THE AUSTRALIAN AUTOMOTIVE INDUSTRY
by Hon. MARK BIRRELL MP
BUDGET PAPERS, 2002-03
Thursday, 30th May 2002
(A speech on the strength and future potential of the nationís car and automotive component industry)
Australia's automotive industry, which is principally headquartered and based in Victoria, is a major contributor to our national economy and Australia's skills base.
I wish to use this budget debate to urge clear-cut government facilitation of car companies and automotive companies in this state. Particularly in the light of the current Productivity Commission review of Australia's automotive industry tariffs, I emphasise the need for high-level advocacy of the long-term case for our efficient automotive sector. This is critically important for public policy in 2002.
There are three dynamic challenges facing this important Australian industry. The first is global market access and as part of that the future of the tariff regime in this country. The second is industrial relations and the need to improve labour productivity. The third concerns exchange rate fluctuations and the inevitable impact they have on the export capacity of this important sector. My remarks are heavily weighted towards the first issue, given the Productivity Commission's assessment of the tariff regime as it affects car manufacturers and automotive component manufacturers.
At the outset I want to say that I believe trade liberalisation since the 1980s has been good for Australia. It has made our manufacturers more efficient; it has put in place disciplines that have created higher productivity and generated an even stronger focus on the most important goal for the Australian economy, which is to be export based.
During that period we have seen the automotive sector completely transform itself. Regardless of the old stereotypes that a few people still apply to this sector, it is now skills based, export focused and in many areas world competitive. Tariffs have fallen from a high of 57.5 per cent to what will be a level of 10 per cent by 2005 - an extraordinary cut in historic protection. The industry has been reborn, and Melbourne is fortunate to be the home of that sector and the benefits it now brings.
Total automotive exports in 2000-01 are a guide to its critical importance. They were just under $5 billion, and there is a likelihood that they will reach $7 billion by next year. This is a sector of the Australian industry that is leading through its own performance and has attracted the eye of people who in the past may have been its greatest sceptics.
It employs over 50 000 Australians, with about 27 000 involved in the component sector.
There are four major car manufacturers, which are the most visible, but of equal importance are around 200 local component tooling, engineering and design businesses.
Significantly, this sector is also an R & D leader with research and development expenditure of about $420 million per annum - something that has led to its high level of achievement over recent years.
We have also seen regular reinvestment and fresh investment, with the most recent announcements of scale being those by Holden, with its $386 million V6 aluminium engine plant, and Mitsubishi's announcement of a $170 million investment in its operations.
These are welcome investments by the large players as the industry gains strength collectively through such individual additions to investment.
The strengths of this sector obviously bring major benefits to Melbourne and to some of our regional centres. They also bring significant benefits to Adelaide and Sydney and the South Australian and New South Wales economies and to the Australian economy overall because of export performance. We see in Melbourne that we are the principal beneficiaries of investment by Toyota, General Motors and Ford.
Perhaps less publicly understood is the equally inspiring work of automotive products manufacturers within our realm. I mention particularly outstanding corporations like Robert Bosch Australia, the Air International Group, PBR International and Delphi Automotive Systems. These Australian-based automotive manufacturers are examples of companies that see a long-term future for this sector and huge potential for export growth and who are investing in skills. Along with other operations, be they domestically owned or foreign owned, they are creating significant employment, they are adding to the training and education base of the nation and they are assisting in the R & D effort with value adding production.
When you put all those achievements in together, it only emphasises the point that a focus on the Productivity Commission's review of this sector is of vital importance to Victoria as well as Australia.
In dealing with the first major challenge that I cited at the beginning of my speech I want to address some of my remarks to how this industry will fare, especially in terms of governmental decisions on future levels of industry assistance.
In its submission to the Productivity Commission I believe Ford Australia correctly sums up the strengths of this sector and its role. It says:
Australia's automotive manufacturing industry, small by global standards, has been transformed into a uniquely valuable national asset with skilled and motivated employees producing high value and high quality motor vehicles. Increasingly, Australian vehicle producers have the confidence to put their products to the test in some of the world's most competitive markets.
The submission also says that Australia is now:
...one of the most open and competitive home markets of any country in the world....
Indeed it is. We are competitive. We are coping with competitive pressures, and we need the right domestic policy settings to ensure that we extract the maximum benefit out of the future growth opportunities for this sector.
In its submission to the Productivity Commission the Federation of Automotive Products Manufacturers argues:
The Australian automotive industry is a major contributor to the economy in many ways:
It generates relatively high numbers of jobs, substantial output and investment.
It is a leading-edge customer for many industries such as steel, glass, plastics, paints and tooling.
It is important to the future of particular regions such as parts of Melbourne, Adelaide and Sydney.....
Its submission then goes on to make perhaps the most important points:
It contributes substantially to skills formation in Australian manufacturing.
It is a major innovator in product design and process engineering.
It is a leader in best practice manufacturing methods and technology.
It has substantial linkages to the services sector.
It has developed a large and growing export market.
Given that no significant Australian business is likely to thrive without export sales, implicit in which is a need to break into fresh markets, we can draw some strength from the fact that the automotive industry has achieved that goal - even though it has faced some of the most difficult circumstances and of course significantly falling tariff levels. I believe those values are neatly summarised by the comments of the Australian Industry Group in its publication A Core Foundation of the Australian Economy of May this year where it states:
The future development of Australia's automotive industries is of critical importance to the growth and wellbeing of the manufacturing industry and the Australian economy.....
Australian automotive industries are a vital component of domestic manufacturing. Despite its small size relative to the global market, the domestic automotive sector accounts for around 8 per cent of total manufacturing activity.
It then highlights what I believe to be the most relevant issue:
The sector has also contributed strongly to the improvement in the export performance of the manufacturing industry in recent years.
That export performance is on the line as part of the Productivity Commission's review because it will lead to final federal government decisions about the level of industry assistance over coming years and the level of tariffs.
My concern is that we ensure that any movement in tariffs after 2005 takes into account a wide range of factors that impact upon our industry. I support the current review of tariffs. I support the reduction of tariffs to 10 per cent by 2005 but I do not believe there should be unilateral or ill-considered movements after that date.
Specifically I believe we have to take into account what overseas nations have done with trade liberalisation - have they opened their markets to Australian cars and components and offered something that is the equivalent of a level playing field? There is no such level playing field now, including the trade activities of the United States of America, where significant barriers are placed in the way of Australian companies that wish to compete in that automotive market.
I am concerned about the failure of other countries to deliver on their trade liberalisation goals. In fact, most other countries that are relevant to this issue are well behind what Australia has done, and it should educate those decision makers who seek to further reduce tariffs after 2005. The Federation of Automotive Products Manufacturers points out in a submission to the Productivity Commission that it has:
...little confidence that the United States will be willing to forgo its 25 per cent tariff on imported light trucks by 2010.
In that part of its submission to the Productivity Commission it highlights that the so-called land of the free, the United States, has one of the most punitive tariffs on imported automotive vehicles. It has not reduced that tariff to date and is not planning to do so by 2005 and may not have done so by 2010. We need to take into account whether the APEC-Bogor goals are likely to be met: whether the public commitment of other countries to trade liberalisation is rhetoric or whether it will become reality.
If you look at other countries that we wish to consider in terms of trade liberalisation, the story is at best mixed. In the United Kingdom, while there is no trade control on goods originating from European Union members there is a common tariff of 10 per cent on passenger vehicles and a 3.5 to 4.5 per cent tariff on automotive components. In the United States there is a 2.5 per cent tariff on passenger vehicles and, as I mentioned before, 25 per cent tariff on light trucks. It should not be forgotten that light trucks make up 70 per cent of United States production and therefore the tariff has a profoundly damaging impact on those that wish to compete against America.
In Germany, whilst it is free from tariffs originating from the European Union members, there is a common external tariff rate of 10 per cent on passenger vehicles. In Canada there is a 6 per cent tariff on vehicles and automotive components. Worse still, if you look closer to home, Malaysia has 140 per cent to 300 per cent tariff for passenger vehicles and 60 per cent to 200 per cent for four-wheel drives. Its outrageous tariff on components is 25 per cent to 42 per cent. In Thailand the tariffs on vehicles range from 60 to 80 per cent.
The story gets even worse when you look at non-tariff import barriers. Once again this information is to be taken on board by those who make the final decisions on what we do with our protection regime, noting as I do that there has been a massive reduction in the past and there will be inevitable reductions some time in the future. Japan has very significant non-tariff barriers against Australian automotive companies that want to export into the marketplace. They include unique vehicle type approval systems. All of these are deliberate non-tariff barriers on our products. Korea has a variety of customs delays and indirect taxes on automotive imports. Malaysia has quotas on imported vehicles, restrictive and discretionally applied import licences and, on top of that, a local content scheme requiring over 45 per cent local sourcing.
Taken together the tariff and non-tariff barriers of our competitors and markets that we want to enter are still very high, and very few countries can claim to have done as well as Australia in terms of trade liberalisation. This is not a case against future reform in the area by the commonwealth government, but it is a case for taking into account all relevant factors before you make a decision.
I believe the difficulties that our manufacturers are having in accessing global markets should be at the front of the mind of the commonwealth government over coming months, and I hope it is well considered by the Productivity Commission. In a nutshell, while there is no doubt that the access levels have increased we still face considerable difficulties in terms of getting into marketplaces that have opportunities for us, if not for the barriers that have been put there.
The second major challenge facing the industry that I raised in my opening remarks is industrial relations. Given that there is a need for Australia to be world competitive, we need increasing labour productivity levels across the sector. If we do not have that our costs will rise proportionately and we will become less likely to win new contracts. The Australian Industry Group has correctly focused on this problem in its submission to the Productivity Commission. It states:
...the level of industrial disputation in the automotive sector remains unacceptably high.
It addresses issues that need to be tackled without delay, including the following:
Union and award structures within the automotive industry need to be reformed.
Union delegates need to be better trained.
Against the backdrop of the destructive and rogue behaviour of the Australian Manufacturing Workers Union (AMWU) and in the context of recent damaging industrial disputes in Victoria and New South Wales it is clear this is a major issue requiring action in particular by state governments. They can be leaders of public opinion and should be so, particularly in the case of the AMWU, which is correctly described by the AIG as a union that is:
...racked by factional infighting and interdivisional rivalries. Such lack of cohesion has a negative impact upon automotive industry employers.
The AIG submission goes on record:
The highly militant Workers First faction controls the metals division of the AMWU in Victoria....The Workers First faction appears to have little interest in cooperating with employers and adopts a highly militant approach. Officials of the Workers First faction have shown little regard for the rule of law.
The intolerable behaviour of this union is harming the prospects of the industry. It would not matter what was done in trade liberalisation or further policy on tariffs in this nation over the coming decade or more if there is this heightened problem of industrial stability for automotive makers and component makers, because then industry will have very little future at all. Improved workplace relations has to be a major policy and program focus of the state government as well as the federal government.
The final challenge which the industry faces and which should be a focus of ongoing government interest is currency fluctuations. There is no doubt that the export element of this great industry has gained by the relative position of the Australian dollar, and we have to ensure that our exports are the highest priority in broader macro-economic planning in this field.
On page 7 of its submission to the productivity commission, General Motors Holden has put these matters in this context:
In the area of exchange rate factors, the vulnerability to fluctuations in exchange remains a significant issue and one that needs to be reflected in any future assistance arrangements for the industry. There is hope that in the long term, the disincentive to capital intensive industry created by Australia's volatile exchange rate will be alleviated. The share of the national export revenue represented by services and manufactures has shown a steadily increasing trend. If this continues, in time the currency will come to be regarded as productivity driven rather than commodity driven, and volatility should decline as a result. Additionally, as companies such as Holden build their export capability there is an increasing opportunity to develop natural currency hedge positions.
I commend Holden and other members of the industry for their focus on this issue and for their attempt to ensure that the Productivity Commission reflects on this challenge to the whole sector as well as others in its review of the future of the industry.
In conclusion it is my personal view that the automotive industry can face these challenges successfully and pass any tests that will be set for it over the coming decade. It is increasingly competitive and export focused; it draws on skills and creates clusters of knowledge. All of that is highly desirable. In a government context there needs to be advocacy at both state and federal levels. In particular, I urge caution after 2005 in terms of a government's approach to changing tariff and non-tariff barriers overseas.
I strongly support the continuation of industry facilitation schemes and in particular a new form of the automotive competitiveness and investments scheme, known as ACIS, which has been successful and needs to continue in a new form in the future.
Finally, these issues do not divide us on party lines, and I commend a collaborative and multipartisan effort towards achieving these objectives.