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PC: end all car assistance by 2020

Findings are in: The Productivity Commission is an advisory board to the government, and its recommendations are to cease public funding for the car industry from 2020.

Productivity Commission urges an end to all industry assistance by end of decade

31 Jan 2014

THE Australian Productivity Commission has recommended that all assistance to the automotive industry end by 2020, and has conceded that displaced automotive workers will end up in lower paid and less secure jobs - if they can find work at all.

Should the advisory body’s recommendation be implemented by the federal government, it would likely have a significant impact on Toyota’s decision whether to remain an Australian manufacturer or not. The Japanese brand will make the decision this year.

The Commission also fears that the $500 million cut to the funding of the Automotive Transformation Scheme (ATS) promised by the Abbott government could prompt Ford and GM Holden to close their manufacturing operations earlier than first indicated.

In addition, the Commission recommended that the federal government withdraw all restrictions on the importation of used vehicles and that the federal, Victorian and South Australian governments should drop their “buy local” fleet policies.

However, the Commission gave no timeline for the adoption of these recommendations.

The recommendations are included in the Commission’s Position Paper, released yesterday.

Releasing the paper, Commission deputy chairman Mike Woods said the arguments supporting public assistance to automotive manufacturing were weak.

He said the wider community would be better off from ending the subsidies.

“Our draft proposal is that there should be no further industry-specific funding beyond 2020,” he said.

Mr Woods also said that the government should make no special effort to sustain Toyota’s manufacturing operations or those of component manufacturers.

The Commission opposes a supplementary rescue package for Toyota and component manufacturers.

“Government could better assist firms by undertaking broad-based economic and regulatory reforms and removing impediments to greater workplace flexibility.” Mr Woods was joined in the enquiry by commissioner Philip Weickhardt.

The commissioners based their recommendation to cease assistance on three main grounds.

First, they could see no compelling evidence that spillover and multiplier benefits exceed the costs of assistance to the industry.

Second, they pointed out that decades of transitional assistance had forestalled, but not prevented, the structural adjustment now being faced by the industry.

Third, they believe assistance imposes costs on the community and dulls incentives to improve productivity, seek export opportunities and diversify into other industries.

In the paper, the commissioners concede that workers who lose their jobs with the car-makers and component manufacturers will have a hard time finding other work and, specifically, other work that pays as well or is as secure.

Citing a 2004 survey conducted after Mitsubishi closed its engine plant and cut back production, the commissioners detailed the poor prospects for displaced workers.

The survey results indicate that many respondents experienced a loss of employment security. Only one-third of them found full-time employment.

Many workers who did find work were being paid less, the survey showed.

“The survey results suggest that the lower earnings partly reflected the shift from full-time to part-time and casual work for many displaced employees, as well as the reality that Mitsubishi paid above the market rate.” The Commission notes that the subtraction of $500 million from the ATS scheme out to 2015 would create an uneven profile with a pinching effect in 2015. The commissioners believe that would prevent the car-makers from receiving the full amount they would qualify for between 2015 and 2017.

“The uneven funding profile could elevate the risk of earlier plant closures by Ford and Holden, and might negatively affect investment decisions by Toyota and its component suppliers.

“The changes to the legislated funding schedule could therefore result in costs greater than the savings benefits …” The commissioners recommend a sweeping change to all automotive legislation, including the “buy Australian” fleet policies imposed by the federal, Victorian and South Australian governments.

“These policies restrict the choice of cars available for government use, which can impose costs on taxpayers,” it said.

“Any benefits of such policies to the automotive industry in Australia appear to be limited. These policies should be removed, particularly if there is only one motor vehicle producer in Australia after 2017.” The Commissioners also say that the current restrictions on the importing of used cars does not help the local industry.

They say the restrictions increase costs, potentially increasing the prices of second-hand vehicles and reducing consumer choice.

These extra costs may exceed the benefits of the restrictions on imports and, therefore, the rationale for the policy is weak.

The commissioners’ comment reports that some interested parties are drawing up a scheme which would deliver increased assistance to Toyota as a means of encouraging it to stay in Australia.

They point out that Toyota would still be eligible to draw on the ATS fund for the three years from 2018 to 2020, limited only by the rule that no participant can receive grants which exceed 5 per cent of its revenues. (Toyota’s revenues are around $8 billion, limiting assistance to $400 million in any one year.) “Additional industry-specific assistance to Toyota would exacerbate the economy-wide distortions already resulting from the current level of assistance to the automotive manufacturing industry,” they said.

“Further, additional budgetary support could encourage other industries to divert management effort towards seeking preferred Government treatment.” “Rather than providing extra industry-specific government assistance, in the Commission’s view, it would be more efficient to assist Toyota to continue manufacturing in Australia by ensuring that broader policy settings allow it, and its supplier base, to best respond to market and competitive pressures.”

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