The Automotive Industry
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INDUSTRY COMMISSION THE AUTOMOTIVE INDUSTRY Report No. 5 17 October 1990 Australian Government Publishing Service Canberra © Commonwealth of Australia 1990 ISBN 0 644 13696 0 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Australian Government Publishing Service. Requests and concerning reproduction and rights should be addressed to the Manager, Commonwealth Information Services, Australian Government Publishing Service, GPO BOX 84, Canberra ACT 2601. Printed by R. M. RUBIE, Commonwealth Government Printer, Canberra INDUSTRY COMMISSION 17 October 1990 Honourable P J Keating M. P. Treasurer Parliament House CANBERRA ACT 2600 Dear Treasurer In accordance with Section 7 of the Industry Commission Act 1989, we submit to you the report on the Automotive Industry. Yours faithfully A S Cole D L McBride W I Scales Chairman Commissioner Associate Commissioner COMMISSIONER Benjamin Offices, Chan Street, Belconnen ACT Australia PO BOX, Belconnen ACT 2616 Telephone: 06 264 1144 Facsimile: 06 253 1662 Acknowledgment The Commission wishes to thank those staff members who contributed to this report. IV THE AUTOMOTIVE INDUSTRY TERMS OF REFERENCE The following are the terms of reference received by the Commission on 10 May 1990. Industry Commission Act 1989 I, PAUL JOHN KEATING, in pursuance of Section 7 of the Industry Commission Act 1989, hereby: 1. refer the automotive industry to the Industry Commission for inquiry and report by 31 December 1990. The inquiry and report will cover the passenger and light commercial vehicle sectors and the component sector including both original and after market components; 2. specify that the report and recommendations will cover the assistance arrangements for the industry from 1993 to 2000 and will include any factors, including institutional, regulatory or other arrangements affecting the competitiveness of the industry; 3. without limiting the scope of the reference, request that the Commission have regard to the Government’s desire: (a) to have a viable and internationally competitive industry; (b) to provide better quality, reasonably priced vehicles to the Australian consumer; (c) to lower the level of assistance to the automotive industry; (d) to provide as far as practicable equality of assistance between the vehicle assembly industry and the component manufacturing sector; and (e) to simplify the administration of assistance arrangements for the industry; TERMS OF V REFERENCE and, in the inquiry and report, have regard to: (i) the large investment required to ensure a viable and competitive motor vehicle industry in Australia; (ii) the lead times associated with the industry and the industry’s desire for a stable planning environment and for a manageable rate of change; (iii) the cost of protection to consumers of automotive products; (iv) the importance of further rationalisation to improved efficiency and productivity within the industry; (v) the measures which enable the industry to concentrate on areas of greatest comparative advantage and to take advantage of opportunities arising from globalisation of the automotive industry; (vi) the importance of volume to achievement of further economies of scale and better capacity utilisation necessary for international competitiveness; (vii) the importance of accelerating moves by the industry toward international best practice, including but not limited to, areas of training and skills development, quality, technology employed and industrial/human resource relations; and (viii) the tooling and technology requirements of the industry. 4. specify that the Commission is to avoid duplication of recent substantive studies undertaken elsewhere. P J KEATING 10 May 1990 VI THE AUTOMOTIVE INDUSTRY ABBREVIATIONS Abbreviations used for participants are given in Appendix B. Other abbreviations used are listed below. ABS Australian Bureau of Statistics ADR Australian Design Rule AIA Automotive Industry Authority AIC Automotive Industry Council AMC Automotive Manufacturing Council ARMS Automotive Research and Marketing Services ASEAN Association of South East Asian Nations ASIC Australian Standard Industrial Classifications cbu completely built-up cif cost, insurance and freight ckd completely knocked-down CNC Computer Numerically Controlled CPI Consumer Price Index CTCS Commercial Tariff Concession System EFS Export Facilitation Scheme 4WD four-wheel drive fob free on board GDP Gross domestic Product GNP General Motors gvw gross vehicle weight IAC Industry Assistance Commission IC Industry Commission IMVP International Motor Vehicle Program JIT Just-In-Time ABBREVIATIONS VII LATA Labour Adjustment Training Arrangements LCV light commercial vehicle ldf landed duty fee ldp landed duty paid MES minimum efficient scale NIEs Newly Industrialising Economies NIEIR National Institute of Economic and Industry Research NZ New Zealand OE original equipment OECD Organisation for economic Co-operation and Development OTC Overseas Telecommunications Commission PMV passenger motor vehicle R&D research and development SCP specialist component producer TAFE Colleges of Technical and Further Education UAAI United Australian Automotive Industries UK United Kingdom USA United States of America VIII THE AUTOMOTIVE INDUSTRY CONTENTS Terms of Reference v Abbreviations vii OVERVIEW 1 SUMMARY OF RECOMMENDATIONS 7 1 THE INQUIRY 11 1.1 Background 11 1.2 The Commission’s approach 15 2 INDUSTRY AND MARKET INFORMATION 17 2.1 An international perspective 17 2.2 Domestic industry and market information 23 3 PRODUCTIVITY AND QUALITY ISSUES 29 3.1 Economies of scale and capacity utilisation 31 3.2 Tooling, product design and technology 33 3.3 Labour issues 35 3.4 Management practices 41 3.5 Quality issues 42 3.6 Conclusions 43 4 THE IMPACT OF ECONOMY-WIDE FACTORS 47 4.1 Participants’ views and experiences 47 4.2 The significance of economy-wide factors 52 CONTENTS IX 5 CURRENT ASSISTANCE ARRANGEMENTS 57 5.1 Assistance to vehicle production 57 5.2 Assistance to components 58 5.3 Export facilitation 62 5.4 Directive restructuring 70 5.5 The role of the AIA 72 5.6 Adjustment assistance for industry employees 72 5.7 General measures 73 5.8 Assistance levels for the automotive industry 73 6 ASSISTANCE ISSUES AND APPROACHES 85 6.1 Vehicle tariffs post-1992 85 6.2 Assistance arrangements for components 98 6.3 Export facilitation 105 6.4 Directive restructuring 119 6.5 Partnerships -- the Ford proposal 123 6.6 Other assistance measures 127 7 RECOMMENDATIONS 129 7.1 Post-1992 assistance framework 129 7.2 The level of assistance to the passenger vehicle industry 130 7.3 The automatic by-law entitlement 136 7.4 Export facilitation arrangements 138 7.5 Offsets 141 7.6 Industry monitoring 141 8 EFFECTS OF IMPLEMENTING THE COMMISSION’S RECOMMENDATIONS 143 8.1 Projected longer term effects on the economy 145 8.2 Projected longer term effects on the automotive industry 147 8.3 Evaluations by participants of the ORANI model projections 149 8.4 Regional effects 156 8.5 Adjustment issues 158 X THE AUTOMOTIVE INDUSTRY 9 OTHER MATTERS 163 9.1 Australian Design Rules 163 9.2 Taxation matters 165 9.3 Environmental issues 168 Appendices A Joint ministerial statement 171 B Information sources 173 C History of government policy for the automotive industry 177 D Industry and market statistics 185 E Competitiveness of the Australian automotive industry 195 F Effects of assistance reductions for the automotive industry 215 References 249 CONTENTS XI XII THE AUTOMOTIVE INDUSTRY OVERVIEW The automotive industry is one of Australia’s major manufacturing activities. The industry accounts for around five per cent of value added and nearly six per cent of employment in the manufacturing sector. Its value added represents around one per cent of Australia’s Gross Domestic Product. However, maintaining domestic passenger vehicle production -- the dominant part of the Australian automotive industry -- has required substantial government assistance. If assistance currently provided to the passenger vehicle industry by the current complex package of measures were instead provided by direct subsidies, the cost to taxpayers would be some $1.6 billion each year. This is equivalent to around $25 000 for each job in the industry and $4000 for each vehicle produced. Inflated prices for cars have been an important factor underlying stagnant demand and an ageing vehicle population over the last 15 years. And even though substantial assistance has been provided to the Australian passenger vehicle industry for more than 40 years, the industry is still a long way from being internationally competitive. Change has begun The current car plan has begun the task of winding back the industry’s very high assistance. Tariffs are being significantly reduced and quota protection and the local content scheme have been abolished. These latter mechanisms had for many years automatically increased assistance to the industry as its international competitiveness declined and thereby shielded it from the need to adjust. But there is still a long way to go. At the end of the current car plan in 1992, the passenger vehicle industry will still enjoy tariff protection more than three times greater than the manufacturing sector as a whole. And, when account is taken of extensive duty free entitlements provided under the automatic 15 per cent by-law provision and the export facilitation arrangements, this disparity with other industries is