What Happened to Australia’s Auto Industry?

If you want to watch the video first (it’s a long one), it is below

Since writing this video, I have had the chance to work on a few other videos looking at car manufacturing and other capital/labor heavy industries. Perhaps I have been a bit too harsh on Australian policy, looking back on it now. I feel like the government did the best with what they knew at the time.

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Once upon a time, the Australian automobile industry employed 100,000 people. They produced tens of thousands of vehicles for both domestic consumption and export abroad.

The cars were uniquely suited for the Australian market, and they were prized in the country's rural areas.

But now that industry has vanished. The last factory, operated by Toyota, closed in 2017. Other than a few units produced for national security purposes, the Australian car-making industry has all but vanished.

In this video we will return to the Land Down Under and look at the rise, decline and fall of Australia’s automobile manufacturing industry.

Post-War

Emerging from the trauma of World War II, the Australian government sought to rebuild its economy, develop major infrastructure projects, and nurture its manufacturing capacity.

The government focused on car manufacturing as a high priority item, offering foreign companies subsidies and tax concessions to at least bring some production to Australian soil.

A number of foreign manufacturers like Volkswagen, British Motors-Leyland and Ford took them up on the offer and entered the market. Most of these facilities were simply bolting together imported parts, but a few companies brought other value-add activities.

The most notable of the latter was the Australian subsidiary of American automaker GM: Holden. In 1948, they produced the first all-Australian car - which it named after itself. Manufactured in Melbourne, the Holden was a rugged car suited for Australia's rural areas.

The Holden launched to great fanfare, with waiting lists stretching years long, and dominated the Australian car market throughout the 1950s. In 1951, Holden sold over 25,000 Holden units and was the country's most profitable publicly-traded company. Even more than mining giant BHP.

Like as in many other countries, Australian cars became a fixture of the national culture. In a country that values the feeling of “survival against all odds”, rugged cars like the Holden "Ute" - what Australians call pick-up trucks - had a lot of appeal.

Holden was just one of many south Australian manufacturing success stories throughout the 1950s. You got Pope Industries, which made washing machines and fridges.

And Metters, a cooking appliance company with their famous green and grey cookers.

This domestic manufacturing industry grew up within a protected product market. High tariffs gave domestic employers guaranteed demand.

Those employers can then pass on the costs of paying a "fair and reasonable" basic wage - a cost backed by powerful trade unions and a unique compulsory arbitration system.

The MNC Car Industry

You see cars around all the time. And that sort of disguises just how complicated they actually are. A single, middle to high-end car incorporates a plethora of complicated technologies - metals, electronics, textiles, so on. Local auto manufacturing in turn supports a local auto-parts ecosystem. Without the former, the latter is hard to be.

The world automotive industry is characterized by large multinational firms like Volkswagen, Toyota and GM. They are very nationally diversified. Components suppliers from many countries. Products based off a common basic design, then tailored to their various international customers.

People today may have nostalgia for their Australian cars. But the interesting thing to note is that none of the Australian car maker companies were actually owned by Australians. This had upsides and downsides.

The upside is that Australia's car-making industry benefitted from being a part of a larger, globalized network. For instance, Australian-made auto components can be made at scale and sent abroad to be placed into cars.

The downside, however, was that the company did not and could not embed itself deeply within the local industry. The Australian government could not fully accept them as "Australian", because in their hearts they knew profits flowed to the Japanese or American headquarters.

At the same time, the executives back home did not hold any emotional attachment to Australia, even the ones who were promoted out of there. Those core decisions came down to the bottom line. So the country did not own and control its own auto-making destiny. This "worst of both worlds" situation would eventually come to be a problem down the line.

The 1970s

By the start of the 1970s, the country's domestic automotive manufacturing industry employed over 100,000 people across multiple states. GM-Holden and Ford were the market leaders.

But the 1970s would see a substantial loss of competitiveness for the domestic automotive industry. Protected markets are not the end-all, be-all. Automakers were producing too many models with five companies producing as many as 15. With individual production runs as small as 25,000 units, they lacked economies of scale.

Furthermore, the car companies were starting to lose their connection to the customer. Australian cars are treasured for their rural ruggedness, but the majority of the country’s people live in the city.

Gaps opened up in the market - especially in the small car segment. This gap in the market granted Japanese imports - high-quality, low-cost small cars - a significant foothold in the market. Sales grew fast off a low base and a small dealer network.

For instance, the Datsun, made by Nissan, had especially strong sales - growing to nearly 20,000 in 1969 despite the tariffs.

The 1972 election of the Whitlam Government would open the door to substantial reforms. He was the first member of the Australian Labor Party - a major federal center-left party - to ascend to power in 32 years. And his administration did not look favorably on the foreign multinational-owned carmakers.

In early 1973, the Australian economy was near full capacity. Demand was strong and policy makers started to worry about rising inflation. The Whitlam government had already strengthened the Australian currency in the previous year but felt that they needed to do more. Tariffs and other trade barriers seemed to be the best way to do that.

Lowering the Gates

The domestic automotive industry itself was slow to reform, with businesses and unions both reluctant to re-organize what had been a good thing for a long time. Government officials eventually came to the belief that a more liberal trade policy was needed to give them a competitive jolt.

Officials felt confident that the Australian economy could survive a relatively rapid drop in trade protections - largely for two reasons. First, lowering such rates would expand international trade opportunities. More lenient trade policy would help cement a re-orientation towards Japan.

And second, Japan and other developing countries were starting to buy titanic amounts of Australian iron ore and other minerals. As I said earlier, in 1973 the Australian economy was strong.

As expected, a variety of voices emerged in opposition of the plan. European assemblers and American-Australian carmakers saw the potential entry of the Japanese as a betrayal. Various state governments were openly fearful of the coming job losses.

The most controversial part of the plan was an abrupt 25% reduction in all tariffs on imported goods in 1973. These things should happen gradually. So this tactic was extremely confrontational.

The industry responded in kind. GM-Holden fired 5,000 workers, sparking a political crisis that required an eventual compromise. Nevertheless, this tariff reduction cemented industry opposition to the Australian Labor Party's reform sentiments for years to come.

The Japanese Ascend

1973 started well, but that year then saw the OPEC oil embargo and the collapse of the Bretton-Woods international monetary regime. This brought about the end of a long post-war prosperity. Oil prices soared 300%. Inflation and unemployment rose within the economy.

In Australia as it did in the rest of the world, this surge in oil prices would spur the sales of gas-sipping alternatives. Sales of the small and medium four-cylinder cars - a market dominated by the Japanese - surged.

Absolute sales volume of large, six-cylinder cars - the domain of the Australian carmakers - remained relatively flat. However their share of the overall car market collapsed.

In my video about Giant Bicycle, I talked about how the oil crisis spurred an unprecedented surge in American bike sales.

Silicon Valley types like to talk about disruptive innovation. It is a process popularized by Harvard professor Clayton Christensen in which an upstart takes root in a big, established market and then relentlessly moves upmarket. This is a pretty good illustration of the concept.

I do want to note that not all of these were wholesale imports. Two major Japanese automakers - Toyota and Nissan - set up domestic Australian assembly operations of their own, looking to avoid tariffs. This added to an already bloated domestic market.

Nissan Motors signed a contract with a local assembler in the city of Clayton, Victoria to produce their Datsun. They would eventually purchase the assembling facility and make it a regional headquarters.

Setting up these local operations of course brought the Japanese in contact with Australia's labor policies. Wholly owned by the Japanese company but run by an all-Australian management team, the Clayton plant hosted eight trade unions. Nissan has a history of anti-union behavior and tensions simmered, but they made it work.

Local automotive incumbents started to suffer as the six-cylinder market began to decline. Thousands of jobs were lost throughout the 1970s. Trouble back home at British Motors-Leyland had forced them to essentially close their Australian operations in 1975, cutting 2,600 jobs. The South Australian government argued that another 15,000 automaker jobs were at risk.

The worsening economic situation throughout 1974 and 1975 forced the government to re-impose import quotas. It somewhat stemmed the bleeding but not completely.

There is little doubt that the reforms probably were not executed in the best way. Reducing the tariffs so abruptly was pretty confrontational. Probably the biggest missing ingredient, however, was a government entity that can help coordinate the industry's transition.

Something like Japan's Ministry of International Trade and Industry or MITI for the car industry. By now, the four remaining domestic OEMs had to face this new world alone. To say the least, they navigated poorly.

The 1980s and 1990s

In other videos, I talked on the concept of "export discipline". Governments in Korea, Japan, Taiwan, and China pushing their domestic companies to export their products abroad. If those products sell, then that is how you know they are good enough. But this is hard, and most companies want to do things that are easy. They need to be pressured into doing it.

The same macro trends that ate away at the Australian carmakers' automobile market back home also annihilated the critical export market. In addition, the rise of Japan and China in the global economy started to edge out traditional winners like Australia.

At the start of the 1970s, the industry produced as many cars for export as it did for domestic consumption - 60,000 units in 1970. By 1979, that number had dwindled to just a few hundred. The collapse of Australia's automobile exports throughout the 1970s told government officials that their domestic car industry was uncompetitive. Back home, consumers had fewer choices. Outside was where you can really see who sinks or swims. And Australia was sinking.

The governments of East Asia responded to situations like this with direct interventions in the domestic market. In the 1960s, Japan faced a situation similar to Australia’s: Too many car makers and a decreasing competitiveness.

MITI responded by arranging mergers between many of them to create two giants - Toyota and Nissan.

Back then, MITI's core tenet was to protect and nurture Japan's carmakers until they were ready. The Australian government opted for a different path - influenced by a faith in rationalism and the de-regulated market.

The mid-1980s saw a new government and major macroeconomic policy changes. Banking sector deregulation, financial market liberalization, and floating the Australian dollar. The intention was to reorient the domestic manufacturing industries towards exports.

As Prime Minister Hawke said:

> Tariffs have been one of the abiding features of the Australian economy since Federation. Tariffs protected Australian industry by making foreign goods more expensive here; and the supposed virtues of this protection became deeply embedded in the psyche of the nation. But what in fact was the result? Inefficient industries that could not compete overseas

The government unveiled a sweeping plan to restructure a variety of manufacturing industries - cars, steel, heavy engineering, and shipbuilding. Among these was a new car plan introduced in late 1983 by Senator John Button.

It offered car manufacturers credits and subsidies for Australian-made cars. There were also generous but temporary government support, like targeted procurement.

But on the other hand, the plan more rapidly reduced import tariffs from 57.5% to 45% in 1988, with additional reductions until 2000. It also removed import quotas with the intention of slimming down the domestic industry into a leaner, meaner entity.

The shrinking part went as expected. Ford lost $60 million in 1992 and laid off thousands of people. The 80s and 90s saw plant closures by all of the domestic automakers.

But perhaps unexpectedly, Australian-made cars became yet less competitive. Domestic carmakers responded with cost-cutting, reducing investment in R&D and manufacturing capacity. The decade from 1984 to 1994 saw just a single new Australian model line - the 1997 Vectra.

Australia as a market has a lot to offer. But for decades, foreign companies entered the Australian market for one reason only: To bypass the country's trade protections. When those trade protections abruptly vanished, those multinationals - located far away back in Japan and the United States - saw little other reason to keep their expensive manufacturing operations in the country.

The 2000s

Throughout the 1990s and into the first half of the 2000s, domestic assembly operations stabilized at around 350,000 units a year.

But since the country was growing both economically and population-wise, the domestic makers' share of the overall market continued to shrink.

This shrinkage occurred despite $500 million AUD of annual government support delivered to the automakers through a duty remissions scheme: the Automotive Competitive and Investment Scheme or ACIS, which began in 2000.

The ACIS would cost the Australian government $7 billion AUD from 2001 to 2011.

2000 would also see the start of a decades-long mining boom - fueled by developing countries like China and India. This buying spree seemed to have no end. Some institutions projected 30 years of mining-led prosperity.

However, this mining boom also caused a dramatic appreciation in the Australian dollar. The Australian dollar reached a historical low of 50 cents to the American dollar in 2001. Over the next ten years, it doubled in value, reaching parity with the American dollar.

Simply because we say a currency is "stronger" one might be tempted to think that this is great. We want Australia to be stronger, right? But like with all things, there are drawbacks. And the major drawback is that the stronger currency dramatically increased the costs of Australian automotive production, leading to chronic losses for the whole sector.

From 2003 to 2010, the industry lost 25,000 jobs. In April 2004, Mitsubishi announced that its engine and assembly plants in southern Adelaide would close. 1,167 people would lose their jobs in an area that can ill afford to lose them.

The industry has been an Adelaide institution since the 1960s. The southern Adelaide economy in particular depended a lot on manufacturing, it made up 18% of employment in 2001. Furthermore, the Mitsubishi factory was located in a critical election battleground region.

Thus the Australian federal government came to the rescue again with $40 million AUD for the region and $10 million AUD to help retrenched Mitsubishi workers. The state government of Southern Australia added another $5 million AUD.

This sounds like a lot, but in context it isn't. The regional fund had to be spread across other businesses in South Australia. The largest grant ended up going to a chicken processing plant in northern Adelaide, far from the plant's location in southern Adelaide.

The whole fund probably would not have saved the Mitsubishi plant anyway. By 2005, each of Mitsubishi's domestically produced cars were already receiving $1,300 AUD of subsidies.

The assistance for retrenched workers did not work out as planned either. The Mitsubishi Labour Adjustment Programme as it was called saw the workers as long-term unemployed, rather than the semi-skilled tradespeople they actually were. Their skills were readily transferrable to other places - mining or defense, for instance. But the program did not take this into account, and so did not achieve the desired policy results.

The local governments did make considerable effort to try to help the retrenched workers. They encouraged local firms to receive federal funds. They pitched a new economic vision for the region, one without manufacturing. They worked with business leaders to encourage this vision.

However, the local authorities - for all their work and good intentions - had little resources to actually effect real change. The Mitsubishi plant closed for good in 2006. Then came the Global Financial Crisis.

In the midst of unprecedented economic conditions, the Australian government passed a number of industry interventions. This included a targeted subsidy program - the Green Car Innovation Fund - and the Automotive Transformation Scheme, which subsidized automobile investment and research - particularly in energy efficiency and green technology.

The Australian Government also provided a $200 million AUD line of credit to GM-Holden to help it restructure through crisis after GM filed for bankruptcy in 2009.

Looking back at it, the Mitsubishi closure was the beginning of the end for the automotive industry in Australia. The situation - a declining car sector and a sizzling mining sector - spurred the Australian government to conceive of an alternate economic future.

Closure

In 2013, a new government ascended to power under the leadership of Prime Minister Tony Abbott. Made up of a coalition of the Liberal and National parties, this new government replaced the Australian Labor Party - which had been in power for six years from 2007.

This coalition can be best described as conservative-leaning. And due to philosophical and political differences, they disagreed with the previous government’s interventions in the automaking industry, saying: "The government’s role is not to prop up private business"

Cars weren't the only industry to see substantial layoffs. BHP restructured their steelmaking facilities in 1999. Kodak cut 600 Melbourne jobs in 2004. Garment Jones closed their garment factory in Victoria. All of Australian manufacturing was hurting. Why should cars receive preferential treatment and subsidies?

The Australian automobile manufacturing industry by now was a shadow of its former self. Modern car manufacturers try to produce about 250,000 cars per factory per year. GM-Holden, the largest of the manufacturers, did 160,000 in the early 2000s. Mitsubishi in 2004 struggled to produce 35,000. Ford did about 70,000.

Furthermore, Australian labor is expensive. There is no denying it. The 2000s saw the emergence of low-cost car manufacturers out in China and Thailand. Australian labor costs multiples more than Thai labor.

In other countries with high labor costs like Canada and the United States, their unions bent on issues of entitlements, wages, and pensions. For instance, the American United Automobile Workers allowed carmakers to produce more than one car on a single production line. They also lowered entry wages for new workers to 60% of the former number.

Australian labor unions eventually came around after the Financial Crisis. GM-Holden collaborated closely with the Australian Manufacturing Workers’ Union near the end, but it would not be enough.

Ultimately, what mattered more than friendly union-employer relations for the Australian carmaking industry was government support.

On this, there is no doubt that the domestic industry has absorbed billions of subsidies over the years, with little to show for it. And now they were coming back hat in hand at a time when the world was in an economic crisis.

With that being said, industry-government relations probably could have been better handled. GM and Toyota at the time were publicly mulling over whether to continue their efforts in the region, but the new government seemed to finally have had enough.

Finance Minister Joe Hockey famously dismissed GM's approaches by saying: "Either you're here, or you're not."

More than the public comments was the uncertainty. Constant delays in new government policies contributed to an overhanging cloud of instability with regards to future policy. Businesses value stability and lasting commitments. Faced with neither, Toyota and GM pulled out.

What Was Lost

The loss of Australia's domestic auto industry has wide-ranging consequences across the national economy.

First, the impact on the domestic components industry. 260 Australian businesses supply the automotive sector. Without the domestic assembly industry to anchor them, many of these did not achieve sufficient economies of scale and closed.

Many of these components - also for reasons relating to economies of scale - were exported abroad to be used in other cars. For instance, 70% of the Toyota Camry's parts had once been made in Australia.

Second, R&D spend in the automotive industry by Australian companies vanished. In its final years, companies spent $700 million AUD on R&D. This made up 2% of the country's entire R&D spending. Of course, much of this was a consequence of government policy - and the ultimate benefits of this R&D spend are rather murky.

Third, we should not dismiss the impact on the laid-off workers themselves. 14,000 or so people lost their job after the Toyota and GM-Holden factories closed.

Two years after the closure, 189 of them were surveyed. On average, they were 50+ year old men with immigrant backgrounds. Less than half of them were still working, a quarter were looking for new work, and the rest had retired.

Fortunately, many of them can rely on redundancy payments, spousal contributions, or their investment assets to support them. In this manner, government and community support definitely helped cushion the financial blow.

And finally, the industry's demise closes the book on a uniquely Australian chapter of history.

Despite being ultimately owned by foreign multinationals, Australian cars were very thoroughly Australian with a capital "A". They helped mythologize the idea of the pioneering spirit. That backyard inventor thriving in the harsh outback against all odds.

Conclusion

So now we have arrived at the end of this long video and there remains one big question: Who should we blame? Our pitchforks are out. The torches are lit. Who's fault is this? What could have been done?

People point to Canada as an example of an auto industry that survived despite similarly high labor costs and oil-fueled strong currency rates. And the Canadian government did go the extra mile to consolidate its auto industry.

But Canada shares a border with the United States and its factories are far more productive, with an average output 3 times higher than Australia's.

In the end, like with all stories in history, there are no heroes or villains. Countries have to deal with the cards with which they are dealt. Australia enjoys the blessings of a beautiful continent full of natural resources, but has to deal with its remote location and higher costs of living.

The government poured billions and countless hours into the industry. But the economics and economies of scale just weren’t there. I don’t think anyone will blame them in the end.

However, throughout this multi-decade saga, the one thing I can say is that the government could have been more involved at certain critical times. I keep thinking back to what Japan's MITI did to their automobile industry in the 1960s - arranging shotgun marriages between the losers until two national champions emerged.

Perhaps if the Australian government forcibly intervened, merged all the five domestic OEMs together into one and invested a controlling share, then the industry would still be alive today. Who knows.

Of course, let us not close with a dour ending. Toyota and other automakers are continuing to tap Australia's trove of educated labor to develop new automotive technologies for the future. The former Toyota Altona factory is now being converted into a transport hub for green hydrogen tech. Pretty cool.