Ex-PC economist fires back at car industry losses

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By Leith van Onselen

Former senior adviser to the Productivity Commission, Jonathan Pincus, has fired back at the findings of the Monash University’s and Allen Consulting Group’s study into the impacts of the closure of Australia’s automotive industry, which claims that Australia’s GDP would take a $7.3 billion (0.6%) hit by 2018 if the car industry shut down, with the overall economy losing some $21.5 billion of activity in net present value (NPV) terms.

According to Pincus, the long-term benefits to the economy from the car industry closing would outweigh the short-term costs by around 2:1 in NPV terms:

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“Almost any reform will cause an initial loss and, if the present value of gains is calculated over a short enough time period, no reform would look to be worthwhile” he said…

Professor Pincus said the modelling showed the cumulative losses out to 2023 added up to about 0.85 per cent of GDP, whereas from 2027 onwards, there was a gain of about 0.1 per cent of GDP a year…

Professor Pincus said the long-term gains would reach 2 per cent of GDP, or more than double the claimed losses (assuming a discount rate, which is roughly equivalent to the government bond rate of 5 per cent).

While I don’t dispute Professor Pincus’ findings, he also needs to recognise that shuttering Australia’s biggest manufacturing industry at precisely the same time as mining investment is set to plunge would be poor policy and risks all sorts of ripple effects that could knock Australian growth onto an entirely different long term course.

While there indeed may be longer-term benefits in doing so, now is not the time to wind back assistance to the automotive industry.

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Comments

  1. “now is not the time to wind back assistance to the automotive industry.”

    Assistance like this you mean?;

    “HOLDEN workers will receive cash bonuses and annual pay rises worth almost $5 million during the next two months as the carmaker seeks extra taxpayer assistance from the federal government to stave off closure.

    The struggling car company, which has received $2.7 billion in subsidies over the past 12 years, including a $275m co-investment package from state and federal governments last year, will have to walk away from a wage freeze it had negotiated with unions in August in an attempt to keep down costs.”

    Pincus is absolutely correct. End the subsidy to Unions.

    • GSM,

      I was discussing innovation with some innovators recently and I asked – how is that Sweden – with half our population and twice the tax burden has ~10 significant global brands and we have almost none.

      One suggestion – their creativity and skill is all they have – they have no resource cash cow to fall back upon…

      Coal is in decline, LNG will remain a cash cow – but probably not grow beyond the current projects and yes IO is doing well (and I’m a beneficiary of the latter two – so I’m no opponent of the resource sector); but there will be an investment cliff.

      What replaces it?

      There is still more advanced LOCALLY sourced content in the auto sector than there is in mining and O&G.

      The auto sector such as it is, remains the one of the greatest users of locally sourced technology.

      Australia is shocking at innovation already and you want to kill off a significant chunk of what remains of our technical capacity?

      I note that Prof. Pincus’ position is the dead opposite of other respected economists. I also note the abject failure by many intelligent people to predict the iron ore price. So I have no confidence in either Pincus, Allens’ or Monash’s predictions…

      So what’s the vision? How does Australia benefit from killing off a significant part of it’s technical capacity? No dismal science please ….

      • Just loving this wholly nebulous notion of ‘Technical Capacity’.

        ‘Technical Capacity’ to do what precisely?

        Assemble cars from mostly imported material. C.F the local/foreign composition of the Cruze.

        Put a diesel powerplant in the Commodore VE and VF to enable export to large RHD markets where commodity cars with large V6 and V8 petrol engines are wholly unsellable due to pathetic fuel economy and taxation.

        Oops, that didn’t happen because instead its easier for GM to emotionally blackmail the bunch of mugs running things here for even more handouts…

        Any other answer which involves converting factories to build tanks and AFVs will be laughed at derisively.

      • The reason is long cold winters in the Northern hemisphere. When you’re stuck indoors you can come up with and tinker with new innovations. I’m convinced that’s why Europe advanced. Compare that to warm climate countries were people are out enjoying themselves.

      • JoeBlow,

        This is an example of the problem the county being run by people lacking technical insight – making short sighted comments about “technical capacity”.

        Innovation – is at it’s core technical. Those who run this country – economists, lawyers, party apparatchiks (from either side), think and say what you just asserted. (I’m fortunate to have both technical and commercial education/experience).

        The entire body, suspension system, crash structure, vehicle systems, internal components, systems integration of the VF commodore – are all done here.

        For both the Cruze and the Commodore, the factory tooling, robotics, etc are all designed here, integrated here and commissioned here using specialist automation firms.

        CAT trucks are built OS and only driven locally. Large processing plant modules are built and pre-commissioned overseas, (in both mining and O&G).

        Increasingly – as we want to implement a technology innovation – we need need to source specialist overseas expertise. The problem with that is that there are less and less people WITH specialist expertise thinking about innovation and competing with each other domestically.

        If we have less technically capable people, less technical activity and creativity going on – we’ll have less innovation. Less technical buzz, less like California more like stuffed Detroit.

        Simple.

        The let’s just hire the nerds thinking – misses the point that it’s very often the nerds that come up with the ideas…

        My reference to “technical Capacity” is not nebulous at all. I can bang on for hours with quite specific examples if you’d like. I pretty sure any technical innovator would know precisely what I’m on about ….

      • You couldn’t be more correct HRHolden.

        Anyone who thinks that we can just do the design/engineering/IP work here and fully outsource our manufacturing clearly has no idea about how engineering really works.

        Your big projects in the resources sector are having a hell of a time managing costs because the amount of overheads and contract disputes involved in offshore design and fabrication is never adequately estimated or prepared for.

        Everyone seems to think it’s as simple as doing a couple of sketches on the back of a napkin, sending that to India to get drafted and then sending the drawings to China to get manufactured, finally assembling it all like a piece of Ikea furniture on-site. It just doesn’t work.

      • @HRHolden,

        Stealing money from the productive economy to make products no one wants to buy is not ‘innovation’, it’s rent seeking parasitism.

        For all the alleged ‘innovation’ outlined above, there is absolutely nothing unique about it, Over a dozen other countries globally are doing a far better job of it.

        As TNA points out here.

        http://thenewaustralian.org/?p=10418#comment-9576

        “Two headlines from this chapter which we are meant to take away and keep in our heads for middle class dinner parties;

        – $1 of government welfare assistance produces $18 in the economy

        – The current $500m p.a. welfare assistance results in 33,000 jobs

        Okaaaaay…. Let’s run with that thought for a moment;

        The total number of unemployed Australians is about 700,000. If they are claiming dole (and some won’t be) they get $246 per person per week, or $8.9bn a year.

        The equivalent weekly cost for an automotive worker using The Turkeys’ figures is $291 per person per week.

        Do you see where I’m going here? Government stimulus to a failing business is a poor investment compared with, say, just throwing money at people to sit on their arse all day.”

    • So, $5 million works out to about $790 per employee.

      Totally outrageous!! My god, what are we doing about these evil scumbag unions?!?!?

      Meanwhile ~$30bn a year in subsidies for the housing industry and no one bats a goddamn eyelid.

    • It’s not about spending 100% of GDP on the automotive industry, it’s about maintaining a balanced and stable economy.

      Pull away some of the subsidies from other industries first. The amount that Holden/Toyota/et al get compared to some other industries is nothing!

  2. When I worked for GMH in a technical capacity, money was thrown around like you wouldn’t believe. That was the 1990’s, but I bet it’s similar now. Detroit will take every last dollar from the taxpayer, and then shoot through. I imagine they have a well developed exit strategy, ready to go whenever they want.

    • Not So Mr X. I too was involved with GM in the 90’s.

      What I can assure you now is that they are as tight as fish’s proverbial, much of their office space is now vacant and every dollar must be justified. Although they are currently investing in cost reduction and productivity improvements.

    • That certainly wasn’t my experience in the component supply chain in that era – we were continuously streamlining & scrambling for every cent.

      Disappointing to hear that while we were as thrifty as we could be, our paymasters were splurging…..

    • I don’t know what it was like in the 90s, but I work in the resources industry and have a couple of mates in processing/manufacturing companies. They are amazed at the stories I tell them of the amount of money pissed up the wall on big-ticket resource projects. While I am equally amazed that they can even manage to keep making things despite the massive cost pressures on them to increase productivity.

      There are a couple of sectors sucking up money out of the economy like parasites, but it sure as hell isn’t manufacturing.

      • No Jason it’s not Manufacturing. Over the last 30 years, all I’ve ever seen is streamlining, streamlining, streamlining. And it’s still getting tighter, to the point of being pointless.

  3. The shutting of the car industry and the opening up of imports of second hand cars from Japan would be a significant benefit to many people.

    In all of these debates there are interests which benefit and those which lose.

    Land prices falling benefit the young who haven’t invested but not the overgeared who have invested recently, a falling dollar would help manufacturers and their distribution chain but hurt the distribution chains of imported goods, a major fall in the currency would help manufacturers and their employees but hurt the buying power (including of foreign investments as well as overseas holidays) of most Australian and devalue our wealth in international terms.

    • + 1000000

      Strong currency v weak currency
      tarriff protection v free trade

      Winners and losers depending on where you stand.

      This is my primary objection to continued support of a dying car industry. All very well if you work in the automotive supply chain or are a share holder in such companies.

      If you are a taxpayer or Australian consumer then assume the ankle grab position.

    • Doesn’t everyone benefit from a balanced and stable economy?

      What is the endgame here, have 0% of our economy in value added manufacturing, 10% in primary industry and 90% in services?

      How the hell is that sustainable? Where is the money going to come from to fund this consumption and provision of services?

      • You want to subsidise and protect uncompetitive manufacturing businesses?

        Where is the money going to come from to protect these uncompetitive and inefficent manufacturing businesses?

        Yep thats right from the productive and efficient manufacturing businesses.

        If the PC don’t knock this stupidity on the head we may as well do away with them as well.

        The science is in.

        End protectionism now.

      • I’d prefer to remove subsidies from most industries and level the playing field.

        But if you’re really mad about subsidies, manufacturing isn’t the right target. The scale of subsidies and guarantees received by the finance and housing industries far outweighs manufacturing. Have you ever seen a ‘First Car Owners Grant’?

        Labour productivity still keeps increasing at a close to constant rate, what has changed in the last 10-15 years is a huge asset bubble in property prices of unprecedented scale on the back of a highly sophisticated rent seeking strategy centred in the finance sector.

        Capital is now largely centred around asset prices of things that already exist, produce nothing of value and require little maintenance/opex expenditure.

      • Hey Patrician – what’s your vision? What will Australia look like in 1o years? What will we be doing?

        What if innovation doesn’t take off and we have lost the ability to value add?

        Might government need top introduce policies to promote innovation and technology be required? It will cost much more than $200 million per year to deliver the amount of activity created by the Auto sector, (which is currently $7.3 billion).

        Heck – $200 or even $500 million per year to retain $7.3 billion in activity seems like a no-brainer to me. Surely only mindless dogma would throw that baby out with the bathwater…

        It might be easy to make these big calls in your twilight years – but for me, in the middle of my career, keeping a team employed – I want to hear your job creation vision – rather than an overly repeated position statement.

    • Lower the cost of cars… increase fuel efficiency standards? (Do they even exist in Australia?)

      So many things could be fixed simply by indexing fuel excise against inflation.

  4. All good points made above, car industry going probably would be a shame. Don’t know if it would really be a disaster as some are pointing out. But it would be good if they could make something well that somebody wanted. All the talk about saving them & yet you pull up at lights & its all foreign owned vehicles. Also a pay rise right now is an appalling look & is almost unvelievable, but pretty normal.

    • More than that, I remember when ford announced they were closing and the media was interviewing staff in the ford car park, I think there was one ford in sight. If the workers at ford don’t buy fords what hope do they have?

      I’m for assistance but why couldn’t the govt have put some conditions around the assistance given. e.g. making it a loan to be repaid, given some equity in GM, having minimum export requirements or imposing a minimum time that the manufacturers have to stay in Australia etc

      • Jumping jack flash

        “… I think there was one ford in sight. If the workers at ford don’t buy fords what hope do they have?”

        Interesting.

        As far as I remember this was covered by Marx, and also mentioned in Einstein’s analysis of the great depression.

        Workers must be willing and able to purchase the products they produce. If they find better value elsewhere, ie, the products are too expensive, then the manufacturer has essentially failed.

  5. I’m in two minds. While I am generally not in favour of business being propped up by taxpayer funding, I can think of several scenarios where that is unavoidable or even desirable, eg. tech R&D in certain areas funded by government subsidies/grants. I do not oppose attempts to retain manufacturing and/or related technological capacity and know-how. IN fact, I think that such capabilities should be retained because I cannot see how an economy will thrive without a strong manufacturing base. If taxpayer funding is necessary to retain technology and capacity, I support it – as long as there is a coherent strategy to deploy such capability into other manufacturing industries, and consequent assistance in these as well.

    Where is the strategy to ensure that, after receiving all these subsidies, these foreign-owned companies will not simply up and leave, taking all the knowhow with them? What plans are there to make sure that the country benefits, in the long-term, from the assistance provided to the car industry?

    I see no evidence of this. It is for this reason that I oppose continued support to the car industry, without evidence of real benefit to the country as a whole.

    Besides, as someone pointed out, we subside flipping housing “investment” to the tune of billions each year. Why not give that money to someone that makes something???

  6. “There’s a paradox when the industry claims that it has fantastic spillovers and is a hi-tech industry, and yet all these workers can’t find a job when you close the industry down”.

    Perhaps because there is less & less manufacturing left to run to anymore? I know of quite a few metal tradies who’ve just left it all behind before they become too old to adapt – most often for better money too.

    “While many of Australia’s most successful auto suppliers have already shifted manufacturing offshore, smart companies will adjust from the loss of auto-industry customers to other industries. The FCAI modelling appears to assume they disappear altogether”.

    I wonder what data he has to support that claim? I’d like to know what the ‘other industries’ are too. If they’re smart they’ve already gone OS, there is no demand here for uncompetitive pricing, even if it really is the best they can do. The suppliers I’ve known have all tried their hand at adapting or finding other products to run – with little success by what I’ve seen, & a lot of that has to do with initial tooling costs, let alone ongoing inputs. In that light I would have to agree with the FCAI that they do indeed disappear altogether.

  7. Another ex-PC economist slams dodgy industry backed report

    http://www.afr.com/p/australia2-0/car_industry_study_slammed_wL5btb3s53M2OEsTjUwgcL

    I normally have little faith in IPA’s rants but on this they are spot on.

    “The modelling makes little account for the boon to the economy when billions of dollars stop being given hand over fist from taxpayer’s hip pockets to multinational corporations, in favour of viable and sustainable industries, and improved living standards and economic growth from buying cheaper cars,” he said.

    • Careful – the IPA would walk off a cliff it was part of barking mad right wing dogma.

      Precisely, what billions of dollars?

      If they are talking about the 5% duty – please tell me how lifting 5% off the price of imported cars is going value add within Australia? People won’t spend any less on imported cars – they will still spend as much as they think they can afford – a 5% price redcution will just manifest as leather accents and GPS options.

      • You are being wilfully disingenuous with the 5% spiel here, The elephant in room is is the implicit subsidy through the effective outlawing of parallel importing of motor vehicles.

        If Australian consumers were permitted to buy their cars at prices close to NZ or the UK, Holden would be forced to price their cars appropriately as they do for the US market or go out of business.

      • Enough of the personal denigration JB. To have the temerity to hold a different view to you does not make one disingenuous. To be one of those thirteen countries that can make a car from design to completion is a remarkable thing given the size of the industry and an achievement. It is absurd to think in a world where everyone protects their manufacturers to get economies of scale that Australian cars should not get any assistance. It is ideological fundamentalism. To maintain the industry is self-defence in a mercantilist world.

      • “The car industry has been in decline since the early 1980s, when Senator John Button introduced his car industry plan to help producers adjust as their protection was reduced. When the industry’s tariff protection was recently reduced by a further 5 per cent, car manufacturers received $6.2 billion of taxpayer support to compensate for the private costs of adjusting to the reduction in border protection. That was followed by selective “innovation” subsidies for individual producers and location subsidies from the Victorian and South Australian governments. ” – Bill Carmichael AFR

      • Good point well made patrician.

        But there is another side.

        “Senator Carr defended the level of taxpayer assistance and said mining and agriculture received more taxpayer support than the car industry, including $6.2 billion to the mining industry over the past four years in diesel fuel rebates alone. ”It will cost a lot more if we don’t have the automotive industry in Australia,” he said. ”It is the foundation stone of manufacturing that employs 1 million people in Australia.” The Age Jan 11 2012

        Mining does not employ in the same degree. Mining is also largely foreign owned but does not have the multiplier.

    • JoeBlow – the parallel import applies more significantly to 2nd hand cars. Not sure how you’re going get a manufacturer to sell you new cars so you can parallel import them. We have about the least protected car industry on the planet. Fact. Countries with more creative technical types in the leadership aren’t as short sighted as us… And that we are – with our near zero global brands…..

      Patrician – $6.2 billion since the Button car plan started in 1985? Is that indexed? If not it’s 229 million per annum – to retain one of the worlds most sought after industries? Sounds like a bargain. How much money has the US piled into Boeing and the EU into Airbus – but I guess they’re a waste of space too…

      Both of you – you’re great at knocking and negativity. You have both failed to tell us your grand vision for a better Australia – without advanced, high volume manufacturing. Tell me what clever stuff we are going to do?

      BTW Joe – did I say that OZ auto industry was a hotbed of innovation? No, I said “Technical Capacity” the ability to do do stuff and the critical mass of technical activity that supports the few who are innovative. To prevent them bailing out of Australia – to stem the brain drain…

      Tell me your plan to develop some globally recognised Australian brands so that we might be viewed as more than a quarry and a nice but very distant holiday destination, (when the exchange rate isn’t through the roof).

      • +100 What needs to happen is that the rules need to be changed so that the locals succeed as best as can be done with as little public money as can be done. It is possible. That’s what everyone else does!!

      • HR, Is 30yrs not long enough to determine whether a business is viable and deserving of further support? How long do you want 50yrs? 100yrs?

        What needs to happen is we need to transition the support to those many locally owned manufacturing businesses that have proven themselves over many years to be internationally competitive and sustainable.

    • How many of the car producing countries cited in this reference can you say have give no government help to car makers. I posit none. It is apparent that none of those producers choose scorched earth as an option.

      • Australia produces 0.36% of global cars.

        Maybe Steve Jobs could turn that around but the Australian word for “entrepreneur” is “landlord”.

      • No argument from me about entrepreneurs and landlords, but this is a mercantilist world, those that write the rules of it succeed. There is no such thing as a level playing field, we have to be better at writing the rules. I have tried exporting and it is difficult to navigate the barriers that are deliberately put in one’s way to protect local industry. What annoys me is that here assistance is stripped away unilaterally without a thought as to social and trade implications on ideological grounds, ignoring what happens in the countries where the competing products are made.

  8. As is so often the case when the peace time tank industry is under the spotlight everyone forgets that whatever it’s merits or otherwise, an exchange rate that bears no reflection of our actual trading ability avoids scrutiny.

    Our $AUS would be much lower if it wasn’t pumped up by the wholesale flogging off to foreigners of:

    1. Public sector IOUs (govt Bonds)

    2. Private sector IOUs (wholesale debt for real estate)

    3. Non-renewable assets like quality dirt.

    Reduce some of the above and the $AUS will fall substantially and then we might find that we are competitive.

    Get rid of most tariffs as they simply encourage the inept to keep doing what they do badly.

    The biggest negative’ tariff is an inflated exchange rate and that is completely within our control – whilst allowing it to remain floating.

  9. If we are going to get rid of subsidies shouldn’t it be done in order from most damaging to least damaging? That way the economy has the best chance of adjusting. And I suspect that the car subsidies are a lot less damaging than some which should go first.

  10. If the govt is going to give the auto-industry money it should at least negotiate to get an equity stake. The equity could be in the rights to the ‘Holden’ brand, because if it all goes tits up GM will put the brand on the shelf, inacessible to anyone even though its possible someone else could use the brand and make a vehicle Australians would actually buy.

  11. Without spending every precious second to verify the numbers, I have seen that every job retained in the industry costs $300,000. It is time to shut this rusty old industry down and invest that money into a) retiring those we cannot retrain and b) retrain the rest. This is hard and cold but the only answer for this country and the future. Do it Tony.

  12. The real problem is that productivity of the Australian manufacturers is comically low. We make something like half the number of vehicles per worker than in other countries (including Germany).