capabilities to develop world-class next-generation electric and hybrid technologies. Even if Australia specialises solely in the export of high value-added components to the global automotive industry, rather than building complete vehicles, this is the preferable road to travel, rather than the gradual unravelling of an entire industry that is one of the central components of the country’s manufacturing base.

Better a small multitude of Ralph Sarichs than a plethora of unwanted cars.

Article by Remy Davison, Jean Monnet Chair in Politics and Economics at Monash University

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.