Monday, March 19, 2007

Tuesday Column: Is it time to turn off life-support for Australia's car industry?

Politicians love Australian carmakers. What they can’t understand is that Australians don’t.

On Thursday Labor’s Ken Rudd promised another handout of another half a billion dollars to Australian carmakers, this time to encourage them to build ‘greener’ cars.

We already hand Australia’s big four car manufacturers assistance worth more than $1 billion a year – and that’s just from the Commonwealth government. No one knows quite how much South Australia and Victoria chip in as well.

Yet the sad truth that for all the repeated talk about how important it is to have Holden, Ford, Toyota and Mitsubishi here in Australia making new cars - ordinary Australians won’t buy them.

What if it was another industry – with four manufacturers were there probably should be two, production in some plants slowed to a trickle and buyers turning away at the rate of 20 per cent in the last year - would politicians be standing in front of its factories offering even more support?

But then the Australian car industry is unlike any other industry, both in the strange way it operates and in the rate at which Australians are shunning its products...

Australians bought just short of 1 million new cars last year. Back a decade ago half of all of the new cars sold were made in Australia. But last year out of the 1 million total only 201,623 were Australian-made.

We are moving en masse to buying foreign-made cars because they are cheaper, smaller and use less petrol.

And that sales figure of 201,623 hugely overstates our interest in buying Australian-made cars.

One of the oddities of car sales in Australia is that even where new Australian cars are sold, for the most part ordinary Australians don’t buy them.

When the Productivity Commission examined the issue 10 years ago half of all new Australian cars sold went to government and private fleets. Telstra was the country’s biggest car buyer.

Jump forward a decade and 88 per cent of Ford Falcons, 87 per cent of new Mitsubishi’s and 81 per cent of Holden Commodore’s go to fleets.

Only new Toyota Corolla’s are bought in any numbers by ordinary Australians. They are 60 per cent sold to fleets.

Companies, governments and charities buy at these sorts of levels for tax reasons - they can help with salary packaging – and then offload them for a good price while they are still nearly new.

Very few individual Australians buy new Australian cars from the showroom. They buy them “near-new” from corporations, or more likely buy cars made overseas.

When he came to office in 1996 the Treasurer Peter Costello tried to crack down on the bizarre tax-driven ritual of corporate car trading. He asked Australia’s state and local governments to pay sales tax on the cars they bought. He was overruled by his Prime Minister.

Since then the rituals seem to be getting stranger.

If you see more traffic on the road between Sydney and Melbourne this month you could well be watching the drivers of salary-packaged cars trying to get their miles up before March 31.

That’s the cut-off date for calculating their rate of fringe benefits tax. The more kilometers they drive the lower their fringe benefits tax rate.

The accounting firm Deloitte has even sent out a note to clients advising them to “Drive your benefits further – before it’s too late!”

It reads: “Many employees may be on the cusp of the next kilometre threshold used to calculate FBT.... Where this is the case, increasing the kilometres driven can also significantly increase your savings.”

It says an employee who drove 24,000km during the FBT year would owe $6,720 in FBT. Increasing the number of kilometres to more than 25,000km would cut the bill to $3,696 – “a saving of more than $3,000”.

Removing all of the convoluted, expensive and environmentally stupid hidden supports for the Australian car industry would force the manufactures to face up to the reality that Australians don’t want to buy their products at the price they are charging.

It would doubtless force at least one of them to close, most probably Mitsubishi whose daily output is now embarrassingly low. But if that is going to happen, from an economic point of view now is probably a good time. There is a skills shortage in many parts of the country (if not in Adelaide) and it should be as easy as it will ever be for retrenched workers to get new jobs.

Mitsubishi itself is reported to have drawn up plans to close its Australian car manufacturing operations after this year’s election under the code-name “Project Phoenix”. After the ABC quoted from the document Mitsubishi denied that it represented its official position.

Officially the industry wants a freeze on the next round of tariff cuts due in 2010 – perhaps indefinitely. The Labor Party says it is prepared to consider the idea and it gone further and held out the prospect of an extra half a billion for research into ‘green’ vehicles, to be matched by manufactures three dollars to one.

Holden has already done that research. With the CSIRO in the late 1990’s it developed what it called its ECOmmodore. Powered by both a conventional and an electric motor it was said to have twice the fuel economy and half the emissions of a conventional Commodore. It drove the Olympic flag on the first leg of its journey from Uluru in 2000.

Little has been heard of it since.

With continuing tariff, taxation and direct government financial support for the Australian car industry (if not consumer support) Holden might have seen only risks in bringing to market a product Australians might want.

Kevin Rudd is to be commended for attempting to get the Australian car industry to do the sort of thing it should be doing anyway.

But I can’t help thinking that away from an election a forward thinking political leader would tell this sickest, most unloved and perpetually needy of Australian industries to stand or fall on its merits.