Taking taxpayers for a ride

Ideas@TheCentre – The CIS newsletter (Sydney), 13 January 2012

Last week, consultancy firm KPMG published its Global Auto Executive Survey for 2012, in which executives from the world’s leading car manufacturers were asked about the situation of their industry. One of their key concerns was global overcapacity, estimated at somewhere between 20% and 30%.

It is against this background that we have to evaluate the federal government’s decision to grant Ford new subsidies towards the production of its Falcon model; it is likely that new support to Holden will be announced shortly. While Ford will receive an additional $53 million from Australian taxpayers, GM Holden is seeking up to $200 million to continue its Commodore production in Adelaide.

By international standards, both Ford Australia and Holden have always been small. With the rise of new car manufacturers in Asia, they are looking even smaller. All Australian manufacturers have a combined annual production of roughly 240,000 vehicles. Even countries like Romania, Taiwan and Belgium produce more. Australia’s annual output is dwarfed by that of South Korea (4.3 million vehicles), Japan (9.6 million) and China (18 million).

Car manufacturing for the mass market is an industry in which size clearly matters because of scale effects. If Australia did not already have a legacy car industry, it clearly would not be established under the current conditions. This tiny industry almost exclusively catering for our tiny market is simply unable to compete with much more efficient car manufacturers abroad.

If a business proposition is no longer viable, then companies need to draw the right conclusions. Indeed, in the KPMG survey, car executives responded that the global overcapacity should be dealt with through cuts in production and industry consolidation. Presumably, that means the weakest car manufacturers should go.

The response of the government is the opposite. By pouring in hundreds of millions of dollars into an industry that will remain unviable for the indefinite future, government is keeping Australian car manufacturing alive for political reasons.

This is an act of cowardice. A courageous government would not give in to the extortionate demands of global car corporates General Motors and Ford, but rather would explain to the Australian public that there is no justification for a car industry that cannot survive without ongoing taxpayer support.

A car industry is only worth having if it is able to stand on its own feet. Keeping an industry alive for the sake of having an industry is economic folly and a waste of taxpayers’ resources.