From Protectionism to Economic Liberalism: The Managed Decline
of the Australian Automotive Industry
Tom Conley
Introduction
For the past 30 years, policy-makers have managed the
decline of the Australian automotive industry. Beginning in the 1980s with the
Button Plan, the aim of policy has been to consolidate the industry and avoid
the economic and political fallout that would accompany its rapid demise.
Managed decline was never the stated aim of automotive industry policies. Up
until recently, the stated aim of intervention and assistance was to create a consolidated
industry that could develop a research and export focus and survive without
protection. Managed decline, however, was an implicit component of automotive
policies as the embrace of economic liberalism and globalisation turned into a
new policy consensus guiding policy for both Labor and Coalition governments.
Managed decline in this paper refers to a long-term cycle of
assistance, declining protection, investment, inadequate restructuring, weak
profitability, declining market share, assistance and so on. Inadequate
intervention and insufficient industry adjustment led to renewed demands for
assistance, increasing calls from commentators that the industry should be
allowed to fail,
and creating dilemmas for politicians about how to manage the costs of
assistance and the potential fallout from industry failure. This led to a growing
acceptance that decline was inevitable, given globalisation.
Assistance provided for industry survival rather than revival. Nevertheless,
governments continued to argue that each new package would set the industry
onto a sustainable path, while others argued that the industry had enough flow
on benefits to the rest of the economy that survival was essential for a
diversified economy.
Managed decline, therefore, was accompanied by rhetorical flourishes that
promised the possibility of increased global competitiveness, expanding
exports, improved R&D spending and the maintenance of employment.
This future oriented narrative only partially disguised the growing realisation
that the sector would require ongoing assistance.
With the policy structure shifting to economic liberalism
and globalisation, the traditional way of ensuring profitability – restricting
the domestic market – was no longer possible. Marks argument in the early 2010s
that Australian policy-makers had successfully globalised the automotive
industry, “thereby safeguarding the viability of production in the long run”,
seems naïve in hindsight.
Rather than a transformation of the industry towards production for global
markets or as a supplier to regional production structures, the declining
domestic market remained the primary focus of Australian car production.
Exports grew, but globalisation
opportunities were limited by foreign parents, who never saw a major role for
Australian operations in their overall global and regional strategies. In 2012,
Toyota assembled vehicles in 23 countries, Ford in 18 and General Motors in 17
countries.
[8] Australian operations have been minor
components of General Motors, Ford and Toyota’s global empires. The parents
were unwilling to provide the investment necessary for a major increase in
export production that would have enable increased economies of scale and
greater specialisation.
This left the possibility of a complete change of ownership.
Policy-makers were unwilling to consider the development of an Australian-owned
car industry with one scale producer. Nor was the possibility of tying a
restructured Australian industry into the growing network of automotive
operations in Southeast Asia. The argument here is not that these changes would
necessarily have been successful, but that no alternatives to the existing and
declining structure of production and ownership were ever seriously considered.
Instead, governments encouraged consolidation of the long-standing industry
structure as a trade-off for more assistance, which, in turn, made production
viable over the short-to-medium term. These inadequate measures were unable to
stave off continual crises and the cycle repeated itself until the Abbott
government made it clear to the remaining manufacturers that there would be no
additional assistance, and Holden and Toyota announced they would end vehicle
production in 2016-17.
Comprehensive policy change and restructuring would have
required a belief in the benefits of industry policy, a faith that died in the
1980s.
Instead, Australian policy-makers shifted the policy framework from a
protectionist policy structure to an economic liberal globalising structure,
which precluded the possibility of comprehensive interventionism in the
automotive industry.
While economic liberalism dominates as a ‘governing’ framework for the
appropriate direction of policy, the automotive industry shows that governments
have not been pure in their liberal embrace, nor have they abandoned all
assistance and industry policies.
Economic liberalism in practice is not the same as economic
liberal theory.
[12] Governments face political imperatives as well
as economic ones. Up until the Abbott government, both Labor and Coalition governments
believed that any sudden end to vehicle manufacturing would have serious
political and economic consequences. Key marginal seats were at stake and
significant unemployment would result. Political machinations, therefore, have forced
compromises on the liberal framework. The automotive industry provides a neat
case study of both the limiting impact of economic liberalism on policy and of
the ways that economic liberalism itself has been limited by political factors.
Economic liberals argue industry assistance (as a key
political factor) is nearly always a backward step, crudely associating it with
the old protectionism.
[14] There
have been many influential critics of policy-makers’ failure to embrace a more
pure form of liberalism. Treasury
Secretary Ken Henry (2001-2011),
for example, argued that, “the structural change in Australia’s terms of trade”
means that there will have to be a “change in the structure of the Australian
economy”. Governments should not resist these structural changes by assisting
the manufacturing sector. Instead, governments should support the transition of
workers to those “businesses in the Australian economy which do have a long
term future with the sorts of terms of trade that we are confronting”.
[15] Australians, Henry contends, “should be
comfortable with the fact that a country’s pattern of national endowments
favours some industries and products over others.”
[16]
The dominant
economic (policy) narrative in Australia is that policy-makers in the 1980s,
1990s and early 2000s heroically transformed the economy by embracing economic
liberalism. The evidence is Australia’s 25 years without a recession. As the
Treasury Secretary from 2011-2014
Martin Parkinson argued:
Australia is not immune from
economic cycles. But the economic reforms of the 1980s, 1990s and 2000s mean
that recessions will happen less frequently and be less severe, on average,
than if we still had the economic policies and structures of the 1970s. The
conclusion that I would like you to take away is that the 23 years of
continuous economic growth that Australia has experienced … was neither an
accident nor was it easy. It was built on the tough decisions made by
governments in the 1980s, 1990s and 2000s.[17]
This paper argues that the comprehensive, albeit ‘impure’
policy shift towards economic liberalism precluded comprehensive industry
intervention because it simply did not fit with the new globalising model of
Australian political economy.
Globalisation and the
development of an economic liberal policy structure acted to constrain economic
policy discretion, but declining policy autonomy from the world political
economy and market forces was not an unfortunate by-product of the policy shift
– it was the very aim of policy. It was
the aim of policy to increase the scope of market regulation by liberalising
economic processes and introducing competition to previously protected areas of
the economy. It was also the aim of
policy to privilege a more ‘economic’ or ‘market’ set of values and regulations
in the determination of individual and societal choices.
This meant that the only viable option for policy was to manage
the decline of the industry. Within the confines of an increasingly economic
liberal policy structure, managed decline was a rational, incremental, and
effective political and policy response to the crisis of car manufacturing in
Australia.
The process of managed decline culminated in the ‘decision’
of the Abbott government to ‘allow’ the closure of Holden and Toyota’s vehicle
manufacturing operations. Eventually a process of managed decline makes the end
less destructive and more palatable. Whether this point had been reached is
debatable, but what this paper’s historical narrative makes clear is that
automotive industry policies during both the protectionist and economic liberal
eras led incrementally and rationally to this outcome.
The paper begins with a brief history of the industry and outlines
how the structure of multiple foreign owned manufacturers – developed in the
1960s – was a recipe for an industry that would require ongoing assistance to
remain viable. Within the protectionist policy framework this was an expected
outcome, even if the form of protection and assistance changed over time. The
next section considers the Button Plan as a key turning point for automotive
industry policy in Australia. Managed decline (‘consolidation’) was an integral
component of the Plan, but it also provided positive assistance that aimed to
wean the industry off protectionism. The new interventionist possibilities of
the Button Pan were restricted by the Hawke-Keating government’s wider embrace
of economic liberalism.
The following section outlines the efforts of
the Howard government to restructure the industry. Howard was a pragmatist who
supported economic liberalism, but realised the potential damage to his
government’s chances of re-election if a key industry folded. This is followed
by an assessment of the Rudd government’s short-lived efforts to develop a new
‘green’ car industry. Rudd’s mid-crisis critique of economic liberalism
soon morphed into a renewal of vows in support of freer trade and smaller government,
and against protectionism. Finally, the article assesses the Abbott
government’s decision to ‘allow’ the industry to fold.
Never a Viable Industry
The Australian car industry was protected from its
beginnings. It had to be. In the lead up to World War I, demand for automobiles
grew quickly and, without protection, their importation would have had a severe
effect on Australia’s balance of payments.
The availability of Henry Ford’s mass produced Model T through importation made
the domestic production of fully built units (FBUs) unlikely. This led to a
compromise wherein Australian workers would build vehicle bodies and assemble
them with chassis and engines imported from North America and the United
Kingdom. Coach builders transferring to
the new industry lobbied hard for increased protection and policy-makers were
only too happy to oblige. There was also a growing demand for components –
tyres, internal trim and leather, shock absorbers and the like – that could be
supplied by Australian firms. After the war, the dual role of tariffs for
protection and revenue made them attractive to a heavily indebted federal
government.
In the 1920s, Ford, General Motors, Chrysler and British
Leyland established assembly plants. Production became very important for
employment. In 1926-7, Australia produced 90,000 car bodies, with a third made
by the former coach building company, Holden. Sales of cars were boosted by
access to consumer credit, with the formation of Australian Guarantee
Corporation. By the end of the 1920s, Australia had the fourth highest number
of cars per capita behind the United States, Canada and New Zealand.
The Brigden Report of 1929, while arguing that a further
rise in tariffs would lead to costs exceeding benefits, fully supported the
role of the tariff in helping new industries like automobile assembly, the building
of vehicle bodies and the increasingly important automotive parts and component
industries.
The
Report noted that manufacturing industries could supply higher levels of
employment than the export industries. It made sense for Australia to be
protectionist during this stage of development, but, as the Report made clear,
this needed to be done with a framework of eternal vigilance. The Great
Depression reinforced the protectionist ethos, with manufacturing seen as
increasingly important for employment and strategic purposes. In 1936, the
Lyons government took the next step in the evolution of the automobile industry
and established a bounty to encourage “the manufacture of motor engines and
chassis in order to permit the manufacture of complete motor cars in this
country”.
After World War II, Australia turned to the United States to
supply capital and technology for the manufacturing sector.
This was especially the case in the nascent
Australian car industry, with the first fully manufactured Australian car, a
product of General Motors-Holden, rolling off the assembly line in 1948.
Investors were provided with extensive tariff
walls and import quotas so that investments were made with the assurance that
the market was fixed and competitive pressures minimal. The state offered inducements for investment
and did not attempt to exact commitments from manufacturers to reinvest profits
so as to ensure modernisation.
The failure of policy-makers to bargain with the multinationals led to low
research and development spending, the use of overseas sources for major
contracts, and a generally low priority given to, and sometimes explicit
banning of, exporting by subsidiaries.
Both political parties were complicit
in easy protectionism.
In 1964, GMH built 150,000 EH Holdens with 100 per cent
local content.
The Menzies government’s 1964 Plans A and B,
however, led to a proliferation of models and reduced any possibility that the
industry could increase scale to make it competitive. Local content rules were
set at 95 per cent, but less Australian content was needed for lower volume
model production. As Richardson puts it, “the system contained an incentive
towards low volume vehicle production – a large number of models produced
inefficiently”.
Conlon
and Perkins argue that the inability to exploit economies of scale “has been at
the core of the industry’s problems throughout its existence”.
In 1966, the Menzies government increased tariffs for completely built up
imports from 35 to 45 per cent, making the Australian car industry one of the
most protected in the world.
Tariffs were increased three times during the 1970s,
although the Whitlam government’s across the board tariff cut of 25 per cent
obviously applied to automotive tariffs as well, lowering the automotive tariff
to 33.75 per cent.
The tariff subsequently returned to 45 per cent in 1974. Chrysler’s position
was increasingly perilous and British Leyland exited Australia. In that year,
“Chrysler, Ford and GMH announced they would retrench more than 7,000
employees”. The Australian share of the market fell from 84 per cent in 1966 to
68 per cent in 1973. The Government’s response in 1974 was to introduce an
80/20 market arrangement, wherein quotas would restrict imports to 20% of the
domestic market.
Prime Minister Malcolm Fraser had opposed the Whitlam
government’s tariff cut from opposition, making his support for protectionism a
significant point of electoral difference.
The new government’s invitations to Nissan and Toyota in 1976 to become full
manufacturers increased their number to five, putting intense competitive
pressures on Chrysler, Ford and GMH. Chrysler tied up with Mitsubishi and then
sold its operation to its Japanese partner in April 1980. Increasing imports,
particularly of Japanese small cars, led the Fraser government to extend the
temporary 80/20 measure to 1984, increase the tariff to 57.5 per cent in 1978
and to develop an export facilitation scheme in 1979.
The 1981 Lynch plan – which would have begun operation in 1984 – continued the
local content scheme, extended export facilitation, and substituted a tariff
quota system for the 80/20 arrangement, which meant that vehicles could be
imported beyond the quota, but at a duty of 150 percent (reduced to 125 per
cent in 1992).
While
protectionism didn’t guarantee profitability, quotas and tariffs did guarantee
a market for Australian manufacturers.
The Button Plan and Consolidation
The Lynch Plan was stillborn after the Hawke government won
the 1983 election. By the mid-1980s, the manufacturing sector had been in
serious decline for more than a decade. Hawke government Industry Minister,
John Button, stressed that he was against special assistance to particular sectors
and that too little of Australian industry was exposed to “the harsh world of
international competition.”
The government, he added, “cannot be involved in any detailed attempts to ‘pick
winners’.”
Button’s express aim in the Motor Industry Development Plan
(Button Plan) was to reduce the number of models produced in Australia from
thirteen to six and the number of car manufacturers from five to three.
The industry had to decline – consolidate was the chosen description – if it
were to be revitalised. The Button Plan had to reform four different types of
assistance: local content plans, tariff protection for vehicle (57.5 per cent) and
component producers, import quotas (restricting imports to 20 per cent of the
domestic market), and export facilitation.
The government wanted to build a streamlined, export-oriented automotive sector
that could cope with the reduction in tariffs and quotas with so-called ‘positive
assistance measures’
such as incentives
for exports, investment, and skill and design upgrades.
Given the problems of Australian industry and the
government’s connections to the union movement, change had to be gradual. The Plan
aimed to maintain assistance in the short-to-medium-term, whilst gearing the
sector for lower protection. According to Owens, the Plan aimed to deliver an
industry that by the 1990s, would exhibit:
·
a lower cost disability against
the world industry (and thus an ability to compete with less assistance)
·
lower real prices for output
·
an ability to export
·
stability of employment
·
greater unity of purpose
between the vehicle manufacturing and component sectors.
The Plan was helped in its initial stages by the significant
fall in the exchange rate, which allowed the government to abandon import
quotas, speed up the pace of tariff reductions and eliminate local content
requirements.
In 1990, the Industries Assistance Commission recommended
that automotive tariffs be reduced from 35 per cent to 15 per cent in 2000 via
annual reductions of 2.5 per cent. The government accepted the recommendation
and opened up the Australian industry to a declining share of domestic sales. The
measures outlined in the 1991 statement,
Building
a Competitive Australia, accepted the IACs timetable to reduce Passenger Motor
Vehicle (PMV) tariffs.
Button’s aims for an industry policy shorn of its
protectionist shackles was hamstrung by the globalising and liberalising ethos
of the government’s two major players – Hawke and Keating. Button’s failure to convince
economic liberals within the government that intervention was a necessary
component of overall economic policy led to significant frustration. Button was
particularly disdainful of Keating’s devotion to Treasury’s economic theories.
In 1989, Button complained:
First they told us that the dollar’s
depreciation would do the trick via the now long forgotten and unlamented
J-curve. Then we had the W-curve theory,
which supposedly took account of the lags.
But these ‘theories’ grossly overestimated the response that could be
expected of a narrowly-based and somnambulant industry sector. Next they told us about the twin deficits
thesis . . . Needless to say, after we had achieved what really is a miracle in
Australia and eliminated the public sector borrowing requirement, the
correlation between the budget deficit and the current account deficit promptly
disappeared up its own R-squared.[47]
The Australian automotive industry structure – small market,
few exports and too many models – meant that it would never be globally competitive
without significant intervention to create one scale producer with perhaps two
or three models. Although there was
support for new interventionism within the wider political and industrial wings
of the party, a combination of faith in the market, global pressures to
restructure the industry, and a belief that the industry needed to be smaller
led to managed decline by default.
Delayed Demise during the Howard Years
In the lead up to the 1996 election, influenced by the
disaster of John Hewson’s Fightback package, the John Howard-led opposition argued
for a more moderate stance on remaining protection. The Coalition stated that
it would link tariff cuts to microeconomic reform and the speed of tariff
reform in key trading partners.
The government quickly announced a review of the automotive industry by the Industry
Commission (IC).
Treasurer, Peter Costello, argued that the inquiry should “have regard to the
Government’s desire to encourage the development of a sustainable, prosperous
and internationally competitive” automotive industry.
The government realised that without cutting costs or winning new markets, the
industry could not survive further tariff cuts. While exports had increased
since tariff reductions had begun in 1988, the industry quickly lost domestic
market share. Vehicle exports increased from one per cent of production in 1988
to 7.5 per cent in 1995 and component exports doubled. The problem was that
imports had tripled over the same time period.
Given the government’s reluctance to increase budgetary assistance, the vehicle
manufacturers soon demanded a tariff pause.
In its 1996 draft report on the automotive industry, the IC
recommended that tariffs be reduced to 5 per cent by 2004.
The Victorian and South Australian
governments were vehemently opposed and the South Australian Liberal Premier
John Olsen warned that the Howard government would not survive “being the
executioner of our automotive industry”.
The Labor Party also called for a freeze on car tariffs.
On the side of further cuts was former Labor
PM, Gough Whitlam, who argued that Labor should support further cuts.
As the time for a decision grew near it was evident that the issue divided the government
with Industry Minister, John Moore, and Costello leading opposed camps. Car
industry executives lobbied the Prime Minister hard and were heavily involved
in the final negotiations.
The government’s response was to freeze tariffs at 15 per
cent until 2005 when they would drop to 10 per cent.
Howard was concerned about marginal seats in
Adelaide and Melbourne, and threats from car companies that future investment
would be curtailed if assistance wasn’t forthcoming. As could be expected, the
decision was widely condemned by a wide range of political commentators, the
National Farmer’s Federation and economic liberals generally.
Much of the rhetoric was hysterical. A major critique was
that Howard himself had directly negotiated with the PMV industry chief
executives and had caved to their demands. One suggestion was that Howard was
pushing an “Australia Inc.” strategy that was redolent of East Asian
development strategies.
[59] If only. In late August, Toyota responded to
the tariff freeze by committing a billion dollars to its Melbourne Production
Centre.
[60]
An acceleration of tariff cuts would have signalled to the
industry that the government was willing to leave it to its own devices. It’s
possible that the government could have matched immediate tariff cuts with
extra assistance, but this would have been costly. The maintenance of tariffs
provided surety and added to – rather than subtracted from – the budget. The
freeze bought some time for an industry that accounted for 5 per cent of
manufacturing and one per cent of GDP. A slowdown in the pace of change
encouraged the new investment necessary for an orderly, rather than precipitous
process of decline. Howard and his key Ministers did not want to preside over
the end of the Australian automotive industry.
In the lead up to the 1998 election, the government
announced an Automotive Competitiveness and Investment Scheme (ACIS) that
Minister Moore argued would provide “an incentive for industry to continue its
progress toward global competitiveness and a self-sustaining future in the
context of trade liberalization and the globalization of the car industry”.
[61] The rhetoric fitted the times, but the real
issue was whether the parent companies were really interested in making
Australian production part of their global strategies.
[62] Earlier, the newly badged Holden announced a
plan to invest $1.4 billion to develop export models. This plan played a
significant role in the government delaying further tariff cuts.
[63] Other manufacturers joined in with headlines
announcing that $6 billion in exports were now possible because of the tariff
freeze.
[64] In April, the government announced a new ‘tax
exemption in return for investment’ program to replace the Export Facilitation
Scheme, which had been ruled illegal by the World Trade Organisation.
[65]
Problems soon returned. In early 1999, Toyota complained
about the falling share of car sales accounted for by local producers, arguing
that the government should introduce measures to provide advantages to local
producers in the domestic market.
[66] The old mind set remained, but the economic
environment was now global.
In late April 2000, Mitsubishi announced it was cutting 600
jobs, blaming exchange rate pressures, global overproduction and declining
domestic demand.
[67] Mitsubishi was the weakest of the car companies
and was always likely to be the next pin to fall, but no Federal or South
Australian government wanted to be held responsible. This meant that a few more
rounds of assistance would be necessary. Mitsubishi’s Japanese parent faced
considerable difficulties and made it clear that the Australian operations
would require further assistance for the company to remain.
In December 2000, Holden’s US parent decided to build V6
engines in Melbourne, providing some hope that the industry had turned the corner.
[69] Chairman and Managing Director, Peter
Hannenburger, argued that Holden’s performance was unique in the world: “we are
the only guys who can design, develop and build a relatively affordable, high
tech car in the low volumes we do while earning some good money”.
[70] The decline in the dollar had improved confidence
and the prospects for future exports. Continued government support, however,
was a necessary part of the profitability equation. Holden had agreed to $400 million of new
investment after the Victorian and Federal governments had offered a further
$160 million of assistance, which was on top of assistance already available
through ACIS.
The
deal annoyed the South Australian government who argued that Victorian Premier Steve
Bracks had “bought Holden for $60 million”.
[72] It didn’t take long for the barbs to come out,
with long-term industry critic Alan Wood arguing that the deal was another
taxpayer gift to Holden.
[73]
The May 2001 Budget provided further assistance to the
industry, with the government announcing a scheme to allow companies to claim
full input tax credits on automotive purchases. This was projected to cut $600
million off vehicle prices over the following year. The prediction was that
this would increase fleet buying by about a billion dollars.
Fleet buying – both public and private – was a significant source of sales for
the PMV sector. Despite this new assistance, the sense of crisis in South
Australia over Mitsubishi was palpable, with continuing rumours that a shutdown
was imminent.
Opposition leader Kym Beazley argued that a review of the future trajectory of
tariff cuts needed to consider “the jobs issue [and] the activities of our
competitors.
The Howard government’s chances in key marginal Adelaide
seats was improved by the announcement in early August that Mitsubishi would
stay until at least 2005. Although no new assistance was offered by the Federal
government, under the revised general $2 billion assistance scheme, Mitsubishi
was entitled to $200 million. The SA government provided a further $20 million.
Mitsubishi represented managed decline
par
excellence. It was not going to last, but it wasn’t going to go just before
an election.
On the eve of the 10 November 2001 election, Beazley
promised to develop a comprehensive 10 year plan for industry policy and review
tariff cuts for the automotive industry. A new Manufacturing Council would
investigate ways Australia could overcome Australia’s $60 billion deficit in
advanced manufacturing goods and industry recipients of aid would have to make
commitments to future employment, skills, R&D and production.
[78] Earlier, while visiting a Tasmanian components
manufacturer, opposition Industry Spokesperson Simon Crean, had argued:
“Australia should not go unilaterally into disarming its tariff levels … There
should not be an automatic reduction”.
[79] Delaying cuts to protection had to be a part
of the process of managed decline if fiscal costs were to be minimised.
In December 2001, Mitsubishi asked for additional assistance
of $140 billion to stay operational. Around the same time, the re-elected Coalition
government directed the PC to review the tariff schedule and to report
after the SA election. The government
also set up an Automotive Council comprising the CEOs of the 4 majors, CEOs of
the five largest part makers and the Heads of the Federal Chamber of Automotive
Industries and the Federation of Automotive Components Manufacturers.
After much debate and speculation about Mitsubishi’s future
and whether the government would provide additional assistance, the company
reported a profit in March 2002.
The Japanese parent had made it clear that profitability was essential if a new
model were to be developed in Adelaide. Finally, at the end of April 2002,
Mitsubishi agreed to invest in its Adelaide operations in return for an $85
million assistance package, comprised of $35 million from the Feds and $50
million from the state government.
In June 2002, the PC provided three options for the Howard government
on future assistance, with the preferred option a tariff reduction from 15 to
10 per cent in 2005, a freeze until 2010 and then another fall to 5 per cent.
The PC argued that workplace relations would be a key component of future
sustainability and that the major companies needed to develop either individual
enterprise unions or a single union for all automotive workers. Surprisingly, for
the PC, it recommended a continuation of assistance for up to 10 years to help
the transition to lower protection.
One of the Commissioners argued that “this should be the last period of special
treatment”.
The
PC’s recommendations were surprisingly moderate, with its Chairman Gary Banks
realising that a hard line approach would see it sidelined from the debate.
Nevertheless, it also recommended an end to tariff protection and a wind down
of assistance.
The political imperative for managed decline was so great
that it had tamed the government’s key source of economically liberal policy advice.
The opportunity to accelerate the process of decline by winding back assistance
had passed. The government could have used its ‘independent’ policy advisory
body and a growing chorus of media and industry backers to back such a stance, but
it was too early both politically and economically. The potential damage to the
economy was too large to contemplate at a time of economic uncertainty. At this
time, the Australian economy had weathered the Asian financial crisis and the
tech wreck of 2000 and early 2001. One of the major reasons for Australia’s
success was the collapse of the dollar, which had led to higher exports.
This renewed export dynamism strengthened the industry’s case that renewed
assistance would lead to large ‘sustainable’ increases in automotive exports.
In mid-December 2002, the Howard government announced a
10-year, $4.2 billion package for the car industry (later redefined to be worth
$7.3 billion).
The Automotive Competitiveness and Investment Scheme (ACIS) replaced an earlier
5-year $2 billion scheme that was to end in 2005. The new package was available
to car makers and the components industry and was to run from 2005 to 2015,
augmenting the 1998 package. The government legislated to lower tariffs to 10 per
cent in 2005, with a further reduction to 5 per cent in 2010.
The Industry Minister Ian McFarlane argued that the package would create “10
years of certainty” for the car industry and suppliers.
He noted that:
The new-look ACIS package goes far beyond what
was recommended by the Productivity Commission Review, adding an extra 50% or
$1.4 billion over the 10 year continuation of the scheme. The package is also
aimed squarely at innovation, it has a greater emphasis on R&D, rather than
production, subsidies. The post-2005 package will deliver more than $1 billion
to car and component research and development. A new feature will be a $150
million R&D fund specifically for vehicle manufacturers investing in new
and innovative technologies.
The Minister also argued that without the package (and
despite the recent assistance), Mitsubishi would not have committed to new
investment and would have folded.
Reinforcing the sense of optimism, Ford announced a $500 million expansion of
its Broadmeadows operation in Victoria, Toyota declared it was considering a
$600 million expansion and Holden announced plans for a $400 million engine
plant in Melbourne and a $460 million plant in Adelaide.
Unsurprisingly, economic liberal commentators were unconvinced and continued to
question the desirability of assistance and protection.
Over the next year, it appeared that the industry was going
from strength to strength, with Mitsubishi and Toyota announcing further
investment in Australia and Holden opening its $400 million engine plant.
Industry executives predicted that by 2010, the PMV sector would “produce
500,000 vehicles a year and export $10 billion worth of product”.
In early 2004, the ALP National Conference committed the
Mark Latham-led opposition to an interventionist industry policy with Industry
spokesman, Kim Carr, announcing that “Labor will work with particular
industries to achieve national goals”.
Labor’s renewed support for interventionism came as pressures in the car
industry began to increase once again. In May 2004, Mitsubishi announced that
it would close its engine plant at Lonsdale in Adelaide, but commit to vehicle
manufacture at its Tonsley Park operations with a $600 million investment in a
new sedan.
Unfortunately,
there were no commitments beyond 2011 and most analysts believed that
Mitsubishi was simply managing its own decline and eventual departure.
Political pressure on the Japanese parent had played a role in staving off closure.
On 1 January 2005, car tariffs dropped from 15 per cent to
10 per cent and the automotive sector faced a rising dollar, significantly
higher steel and energy prices and greater competition from imports. The
components sector was particularly hard hit as cost pressures led to closures
and offshoring, which in turn lowered the level of local content in the ‘locally’
built models.
Exports, however, continued to expand, with
the Ford Territory SUV garnering significant sales in South Africa, Holden
entering China and South Korea and Toyota exporting Camrys to the Middle East.
In early August, Minister Macfarlane announced the formation of an Auto
Industry Strategic Group to develop a ‘Team Australia’ approach to negotiations
with Detroit and Tokyo.
Once again, problems soon returned. Holden announced it
would reduce production from 855 cars a day to 620 and cut 1400 jobs.
The new Commodore VE model – a flagship for the company – would be only 50 per
cent locally built, meaning less business for local component manufacturers.
On a trip to Tokyo to plead for more work for Australian component makers,
Macfarlane warned that: “[t]his is the low-water mark for the Australian car
industry.”
The misery continued into 2006, with Holden’s announcement
that it would use an Australian designed ‘Zeta’ platform for a new Camaro model
in the United States, a rare exception. Mitsubishi bled more jobs and there was
growing belief that the industry’s days were numbered. In May 2006, Howard
announced a further $52 million of assistance for Ford and $101 million for
industry research and development.
He argued, “I don’t believe in an Australia with a steadily diminishing
contribution from manufacturing industry to the nation’s future”.
In late 2006 and over the whole of 2007 rumours about
Mitsubishi’s imminent demise grew stronger.
The US parents of Ford Australia and Holden announced major losses, adding to
the general perception of malaise.
In December, Macfarlane announced a $7.2 million assistance package for the
components sector.
Later that month, the four majors asked the government for a tariff freeze at
10 per cent and an additional billion dollars of aid. Both Costello and Howard
ruled out any further changes, reminding the companies that the government was
committed to planned tariff cuts.
The protectionist option was no longer considered by either the government or
the opposition. The automotive unions, however, continued to support tariff
protection as did Finance Minister, South Australian Senator Nick Minchin.
By 2007, the rising dollar increased the attraction of
imports and the rising price of petrol was further bad news for Australian
vehicle production. In March, the Labor opposition announced that it would
develop a$500 million dollar plan aimed at the production of environmentally
friendly vehicles.
In July, Ford announced that it would close
its engine plant in Geelong in 2010 with a loss of 600 jobs, but then announced
that it would begin manufacture of the small Ford Focus.
The Federal and Victorian state governments contributed $20 million each.
The project, however, never got off the ground.
Despite his reputation on the left of the political spectrum
as a neoliberal ideologue, Howard realised that
ad hoc assistance bought some time – helped to manage the decline of
the sector – and was necessary to maintain electoral support.
The strategy was to provide support and hope that it would be enough to keep
the companies operational for at least the next electoral cycle. The booming
economy of the early –to-mid-2000s led to some complacency about the state of
manufacturing generally, but it also provided an important budgetary boost. From
1996 to 2005, exports grew at an annual average of 14 per cent, but this good
news was overshadowed by the four car makers’ loss of domestic market share to
20 per cent of the market in 2006.
Australians were buying cars in record numbers, just not Australian made ones. The
industry unsuccessfully gambled on a continuation of Australians’ love affair
with large family sedans, but buyer preferences shifted to smaller cars and sports
utility vehicles (SUVs) not manufactured in Australia.
The
ad hoc nature of industry
assistance could not counter the unpreparedness of the Australian industry for
globalisation.
If we consider openness, assistance and investment as three
key variables, then it is clear that all three were necessary for the industry
to continue. The equation was clear for
policy-makers: openness was now a given, which meant that new investment would
require ongoing and substantial assistance. The overall embrace of economic
liberalism presented policy-makers with a choice: let the industry die or
maintain the charade that the industry could get on a sustainable footing with
another round of assistance, leading to another round of investment. Apart from
consolidation, industry structure remained the same, which meant that
continuing assistance would be necessary. But what if the Australian industry
could embrace green technologies, would that allow the industry to get on a
sustainable footing?
The Unfulfilled Promise of the Rudd Government
Despite Kevin Rudd’s rhetorical support for manufacturing,
he left office with a substantially smaller sector than when he entered.
Manufacturing fell from 10.1 per cent of gross value-added in 2007 to 7.1 per
cent in 2013.
Its percentage contribution to overall employment slipped from 9.9 per cent in
2007 to 7.9 per cent in 2013.
The pain started immediately. Mitsubishi announced that it would cease vehicle
production and the government considered a tariff freeze for the three
remaining manufacturers.
The Rudd government quickly announced four industry inquiries and did not give the
PC a role in assessing the merits or otherwise of prospective industry assistance.
Rudd knew what the PC would argue, because it had been arguing the same thing
for years – that assistance to the car industry came at a cost to other sectors
of the economy and that it should be abandoned. The PC and its Chair Gary Banks
believed that the automotive industry should adjust to the shift in investment
towards commodities, meaning that its continued operation was not necessary for
Australian prosperity. Worse, assistance inhibited the free working of the
market.
This view was widespread amongst key economic policy-makers in the Treasury and
the RBA.
Industry policy also lacked support among economic policy
commentators. It was easy to criticise industry policies as
ad hoc, because they were.
The Rudd government, they argued, was returning to the ‘bad old days of big
government and state intervention in the economy’.
Any effort to comprehensively restructure the industry, therefore, had to
battle against the now dominant economic liberal policy consensus. Australian
business was also offside with what it considered to be the “old, failed
policies of protectionism and intervention.
Despite pressure from the unions, the Rudd government was keen to establish its
free trade credentials by upholding plans to reduce tariffs. The government’s
trade policy did not help the car industry and manufacturing generally. Free
trade deals with Thailand and the United States allowed cars to come into
Australia tariff free, while Australian producers faced prohibitive tariffs in
Thailand and parent-imposed limitations in the US.
In response to the global financial crisis (GFC), the
government increased spending, but targeted households and infrastructure,
rather than long-term industry development. With the Australian economy
subsequently invigorated by China’s massive economic stimulus, the government
soon cut spending to improve the budget position, restricting the scope for
future assistance measures. No wide scale restructure of the car industry
occurred because it would have been expensive and policy-makers lacked faith in
its potential to flourish even with increased assistance.
The rearranging of the deck chairs continued. In mid-2008,
Holden announced it would cease production at its engine plant, but announced
that it would build the Cruze – another small car model.
Given the tardiness of their parents in developing hybrids, it was unlikely
that Australian production could adapt to growing demand for these vehicles. Ford
and Holden’s aim in Australia was to continue to bet on domestic demand
buttressed by continuing assistance. Assistance was assured under a Labor
government, but within the opposition there were growing calls for an end to
the endless cycle of assistance.
The major players continued to stumble through a cycle of
crisis-assistance-crisis, which ultimately ended with the closure of Mitsubishi
in 2008. The substantial funds that the South Australian and Federal
governments poured into the company ultimately could not save it. The political
ramifications were less severe because the Rudd government was newly in office
and could not be blamed for its closure (although the state government could be
blamed) and most people, even in the southern suburbs of Adelaide where the
factory was located, had increasingly accepted the fact that Mitsubishi was
doomed. Managed decline had worked.
Throughout 2008, there was dire news from both Ford and the
components sector. Ford announced more than 1450 job losses and the components
sector warned that up to 7000 jobs were in danger because of falling demand.
Holden also announced significant job losses. Production cuts were planned by
the whole sector and the global industry was experiencing its worst crisis in a
generation. In June, The federal government and Victorian state government gave
Toyota $35 million each to build a new hybrid Camry in Melbourne.
Some critics argued that Toyota had already decided to build the car and that
the money was a gift.
The global credit crunch severely affected demand for cars
world-wide because of the vital role that consumer credit plays in car
purchases. Ford and General Motors in the United States teetered on the brink
of bankruptcy and became even more reliant on government bailouts. Global
oversupply and widespread assistance to national car industries throughout the
world meant that continuing assistance would be vital for the survival of an
Australian industry.
In August 2008, the Bracks Review argued for increased ‘green’
assistance but no delay on planned tariff cuts.
Paul Kelly argued that the report showed an enthusiasm for “green
protectionism”.
The PC was also a critic arguing:
Assisted ‘green car’ production is unlikely to
lead either to innovation spillovers or lower greenhouse emissions. The GCIF
[Green Car Investment Fund] will likely encourage some buyers to switch from
taxed, more efficiently produced imported hybrid and fuel-efficient vehicles to
subsidised, higher cost, locally-produced ones — without markedly increasing
‘green car’ sales overall. Moreover, with an Emissions Trading Scheme in
prospect, policies that directly encourage or prescribe production and use of
particular emission reduction technologies are not needed and may be
counterproductive.
Labor wanted its car industry plans to tie in with its climate
change commitments. The aim was to revitalise the local car industry by
developing fuel-efficient vehicles. Soon after, Ford announced that it was
cutting 300-350 workers at its Melbourne plants because of declining demand for
its 6-cyllinder vehicles. A month later it said another 450 jobs would go.
Meanwhile Holden was increasing its number of ‘down days’.
In November 2008, the government responded to the Bracks
Review by announcing
A New Car Plan for a
Greener Future. New assistance aimed to support continuing production and was
now backed by a new ‘green’ justification. The measures involved would not be
enough to assist any wide scale restructuring of the industry to take advantage
of future changes in vehicle demand; nor were there any plans to tie in with regional
production networks. Rudd argued the Plan was a “decisive action to build an
internationally-competitive, green economy for the future”.
The substantial new assistance was greeted with relief by the industry and
workers and criticism from the usual suspects.
Nevertheless, the sums committed were not small. Total assistance was $6.2 billion. A 10-year Green Car Fund (GCF) provided $1.3 billion of assistance, with the aim of generating $5 billion of investment. A $3.4 billion Automotive Transformation Scheme (ATS) replaced the Howard government’s ACIS and was to operate from 2011 to 2020, with the aim of generating $12 billion in new investment in R&D. There was $2.2 billion in new assistance, beyond what had already been committed, and the main assistance items would only be spent if the industry committed to new investment. The objective was to kick-start the production of low-emission and fuel efficient vehicles and to get the industry to embrace green car technology and reduce fuel consumption. Assistance to the car industry was sold as a contribution to the wider policy aim of reducing carbon pollution.[137]
Industry survival required the government to deliver assistance across the board to both the manufacturers and component suppliers. The green plan included a $116 million structural adjustment program for the components sector, $80 million to smooth the transition between ACIS and the ATS, $20 million to help suppliers integrate into the global supply chain, $6.3 million to improve market access, and a $10.5 million expansion of the LPG vehicle scheme.[138] The plan led Ford to shelve plans to shut its Geelong engine plant and Holden received another $180 million ($149 million from the GCF and $30 million from the SA government) to produce a small, fuel-efficient model.[139] The problem was that the Plan continued to rely on the benevolence of the parents to maintain existing and develop new production.
Despite the initially positive outlook generated by the new
plan and investment, the mood soon turned sour, and once again it was not long
before the industry was pleading for more assistance. In 2009, Holden announced
an end to Holden’s exports of a restyled version of the Commodore, sold in the
United States as a Pontiac. In 2008, Holden had shipped 36,000 cars to the US.
With GM filing for bankruptcy in the US, the directive was that overseas
subsidiaries would have to finance themselves.
Holden was not their major concern. Minister Carr and Holden moved to reassure
Australian workers that their jobs were safe. In August, Holden announced that
it would build a new ‘green’ V6 engine in Australia.
In August the Federal government gave Holden another $200 million. This was on
top of the $179 million given to the company to fund the new ‘green’ car.
The debate then turned to the possibility that Australia could become an
electric car “champion”. In October, the Federal government led a mission of
executives and designers to the US and the UK to try to secure additional
business for the automotive sector. Survival was the major goal. Minister Carr
said that:
Australian vehicle production volumes for 2009
have fallen to the lowest level since 1957, yet car manufacturers in Australia
have emerged as survivors from the global recession. This is a testament to
both the sacrifices made within the industry, and to the effectiveness of the
support it has received from the Rudd Labor Government.
In early 2010, Ford President Alan Mullaly argued that the
end of the road was near for the Australian produced Ford Falcon.
The PC continued its criticism of assistance, arguing that the government
should rollback existing subsidies for the sector. The launch of the hybrid Toyota
Camry in February took place amidst global safety concerns about Toyota’s Prius
models.
In October, Holden opened a new Cruze body shop at Elizabeth in readiness for
the production of the small car, which would occur alongside the manufacture of
the Commodore.
In the 2010-11 Budget, the government scaled down the
Green Car Innovation Fund
(GCIF) by $200 and subsequently abolished it in January 2011, saving $234
million from uncommitted funds over the forward estimates and $401 million over
the life of the scheme. These savings helped to pay for recovery and
reconstruction after the natural disasters of early 2011.
The government broke its promise to develop a new
environmental focus for the Australian industry and any possibility that the
government was not simply managing the decline of the industry disappeared with
the cuts.
Despite the difficult conditions caused by the GFC, during the
life of the fund, local manufacturers “introduced Australia's first hybrid car
(Toyota's Camry Hybrid), and committed to introducing a new small car (Holden’s
Cruze) and the release of a number of new, more fuel-efficient engines, including
the country's first diesel engine”.
In April 2011, Toyota’s operations were negatively impacted
by the Japanese earthquake and Ford announced another 240 job losses.
In May, the government committed $39.8 million to Holden under the Green
Innovation Fund to help produce a more fuel-efficient Commodore. The company,
however, was critical of the wider cuts to the GCIF and later in the year
argued that the government needed to develop a new and comprehensive
co-investment program with the vehicle manufacturers.
Desperate measures to stave off further decline continued. In
January 2012, the Federal and Victorian governments committed $34 million to
help Ford maintain production until 2016. Later that month, Toyota announced
that the high Australian dollar had forced it to cut 350 jobs. Despite the
regularity of new assistance to the industry, the public still overwhelmingly
supported automotive production. In an
Age/Nielsen poll in February 2012, 79 per cent of respondents supported either
maintaining (58 per cent) or increasing (21 per cent) subsidies to the
industry.
In March, Prime Minister Gillard announced a $275 million
deal to sustain Holden’s operations after the company threatened to close its
manufacturing base in Australia if it didn’t receive further assistance.
The federal government contributed $215 million, the South Australian
government provided $50 million and, after some resistance, the Victorian
government offered $10 million. In return, Holden agreed to invest more than $1
billion in its manufacturing operations, which were to continue in Australia
until at least 2022. The government declared that the assistance was “not a
hand out” but “a strategic investment”.
Darkening the clouds was the fact that
the opposition was committed to cutting $500 million from automotive assistance
if it won the next election.
The equation was now clear: either government provided
assistance and managed decline continued for another round or assistance was
cut and the industry folded. It seemed all players had dropped the pretence that
the industry could eventually stand on its own two feet after just ‘one more
round of assistance’. Opposition Treasury spokesperson, Joe Hockey stated that
he had “deep, deep reservations” about assistance to Holden.
Paul Keating joined the chorus of criticism arguing the case for economic
liberalism: “[i]f you are going to have terms of trade like this for a decade
or 15 years or even perhaps longer, and the exchange rate is going to be
elevated and the structural pressures are on, then the idea of trying to
insulate companies and industries is a sub-economic idea”.
Throughout the rest of 2012, speculation grew that Ford
would be the next manufacturer to fall. Late in the year in an increasingly
rare piece of good news Toyota opened a new $330 million engine plant after
receiving $63 million in Federal funding. Toyota Australia President Max Yasuda
said “I am a true believer in local car making and Australian manufacturing … Building
a new engine plant in Australia is at the heart of our manufacturing strategy”.
In April 2013, Holden Chairman, Mike Devereux, revealed that
the company had received $2.2 billion in assistance over the previous 12 years.
He argued that without the assistance it would have been “absolutely impossible
to make cars in this country”.
The company then announced that it was
cutting its Elizabeth workforce by a quarter. In May, Ford Australia confirmed
that it would end local vehicle production in October 2016, leading to the loss
of 1200 Victorian jobs and the end of production of the Falcon and Territory.
After returning to the Prime Ministership, Kevin Rudd announced $500 million of
new assistance to the car industry, insisting that the September election would
be a “referendum on the car industry”.
If that were true, the subsequent election of the Abbott government was not a
positive sign for the industry.
The Abbott Government and the End of the Road
Despite calls for additional assistance, new Prime Minister,
Tony Abbott, made it clear that there would be no extra financial support
beyond the $1 billion allocated from 2015 to 2020. Holden rejected Abbott’s
demand that the car companies double exports in return for any assistance,
arguing that there would be insufficient international demand.
In distinction to Labor’s sidelining of the PC in industry inquiries, the newly
installed Abbott government assigned the PC the dominant role in its
deliberations on the sector’s future.
This was a clear signal of change, given the PC’s hostility to automotive
assistance.
On 5 December 2013, Abbott told Holden there would be no
additional assistance and demanded that the company reveal its intentions.
Over the next few days, Joe Hockey argued that the “numbers involved in [automotive]
employment are greatly exaggerated when it comes to the motor vehicle
industry”. Hockey expressed frustration that Holden had not revealed its plans
and in Parliament stated: “either you’re here or you’re not … There’s a hell of
a lot of industries in Australia that would love to get the assistance the
motor vehicle industry gets”.
Within the week, Holden was gone; the company announcing that it would cease Australian
production by 2017. South Australian Premier, Jay Weatherill, was scathing
about the government’s cavalier attitude: “The Feds asked Holden to delay a
decision about their future pending the Productivity Commission report. Now
they bag them for delaying a decision about their future.”
In February 2014 Toyota decided that it too would cease local manufacturing by
2017.
The Abbott government’s failure to continue assistance
fitted with its rhetoric about the “end of the age of entitlement”.
Abbott argued that ‘we don’t want to see corporate welfare … we don’t believe
in corporate welfare’.
Trade Minister Andrew Robb warned of “hard outcomes” for companies that could
not adapt to global change.
According to the Treasurer, Joe Hockey: “Everyone in Australia must do the
heavy lifting now. The age of entitlement is over. The age of personal
responsibility has begun.”
A year after the announcements Hockey
argued that the end of car industry assistance had been an important trade-off
for the completion of trade deals with Korea, China and Japan: “There would not
have been any free-trade agreements if we hadn’t made the hard decisions about
industry assistance”.
The demise of the industry did not mean an immediate end to
budgetary outlays as the government had to assist the large number of workers
affected and provide funds to encourage alternative economic development. The
major issue for the automotive industry after Toyota’s exit announcement was whether
the components industry could survive without demand from the domestic vehicle
manufacturers and without increased government support. Given the reliance of
many components manufacturers on contracts with vehicle manufacturers, the end
of vehicle production has meant the end for many component suppliers.
Both the government and the Labor opposition blamed each
other for Holden’s demise.
The government argued unpersuasively that Labor’s carbon tax and excessive
wages were major factors.
Clibborn
et al. argue that it is “difficult to accept the argument prominent
in public discourse that industrial relations arrangements were the main factor
contributing to the demise of the automotive industry”.
The opposition contended that the
government bullied Holden out of Australia by criticising its failure to commit
to future production and refusing to canvass reinstating already withdrawn
assistance or developing new forms of assistance.
The Abbott government gambled that the political fallout
would be limited and that the economic consequences could be limited by
expansion in other sectors of the economy.
The continuing growth of the economy over 2016 and 2017 has helped to
soften the blow of closure, but the major concern for the Turnbull government
or its successor is whether the final end of production in October 2017 will be
accompanied by an end to Australia’s comparatively stellar 25 year economic
performance.
Regardless
of the political consequences, the economic consequences are certain. Australia
no longer has a vehicle manufacturing industry.
Conclusion
Managed decline provided a neat fit for an automotive industry
that was increasingly seen as economically unsuited for the new policy
environment shaped by globalisation and economic liberal ideals, but which was
still politically significant. Automotive industry policies show how economic
liberalism shapes policy possibilities and how the uptake of economic liberal
policies is itself limited by political demands for government assistance and intervention.
Political demands for assistance have been the norm in
Australia’s manufacturing industries and it is this expectation of protection
that had to be fought against in the 1980s. Once that battle had been won by
the 1990s, the question was whether the industry as it existed could ever be
viable in an open Australian economy without ongoing assistance. The answer was
clearly no. The automobile industry moved from birth through infancy to old age
without ever really achieving adulthood.
The demise of the automotive industry and continuing decline
of the wider manufacturing sector signals another victory for economic liberals
who have long argued that governments should facilitate rather than fight the
reallocation of economic resources from manufacturing to resource and service industries
in which Australia has a comparative advantage. The major issue for governments
has been the electoral consequences of collapse rather than the role an
automotive industry (or indeed manufacturing) could play as a key component of
a diversified economy.
The Australian industry did not develop as part of a global
production network, nor did it integrate sufficiently into the evolving
regional production structure. China is already the world’s largest producer of
cars and India is likely to join it at the top in coming years. Thailand’s
protected industry is also likely to grow. The domestic industry could have
developed a global or regional niche for specialised vehicles or components or
pushing Australia’s strengths in rear-wheel drive, sophisticated large car
production. Consolidation could have co-existed with an attempt to encourage
one of the major producers to turn their Australian operations into high volume
producers of major components or engines. If even a portion of assistance
provided to the major foreign producers had been spent on researching
alternative engine technologies, Australia could have been at the forefront of
a vibrant and potentially productive industry.
Productivity Commission
(2011) Trade & Assistance Review
2009-10, Annual Report Series, Productivity Commission, Canberra, May.
