Did subsidies contribute to the demise of the Australian auto industry?

Toyota Australia's decision to cease manufacturing in 2017 will likely mean the complete demise of the Australian automotive industry if radical new thinking is not undertaken by all industry stakeholders. So says a statement from the Federation of Automotive Products Manufacturers(Melbourne, Australia). And at least one party claims generous subsidies may have contributed to the industry's downfall by "dulling incentives to improve productivity, seek export opportunities, and diversify into other industries."

The decision by Toyota Australia to cease manufacturing in Australia in 2017 is a very dark day for Australia," said Chief Executive Richard Reilly. "Traditional automotive manufacturing will go completely. Our industry is devastated." Toyota's announcement follows a previous announcement by GM affiliate Holden in December last year that it would cease production in 2017 and Ford Motor earlier that it would exit production  in Australia  by the end in 2016.

All vehicle manufacturers in Australia are producing well below the 200 000-300 000 vehicles needed annually for an assembly plant to be cost competitive. In fact total production in 2013 was just 210,538 vehicles versus around 324,000 in 2008. In 2012, Ford manufactured just 37,702 vehicles, while Holden assembled 82,908 units and Toyota 101,381 cars.

The Federation of Automotive Products Manufacturers (FAPM) estimates up to 33,000 jobs in the automotive supply chain will be affected by today's announcement as Toyota's decision, following on from Ford and GM-Holden in 2013, will effectively see the death of an entire industry. This will mean the loss of thousands of jobs in engineering, design, prototyping, R&D and assembly.

The FAPM appreciates the decision was not based on any single factor but a combination of domestic and international pressures including an unfavorable Australian dollar, low volume, unfair free-trade-agreements, an open and fragmented market and unequal investment competition from other national governments around the world.

Subsidy support

To be fair though, the Australian auto industry has been uncompetitive for some time due to some of the factors cited above and it probably only remained as long as it did due to generous federal and state government subsidies. According to a position paper on auto manufacturing by  the country's Productivity Council, the industry enjoyed support in 2011 valued $1885 per vehicle, compared with $297 in Sweden, $206 in Germany, $166 in the US, $28 in Canada, and $22 in the UK.

The Productivity Council adds that decades of transitional assistance have forestalled, but not prevented, the structural adjustment now being faced by the industry. "Assistance imposes costs on the community and dulls incentives to improve productivity, seek export opportunities, and diversify into other industries," it notes in the paper. The Automotive Transformation Scheme (ATS), scheduled to run from 2011 to 2020, provides assistance in the form of cash payments to registered participants against their eligible automotive production, plant and equipment investment, and research and development expenditure. The total budget for this scheme is A$2.5 billion ($2.25 billion).

The FAPM had been working with its members, vehicle manufacturers, all levels of government and other stakeholders on new opportunities for the industry and a long-term sustainable manufacturing sector. "We may now not have time enough to transition" said National President Jim Griffin. "Our industry has the skills and know-how to be competitive but we need time and assistance to re-shape our businesses, to get new customers and diversify into new markets."

The FAPM will be working with its members over the coming days to assess the impact of the announcement. It is expected that the supply chain will experience widespread job losses leading up to 2017 unless it can successfully diversify into non-automotive industries. The FAPM believes that radical new ways of approaching manufacturing in Australia are needed which requires substantial, well targeted government support and stakeholder buy-in.

"A lot of our members won't make it," concluded Reilly. "Our only hope now is to diversify, export or attract new models of doing business. There are still some good companies out there with innovative businesses and world class technologies. We must have a strategy to save as many as possible."

Among its members, FAPM lists 12 suppliers of plastic components but undoubtedly more plastics-related companies will be affected by the end of auto manufacturing in Australia.