Ford’s departure . . .

Today’s Age and SMH Column.

GLOBAL downturns are the fault lines around which our automotive industry has always reinvented itself. In theory, managers should restructure their businesses and businesses should change hands whenever it improves productivity.

Alas human nature intervenes. Corporate dreams are dreamt and restructuring is delayed … until the alternative is collapse. Way back in 1931, as the Great Depression savaged output at a South Australian automotive body manufacturer called Holden, US giant General Motors came to the rescue. The rest, as they say, is history.

VW, Leyland, Chrysler, Nissan and Mitsubishi all withdrew from car making in Australia – VW handing over to Nissan, Chrysler to Mitsubishi – long after they’d ceased to be healthy, all during crises for their parents and/or amid global downturns.

And here we are again.

After a ritual acknowledgment of the conventional wisdom that Australia is no good at making cars, the pundits peel off into ”protectionists” (sometimes dressed up as ”innovation” buffs) – who want to keep the industry alive with additional assistance – and ”free traders” who don’t. Count me among the free traders. But I’ve never bought the line that Australia couldn’t make cars without assistance.

Yes, some low-wage countries are gearing up production and, yes, our domestic market isn’t huge. But while lower-income countries will continue to grow market share in smaller, lower-quality cars, the bulk of production continues to be in high-income countries, particularly for larger, better cars. And though our market is small, so is Sweden’s. But Sweden has provided a volume base on which unique products have been built, which have then acquired export niches.

Toyota and Holden’s Australian operations have tapped into their parents’ global brands and marketing networks permitting rapid export growth. Rather than slaving away for decades building one’s presence in foreign markets, subsidiaries of global giants can win contracts with head office to supply specific market niches.

So far Toyota’s been the star, focusing all Australian production on one car line – the Camry/Aurion – manufacturing up to 150,000 units annually (right now it’s below 100,000) and consistently exporting more than half its production. Yet the Camry car line is produced in Japan and the US and if it comes to be produced in lower-cost locations, they could become preferred suppliers, first to our export markets, and ultimately to Australia.

Holden seems better placed because it manufactures unique vehicles around which more durable export niches might be able to be built. Our high exchange rate and the termination of the Pontiac brand have cruelled Holden’s exports recently, though it retains a monopoly on producing large rear wheel drive cars within GM’s network.

And then there’s Ford. Since the embarrassment of exporting the small, leaky, poorly finished convertible Capri to the US in the early 1990s, Ford US has shown scant interest in its Australian subsidiary’s entreaties to get serious about export from Australia. To utilise its assembly capacity it did some fine re-engineering of its Falcon car line to also produce the Ford Territory. But with flagging domestic Falcon sales and no serious exports, total volume is now around a third of Toyotas and Holdens which is hopelessly unviable. In fact Ford Australia still has great automotive assets, but they are not – and cannot be – strategically important for its current parent. Nevertheless they could be really valuable to up-and-coming Chinese or Indian car makers.

And while new Asian car makers gear up to export millions of small and medium-size cars, they’ll have little interest in making large cars like Falcons and Fairlanes. If they owned Ford’s Australian assets they’d get a foothold in our market and, more importantly, a large, sturdy, luxurious, rear-wheel drive car to badge with their own global marque. Would it be good public policy to subsidise such a transfer? Probably not. But since the current plan is to keep throwing good money after bad, let’s make that assistance conditional on a new owner or at least major equity partner and a global sourcing plan.

This idea was high-risk politics for as long as Ford was muddling through. But now the writing’s pretty much on the wall, the indignity of begging Ford to do us the favour of taking our money to hang around a little longer looks politically riskier still.

 

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Robert Merkel
9 years ago

Nick,

You might look at what happened to Saab, and what the Swedish goverment did in response to its troubles.

A model to emulate, in my view.

Robert Merkel
9 years ago
Reply to  Robert Merkel

s/goverment/government

john r walker
9 years ago

SAABs story is more complex than that of subsidies or lack of. One factor was that they built cars that were very engineered , a lot of the build quality( and expense) was not obvious, until you had a roll over type prang.

Nicholas

Some interesting figures on another subsidised sector:

Gav P
Gav P
9 years ago

And here’s a letter that the AGE didn’t print (submitted August 3):

HOW TO SAVE FORD

The Federal Government shouldn’t be throwing money at Australian manufacturers. It should be removing the tax component of the cost of labour and abolishing other taxes that act as reverse tariffs. If we confine our attention to Federal taxes, the process has four steps:

(i) Allow employers to keep the PAYG income tax that they withhold from employees and contractors — while the employees and contractors still receive credit for the withheld tax as if it had been paid to the ATO on their grossed-up wages/salaries/fees. Thus personal income tax is not abolished, but is removed from employers’ labour costs. Employees don’t see any reduction in their take-home pay.

(ii) Abolish compulsory superannuation contributions and the Superannuation Guarantee Charge (the penalty tax that enforces super contributions), and fund the contributions out of general revenue.

(iii) Abolish company tax (except capital gains tax, which is more of a resource rent than a reverse tariff).

(iv) Replace the revenue with a border-adjusted VAT, calculated by the subtraction method, at a rate specified on the VAT-inclusive, GST-exclusive base (so that the VAT interfaces with the GST as company tax did).

When economists say that replacing income tax by a VAT would raise prices, they assume that the PAYG income tax withheld by employers would instead be paid out in gross wages and salaries, so that the income required to pay the VAT would need to come from elsewhere, i.e. higher prices. My proposal avoids the price rise by making the withheld PAYG income tax (and super and company tax) available to pay the VAT. It also satisfies the political requirement of not touching the GST.

The reduction in labour costs from steps (i) and (ii) would far exceed that from WorkChoices and would be achieved without any erosion of take-home pay or working conditions. Unemployment and welfare expenditure would fall. Hence not all of the forgone revenue would need to be replaced. Hence the required VAT rate would actually lead to a one-off FALL in prices. What’s not to like?

… Gavin R. Putland …

conrad
conrad
9 years ago
Reply to  Gav P

I love magic since magic always works.

derrida derider
derrida derider
9 years ago

Yes, I agree that that its possible for a small high income country to find a profitable niche making specialised and quirky cars.

But I think the opportunity for Australia to go down that path has long passed. That opportunity was missed precisely because we spent our time and energy propping up multiple manufacturers attempting to fill a non-existent mass domestic market. Button needed to be say something like “We’re going to help only one manufacturer build a niche export market, exporting no more than two models. So lodge your tenders gentlemen”. But even by Button’s time it was probably too late.

And just because we subsidise, rightly or wrongly, some other sector is no argument at all for subsidising cars. That’s like the other faulty argument that “others subsidise their car industry so we should”.

john r walker
9 years ago

dd
“the best car in the world at 100 miles per hour”.
Sadly making specialised and quirky cars does not seem to be profitable these days- though the coming era of 3D printing might possibly change that, there are already people ‘printing’ things like new 1960s jaguar parts.

Did you see the top gear tribute to SAAB? They dropped a 1980s model on its roof from 5 meters and you could still open the doors!

Robert Merkel
9 years ago
Reply to  Nicholas Gruen

Nick, with respect, that’s not the way the car industry is going.

Ford and GM are desperately trying to catch up to where Toyota and VW have been for some time – investing big bucks in developing global models that are essentially the same in every market.

derrida derider
derrida derider
9 years ago
Reply to  Nicholas Gruen

Robert’s right – you’re proposing a strategy of tight integration into global chains. But:

a) that’s not the pretext on which the manufacturers sold the latest round of business welfare to gullible governments. It was all about “our specialty – no-one else does large rear wheel drive sedans, we can fill a niche”, and “only 12 countries in the world can do the full range from initial design to marketing” – ie the opposite of us just being one of a large number of countries with a factory producing an identical global car.

b) if you’re a multinational looking for one or more southeast Asian hubs to produce your one size fits all car, why on earth choose Australia when there are plenty of nearby cheaper places? If its a one-size-fits-all car, what does Oz offer that others can’t? We don’t even have an advantage in government gullibility – there are plenty of others keen to donate their citizen’s taxes to Ford et al.

john r walker
9 years ago

“our specialty – no-one else does large rear wheel drive sedans, we can fill a niche”
‘niche’ : hole in cemetery wall

john r walker
9 years ago
Reply to  Nicholas Gruen

Nicholas

suggest the market here is a lot more fragmented than most, from memory Australia’s market has more makes and varieties of models than many other much bigger car markets. Not that surprising given the very diverse terrain of Australia.

Rear wheel drive (or AWD) is necessary for big heavy cars, it is not possible to put more than about 150 KW through the front wheels.
AWD is more costly (and heavier ) than rear wheel drive.

Robert Merkel
9 years ago
Reply to  Nicholas Gruen

Nick, have you had a look at the sales figures for Falcons, Commodores and Aurions lately?

I don’t have the private buyer figures to hand, but I’d bet London to a brick that the vast majority of those are going to fleets, most of them to government fleets who are de-facto obligated to buy Australian.

Large rear-drive sedans used to be a distinctively Australian consumer preference, but that no longer appears to be the case. “Small” cars are now big enough, fast enough, and luxurious enough for most applications, and for those that genuinely need or want the space it seems that they prefer the innumerable “crossover SUVs” now on the market.

Incidentally, we haven’t even begun to talk about what’s going to happen to the car industry in about a decade’s time when autonomous vehicles start to roll out onto Aussie roads.

john r walker
9 years ago

The last owner of SAAB is currently suing GM (it looks like a long shot)

“As part of the deal selling Saab, GM retained say over GM technology used by Saab……The lawsuit alleges that GM unfairly used its leverage over its own technology licenses to prevent the sale of Saab to a Chinese company, notably its ownership of chassis technology.”

It is interesting that GM Australia needed government help to develop the kinds engine technology needed to make smaller, fuel efficient and grunty , engines.