February 1, 2014 7:00 am JST

Australia mulls end to carmaker subsidies by 2020

KAORI TAKAHASHI, Nikkei staff writer

SYDNEY -- With Australia's tax revenue shrinking and manufacturers still fleeing, Prime Minister Tony Abbott's government is considering a proposal to cut off financial support to automakers.

     Australia offers manufacturers subsidies based on such criteria as production volume and capital spending. It has sunk 30 billion Australian dollars ($26.79 billion) into assistance to the auto industry since the measure's 1997 start.

     But a number of major automakers are still shuttering their Australian operations. General Motors unit Holden plans to halt production by 2017, and Ford will do the same in 2016.

     The Productivity Commission, a government advisory body, recommended in a report Friday that automotive subsidies be cut off by 2020 and "not be extended or replaced with other specific assistance."

     With Toyota still in the country, the agency considered continuing support but ultimately decided against it. "The commission opposes a supplementary rescue package for Toyota and component manufacturers," Deputy Chairman Mike Woods said.

     GM's departure will likely hamper Toyota's ability to procure parts locally, leading some at the Japanese carmaker to argue that it will need to bow out as well. Should the company go this route, the plant in the state of Victoria is generally expected to close around 2017, timed with a planned revamp of the Camry sedan.

A costly environment

The subsidies have done little to keep other industries here.

     Australia's policy rate of 2.5% exceeds those of Japan, Europe, and the U.S., bringing in money from around the world and strengthening the local currency. Labor costs have soared, fueled by the resource boom. Once lower than in the U.S. back in the 1990s, they were 30% higher as of 2012.

     Manufacturers unable to cope with this double whammy have moved abroad, reducing the workers in the sector by more than 5% from a decade earlier.

     U.S. food maker Kellogg will close a New South Wales snack factory by the end of this year. Anglo-Australian mining company Rio Tinto plans to cease production at an aluminum-smelting facility in the north this year. And American aluminum manufacturer Alcoa, which received government assistance in 2012, is thinking about shutting down a Victoria smeltery.

     Abbott, elected last September, advocates smaller government. When Coca-Cola Amatil subsidiary SPC Ardmona sought government support, Abbott defied public opinion and turned it down, saying the necessary restructuring should be "led by business."

     The government is working to alter the nation's industrial structure to cope with the flight of manufacturing. Industry Minister Ian Macfarlane has emphasized a shift from heavy industry to the manufacture of value-added niche products.

     The Abbott government hopes to use quality postsecondary education and the high standard of living to attract talent and build up such industries as biotechnology, materials development and high-quality food processing.

A rush to deregulate

The government is considering lowering the corporate tax rate to attract new foreign investment. It is also working to cut electricity rates, an effort centered on eliminating the carbon tax to ease the burden on energy companies.

     The government plans to present deregulation bills to Parliament in March, aiming to improve productivity and competitiveness. Arguing that previous governments introduced 21,000 new regulations in six years under Labor Party rule, it hopes to do away with an array of restrictions on business activity, such as requirements for environmental approval.

     But unemployment remains at a stubbornly lofty 5.8%. The resource boom is dying down, and growth in gross domestic product has slowed. The country has little time to wait for new industries to flourish.