Car Makers: Beached As
By Bernard LaganFebruary 9, 2012
With General Motors Holden cutting 500 jobs, Australia’s governments are reconsidering auto subsidies. Consider the New Zealand approach: lift the tariff on used-car imports and lose manufacturing jobs.
When New Zealanders go looking for a new car, they frequently buy an old one.
It is likely to be a well-used Japanese model that has spent the better of its days running around Tokyo or Singapore. These mostly high-mileage cast-offs are shipped by the tens of thousands to New Zealand — 80,000 arrived last year — and 14 years ago snuffed out the New Zealand new-car assembly industry. The big car makers stopped their assembly lines and fled, helped out the front door with government compensation.
While Australia — spurred by the Coalition's policy to cut back government assistance to the car industry by $500 million — continues to debate maintaining the industry's billions of dollars in taxpayer support, it is worth considering the Kiwi experience. New Zealand is probably the only advanced Western economy to wipe out its own assembly industry plus scores of local car component manufacturers that couldn't survive once the assembly lines stopped.
New cars are no longer built in New Zealand. All — whether new or used — are imported fully built-up, including those made in Australia, which ships about 13 per cent of its new-car exports across the Tasman.
As Australian taxpayers contemplate the AUD10 billion they will be parting with — from 2001 to 2020 — to keep the remaining three car plants going, might they also swallow their pride and inflate their wallets by jumping into a used Corolla, a Camry or Cressida once owned by a Tokyo family?
Would lower car prices tempt Australians? In New Zealand, AUD10,000 buys a 2006 Toyota Corolla with 100,000 km on the clock. Expect the same car in Australia to cost between $11,500 and $14,000.
Though the notion of mass importation of used Japanese cars to Australia might have been a risky affront to many even five years ago, the viability of Australia's car manufacturing industry has been so squeezed by the rising Australian dollar and the trend toward overseas-built, smaller, more sophisticated cars, that the used-imports option is being canvassed within the Liberal Party — though not so loudly just yet. Allowing the mass importation of cheap, used cars from Japan and Singapore would very likely force the closure of Australia's remaining car-assembly plants, as happened in New Zealand.
Peter Reith, John Howard's workplace relations and, later, defence minister, is one Liberal stalwart, albeit long out of Parliament, who is pushing for the change. Long a fervent advocate of free-market policies, Reith, in a post two weeks ago on his on blog, wrote: "The current rules for the import of second-hand cars should be wound back as has happened in New Zealand. Second-hand cars are much cheaper in New Zealand."
Another who wants cheap used-car imports allowed into Australia is the leading economist and car industry expert Dr Nick Gruen, an advisor to the Hawke Government who was heavily involved in crafting that government’s car industry plan. He has been closely involved with Australia's car industry since.
Gruen says that the prohibitive $12,000 tariff that the government applied to imported used cars was "a naked piece of protectionism and probably one of the most expensive pieces of protectionism we have."
He says there was no doubt that if Australians had access to cheaper imported used cars, the car industry would come under even more pressure: "It would place quite a lot of pressure on the existing industry but, other things being equal, that's a good thing."
Gene Tunny, a former Commonwealth Treasury officer and now private consulting economist, in his study of the car industry, published late last year, argues that the government would make itself highly popular with Australian drivers if it were to open up Australia to cheap, used cars imported from Japan or elsewhere. The door is kept firmly shut, for now, by the special AUD12,000 tariff that is applied to each used-car import unless there are special circumstances to justify its entry into Australia.
Allowing mass used-car imports from Japan is a proposition, predictably, scorned by the Gillard government. The Minister for Manufacturing, Senator Kim Carr, charged with negotiating the government’s continuing aid to the car makers, dismisses New Zealand's path. "The New Zealand Government did not actively assist the industry in the transition to lower tariffs," says Senator Carr. "I think they actively promoted the demise of industry. This was the Roger Douglas [New Zealand's fervent free-market Labour finance minister] approach."
While it will doubtless vex New Zealanders, Carr identifies the loss of their car industry, and associated local car component makers, as the reason for the country's insipid manufacturing industry: "The non-existence of the New Zealand motor industry has had a massive, negative effect on New Zealand manufacturing."
The evidence does appear to support Carr.
Just north of New Zealand's capital, Wellington, is an unmarked, grey building the size of several football fields, mostly empty and for sale. A passerby through this low and silent valley would be hard-pressed to know that 20 years ago here was a clanking, frenetic assembly line where 2,000 people once worked, many of them Pacific Island migrants on a new start. They made the Holden cars that for years cornered New Zealand's new car market.
A short drive to the south lies a narrow, high and still striking red-brick factory in an art-deco style; built in 1936, it was the Ford Motor Company's New Zealand assembly plant in Lower Hutt which poured out new Fords until it, too, fell silent in the mid-1980s.
It is now a go-kart track.
Away to the west of Wellington, covering an area the size of nine rugby fields, lies another set of cavernous building. For 25 years — through to the late 1990s - some 2,000 people were employed here making Chrysler and Mitsubishi vehicles. A benevolent family of industrialists, the Todds, established the factory, which included three large lecture halls that the family offered its employees to improve their skills.
The Todd buildings are mostly used for storage now.
All are testaments to New Zealand's loss of its car-assembly industry, along with myriad smaller factories and workshops that built car components such as oil filters, exhaust systems, radios and windscreens; about 30 per cent of the content of every new car built in New Zealand was made by local manufacturers. At its peak in the early 1980s, the car assemblers directly employed about 8,000 workers. Another 4,000 worked for component makers. The numbers may seem small, but for the New Zealand of the 1970s and '80s the car component makers were a large chunk of a small manufacturing base.
Before we transport this bleak scenario across the Tasman and layer it over the Australian car industry, some big differences between the industries in both counties — when New Zealand still had a car industry — need to be acknowledged. The biggest was that New Zealand's was a car-assembly industry only; its assembly-line workers took parts imported from overseas out of boxes and bolted, welded or screwed them together.
Sure, small New Zealand factories made components such as batteries, lights and exhausts systems. And they even exported car wheels and windscreens. But unlike the Australian industry, New Zealand did not have the design and engineering expertise that allowed it to build engines, transmissions or braking systems. It was a long way short of the Australian motor industry's present status; Australia is one of the 13 nations in the world capable of designing and manufacturing vehicles from clean sheet to dealers.
So Australia has a lot more to lose if its car industry goes the way of New Zealand's. Around 55,000 Australians are employed by the car makers alone, and there are about 200 automotive component makers employing about 50,000 people. Australia exports about 100,000 cars a year, mainly to the Middle East.
However, Australia's car industry has entered a dangerous and uncertain time and, like much of the malaise in economic activity outside of the mining rush, the high Australian dollar is much to blame.
The numbers tell the story in the economist Gene Tunny's study of the industry: The three remaining Australian manufacturers, General Motors, Ford and Toyota (Mitsubishi closed their South Australian plant in 2008), produced about 240,000 vehicles in 2010. Seven years ago, 400,000 vehicles were made each year in Australia.
The dramatic fall off in production of course reflects falling market share for Australian-built cars. Ten years ago Australian car makers held a 30 per cent share of local new car sales. Today it is less than half that and, consequently, the number of employees in car manufacturing has been cut by more than 25 per cent from about 80,000 over the past seven years.
The higher dollar squeezes the manufacturers in two ways: It favours the pricing of built-up new imports and pushes up the price of the cars that Toyota Australia exports to the Middle East and that Ford and GM export to the US.
That helps explain why the smallish Mazda 3 sedan — a fully built-up import — entered the Australian motor industry's timeline of gloom in January when it was confirmed as knocking off the locally built Holden Commodore as Australia's most popular new car.
That brings us to the present debate, which is really about how much Australian taxpayers are prepared to spend to keep an ailing local motor industry on life support. The numbers are already vast and it is, again, Gene Tunny's study that best unravels them: in November 2008 the then-Rudd government announced $3.2 billion of new financial assistance. That was later rolled back to leave car makers with $6.2 billion of government support over 12 years, through to 2021.
But in return for the cash the government also kept a foot on the local industry's neck by way of further cutting the tariff on new car imports. The tariff dropped from 10 per cent, to 5 per cent at the beginning of 2010. It translated to a theoretical price cut on new imported cars of about $300 on a $15,000 car and $1,200 on a $40,000 model.
The cut was, of course, good news for buyers of new car imports; tariffs have been falling even since the mid 1980s when they were 60 per cent. But they weren't good for the local car makers; Australia went from five car makers assembling 13 different models in eight car plants, to just three car makers assembling six models.
The type of assistance the Australian Government now gives the local car-makers has shifted dramatically from the protection of high tariffs slugged on the imported competition to cash. Billions of it.
Says Tunny: "The ability of politicians to take tough decisions regarding the automotive industry is doubtful, with their romantic attachment to manufacturing in general and automotive manufacturing in particular."
He argues that there is now a strong case for at least reducing barriers that prevent Australians driving imported used cars - most likely imported from Japan and Singapore. His rationale? The goal posts have changed; when the Productivity Commission set out the case against used-vehicle imports back in 2002, it did so on the basis that a flood of cheap cars would unnecessarily disrupt the orderly transition of the Australian motor industry to the new world. This was a world in which the car makers would gradually receive less help from the government and an end to access to taxpayers' cash by 2015.
Now that the cash from the government is set to roll on beyond 2015 to the car makers, Tunny believes the government should consider cutting the $12,000 special tariff on used imports, allowing them to begin flowing in.
"It would also make itself highly popular with motorists, particularly struggling students, if it lifted the $12,000 tariff on used cars," he says.
New Zealand's 20-year history of allowing used-car imports has, however, acted to lengthen the average age of the national fleet. It is now 13.5 years, compared with the average age of Australia's, which is 10 years.
Australians — now judged by Credit Suisse as the world's richest people — may not see progress as getting behind the wheel of a clunker.