Productivity Commission: Too little too late

The federal government’s Productivity Commission has today handed down its interim report on Australia’s automotive industry, citing no new reasons for what now appears to be its inevitable demise.

High labour costs and limited export opportunities are the Achilles heels of the industry, said the preliminary report, which was handed down little more than a week after General Motors announced it will close Holden’s local manufacturing plants by 2017.

It follows a similar announcement by Ford Australia in May, and comes a day after Toyota Australia said it will appeal a federal court ruling that last week granted an injunction to stop it from varying its workplace agreement.

Already under pressure from a threatened supplier base, Toyota Australia is seeking 27 cost-cutting measures that it says is crucial for the survival of what will be Australia’s sole remaining car-maker, as part of an effort to reduce the cost of each vehicle it makes by $3800.

Toyota Australia will honour two scheduled pay increases for its 2500 workers in 2014 as park of its current workplace agreement, which expires in March 2015, but says it needs to make $17 million worth of productivity improvements to make its local manufacturing operations viable.

The subsidiary is vying with several other Toyota plants for the right to produce the next-generation Camry from 2018, a decision on which will be made by mid-2014.

Among the changes Toyota had sought to put to its workers, who yesterday commenced a 21-day Christmas holiday, was the reduction of its summer shutdown to 10 days to meet demand – which would still have been twice as long as the shutdown at one of the Japanese factories it is vying with.

The Productivity Commission’s interim report will be followed on January 31 by a ‘position paper’ that will address the full terms of reference of the inquiry, including assistance to the industry and affected Holden workers.

The commission will then hold another round of public hearings in February before releasing its final report on March 31, which is likely to be too little too late for Toyota.

In its preliminary report, the commission described the Australian automotive manufacturing industry’s root problems as “small scale and high cost”, including labour rates that are comparable to Germany and Japan, but four times higher than those in Thailand and China.

“Australia is a high cost producer of motor vehicles,” it said. “Australia’s overall volume of production is small and its three assembly plants are all operating well below the recognised efficient scale of production.

“Labour costs are relatively high in Australia. They are not substantially different from those in developed countries such as Germany and Japan, but are four times or more those of China, Thailand and other developing countries where motor vehicle production is expanding.”

The commission said competition from lower-cost countries, low domestic demand, the high value of the Aussie dollar and continuing barriers to trade reduced the opportunity to increase production for both domestic and export sales, which are central to the viability of Australian factories.

“A substantial increase in the volume of production in Australia would be needed for any motor vehicle producer to improve their financial performance in the long term, but increasing the volume of production is challenging,” it said.

“The Australian new car market is small by global standards. It is highly competitive, to the benefit of Australian consumers, but is fragmented. Top selling models enjoy sales of only a little over 40 000 vehicles a year.

“Export opportunities are limited by the high costs of production, the sustained high Australian dollar, competition, and continuing barriers to trade.”

Commissioned soon after the federal election by the Abbot government, which always said it would reduce its expenditure for the Automotive Transformation Scheme by $500 million, the PC report said around 45,000 people were directly employed in the manufacture of cars, trucks, buses and their components in Australia last year.

“Another 225 000 people were employed in the repair, maintenance and wholesaling of motor vehicles and parts -- these workers are not significantly influenced by the level of motor vehicle manufacturing undertaken in Australia,” it said.

The PC said the problems faced by the Australian industry are due to global forces that are likely to continue to drive dramatic changes in both the demand for motor vehicles and the size, scale and location of production.

“Global forces are changing the location and structure of demand and supply. Demand for motor vehicles in a number of developed countries has been slow to rebound from the global financial crisis, but is growing rapidly in some developing countries, particularly in China. Consumers are favouring either smaller vehicles or sports utility vehicles.

“Motor vehicle production in the United States, European Union and Japan has declined in absolute terms, and as a share of global production, over the period 2002 to 2012.
Motor vehicle production is increasing in many developing countries.

“Motor vehicle producers are investing in large scale assembly plants in countries that have relatively low labour costs and are in a region of growing demand for motor vehicles, such as Brazil and China.

“Demand for motor vehicles is largely met through intra regional trade, with production increasing in export oriented countries such as Korea, Mexico and, increasingly, Thailand.”

The commission said workplace agreements were also impacting the sector by limiting room for negotiations between companies and their employees.

"To the extent that these (workplace agreement) parameters impede flexibility at the workplace level, they limit the ways in which the automotive manufacturing industry can respond to future challenges," it said.

“"Further, rigidities in the policy environment can increase the threat from any future shocks if firms in the industry are not able to continually adapt to changing circumstances."

The PC suggested further examination of Australian tax policies, including luxury car tax and fringe benefits tax.

"Removing distortions created by these taxes has the potential to improve economic efficiency, to the benefit of the sector and the broader economy (this will be discussed further in the position paper)," it said.

Federal industry minister Ian Macfarlane said the PC report highlighted clear problems within the local car-making sector.

“There are clear productivity and scale of production challenges," he said. "The government looks forward to receiving the updated reports from the Productivity Commission in the new year.

"These reports will be used as the government acts to facilitate a new era of manufacturing in Australia that will focus on increased productivity, an expanding skills base, encouraging private enterprise and investment and creating new opportunities for exports and access to global supply chains."

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