Will the car manufacturing industry end in Australia? Economic loss will be $21.5 billion: FCAI study

The Australian economy has been tipped to lose $21.5 billion should automotive manufacturing leave Australia, according to a new study commissioned by the Federal Chamber of Automotive Industries.

The study found Melbourne and Adelaide would suffer most in terms of job losses and Australia would experience a long-term fall in GDP.

By 2018, the FCAI calculated Australia’s GDP would be $7.3 billion smaller.

The study will form the basis of the FCAI’s submission to the Productivity Commission’s review of the sector, as the industry is currently fighting to keep car manufacturing supported by government funding.

The automotive sector currently receives $500 million in government money each year, but its funding is currently being reviewed.

FCAI chief executive Tony Weber told SmartCompany should the industry lose this money, Australia will also lose billions of dollars in foreign investment.

“The reason why car companies invest overseas is they go where they can make the best returns. If they’re provided with a greater level of assistance in one country, they’ll look there,” he says.

Weber says many small businesses will also be impacted by the loss of car manufacturing.

“It will have an enormous impact on small business. All the small businesses which are connected indirectly or directly to car companies will be impacted,” he says.

“There is the supply chain underneath the production of cars which provides the parts to car makers and the vast majority of these are small businesses. There is a whole ecosystem out there of people who connected to the industry who will be affected, and most of these other businesses will be forced to close.”

Weber says government assistance levels need to be maintained to ensure Australian skills and foreign investment is not lost.

“For that investment, Australians receive significant returns through direct foreign investment, employment, skills, training, technology, transfer and research. And the investment also generates spill-overs that flow into other industries and areas of the economy,” he says.

“Without that investment, we lose these long-lasting benefits.”

The end of the car manufacturing industry will see the loss of 33,000 jobs in Melbourne by 2018 and 6000 in Adelaide.

The study found these jobs would return to Melbourne by 2027 and to Adelaide by 2025, but with a lower real wage.

The Melbourne and Adelaide economies would also be negatively impacted, tipped to suffer up to a 1.4% fall in gross regional product, with these estimates not including additional impacts on the smaller manufacturing businesses likely to be affected.

Last week the federal government commenced a Productivity Commission inquiry into the sector, to examine the best way it can ensure its ongoing viability.

The Coalition also pledged not to proceed with the former Labor government’s plan to tighten Fringe Benefits Tax rules, on the back of the car industry urging the government to reconsider the changes. 

Of late the industry has been impacted by an uncharacteristically high Australian dollar and difficulties accessing foreign markets.

“Looking back at the exchange rate, in 2002 the Australian dollar was at 55 cents to the United States Dollar but by 2012 it had climbed to an average of $1.04. This had an enormous impact,” he says.

“We also have a lack of access to other markets, despite some free trade agreements. Our competitive domestic market also makes it difficult to get the volume of sales needed.”

But Weber says it’s not all bad news, predicting the industry’s fate isn’t as grim as it’s being made out to be.

“Obviously it’s an extremely difficult environment and the GFC hasn’t fully played out around the world yet, but we have the fundamental strengths to make quality products,” he says.

“It’s a much brighter future than a lot of people think and Toyota and Holden are improving their competitiveness each day. Economists also tell me all the time the dollar is overvalued given the structure of the economy… most believe it should be between 75 and 80 cents and the probability of the weaker Australian dollar puts us in a much stronger position.”

Weber says should the industry survive, its strength in the future will be from a balance of exporting and domestic sales, as well as exporting their services and developing cars for other markets.