Manufacturing Futures Conference
Melbourne Park Function Centre
Melbourne, Victoria
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These are tough times for the automotive industry – not just in Australia, but in the US and other places as well.
We are all familiar with the impact of increasing competition from low-cost producers, but there is more to it than that.
Rising fuel prices and environmental concerns are changing the way people think about motoring.
The United States seems to have reached the tipping point when petrol approached US$4 a gallon.
US vehicle sales had already fell from 17 million in 2006 (according to the Census Bureau) to 16 million in 2007 (according to the trade press)
General Motors predicts sales will be lucky to top 14 million this year.
Vehicle-miles travelled fell in 2007 for the first time since 1980, and they have continued falling through the first six months of 2008. (FHWA)
In Australia, vehicle sales for August were down 12 per cent compared to the same month in 2007 – although sales for the year to date are still in line with last year’s.
No one is suggesting the motor car is dead, but what these figures do tell us is just how dramatically consumer sentiment has shifted, and how urgently the industry needs to reinvent itself.
The Australian Government sees a strong future for the automotive industry in this country and we stand ready to work with car makers and component suppliers to achieve that.
At the same time, we recognise that business as usual isn’t good enough.
Things have got to change.
No one should be daunted by this.
Today’s car industry is radically different from the car industry of twenty-five years ago – more innovative, more productive, more outward-looking and more competitive.
It is no stranger to change.
Response
The transformation of the industry in the 1980s owed much to the car plan drawn up by John Button.
Now it’s time for a new car plan.
This is an absolute necessity.
If we can’t agree on a plan for the industry, we won’t have an industry.
That’s why we’ve been so keen to talk with the industry’s top domestic and international decision-makers.
We’ve already had visits from the global chiefs of Toyota and Ford, and we’ve invited Rick Wagoner of General Motors – whom I met when I visited Detroit in June.
With luck, Mark Reuss will help us get him out here soon.
Our first message to the industry is that we want to keep it here.
We want it to thrive.
We want it to be part of a growing manufacturing sector which is tightly integrated into global markets and supply chains.
It is no accident that the Prime Minister has been directly involved in our discussions with the industry to date.
This is a measure of how seriously the Government takes the sector’s future here.
The message coming out of our meetings so far is that the car and component makers broadly agree with what we are trying to do.
Everyone recognises that we have to work together on this.
To make the industry sustainable in the long term we need to tackle the twin challenges of climate change and increasing competition for oil head on.
That will require a lot more innovation and a lot more investment.
We have to start building greener cars – cars which consume less fuel and produce fewer emissions.
In his World Environment Day speech, the Prime Minister highlighted measures the Government is taking to help Australian families and businesses make the transition to a low-carbon economy.
These include measures to reduce the environmental impact of transport – like the $500 million Green Car Innovation Fund and the Green Car Challenge.
We’ve already advanced $35 million from the fund to bring production of the hybrid Camry to Australia.
As the Prime Minister said on World Environment Day:
“Australia needs a car industry that uses frontier technologies to increase fuel efficiency and reduce greenhouse emissions. Australia needs a car industry clever enough and farsighted enough to make motoring more affordable to working families and less costly to the planet.”
This is the path the industry needs to be on.
And when I say the industry, I mean the whole industry – not just the three car makers, but the 200-odd component suppliers as well.
You can’t have a healthy car industry without a healthy components sector, and there are clear signs that the Australian components sector is in distress.
According to Steve Bracks: “anecdotal evidence suggests that up to one-third of the 200 Australian automotive component firms could be at risk of exiting the industry over the next few years”. (p. 82)
And when key suppliers go under, production lines shut down.
That’s why we are looking for solutions that will work for the whole supply chain.
Bracks
The Bracks Review of the Automotive Industry released last month proposes one possible set of solutions.
Steve’s recommendations challenge the assumptions that have underpinned the industry in recent times.
These assumptions need to be revised in the light of new circumstances – especially the rising cost of money, the rising cost of fuel, and the rising value of the Australian dollar.
The three headline recommendations are:
- first, that we should replace the Automotive Competitiveness and Investment Scheme with a new and retargeted Global Automotive Transition Scheme to support research, development, design and export, and extend support from 2015 to 2020;
- second, that we should bring forward the Green Car Innovation Fund and double it to $1 billion if it’s successful; and
- third, that we should reduce the passenger motor vehicle tariff from 10 to 5 per cent by 2010, making Australian car tariffs the third lowest among major automotive-producing countries.
I’ve been saying all along that tariffs are a second order issue, and recent developments have only reinforced that view.
The Australian dollar doubled in value against the US dollar during the seven or so years between the early days of ACIS Stage One in 2001 and mid-July this year.
In the two years to mid-July it rose 31 per cent.
Since then it has fallen 17 per cent – including 5 per cent in the last week.
Despite that, the dollar is still 69 per cent higher today than it was at its low-point in early 2001.
These currency fluctuations have had – and will continue to have – a much bigger impact on price relativities than the tariff.
Steve also recommends:
- a short-term restructuring fund to help the automotive supply chain improve economies of scale;
- increased support for developing capabilities in the components sector through programs such as Automotive Supplier Excellence Australia, run by the AutoCRC;
- including road transport in an emissions trading scheme;
- negotiating more free trade agreements, particularly with the Gulf States, ASEAN and South Africa
- appointing automotive ambassadors to increase access to overseas supply chains;
- harmonising State and Territory passenger motor vehicle taxes; and
- establishing a new Automotive Industry Innovation Council.
Steve Bracks has delivered a comprehensive and thoughtful report that provides a basis for informed policy choices.
The Government will make its response shortly.
What we want above all is additionality – the assurance that whatever public dollars we dedicate to this industry will make a demonstrable difference.
The industry
The automotive industry makes a huge contribution to Australian employment, exports and innovation.
The whole economy benefits from the investment, skills, demand, spill-overs and R&D it generates.
The automotive industry is critical to the viability of manufacturing in this country, and manufacturing is critical to the economy as a whole.
Anyone who doubts that need only look at last week’s national accounts, which show that manufacturing production grew 4.6 per cent in 2007-08.
Growth in services sector production was slower at 4.1 per cent, and mining production actually fell 0.2 per cent. (ABS 5206.0)
Despite the factory closures and job losses of recent months, manufacturing employment has increased by 24,300 since last November.
This employment and output growth gives me great confidence in the future of manufacturing.
It is essential to keep pushing this positive message.
We can’t allow the furphy that manufacturing is in terminal decline to gain ground.
It doesn’t just affect the attitudes of consumers.
It also affects the industry’s capacity to attract bank credit, new investment, new technology and new jobs.
There are very disturbing signs that banks are trying to minimise their exposure to manufacturing in general and the automotive sector in particular.
Many companies have talked to me about this.
The last thing we want is already vulnerable component suppliers being forced to borrow from non bank lenders at higher interest rates.
One of our objectives in developing a new car plan is to turn business confidence around by demonstrating the Government’s support for the industry.
I repeat, no one is more conscious than I am of the effect factory closures have on individual workers and local communities, but we should not lose sight of the fact that the sector as a whole is growing.
There are some who say we should forget about manufacturing and accept that Australia is now a service economy.
Some go further and suggest this is a desirable thing in itself – that it represents a higher stage of economic evolution.
Switching to services is nice in theory, but how do you then pay your way in the world?
Many services are non-tradeable.
Commodities will only get us so far.
How do you pay for the manufactured goods people still want and need?
The best way is by selling the world manufactured goods in return.
Australia does that already.
In 2007-08, services exports were worth $50.9 billion.
Agricultural and resources exports were worth $82.5 billion.
Manufacturing exports topped both.
They were worth $88.4 billion. (ABS 5368.0)
We need more of them, not less.
That includes more automotive exports – which were worth over $5 billion in 2007. (DFAT)
Exports are critical to the car industry not just because they boost earnings, but because they push production volumes up.
The industry can’t achieve the critical mass and scale economies it needs to remain viable by producing solely for the local market.
The imperative is pretty clear – export or perish.
The future
That’s why greening the industry is so important.
Committing to a low-carbon future now will accelerate innovation and give us a head-start in developing climate change solutions – including green cars – that we can use at home and sell to the world.
This means rethinking our terms of engagement with the global production system.
It means rethinking how vehicle producers, component companies, research and training institutions, and unions can work together to strengthen the industry as a whole.
It is precisely because commercial conditions are tight that the industry needs to collaborate more effectively.
The industry can only grow stronger if it grows together.
It will need to develop more effective partnerships on a whole range of issues – including restructuring.
Finally, committing to change means rethinking what we mean when we talk about the supply chain.
It doesn’t just include suppliers of nuts and bolts.
It must also include suppliers of ideas.
We have materials scientists around the country working with lightweight metals.
We have biotechnologists working on alternative fuels.
We have designers making advances in aerodynamics.
How do we use these capabilities to build competitive advantage?
In the idealised world of the economist, each country focuses on those industries in which it has a natural comparative advantage.
In the real world, most developed countries have a similar range of industries.
If they want to be competitive, they have to create their own advantage by investing in education, research, knowledge transfer, risk management and more.
Our primary aim must be to secure that kind of investment.
We want to see companies investing in improvements to existing platforms right now.
And we want to see them investing in the production of new engines and new models in the years ahead.
We already have two new models on the way – the Ford Focus and the hybrid Toyota Camry.
Holden has announced that it will be producing LPG only and E85-only variants of the VE Commodore.
Both the Focus and the Camry will be built for export as well as for domestic consumption.
And just last week Holden announced that it would be expanding its export program by selling a locally made GM Daewoo Veritas to South Korea.
These are all important steps along the way to creating a genuinely green, globally focused industry.
The Government’s job is to accelerate this process by working with the industry to develop the right policy framework.
Renewing the car industry isn’t just an economic necessity, and it isn’t just an environmental necessity.
It is a social necessity as well.
We owe it to the thousands of men and women who work in the industry, their families, and the communities they support.
If we are serious about equity and social inclusion, we must also be serious about increasing the supply of high-skill, high-wage, high-quality jobs.
These are just the kind of jobs the car industry provides.
They are just the kind of jobs manufacturing provides.
For this reason above all, they deserve our support.