What can be done to improve the struggling Aussie Motor vehicle industry

[Ford17]

This is a long but worthwhile read...

Why the Aussie Motor vehicle industry is struggling by the CEO of Futuris (Elders)

Firstly, thank-you for those that provided some positive feedback from last weeks 'Part 1' Auto Blog - it was very much appreciated.

Just to refresh your memories from last week, the Auto Playing Field is NOT level, with Australia having the lowest Tariffs in the Auto making world (5% but with many FTA's, leading to an average tariff of 3.5%) and also the lowest per capita Government co-investment program at about $25 per person per annum.

So, onto Part (2)….What can be done to improve the situation?

First a few interesting facts to further set the scene:

• I mentioned last week that in 2011 Australia only produced 14% of all 1 million cars sold in this country annually.
• Did you know that 5 years ago, this was ~20%, 10 years ago was ~30% and 20 years ago this was ~53%?

So what has changed…….are we not making the right cars that people want?

• NO, in fact of the 5 platforms built in Australia (Commodore, Cruze, Falcon, Territory and Camry), in 2011, 4 were in the top 10 selling cars.

• If you add up the volume of the top 10 selling cars in 2011 it equates to only 295,212 vehicles. So even if we build every one of these top 10 in Australia (not just 4 of the 10), we would still only be at 29% domestically produced as a ratio to total sales.

• So Australia produces a meager 14% of all vehicles sold here, but if we include all export production as well, we made ~220,000 cars in total (140k domestically produced & sold + 80k for export) - so Australian total production to total sales ratio of 22%.

• Let's compare that to the 4 countries that make up most of (95%) the 86% imported cars sold here (Japan, Thailand, Korea and Germany).

- In Japan, sales of 4.4 million vehicles versus production of 8.4 million vehicles (190%)
- In Thailand, sales of 800,000 vehicles versus production of 1.5 million vehicles (188%)
- In South Korea, sales of 1.46 million vehicles versus production of 4.66 million vehicles (318%)
- In 2011 German vehicle sales of 3.17 million whilst production was 5.87 million cars (185%)

So why are we at 22%? Why has it come down from 53% 20 years ago? What do we have to do to get it right like these 4 countries above (and many others as well - from my research, almost every other car making country has a ratio > 50%)?

Let's first take a closer look at Tariffs

• Tariff rates for imported cars into Australia 20 years ago were a whopping ~32% (down from their peak of 57.5% in the mid 80's) and have been rapidly reducing ever since under the 'Button Plan'. More recently, they were reduced in 2005 to 10% and then again in January 2010 to 5% (effective 3.5%)

• By comparison, most mature car producing countries have at least 10% import tariffs (Germany, Korea, Japan, UK) + other various taxes and/or roadblocks.

• The exception is the USA, who have a 2.5% import tariff on passenger cars…….however, what most people don't know is that the local producers in the USA make a very large number of "pick-up trucks" (like the F150 Ford, Chevy Suburban, Toyota Tacoma etc), and in fact almost all profit for the North American producers comes from these types of vehicles……and if you want to import a pick-up truck into the USA, it attracts a huge 25% import tariff !! They protect their Golden Goose !!

• Since the Button plan in the late 80's was devised and Australia set a path to reduce tariffs to zero (this is the current plan in Australia from 2015), we have also seen the emergence of low cost countries as Auto producers. It is interesting to compare the import tariff should we try and send a car into one of these so called emerging countries……Thailand 80% (duty not tariff as explained last week); India 60% + duty of up to a further 50%; Russia 48%; Brazil 35%, Malaysia 30%; China 25% + 18% VAT. These countries are all now importing cars to Australia (at 5% or some at Zero). I find it interesting that the likes of China, who are now the largest Auto producing nation on the Planet (18 million cars/trucks produced per year and growing), with the World's second largest economy, is seen as an 'emerging' player who can justify 25% Tariffs + 18% VAT !

So, we've established that in relative terms to every other Auto producing nation, we have scaled down our industry protection (and co-investment - see last week) to almost nothing…….and the net effect is that we have the most open Auto market in the world

• Did you know that more vehicle brands and models are on sale in Australia than any other country in the world (~64 brands at last count, with over 240 model variants to choose from)?

• By comparison in the USA, where they sell about 14 million cars/trucks per year (versus our 1 million), there are only 33 brands on sale! That is 14 times the amount of sales but only half the number of brands !

• 20 Years ago there were 48 brands in Australia and only 97 model variants to choose from.

So, should we just raise Tariff's?

• Well, my view is that, with the exception of cutting some slack for genuinely emerging countries, in a very small manufacturing market like Australia tariffs should al least be reciprocated (in fact, with our lack of economy of scale, there is an argument to be higher than Japan and Korea etc). That is, I have no problem scaling down to zero - as long as everyone else is doing the same. But clearly they are not. With the onset of the GFC, many nations chose to freeze their tariff positions, and in fact some (like Brazil), actually raised them to offset the effect of their high dollar. Reciprocity (except for genuine emerging countries) - you can't get fairer than that. If it is 10% + 19% VAT for us to get an Aussie car into Germany, then we should have a 29% total tariff + duty on German cars to Australia (rather than 5% today falling to 0% in 2015)……43% (25 + 18%) for Chinese cars; 10% for Japanese cars etc.

But won't this just raise the price of cars for Australians?

• NO - if you buy an Aussie made car …… and that is the point !

• YES - if you buy an imported car. However, a 5% increase in Tariff on a $35k car is a $1750 increase…….this pales into insignificance when compared to the savings that we should be getting from the Aussie dollar appreciating 40% in the last 5 years!

• The other added benefit is that a 5% increase in Tariff (back to a 10% average like most other mature Auto making countries) would raise Government revenue by ~$1.2 billion - which I'm sure we can all think of some good ways to spend.

As right and fair as I think reciprocity is, the likelihood of our Government altering the tariff path is virtually zero.

So what else can be done? Here's one that

• So ~220,000 cars in 2011 were built in Australia (140k for domestic consumption and 80k for export).

• Did you know the Governments (Federal, State and Local) + fully funded Government bodies (the likes of the ABC, Medicare, Gov't schools, Youth services…..there are literally hundreds of taxpayer fully funded departments and agencies) purchased 60,000 vehicles in 2011 (down from ~100,000 in 2004 as we tighten recent spending)

- Of these 60,000 vehicles, only 19,772 were Australian made !
- This is a disgrace!
- It costs no more to purchase a Holden Cruze than a Hyundai i30 or a Mazda 3……or a Falcon EcoLPG or Toyota Camry than a Honda Accord or a Hyundai Sonata……so it is not price.

• Local products are now just as 'Green' as any imported car - we now make LPG Falcons and Commodores, diesel Cruze and Territory, Hybrid Camry, 4 cylinder Falcon…..there is NO 'Green' excuse not to buy Australian for Government fleets.

• Why is it OK that the Mayor of Hobsons Bay (Altona - where thousands of people are employed by Toyota and many suppliers) has our taxpayer money paying for a $51,000 Saab 9-5 when he should be driving a Toyota Aurion?

• Now, there are some special purpose vehicles that we don't make here - for example, Police in the Northern Territory need full FWD capable vehicles - but let me be generous and say these special purpose cars may make up 25% of the 60,000 total procured……so ~45,000 vehicles (minimum) of the annual 60,000 purchased should be local made products.

• At 220,000 vehicles produced here, an increase in Government fleet purchase from ~20,000 cars to 45,000 cars (25,000 improvement) is an 11% improvement to our Australian production total………the industry would kill for that!

• With 60,000 people directly employed in the Australian Auto sector - about half of which are on direct production activity - an 11% improvement in volume would create about 3000 jobs!

• In analysing the data further, Federal Government procure about 44% local vehicles; The Vic and SA State Governments do a reasonable job (at ~70%). NSW, QLD and WA are poor at 32%, 20% and 17% respectively. Local Councils take the (poor) cake at 16%.

• Please get vocal about this !

Any other ideas? Yep, lot's…..but to pick out just a couple:

Safety

• Of the 1 million cars sold here in 2011, 30% (300,000) did not meet the 5-Star ANCAP safety rating.

• All Australian made cars meet the 5-Star ANCAP safety rating.

• The cost of all road accidents in Australia is estimated (by the department of infrastructure) at $18 billion/year

• Why don't we put a penalty on new cars that don't meet 5 Star - say $2500 for each star below 5…..so a 3-Star vehicle would attract a $5000 levy.

• This would discourage purchases of less safe vehicles. A 5.5% improvement in the accident costs (through prevention and/or minimising injury) would mean $1 billion of that $18 billion / year cost would be saved.

• It would also have the potential effect of shrinking the number of brands and model variants - with people moving to safer (and perhaps local) brands and models.

Gaseous Fuels

• Australia is a net importer of Petrol / Oil.

• Despite our very high dollar, making importing cheaper, Petrol this morning rose to $1.64 per litre

• Many experts are projecting by 2020, petrol in Australia will be around $6 per litre…….and being a finite and diminishing resource with increasing global demand from China and India in particular, it is not that difficult to believe that this is possible / probable.

• Australia is sitting on the 12th largest natural gas reserves in the world.

• If we converted every car to run on compressed natural gas (CNG) in Australia, with our projected population growth, we would have enough of our own current reserves to last 90 years!

• The current equivalent per litre cost is between 19 - 26 cents!

• Compared to a Petrol engine, CNG delivers 40% less CO2, 80% less CO and 90% less NO.

• It is 50% quieter than a Diesel engine

• It leads to lower maintenance

• It is lighter than air, so if spilt, is easily mixed.

• Is less likely to auto ignite (needs to be at 540 degrees C)

• In 1996, there were 1 million CNG cars in the world. In 2011 there are 14.8 million.

• Now, CNG is not LPG……LPG is derived from Oil and is liquefied (hence the 'L'). CNG is compressed natural gas and its only downside is that it takes up more space.

• Many buses in Sydney already use CNG. Cars and Taxi's in India, Brazil, Argentina, China, Iran etc are using CNG. Trains in the Napa Valley in the USA.

• So, my view is we need to get people in Australia used to using gas….the technology has come a very long way - in fact the Falcon LPG vehicle is more powerful than the Petrol variant and I would defy anyone to pick the difference in smoothness or refinement - it also costs less to run than a Mazda 3……so let's have Government offer huge incentives for gaseous fuel cars. This can be justified under the banner of 'Green', as even LPG is far cleaner than Petrol.

• I think the incentive should be (1) a $5000 rebate from Government for dedicated factory fit Gaseous fuel vehicles and (2) be FBT exempt……the net effect of these two things would provide a massive shift toward Gaseous Fuel vehicles.

• Now here's the good bit for Australian industry……the only vehicles in the 64 brands and 240 models currently sold in Australia that are dedicated factory fit Gaseous fuel are the LPG Falcon and the LPG Commodore…..Aussie made, so we get more production volume, more jobs, and a greener outcome. The cost impost to Government could be covered by the revenue generated by the safety levy or by increasing tariffs back to ~10%!

• Then we need to shift the future Government research funds toward CNG technology. Given our natural reserves, why not become a global leader in CNG technology and a niche producer of CNG vehicles - the export markets would be large.

• In my view we have to build industries and business not just around the skills and passion of the people, but around strategic benefits we have as a Country - and we are sitting on one in CNG.

So, in summary, what I think we can do to improve the situation:

(1) we need Fair Trading Terms - it can't get any fairer than reciprocal Tariff and Duty arrangements.

(2) Our tax payer funds MUST be directed towards locally produced purchases for Government fleets - especially where there is no cost impost and no longer any 'Green' rationale not to

(3) We should take a stand on Safety and not allow (relatively) unsafe vehicles to be sold here without significant penalty

(4) We need to reduce our oil dependence and use our naturally abundant resources to our advantage

And all of these smart and logical things will have an added benefit of significantly improving the health of the local Auto industry.