Economics for Business: Analysis of Australian Car Industry

This report examines the economics of the Australian car manufacturing industry, focusing on the government's policy decisions and their impact. It analyzes the historical context of car manufacturing in Australia, highlighting the role of state support through protectionism and incentives. The report delves into the costs of production, particularly labor costs, which made Australian car manufacturers non-competitive compared to Asian counterparts. It discusses the implications of removing import tariffs and the challenges faced by the industry in terms of factor endowments and market size. The report concludes that the industry's closure was inevitable due to unsustainable costs and lack of demand, supporting the government's decision to withdraw support. The analysis references various sources, including reports and articles, to support its arguments.

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Introduction
Car manufacturing has a rich history in Australia which has hosted car manufacturing
companies for over a century. Infact, the world renowned car manufacturer (Dowling, 2015)
Toyota had the first foreign manufacturing facility based in Australia which besides catering
to the domestic demand also was exported to other countries. However, with the
announcement of withdrawal of support by the government couple of years back, the car
industry is about to come to a sad demise. The government would withdraw all support from
the car manufacturing industry by February 2018 in wake of which the various manufacturers
would close their plants citing economic infeasibility (Dowling, 2017). In this backdrop, the
objective of this report is to highlight the government policy with regards to car
manufacturing and whether the policy decision taken by the government is correct or not in
wake of economic rationale.
Discussion
Even though the car manufacturing industry traces a long history in Australia but the same
would not have been possible without state support. This state support over the years has
been extended through protectionism so as to discriminate against the imports and also
through various incentives. Infact, it is estimated that over the last decade only, a total sum of
$ 5 billion has been extended as state support to car manufacturing industries (Dowling,
2015). Also, it is noteworthy that that the government policy since long has been of managed
decline which was never aimed at making the industry sustainable but rather ensuring that the
state support be withdrawn in a gradual manner so that the impact on the economy is
minimised (Conley, 2014).
The main reason for providing support is the employment which is provided both directly and
indirectly. The indirect employment is also significant considering the auto ancillaries which
are in business so as to provide various parts to the car manufacturing facilities based in
Australia. The contribution of car manufacturing to employment in various states of Australia
as a percentage of all manufacturing jobs is apparent from the following graph (Jericho,
2014).

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The pivotal question which arises is why the state support is needed for the Australian car
manufacturers to survive. The explanation for this lies in the production costs associated with
cars which renders them non-competitive with regards to other car manufacturers. In the cost
of production, the particularly concerning cost is labour cost which for car manufacturing
tends to be significant (Dowling, 2015). Being a developed country with limited supply of
skilled manpower and strict wage laws, the wages paid to the workers in Australia are
significantly higher as compared to the low cost destinations found in Asia for car
manufacturing. Further, in the recent times, the government has completed removed the
import tariffs on cars which has made imported cars more competitive despite the
transportation cost. Till now the state was providing support though reluctantly to this ailing
industry (Dowling, 2017).
Now since the plug has been pulled by the state government, the critical question arises as to
whether the industry can sustain through any reforms or policy change. In this regards, it is
noteworthy that for production of any good, the factors of production play a vital role. With
regards to Australia, it is apparent that the factors of production which Australia has abundant
supply of is capital and technology but not labour. This is in sharp contract with Asian
developing nations which have vast availability of labour which is semi-skilled and owing to
the high unemployment and labour supply, the prevailing wages are quite low which lowers
the overall cost of production in these nations. Further, these countries also provide huge
markets on account of local consumption and hence various foreign manufacturers are

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locating their manufacturing plants in these locations so as to serve the domestic demand and
also cater to exports at a lower cost (KPMG, 2014).
It is apparent that Australia by virtue of the factor or resource endowments is more suited for
service industry and primary industry (such as agriculture and mining). As a result, it would
not be possible for Australian car manufacturing companies to compete with these Asian
manufacturing hubs in terms of cost. But, there is an alternative model which is practiced by
western car manufacturers based out of Europe that have concentrated on luxury cars only
and outsourced the production of mass vehicles if any to low cost destinations (KPMG,
2014). Since the core competency of these developed nations lie in technology, high skilled
manpower and capital, hence these have leveraged the available resources to manufacture
luxury cars. Similar endeavour could be focused by Australia also having the same set of
resources but still on account of the geographical factors, this plan is not feasible in Australia.
The European car manufacturers tend to have a significant sized market based at home and
neighbouring developed countries of Western Europe. However, Australia does not have that
privilege with the only neighbouring country of New Zealand and therefore the collective
demand from these two nations would not justify setting up a production unit for luxury cars
(Williams, 2016).
Conclusion
Based on the above discussion, it would be appropriate to conclude that the car
manufacturing industry in Australia had to close down as it was unsustainable from the
beginning. Neither can the Australian manufacturers compete in terms of cost nor can they
venture into high end cars due to lack of demand. As a result, it does not make sense to
sustain an industry which is not competitive in the modern world when imports are becoming
increasingly prevalent. The move by the government is prudent especially considering the
fiscal deficit in face of the slowdown from China. Further, the government also needs to
deploy the public money in a prudent manner rather than supporting an ailing industry
without any sustainable future.

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References
Conley, T.(2014). Managed decline to rapid demise: Abbott’s car industry gamble, The
Conservation, [Online] Available at http://theconversation.com/managed-decline-to-rapid-
demise-abbotts-car-industry-gamble-23124 [Accessed August 25, 2017]
Dowling, J. (2015), Who killed the car industry?, The Sydney Morning Herald, [Online]
Available at http://www.smh.com.au/business/the-economy/who-killed-the-car-industry-
20151112-gkx1c8.html [Accessed August 25, 2017]
Dowling, J. (2017), Why Australian car manufacturing died — and what it means for our
motoring future, Adelaide Now, [Online] Available at
http://www.adelaidenow.com.au/technology/why-australian-car-manufacturing-died-and-
what-it-means-for-our-motoring-future/news-story/0428dc235d1b44639459959f5a3bbf9b
[Accessed August 25, 2017]
Jericho, G. (2014). Car industry exit: manufacturing is declining but it is still a vital cog, The
Guardian, [Online] Available at
http://www.theguardian.com/business/grogonomics/2014/feb/13/car-industry-exit-
manufacturing-declining-but-still-vital [Accessed August 25, 2017]
KPMG (2014), The UK Automotive Industry and the EU, KPMG Website, [Online] Available
at https://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/
Market%20Sector/Automotive/uk-automotive-industry-and-the-eu.pdf [Accessed August 25,
2017]
Williams, A. (2016), Collapse of Australian car manufacturing industry, Swinburne Website,
Retrieved on August 25, 2017 from
http://www.swinburne.edu.au/news/latest-news/2016/10/collapse-of-australian-car-
manufacturing-industry-.php [Accessed August 25, 2017]