Car Industry Report Predicts Economic Devastation If Government Assistance Ends

The Federal Chamber of Automotive Industries has released a report on the car industry.

The report, prepared by the Allen Consulting Group, is titled: The strategic role of the Australian Automotive Manufacturing Industry.

The report argues that Australia’s GDP would be $7.3 billion smaller (in today’s dollars) by 2018 without autmotive manufacturing. It says billions in foreign direct investment would cease and the economies of Adelaide and Melbourne “would be devastated” if government assistance to the industry ceased. The report says employment would fall by around 1.5%.

The car industry receives around $500 million in government funding each year. The report says: “For this investment, the Australian economy is $21.5 billion larger.”

The report comes as the Abbott government faces a decision about the continuation of government assistance to the car industry. Politically, the timing of the decision is awkward because of the South Australian election next March and the Victorian election at the end of 2014.

The government’s decision will also be a test of its economic decision-making and its commitment to market principles.

Extract from “The strategic role of the Australian Automotive Manufacturing Industry”, p55.

In summary, the findings of this report are:

  • The Australian automotive manufacturing industry is one of Australia’s most advanced industries in terms of manufacturing techniques and technologies employed, but it faces an uncertain future. Today Australia produces only around 225,000 motor vehicles per year. In an industry where economies of scale are very important in achieving cost competitiveness, this is a real disadvantage. The high value of the exchange rate has placed the industry under further competitive pressure, as have barriers to Australian exports.

  • The automotive manufacturing companies have major decisions forthcoming on whether to invest in new models. If they do not make the investment, this will be likely to lead to the eventual shutting down of their Australian operations.

  • At present, the automotive manufacturing industry receives around $500 million per year in government support. This is a small amount compared to the support given to automotive manufacturing in other countries and compared to when the industry in Australia was protected from import competition through tariffs. There is little or no doubt that, absent this support, the three major car companies will not invest in new models in Australia, and will instead make the investments elsewhere in the world.

  • A shutdown of the Australian automotive manufacturing industry will lead to not just to a permanent loss of GDP, but a loss in economic welfare (measured as loss of consumption expenditure) as well, amounting to $21.5 billion, or $934 per person. The economic loss will be particularly severe in the automotive industry-intensive states of Victoria and South Australia, especially in Melbourne and Adelaide.

  • In contrast, if the barriers to Australian exports of motor vehicles could be lowered, this would lead to significant positive economic effects. A shutdown of the Australian automotive manufacturing industry will also deplete the range of spill-over benefits the industry currently provides to the broader economy. This includes technology transfer, lean management techniques and applications, and advanced labour skills and manufacturing techniques.

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