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It’s good to be back with representatives of the Australian automotive industries, sharing
views about the future of car and motor cycle making, component manufacturing and
imports. All three segments of the market are represented here today.
This is my third political incarnation, the first two as shadow minister and this one with the
shadow finally removed.
As Shadow Minister for Innovation, Industry, Trade and Tourism I visited most of the car
and components manufacturing sites in Australia. Then as Shadow Minister for Industrial
Relations, I re-engaged with automotive industry representatives on Labor’s IR policies
ahead of the 2004 election.
And previously, I was economic adviser to former Prime Minister Bob Hawke in the mid
to late 1980s when we were putting in place a car plan primarily developed by John
Button.
It's a long way of saying that I've been in and around the car industry for more than 20
years now.
So it's great that now, as Minister for Small Business, Independent Contractors and the
Service Economy and Minister Assisting the Finance Minister on Deregulation, I again
have an opportunity to exchange policy perspectives with you.
Before I go on, I want to say something about the late John Button. I worked closely with
John and he had enormous confidence in the capacity of the Australian automotive
industry to adapt to change. Sometimes I think he had more confidence in the industry’s
ingenuity and creativity than the industry had in itself. John was very proud of his
achievements. I asked him not so long ago what he thought should be the next big policy
idea for the automotive industry. His answer was in one word – innovation.
Industry challenges
Government ministers are probably the last people whom you need to tell you about the
challenges confronting the Australian automotive industry; you live and breathe them
every day. During the week before last I commented on so-called Dutch disease, or the
Gregory effect as it is known here in Australia.
A booming sector of the economy – in our case, mining – forces up the exchange rate,
penalising local manufacturing and benefiting manufactured imports. This is more than a
theoretical construct. The Australian dollar is above 90 US cents and while new vehicle
sales broke the one million mark last year, all of the growth was in imports; sales of
locally-produced vehicles were static. Now one of the four local vehicle manufacturers has
closed. Two of the other three experienced a drop in sales last year.
Attracting and retaining skilled employees is an ongoing challenge for the local automotive
industry. And no-one likes to see increases in interest rates, as have occurred on 12
occasions since 2002.
Responding to challenges
The Government believes the best way of responding to Dutch disease is through
increasing efficiency and productivity – by innovating and making the most of your
strengths. Increasing levels of protection are not the answer.
Twenty years ago we went through a bruising debate about protection of the Australian
automotive industries. I remember at that time that imported cars attracted a base tariff of
57½ per cent. When the impact of quantitative restrictions (or quotas) on imported
vehicles was added to the tariff, the effective rate of protection for the Australian
automotive industry was more than 250 per cent!
Today there are no quotas on imported cars, the tariff rate is 10 per cent and the effective
rate of protection for the Australian automotive industry is less than 13 per cent. Tariffs on
passenger motor vehicles are going to zero by 2010 on two of our three largest import
sources – Thailand and the US.
And the Australian automotive industry has adjusted. With competition from around 55
brands (that’s brands, not models), Australian manufacturers still delivered the most
popular vehicle in the Australian market in 2007 – the Commodore. They also accounted
for almost $5 billion in exports.
Now that tariff rates are down to 10 per cent, some parts of the industry are again arguing
that they must be frozen. Some are also arguing that the Automotive Competitiveness and
Investment Scheme (ACIS) should be increased.
What I would say to you in the strongest terms is this: there is a review underway. We
encourage your active participation. But we urge you to make your submissions on the
basis of hard evidence.
The industry must take responsibility for producing proper economic analysis to support its
arguments. That’s not just a message from me, that’s a message from my colleague, the
Minister for Innovation, Industry, Science and Research, Kim Carr, and I know it is
something he has spoken to you about already.
It's not for me to pre-empt the present review. But I can tell you for sure that tariffs won’t
be going back up. And surely, in doing your investment planning – your cash flow
analysis – you will need to factor in a scenario of them continuing to fall.
And of course, global competition will continue to get tougher. Over-capacity is a constant
threat. That’s why the Australian industry must concentrate on its strengths.
We can work in partnership on other challenges – particularly the challenge of climate
change. As you know, the Rudd Labor Government is committed to a $500 million Green
Car Innovation Fund to generate investment in developing and building fuel-efficient
vehicles in Australia. KPMG last year described the global shift in demand towards more
fuel-efficient vehicles as a “tectonic shift” in consumer preferences.
Another response of industry to the challenges confronting it has been to lobby for and
support preferential trade agreements. The automotive industry supported the Thai-
Australia free trade agreement on the basis that it would allow entry of Australian vehicles
into the Thai market that had been subject to an 80 per cent tariff.
This advocacy was provided without sighting the 220 pages of rules of origin that were
settled after the agreement was signed. As shadow trade minister I argued that the Thais
would not allow the duty-free importation of Australian vehicles, as they were promoting
car making as one of their sunrise industries. Nevertheless, the Australian industry pressed
on with its support for this preferential trade deal.
The result? Japanese car makers have taken advantage of the tariff-free entry into
Australia of vehicles produced in Thailand by shifting some of their operations to that
country. Fair enough. They were given the incentive to do so by the previous Australian
Government. Australian imports of motor vehicles produced in Thailand have more than
tripled from $1 billion in 2004 to $3.2 billion in 2007, increasing by 50 per cent in 2007
alone. What have Australian vehicle manufacturers received in return? Australia now
exports 300 vehicles to Thailand, up from 79 vehicles in 2003.
The Thais restructured their excise on motor vehicles, escalating it according to engine
size. Though the excise applies ostensibly on a non-discriminatory basis to all exporters, it
just happens to disadvantage Australian car exporters, who produce only large-engine
vehicles.
The Australian Government will be pursuing this issue with Thailand in the built-in FTA
agenda we have with them.
The story so far with the US-Australia preferential trade deal has not been very different.
Since it came into force at the beginning of 2005, the number of Australian-made motor
vehicles exported to the United States has actually decreased. This may be changing now,
with GM Holden’s Pontiac G8 hitting the American market this month and the utility in
2009, with 30,000 vehicles expected to be exported over three years. Maybe the US–
Australian trade deal will be good for Australian car manufacturers. Let's hope so.
The lesson is that we do need to work closely together to ensure the automotive industry
can actually benefit from freer trade. And there is no doubt that improved market access
can benefit the Australian industry, since almost automotive producing country protects or
supports its industry to some extent.
My point in all this is that relying on governments to change laws might not be the most
far-sighted strategy for the Australian automotive industry.
The conventional industry argument is that since the governments of other countries
financially support automotive industries, the Australian Government must support ours if
we are to attract headquarter investment to Australia.
This position often accurately reflects the demands of parent companies and the fact that
each Australian manufacturer’s main competition comes from the other subsidiaries of the
same company.
It also puts the question of the tariff in a different context – the reality is that, at
10 per cent, the tariff is largely a symbolic issue.
My reputation may have led some of you to conclude that I would be happy to see the
demise of the Australian automotive industry. I wouldn’t. I think the industry has
responded magnificently to the enormous challenges that have confronted it over the last
20 years. But I do urge the industry to continue to respond positively to the challenges of
the future.
New thinking for the Australian industry
Governments can, in fact, play an important role in the future of Australian industry,
including the automotive industry. They can do so in two ways: by removing impediments
to industry development and enhancing industry capacity.
Governments, themselves, have erected numerous impediments to Australian industry
success. Overbearing business regulation that is inconsistent between states or overlapping
between the Commonwealth and states stifles industry productivity. Late last month the
Council of Australian Governments (COAG) announced the most wide-ranging regulatory
reform program since the deregulation era of the Hawke and Keating Governments.
Of particular relevance to the automotive industry, tradespeople will be able to move more
easily from state to state, occupational health and safety laws will be harmonised,
chemicals and plastics regulation will be reformed, environmental assessment and approval
processes will be streamlined, development assessment processes will be simplified and
payroll tax systems will be harmonised.
Industry capacity can be enhanced by governments addressing genuine market failure.
Market failure can occur when a private business cannot capture for itself all of the
benefits of its own research and development (R&D) or its workforce training. Other
businesses reap some of these benefits as the innovations are taken up and they hire pretrained
employees. Knowing this, each private business will under-invest in R&D and
training from society's viewpoint, creating a role for government to address the market
failure.
But businesses will still undertake some R&D and training without government incentives.
The Rudd Government recognises the importance of enhancing the capacity of Australian
industry through public support for R&D and skills creation. That's why Kim Carr has
initiated a national innovation review.
And it's why Deputy Prime Minister Julia Gillard has said in the education portfolio that
we want to invest in getting more people into our workforce with the skills we need, with
20,000 new places coming on stream as early as this month.
Industry demand is at the heart of the skills training system and part of the problem has
been that training has not sufficiently matched industry’s needs. Businesses have not been
provided with enough assistance to enable them to diagnose, predict and tailor training to
their future workforce needs.
The Government will align skills development policies and training delivery with industry
priorities, and position the training system to better meet the needs of individuals and
industry.
Like other industries, the automotive industry will be able to take advantage of the
Government's support for R&D and skills development.
Some ideas for the future
Australian car-makers have developed competitive strengths in the manufacture of bigger
cars. At the same time, our component manufacturers have been able to compete
successfully in incredibly tough export markets. And this in the face of an historically high
exchange rate. This success is testimony to the ingenuity of Australian management and
the industriousness of its workforce.
As Shadow Minister for Innovation and Industry, I was told repeatedly by management of
the Australian component manufacturing industry that it could not survive if Mitsubishi
closed.
What now? Is it possible to imagine a highly-sophisticated Australian automotive
component manufacturing industry producing not 100,000 units for the Australian carmaking
industry but 10 million units for the world car-making industry? Components
whose manufacture embodies high levels of innovation and skills, such as sophisticated
electronics used in modern cars, are more likely to be candidates for competitive
production in Australia than those relying on low-cost labour or on large-scale
manufacturing processes.
If this idea seems whacky, imagine having the idea 20 years ago that the Australian
automotive industry, enjoying effective protection of 250 per cent, could survive in 2008
with effective protection of less than 15 per cent and an exchange rate of more than 90 US
cents. I have a lot of faith in the ability of the Australian automotive industry to meet the
competitive challenges confronting it.