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          Why does economic reform in the automotive industry need a change of gears?

          Economic reform in the automotive industry does not come easy, and Tim Harcourt examines the lessons to be learned from GM's recent decision to close down Holden

          The announcement by General Motors (GM) that Holden will stop selling cars in Australia is a sad end to a proud national story. The decision will not impact the national economy as it once would have, but we should acknowledge that it was not inevitable – or desirable – that GM’s hand was forced.

          The automotive industry in Australia has been in seemingly constant flux, especially during the major downsizing in the manufacturing sector over the years. Falls in sales and job cuts have dominated as the industry faces major disruptions and global competition.

          Government attempts to save the industry

          Government support dates back to 2008, when former Victorian premier Steve Bracks conducted a review of Australia’s automotive industry.

          Amidst intense pressure to stop tariff cuts, Bracks was driven by a desire to build on John Button’s great legacy of weaning the industry off tariffs and making it more export-oriented.

          However, despite the industry’s and government’s efforts, Ford, Toyota and Holden ceased Australian production to focus instead on imported models and research and development (R&D).

          The 2020 Australian Automotive Industry report stated that “the winding back of support, against a backdrop of a high domestic exchange rate, the introduction of free trade agreements with other vehicle producing countries, and shifting consumer preferences ultimately forced the closure of domestic vehicle production”.

          What did the review achieve?

          Firstly, the automotive industry review held the line on tariff reductions, focusing on the Button approach of export orientation and trade promotion, supporting the free trade agreements and building on our export success in Asia and the Middle East as well as emerging markets.

          General Motors Corporation.jpg
          GM’s hand was unfortunately forced in its decision to wind up the Holden brand. Image source: iStock

          Secondly, the review provided an overhaul of the Automotive Competitiveness and Investment Scheme (ACIS) so that the industry could restructure to suit future conditions. The reforms ensured the industry could focus on innovation, R&D, excellence, and design, with an emphasis on skills and training.

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          Thirdly, the review recommended restructuring the industry’s role in the supply chain, drawing on strong design skills and intellectual property, and adjusting to an energy-efficient, low carbon future.

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          I was struck at how GM and Ford told us that Australian automotive design skills were the best in the world, and that environmental innovation here was also world-leading.

          In hindsight, we can be relieved that Bracks made those changes and that the final report was tabled in July 2008 before the collapse of Lehman Brothers.

          The subsequent global financial crisis (GFC) caused a fall-out in Detroit and changes in the global economy that impacted the Australian car industry. A very high Australian dollar would also have wiped out any impact of a tariff freeze and the protectionist lobby would have had only a pyrrhic victory of a few months.

          Automotive industry.jpg
          The Australian car industry has suffered with major downsizing in the manufacturing sector. Image source: iStock

          What can we learn from this?

          In the current debate over the future of the automotive industry, there are two extremes dominating. There’s one camp that says to protect the industry at all costs, including manufacturing; the other camp that says Australia should not produce cars and belittles any efforts by the industry to raise international competitiveness.

          Fortunately, Bracks – like Button before him – avoided both extremes and instead advocated a moderate path of reform for the automotive industry.

          The reform is based on the following three simple principles:

          • Protect workers, not markets: It is better to improve workers’ skills than penalising consumers with high prices via tariffs. Tariff protection is like declaring war on your own people during peacetime.
          • Look for where you have a competitive advantage at home and abroad: Tap into global supply chains – Australia has strong R&D, design and innovation at home, and is therefore able to tap into global supply chains in countries such as Thailand.
          • Prepare workers and entrepreneurs for a low carbon future: Make sure workers have the skills that are in demand in a range of companies and industries and provide a strong open environment for entrepreneurs to invest and employ them.

          The 2020 Australian Automotive Industry report states that “the Australian government will continue to encourage innovation, build industry capability, and assist future emerging industries such as autonomous vehicle and related technologies; hydrogen and electric vehicles and related technologies. This will grow the remaining research and development and design elements that are thriving in Australia”.

          As Button knew, and Bracks knows, economic reform is not easy. You need a good feel for direction amidst regular renewal of strategy, tactics, maintenance and the constant changing of gears as global economic and environmental conditions change.

          In short, economic reform in the automotive industry does not just come automatically.

          Tim Harcourt is the JW Nevile Fellow in Economics at the UNSW Business School.

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