May 2016


Crunch time

By Richard Denniss

© John Turner / Alamy Stock Photo

Australia’s car industry has met policy failure head-on

In 2000, as the Olympic torch wound its way around Australia en route to Sydney, the car leading the relay was an Australian-made, electric–petrol hybrid, the ECOmmodore. But during the decade that followed, Holden decided there was no future in Australian-made electric cars. It never pursued the hybrid Commodore, and by the end of next year Holden, along with Ford and Toyota, will have closed all of its Australian car factories.

Last month Tesla Motors, the American electric-car company that didn’t even exist when the Sydney Olympics were held, announced it had a waiting list of more than a quarter of a million people who had put down a US$1000 deposit for its latest model. The United States doesn’t have the lowest wages or taxes in the world, yet somehow it isn’t just competing in the electric-car market; it’s conquering it.

Since 1989 the Australian manufacturing industry has lost 270,000 jobs. The demise of the car industry will trigger up to 200,000 further job losses.

Australia is still a country that makes things. Businesses that employ more than three times as many people as the mining industry make building materials, chemicals, high-end electronics, machine tools, textiles, plastics, trucks, and various niche- and advanced-technology products. Indeed Australia is one of only 13 countries in the world that can build a car from beginning to end. It has a highly educated skilled workforce, a stable political climate and, despite claims to the contrary, lower taxes than most other developed countries that make things. Yet the same politicians who express concern about job losses in mining are much quieter, or resigned, when it comes to those in car manufacturing. The Coalition government’s only plan for the car industry has been to manage its decline.

Both the car industry and the electricity industry are on the verge of dramatic, and related, transformations. The combination of new battery technologies, the plummeting cost of renewable energy and global efforts to tackle climate change is leading to the emergence of not just new kinds of cars but also new industrial regions to make them. While it is inevitable that some countries will stake a claim for these new opportunities, it is not inevitable, or likely, that Australia will even try.

To justify inaction, Australians are told that we have no chance of competing in the world market for things that are made. For decades it has been said that our “high wages” and “high taxes” make us “uncompetitive”. That the German car industry thrives despite paying higher wages and higher taxes than companies in Australia is rarely mentioned.

It is apparently a bad idea for governments to be strategic in attracting investment to new industries, and such an old-fashioned approach to “picking winners” simply doesn’t work. The market, we are told, must make such decisions. And yet Australian governments intervene all the time, just not in the manufacturing sector.

Billions of taxpayer dollars have been spent on ports and railway lines because new mines “need to be competitive”. Such support for mining is rarely described as a subsidy; it is better known as “investing in infrastructure”. In addition to direct subsidies, billions are offered in tax breaks to casinos, banks and mining companies to “attract investment” and “make Australia competitive”, but again, such taxpayer support is rarely described as industry assistance.

Making engine mountings might not be as cool as developing a new app or launching a new online coffee-delivery service, but manufacturing is often quite innovative. Manufacturing in fact accounts for around a quarter of Australia’s expenditure on research and development. (You would think a prime minister who was excited about innovation would be excited about manufacturing.)

There is of course one kind of manufacturing that is acceptable for governments to subsidise and promote. While only “unions and inner-city greenies” think that the government could play a role in kickstarting the Australian manufacture of electric cars, next-generation batteries or wind turbines, defence industry pundits and supporters are taken very seriously when they suggest Australia should compete with the US, Germany and Japan in the construction of navy vessels and fighter jets. While helping the car industry is “bad for the budget”, helping the nascent fighter jet industry is “good for the economy”.

The Coalition government has preferred a far less interventionist approach to creating jobs in the car industry than it has with the defence industry. It scrapped tariffs on imported cars as part of its 2014 free-trade deal with South Korea, and wound down assistance to the car industry in March 2015, with the then industry minister, Ian Macfarlane, declaring, “We are ending the age of entitlement to the auto industry in 2017, [and] that was always going to be the case.”

This all goes to show that myths and contradictions lie at the heart of our understanding of the Australian economy. Ghost stories about the dangers of protectionism and fairy-tales about the benefits of free markets are used to influence public thinking. And although such stories might win votes, they do nothing to reduce unemployment or create jobs. They certainly don’t help Australia plan for, or adapt to, the globalised economy.

The Australian car industry was developed according to the myth that Australians need big cars because we live in a big country. As bizarre self-images go it is certainly up there with the idea that looking after your mates is a uniquely Australian attribute, or that inventing a clothesline that spins makes us a nation of innovators. But bizarre or not, the big country/big car story has been as economically damaging as it is culturally enduring.

Australians are near the top of the pack when it comes to car ownership and towards the bottom when it comes to the fuel efficiency of our vehicles. And while our country may be large, we spend the vast majority of our time driving around very small parts of it. Indeed, we are among the most urbanised countries in the world and the odds of our fleet of four-wheel-drives hitting a dirt road, let alone hitting a kangaroo, are vanishingly small.

We do hit traffic though. Since the Sydney Olympics, Australia’s population has grown by more than 4 million. The grinding traffic jams that lead many city dwellers to dream of escape to the bush in a 4WD also encourage those with a need for speed to buy sports cars.

Knowing this, good car companies sell such freedom. Whether it is a lone sports car zoom-zooming on an empty freeway or a solitary 4WD crossing a shallow river on its way to a secluded camping spot, car ads promise freedom, convenience and control.

For decades, cars and roads have been powerful symbols, not just of freedom but also of influence in electorates. And of a nation’s progress: only developed countries had the know-how to manufacture something as complicated as an automobile. But times have changed. Fast.

The big country/big car myth led us to specialise in the production of cars that the rest of the world didn’t want. Rather than encourage innovation, we encouraged the myth, and used cheap petrol and tax breaks on company cars to prop up demand for large family sedans that fewer Australian families, and still fewer foreign families, wanted to buy. What exports we managed were to the few other countries with petrol as affordable as ours. Apparently the Saudis liked them.

New kinds of cars are now offering new kinds of freedom. Electric cars not only offer freedom from petrol stations, they already offer freedom from steering, braking and accelerating in certain conditions. As they evolve into completely self-driving cars, they will also provide the freedom to be chauffeured through congested cities: to read, work or watch movies on the commute. The question is not whether self-driving cars will be with us in the coming decades but rather what, if anything, Australia will do to position itself to profit from such a radical shift.

Italy builds Ferraris. Germany builds Mercedes. Both are high-wage countries. Both have a carbon price. They collect higher proportions of their GDP in tax than Australia does, and their workers have access to more annual leave. But neither country finds it “impossible to compete with China”, and neither Germans nor Italians think that lower wages and lower corporate taxes are the only way to compete. Our myths about taxes and wages provide comforting excuses, but the one about a big country needing a big car was comforting too. Right up until it wasn’t.

Australia’s car industry provides a window onto the insecurity and failure of imagination that lie at the heart of Australian policy debate. It wasn’t always this way – in the 1800s Australia was at the cutting edge of the nascent global car industry. Australia’s first steam-powered car was produced in Melbourne in 1896 and our first petrol-powered car was built in 1901. The industry grew steadily in the following decades, but it wasn’t until the end of World War Two that it took off.

Holden started out in the saddlery business, but as Australians shifted from horses to cars so too did Holden, apparently never believing that in a big country one would always need a big horse. In 1948 it released the first mass-produced car that was both designed and built from the ground up in Australia.

In the 1950s the town of Elizabeth (now a northern suburb of Adelaide) was built to house the workers needed for the state’s push towards industrialisation. Holden’s plant at Elizabeth began production in the early 1960s, helping to grow Australian car production from 1000 cars per week at the time to nearly 10,000 per week by the 1970s.

In the 1980s, federal Labor senator John Button’s Motor Industry Development Plan transformed the industry into an outward-looking sector that was, for the first time, export oriented and innovation focused. Where industry policy had for decades been designed to protect Australian-made cars from imports, Button’s plan rewarded manufacturers who could export their cars or components. The radical shift in both sentiment and policy is best encapsulated by the changing views of Paul Keating. As a backbencher in 1974 he moved for a quota to ensure an 80% market share for Australian-made cars; as treasurer a decade later he was the leading proponent of free trade.

But for the past 15 years car-industry policy has revolved around the provision of tax breaks for company cars, and state and federal government bulk purchases of Australian-made cars. The Rudd government developed the $500 million Green Car Innovation Fund to kickstart the production of low-emission and fuel-efficient vehicles in Australia, but the policy wasn’t substantial enough and the government didn’t last long enough to make a difference to an industry that takes ten years to roll out a new model.

These days, Australian manufacturing policy is seen more as a political opportunity to be exploited than a problem to be solved. Once the domain of technocrats and bureaucrats, the role of policy has been transformed. Political strategists and media advisers now play an active role in “policy development” not because they know how to win investment or create jobs, but because they know how to win votes and create political momentum.

As is so often the case, Tony Abbott provides an extreme example. In 2012 the then Opposition leader was thundering around the country, declaring that the introduction of a carbon price would be a “wrecking ball” for the Australian economy. The man who for decades had championed the need to scrap penalty rates and unfair dismissal laws was, he told us, deeply concerned that a carbon price might hurt blue-collar workers.

The second iteration of the Rudd government proposed scrapping the $800 million per year loophole that allowed mainly public sector and managerial workers to pay a lot less tax if their employer let them “salary sacrifice” and lease a company car using pre-tax wages. It was an expensive and inequitable rort that had long needed fixing, and doing so would help address the “budget emergency” that Abbott was apparently so worried about. Needless to say, Abbott attacked the idea. The Opposition leader leapt to the defence of struggling company-car drivers and the imperilled car industry, again professing his concern for jobs that would be lost.

After becoming prime minister, Abbott refused to provide any additional funding to a car industry still buffeted by the highest exchange rate since the dollar was floated in 1983. As part of his free-trade agreement with South Korea he also agreed to abolish the 5% tariff on imported cars, worth around $110 million per annum on today’s volumes.

Abbott’s U-turn in abandoning car workers, along with his apparent lack of concern for losing revenue in the face of a “budget emergency”, might seem inconsistent when viewed from a policy perspective. But that is the wrong way to look at it.

In the lead-up to the 2013 election, the Coalition’s “message” was all about jobs. But after it formed government the message was all about ending the age of entitlement. Policy decisions aren’t meant to protect jobs, they are meant to project an image. They send a signal about the values, philosophy and priorities of governments. The problem for the car industry, and for Australia more generally, is that while being perceived as a good economic manager with a clear narrative might boost Newspoll results, it doesn’t boost exports.

Once upon a time, governments employed communications advisers to help sell their policy ideas to the public. These days, governments more often employ policy advisers to help turn their communications message into new policy ideas. Such is the acceptance of this reversal among the political class that new policy initiatives are called “announceables”. In the lead-up to the election you will see lots of them.

In a country as rich as Australia it makes sense for politicians to focus more heavily on style rather than substance. What would be the point in solving problems if no one noticed? And in a country that has had five treasurers, six prime ministers and seven defence ministers in the past ten years, what minister thinks they will have the time to see a big reform through from beginning to end?

Ministers are praised for the policies they launch, rather than the problems they solve, and a policy “works” if it helps the government send the right signal. Consider the following: Politicians show that they are “tough on crime” by announcing longer prison sentences – not because it reduces crime, but because it shows voters that they are “anti-crime”. And they show that they’re concerned about taxpayers’ money by cracking down on “welfare cheats”, not because it saves much money, but because it shows voters they are “anti-bludger”.

Virtually every criminologist and welfare expert is adamant that such policies are ineffective. But the experts are looking at it the wrong way. Such policies might not make our communities safer, but they are highly effective in making the marginal seats safer.

The problem for the car industry is that providing government assistance sends a “mixed message”.

Prime Minister Malcolm Turnbull is pro innovation, pro jobs, pro investment and pro growth, so you might have assumed he would be pro doing something to stop hundreds of thousands of jobs being lost in and around the car industry. At a minimum you might think he would be working on a plan to attract new investment, to ensure Australia plays a role in the new supply chains that will build the new electric cars that consumers are queuing up to buy.

But the prime minister is also pro market, pro tax cuts and pro deficit reduction, which makes taking responsibility for protecting the jobs of manufacturing workers tricky. Outlining a plan for manufacturing? That would be way “off message”.

Nevertheless, standing back while a whole industry collapses and communities are destroyed demonstrates neither good economic management nor empathy to voters. So which way should Turnbull jump?

As with most big election-year decisions, electoral logic often trumps economic logic. Take the submarines, for example. Abbott’s defence minister, David Johnston, said that he wouldn’t trust ASC, the company that built the Collins Class subs, to “build a canoe”. But the new minister for industry, South Australian Christopher Pyne, can’t sing the South Australian manufacturer’s praises loudly enough. While minimising the price of naval defence vessels was the priority of a newly elected Abbott government that was focused on a “budget emergency”, maximising jobs for the workers in marginal seats is the priority for a Turnbull government that is neck-and-neck with the ALP in Newspoll.

So although apparently only corporate tax cuts and lower wages will create jobs in the rest of Australia, it seems that good old industry policy and government spending work a treat in South Australia. As Christopher Pyne put it recently, “As the senior South Australian cabinet minister, obviously I want to maximise the amount of naval shipbuilding done in my great state … I personally, as the minister for industry, brought the Centre for Defence Industry Capability to South Australia, which was announced about three weeks ago … I’m working as hard as I can … to maximise the build in South Australia, ’cause I know it means jobs and growth.”

In the vacuous expanse that is Australian policy debate, building defence vessels creates jobs while building hospitals creates debt. Using taxpayer money to build a centre from which to “promote defence industry competitiveness and guide the priorities across defence industry” secures jobs for decades, but trying to attract car industry investment is a quaint idea that will never work. Yet while such a contradictory approach makes no economic sense, it makes perfect electoral sense.

As the Liberal primary vote declined, and Nick Xenophon announced he would run candidates in Pyne’s seat and in other marginals, the Liberal Party’s awareness of the link between public spending on naval defence and “jobs and growth” has become acute.

The message to manufacturing workers who don’t live in marginal seats held by cabinet ministers has been quite different.

Electric cars are as different from your current car as personal computers were from typewriters. While they once looked similar, and on the surface they did some of the same things, it wasn’t long before people were doing things with their PCs that the inventors had never considered.

At the heart of a traditional car lies a complex feat of engineering. An internal combustion engine can have thousands of parts. The heat from the exploding petrol makes the metal expand and wear out. Air needs to be sucked into the engine to help the petrol explode. Water needs to be pumped through the engine to keep it cool. Oil needs to be pumped through the engine to stop the moving parts destroying each other. Air filters, oil filters, cooling fluid and brake pads all need regular replacement.

At the heart of an electric car is an enormous battery and a couple of electric motors. Electric motors are simple. They have far fewer moving parts than internal combustion engines. Clever electronics mean that the batteries recharge when you step on the brakes. While electric cars have traditional brake pads, they almost never need to be replaced.

Just as computers didn’t need typewriter ribbons, regular lubrication or liquid paper, electric cars need virtually no maintenance. And because there just aren’t many parts that need tuning, tightening or tinkering, there won’t be many people employed as mechanics in the future. Needless to say, service stations will also be in a bit of trouble.

It is not just the car industry that will be transformed by the rise of electric cars. Demand for electricity will rise rapidly as demand for oil falls. This will affect everyone from the producers of solar panels to the members of OPEC. As US imports of oil dwindle, so too will its foreign policy interest in the Middle East. The future will not simply look like the present with cooler gadgets.

Having said that, economists are terrible at predicting the future. The US Federal Reserve didn’t see the global financial crisis coming, and Australia’s Treasury didn’t foresee the end of the mining boom. Government economists can’t tell you what interest rates or oil prices will be in six months’ time. Private investors aren’t much better at predicting the future, but then again no one asks them to write budgets with four-year forecasts for every macroeconomic variable; private sector forecasters are simply better at hiding their wrongness.

The problem is that while the identity of the modern politician is wrapped up in being a “great economic manager”, no one, including them, has a clue what will happen to the economy in the next few decades, and nor will modern politicians admit it.

But the inability to predict the future doesn’t mean that we shouldn’t plan for it. The trick is to understand that there is a difference between knowing what will happen and being well positioned for trends that are likely to emerge. So as the world moves to reduce fossil-fuel use, and the prices of renewable energy and battery storage continue to fall, and electric cars become cheaper, faster and cooler, what should Australia do?

Should we have an inquiry into the opportunities for Australian manufacturing that flow from the likely surge in demand for renewable energy and battery storage? Should we develop a National Electric Car Plan? Or should we simply “let the market decide”?

Most people would refuse to answer whether they would prefer to be a teetotaller or an alcoholic, yet many feel obliged to have an opinion about whether they support government intervention or free markets. It’s a silly question.

Governments of all political persuasions intervene in the market all the time. Sometimes they want to brag about it, as in marquee public infrastructure projects. And sometimes, when they give billions of dollars to the mining industry, for example, they are determined to deny it.

Once you accept that the purpose of much government policy is to send a signal rather than solve a problem, the incoherence of Australian industry policy starts to make a lot of sense. What is important is not that taxpayers’ money is handed out in a consistent manner but that the decision is explained effectively. Econobabble is used to conceal why it makes “good economic sense” for politicians to give taxpayer-funded support to friends, but is “economically irresponsible” to support your foes.

For instance, your friend’s big new idea simply needs some “infrastructure support”, while your foes need subsidies for their “financially unviable” projects. Imagine if a hotel developer proposed building a new hotel in a remote and beautiful part of Queensland on the basis that the venture would be profitable if the government paid to build an airport, an access road, electricity supply, water supply and a water-treatment plant. If the developer were a friend, taxpayer funding would be supported on the basis that it was infrastructure, but if the developer were a foe the project would be described as financially unviable.

Your friends need a “competitive tax environment” and your foes want protection because they can’t compete on a level playing field. Your friends create jobs, while your foes need to become more productive (by employing fewer people). And so on.

When mining companies build new mines, with a bit of help from taxpayer-funded roads and ports, as well as access to tax concessions, they create jobs. But what’s rarely discussed is how many jobs would be created if those taxpayer dollars had been spent building hospitals or supporting manufacturing. These sectors need to “live within their means”. Simple questions about the efficiency of government support, or whether it is focused on industries of the future or the past, aren’t even addressed.

Australia has an elaborate and expensive array of industry policies that can never be compared or evaluated. As a result, it has no plan to shift assistance from mature industries towards new and innovative industries.

Tesla was founded in 2003. It is based in the US, manufactures in the US and has received significant financial support from what we are told is the free market–loving US government.

When Tesla was struggling financially in 2010, it received a US$465 million loan from the Department of Energy’s US$25 billion fund dedicated to supporting the development of advanced vehicle manufacturing technology. The state of Nevada offered Tesla around US$1 billion in incentives to establish its so-called Gigafactory, which will become the world’s largest lithium-ion battery factory and will employ an estimated 6000 people when it reaches full capacity.

Tesla produces its cars at a California site that once produced Toyotas. Australia has several such sites, as well as a workforce that will soon be looking for employment. Tesla did not set up its factories in the US because wages and taxes were lower than those in China.

Tesla never set out to build the cheapest electric cars. Its first model was an expensive sports car, its second a large luxury sedan. It has now taken deposits on an estimated $17 billion worth of family cars that will hit the road in Australia for around $70,000. American taxpayer support for Tesla has paid off, big time.

If Tesla is a success, and is the kind of company that Australia wishes would establish production here, then politicians might need to accept that well-designed industry policy does work.

Fortunately, Australia’s current set of industry policies is so bad, and expectations about attracting new investment into the manufacturing sector so low, we can’t lose. A genuine attempt to support it would include the following.

First, industry subsidies would be tilted away from established industries that don’t create many jobs. The mining industry, for example, pays less for its diesel fuel than ordinary motorists do. Treasury estimates the annual cost of the diesel fuel rebate at around $6 billion per year. And now that there is no local car industry to protect, the fringe-benefits tax concessions for company cars, worth $800 million per year, can be scrapped. Call the savings “seed funding”.

Second, given the willingness to build roads, ports and energy supplies for remote mining facilities, similar infrastructure support could be offered to those proposing to build significant new manufacturing capacity in the existing industrial regions of cities. Everyone likes infrastructure.

Third, the manufacturing industry should receive similar forms of tax concessions as those offered to the mining and oil industries, such as accelerated depreciation on new factories.

Fourth, Australia has the capacity to simultaneously help citizens and new investors by aligning the focus of its high-quality education and training capacity with the needs of new factories. One of the most successful new manufacturing exporters to develop in recent decades is Tasmanian-based Incat, which produces large aluminium catamarans for passenger and military use. The willingness of the local TAFE to guarantee a supply of highly trained aluminium welders played a central role in the decision to locate a major manufacturing exporter in Australia’s southernmost capital city. Our highly regarded universities are yet another attraction.

Put simply, the cost of trying to attract new investment and failing is near zero. If we offer to provide tax breaks and to train a workforce for new facilities and there aren’t any takers, then it won’t cost anything. And if leaders genuinely believe that there is no chance of attracting significant investment in manufacturing, then it will be very easy to tell if the incentives work or not. Any tax paid by a company we thought would never establish here is a bonus.

These policy changes would combine to tell the world that Australia is genuine about attracting new manufacturing to its shores. Not only can we offer large industrial areas with good access to ports and energy but we can also offer a skilled and motivated workforce in a country with a stable democracy and pretty good weather.

But it is unlikely that we will try. It would take years, decades, for the benefits of such an approach to show up, and what kind of “message” would it send, to admit there is a role for government in shaping our economy?

Why try to stem the decline in manufacturing when instead you can have a special commission for a construction industry that is so constrained by the union movement that it has doubled in size? Because blaming unions for economic problems is “on message” and admitting that other countries have successful industry policies is not.

Richard Denniss
Richard Denniss is the chief economist at The Australia Institute.

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