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What really killed vehicle manufacturing in Australia

Image from theage.com.au

Image from theage.com.au

The death knell for Australia’s vehicle manufacturing industry was not because of high labour costs, writes Andreas Bimba in this guest article, but the free-trade agreements that acted to the detriment of the local industry. And who signed them? You won’t be too surprised to learn who.

Toyota, Holden and Ford did not decide to cease local automotive manufacturing because of high labour costs (this is nothing new), nor from a lack of direct financial support (this has been fairly constant but small), although both of these factors added to the pressure. Primarily, it was because of inadequate trade protection of the Australian new car market, the historically high Australian dollar, and finally, extreme hostility shown by the current Federal Government and the Productivity Commission in regard to dealing effectively with the urgent concerns of the industry.

It is quite obvious really, but as we have come to expect, the truth of the matter has largely been ignored by our superficial national media. The main headwind of the many facing Toyota Australia’s local manufacturing operations, and also those of Holden and Ford, is the one-sided Free Trade Agreements (FTAs) signed by our Federal Governments and the almost complete lack of tariff protection.

These FTAs conform to the neo-liberal philosophy of global free trade that is currently in favour with the Coalition Government, the Federal Government’s advisory bodies such as the incompetent Productivity Commission, and also the Australian Labor party.

The Australia Thailand Free Trade Agreement (TAFTA) came into force on the 1st January 2005 and was implemented by Prime Minister John Howard.

This agreement has allowed Thailand’s subsidised vehicles into Australia without restriction but has not prevented Thailand imposing secondary restrictions that have totally prevented Australian vehicles from being sold into the Thai market. Australia’s three top selling vehicles in 2013; the Toyota Corolla (43,498 units), the Mazda 3 (42,082 units) and the Toyota HiLux (39,931 units) all came from Thailand. By comparison, for 2013 the Australian made Holden Commodore sold 27,766 units locally and the Toyota Camry sold 24,860 units locally. I have not included Australian exports in these figures.

Over the preceding eight years not one Australian government has addressed the inequities of this vehicle trade imbalance and have stood back and ignored the inevitable consequences. Perhaps the Australian automotive manufacturers have also not tried diligently enough to address this trade imbalance as most of the vehicles being imported were made by subsidiaries of the parent companies.

This chart from GoAuto clearly shows what has been happening from 2005 to 2013. For the Australian new vehicle market it shows total Australian made vehicle sales (exports excluded) and total Thailand made vehicle sales.

GoAuto The Australia Korea Free Trade Agreement (FTA) came into force on the 5th December 2013 and was implemented by the Abbott Government. Korea has an almost totally protected car market and provides substantial subsidies to its manufacturers. It is also a much larger and more advanced automotive manufacturer than Thailand.

On the 11th December 2013 General Motors Holden announced the planned closure of its Australian manufacturing operations from the end of 2017.

On the 10th February 2014 Toyota Australia also announced the planned closure of its Australian manufacturing operations from the end of 2017.

It looks fairly clear to me that Holden and Toyota Australia concluded that the Australia Korea FTA was the last nail in the coffin and that there was no longer any point in baring their trading losses in the hope that the national industrial policy environment would improve.

The fact that Holden and Toyota Australia made no headway in Canberra with either the Government or the Productivity Commission with addressing their major concerns about viability under such extremely trade exposed conditions showed that the situation in their eyes was hopeless.

A bumpy road I believe that if a Labor Government was in power that the views of knowledgeable and reasonable negotiators such as Senator Kim Carr would have prevailed and that realistic strategies to address or counteract all of the concerns of the Australian automotive manufacturers would have been implemented. This would have occurred at the time of Holden’s threatened closure and I believe would have saved the local manufacturing operations of Holden and subsequently also those of Toyota Australia.

Even though during the Rudd and Gillard Governments (as well as the Howard Government) the issues of the vehicle trade imbalance with Thailand, the lack of trade protection in general, the unreasonable barriers placed against exports, the occasional unwillingness to export and the historically high Australian dollar were not adequately addressed, I believe that Labor would have done whatever was needed to retain the Australian automotive manufacturing industry as soon as it became aware of how critical the current situation had become.

Given the above, the only reasonable conclusion that can be drawn is that the current Coalition Government is primarily responsible for the announced cessation of all Australian automotive manufacture.

Can the Coalition bring themselves to adjust the Australian automotive manufacturing national policy environment sufficiently strongly that Toyota, Holden and possibly also Ford can be persuaded to continue local automotive manufacture beyond the announced closure dates? This is not very likely even though it is strongly in the national interest on so many levels, as it would basically entail the partial abandonment of their neo-liberal economic philosophy which they possibly hold as being more important than the national interest. Perhaps it is time for a leadership spill in the Federal Liberal and National Parties?

Can the next Federal Labor Government, which has every opportunity to win in 2016, bring about a policy environment sufficiently realistic and powerful that Toyota, Holden and possibly also Ford can be persuaded to continue local automotive manufacturing? Despite all the gloom I think that is possible. Even if some or all of the original manufacturers choose not to continue with local manufacturing, it is plausible that other players whether local or foreign may take over the current manufacturing facilities, perhaps even with the original manufacturers holding a minority share of the ownership.

We will see.

Never give up on the future of the Australian automotive manufacturing industry

ford-broadmeadows Can the automotive manufacturing industry in Australia be saved? “Yes”, writes Andreas Bimba, but only if the Abbott Government is defeated in the 2016 election.

The next federal general election will probably be in late 2016 and Labor will in all likelihood win. Ford announced that closure of their Australian automotive manufacturing operations will be in October 2016. Holden announced closure will be by the end of 2017.

Australians must continue to buy locally manufactured Fords (Falcon and Territory) and Holdens (Commodore and Cruze) till those announced dates to avoid early factory closures. Also please don’t forget ‘last man standing’ Toyota (Camry and Aurion) which is just hanging in there.

The dogmatic right wing of the LNP Coalition Government will probably follow the totally worthless advice of the Productivity Commission and cut currently scheduled Automotive Transformation Scheme (ATS) industry assistance so as to force an earlier closure.

Even with an early closure it is still perfectly feasible to save the manufacturing operations of Ford and Holden which are only slightly less productive than the more up to date facilities of Toyota (Toyota knows that both Ford and Holden are very tough competitors). These manufacturing facilities are worth billions of dollars and compared to other sectors of the Australian economy, like most service industries, are highly efficient and productive.

Other factors brought Ford and Holden into their loss making position such as the historically high Australian dollar, a poorly implemented export strategy (Detroit and Canberra are primarily to blame), a poorly thought out national industrial policy/support environment created by all Australian Federal Governments which made industry investment hard to justify, an excessively open new car market (refer to the Thailand car trade imbalance) and as a result of these factors, ever declining production volumes and worsening economies of scale.

If Ford and Holden, after the Labor victory, still choose to quit local manufacturing, their manufacturing facilities can still form an extremely valuable core of a new player into the Australian automotive manufacturing industry that could be local, foreign, or a consortium. A locally owned manufacturer would be the best solution as it would allow management for the first time in Australia’s automotive manufacturing history to control its own destiny and not defer to the colonial master for permission or guidance. All the skills and technological capacity required for the successful operation of this enterprise already exist in abundance.

Manufacturing is a value adding industry that provides much more employment per unit of economic activity than the bulk resources industry. It can also be a major foreign exchange earner or replace a substantial portion of our imports. As a foreign exchange earner the industry can drive average living standards higher and can support the service sector of the economy.

A second sizable local manufacturer will greatly assist the survivability of Toyota’s Australian manufacturing operations through healthy competition, greater political and public support for the industry and better economies of scale for components suppliers.

A doubling of Australia’s current automotive manufacturing capacity so as to meet at least 50 per cent of the local 1.1 million per annum automotive market plus exports should then be the medium term aim, again to improve economies of scale and model range.

One should also not forget the other benefits of an automotive manufacturing industry such as a technology and productivity driver in the economy, a source of national confidence, a large employer of unskilled, semi skilled and tertiary qualified personnel and as a industrial capacity and technology reserve during times of national emergency. Don’t ever think a few submarines will suffice.

A moderate tariff of 10 – 15 per cent plus export credits would allow local manufacturers to pay Australian award wages and still make a profit. Such a tariff is a means of providing a level playing field with low cost and high technology manufacturers like Korea, Thailand and China.

The current alternative to tariffs of direct grants by governments is too unpredictable, making investment decisions by manufacturers hard to justify.

The current foolish federal government sees such grants as a subsidy for an inefficient industry rather than as a good investment giving a net rate of return of about five times the size of the subsidy. The current high profitability of Toyota Japan shows that the automotive manufacturing industry is a dynamic and valuable industry for countries with relatively high wages. Not just low wage countries as foolishly suggested by the Productivity Commission.

(Reference: the Productivity Commission).

The Coalition’s slash and burn economic philosophy is extremely unpopular with the Australian people and ultimately it is the views of the Australian people which will prevail and not those of ill-informed special interest groups such as the reckless financial services industry or the mining/resources industry. These sectors, apart from the superannuation industry, are the biggest recipients of government aid and extraordinary tax concessions, estimated to be valued at over $4.5 billion per annum for the mining/resources industry and about $1 billion per annum for the financial services industry.

(For further information refer to the Trade and Assistance Review 2011-12).

With a well thought out national industrial policy environment manufacturing can again thrive in this country. Will Labor get it right this time?

The best model is the Japanese METI model where government and industry work together as a partnership. Moderate government funding is provided but it is returned many times over to the tax payer through general taxation of the manufacturing industry and its employees.

It is a profitable investment by the Japanese tax payer into their manufacturing industry and it is the core of Japan’s large, productive and successful economy.

The METI model provides a level playing field that allows Japanese businesses to pay Japanese labour and other business costs (which are higher than Australia’s) and to still compete successfully with low cost and high technology competitors like Korea, Thailand and China.

(For further information refer to Ministry of Economy, Trade and Industry (Japan) and an overview of METI).

The growth of the mining/resources industry must be moderated if Australia is to have a sustainable manufacturing industry. Expansion of the fossil fuel industry must be severely limited in any case due to the global cumulative atmospheric carbon limit of 500 GtC set recently by James Hansen, and also to limit the value of any stranded or unusable assets arising from the carbon limit.

Will truth win over poorly applied simplistic ideology?