The automotive industry – an industry policy lesson

This month marks the closure of automotive manufacturing for Ford in Australia. Next year will see GM and Toyota finish their production run.

This event represents an opportunity to reflect on what might have been, and to try to understand what lessons arise.

The first is that industry policy is not ‘set and forget’.

Like all major industrial developments, this outcome has not arisen as a result of one occurrence, nor is it simply a matter of a higher level of government subsidy being required to save the day.

While the government process that ultimately played out when the Holden decision was announced in 2013, was extremely inelegant (especially while the Government’s own review of future industry policy settings was still underway), the industry policy failures went back much earlier, and came from both sides of the political aisle.

This isn’t a story about an industry needing more government assistance – it’s one about being smarter in the way the money was spent.

Firstly, Australians received too little from the car companies in return for the billions in taxpayer funding handed out over the years. While I’m sure successive governments made demands of the US and Japanese head offices when it came to having more vehicle models being built in Australia (particularly global platforms with export markets), in the end the car companies saw their product portfolios first homogenise, then eke away. Not having a mix in build types, or enough models that could be sold overseas meant we were caught napping as an industry when consumer preference changed.

This quickly became a self-fulfilling prophecy. With closure announcements nigh, local management teams of all the car manufacturers worked assiduously with their global parents to try to get the numbers to add up, but by this time it was too late. As an industry we had lost momentum, making these individual discussions with head office more difficult to sustain.

 

automotive manufacturing

 

Successive support programs also gave too much subsidy support to too many component suppliers. While the Button Plan of the 1980s rightly rationalised the number of vehicle manufacturers from nine to four (and ultimately three), the same slimming down was required amongst our parts manufacturers. At one point, we had 12 metal stamping companies alone, amongst a broader industry of 150 component suppliers that should have been closer to half that number. Redirecting this government support to driving better outcomes amongst the car companies (or attracting new players into the mix) was the option for a sustainable industry missed.

Australia also let new business models for automotive manufacturing pass it by.

Mahindra Reva in India makes electric vehicles and builds plants with 30,000 unit capacity – not 300,000. This makes it more agile and responsive, and completely changes the economics around small car production, which had been seen for decades as “not turning a profit in Australia”.

Contract manufacturing was another option not adequately explored. Here companies like Magna Steyer and Valmet in Europe operate manufacturing plants that have the agility to build small production runs of different makes and models, and work for a number of marques, including Porsche and Mercedes Benz.

While successive industry ministers were no doubt told over decades by the incumbents there was no room for any new entrants, as the industry was hollowed out this lack of volume ironically became its death knell.

What might have been? South Africa and Australia once produced a similar number of cars. Then the trend shifted – they kept growing through attracting new manufacturers such as Fiat, BMW and Volkswagen, (and contract manufacturers) and being more cautious in their tariff reduction policy.  South Africa now makes more than 600,000 cars annually, which gives them a seat at the global table when new build discussions are being conducted.

Where does all that leave us now? The reality is that governments effectively choose which industries they want to have. This is not an immediate cause and effect thing, as with Australia’s automotive story it happens over decades and results from a range of small decisions made or not made, or chances missed.

Much has been made of the opportunities that will be presented to Australian manufacturing in regard to new defence projects that are coming on line over the next decade. If the automotive story teaches us anything, it is that in a dynamic global industry our policy makers need to constantly stay attuned to what needs to be done to sustain opportunity for Australian industry. This is done by ensuring our policy frameworks are competitive with other comparable economics. We are entitled to ask our manufacturers and other businesses to be globally competitive – we cannot expect them to rise to this challenge if industry policy sees them starting from behind.

The defence opportunities and Turnbull Government’s focus on innovation is an interesting starting point, but these policy settings will need to be constantly reviewed to keep pace with what is happening with our global competition to avoid another sector being off-shored.

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