Australia's automotive manufacturing industry

Position

Position paper

Released 31 / 01 / 2014

This report considers potential options for government assistance to the automotive manufacturing industry.

You were invited to examine the paper and to make written submissions by 13 February 2014.

This inquiry has concluded. The final report was sent to Government on 31 March 2014 and publicly released on 26 August 2014.

Please note: This position paper is for research purposes only. For final outcomes of this inquiry refer to the inquiry report.

Download the paper

Australia’s automotive manufacturing industry is undergoing significant change.
- Ford and Holden announced their manufacturing plants will close by 2016 and 2017. Toyota will decide this year on the production of the next generation Camry.
- A number of component manufacturers and employees will be affected.
The policy rationales for specific assistance to automotive manufacturing are weak. The community would benefit from the ending of assistance to automotive manufacturing through the Automotive Transformation Scheme (ATS).
- There is no compelling evidence that spillover and multiplier benefits exceed the costs of assistance to the industry.
- 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.
Current government funding should be reassessed to determine when subsidies should end, and whether to change the timing and amount of funding withdrawn from the ATS.
- ATS funding for Toyota and other eligible businesses should cease in 2020, and not be extended or replaced with other specific assistance.
- The closures of the Ford and Holden plants are expected to contribute to an underspend of $380 million under the legislated ATS funding schedule by 2020.
- The effect of the uneven profile of funding as outlined in the MYEFO estimates is unclear. It could elevate risks of earlier plant closures by Ford and Holden and might negatively affect investment decisions by Toyota and its component suppliers. A smoother reduction profile would delay the savings benefits, but may reduce adjustment costs.
- The amount of funding withdrawn from the ATS set out in the MYEFO could result in adjustment costs greater than the savings benefits. Further feedback is sought.
Firms remaining in automotive manufacturing would benefit from broadly based economic and regulatory reforms and greater workplace flexibility.
Structural change is often costly for retrenched employees and their families, and may involve job search and training costs, and lead to lower paid or less secure jobs.
- Some employees of component manufacturing firms may warrant particular consideration if generally available measures appear to be insufficient.
Loss of employment and economic activity will be concentrated in some regions, with some already having relatively high rates of unemployment and disadvantage.
- Generally available welfare, employment and training services should be relied on in the first instance, and need to be adequately resourced in the affected regions.
- Regional adjustment programs can be of limited value. Infrastructure investment and labour adjustment programs, where warranted, need to be designed in ways that generate net benefits for the community as a whole.
Given the advanced notice of Ford and Holden plant closures, there is time to learn from previous adjustment programs. The Commission is seeking further input.

Auto adjustment assistance needs a measured approach

The Productivity Commission has called on governments to adopt a measured approach to the development of their adjustment assistance plans for the automotive manufacturing industry and its employees. On releasing its position paper on the industry, the Commission's Deputy Chairman, Mike Woods, stressed that government policies and programs should aim for a stronger economy at the end of the journey.

The Commission considers that the arguments supporting public subsidies for automotive manufacturing are weak and that the wider community would be better off from ending those subsidies. 'Our draft proposal is that there should be no further industry specific funding beyond 2020', Mr Woods said.

'The Commission opposes a supplementary rescue package for Toyota and component manufacturers. Governments could better assist firms by undertaking broad based economic and regulatory reforms and removing impediments to greater workplace flexibility'.

Any significant or uneven reduction of subsidy funding in the next few years, as outlined in the MYEFO estimates, could elevate risks of earlier closures by Ford and Holden and increase adjustment costs throughout the supply chain, especially where firms close at short notice. It might also negatively affect investment decisions by Toyota and its component suppliers. In terms of supporting retrenched employees, the Commission's preliminary view is that generally available welfare, employment and training services should be relied on in the first instance, provided those services are adequately resourced.

'Infrastructure stimulus programs need to demonstrate a net benefit, or else could end up being costly exercises. And schemes that divert valuable labour and capital from one subsidised industry to others represent a lost opportunity for our economy', Mr Woods said.

The Commission has issued a number of information requests, including:

The best ways to assist employees and their communities adjust to the industry changes.
Whether employees of some component manufacturing firms that close might face more difficult circumstances than employees of Ford and Holden.
Whether the benefits of early budget savings could result in even greater adjustment costs.

The Commission is calling for submissions in response to this Position Paper and to its Preliminary Findings report released last December. Public hearings will be held in late February and it will submit its final report to the Government by March 31 this year.