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Economy

Car manufacturing reaches end of the road in Australia

Free trade deals to boost agricultural exports had harsh consequences for autos

Toyota Motor ended its car making in Australia on Oct. 3. (Photo courtesy of Toyota)

SYDNEY -- Australia's near century of car making ends Oct. 20, when GM Holden wraps up production following Toyota Motor's exit on Oct.3.

It was a long time coming. The seed of the industry's demise was planted in the late 1990s, when the Australian government started actively pursuing free trade deals in an effort to boost agricultural exports.

As one of the top farming nations in the world, the strategy makes sense. But it has brought devastating consequences to the nations' car manufacturing industry.

On its last wheels

The final Australian-made Camry sedan rolled off a production line at Toyota's Altona plant last week as workers called out to each other to make it the best car they ever made. The special edition vehicle is painted with the Australian flag, an aerial view of the plant and a cityscape of Altona, a suburb of Melbourne in the southern state of Victoria.

The leading Japanese automaker began making cars in Australia in 1963. Its annual output in the country reached roughly 149,000 units in the peak year in 2007, but the figure has fallen to about 90,000 in recent years.

The end of production also means job losses for around 2,500 people, or two-thirds of Toyota's Australian workforce. Its local subsidiary will be reorganized to function as a sales company.

Ford Motor of the U.S. was the first to make cars in Australia, beginning operations back in 1925. With Japan's Nissan Motor and Mitsubishi Motors also setting up shop, Australia boasted five automakers in the early 1990s.

But one by one, the manufacturers have exited the scene. The series of free trade agreements signed by the government eliminated the economic rationale for making cars in Australia.

Victim of free trade

The country began pursuing free trade deals in the 1980s. The U.K., Australia's former colonial master, had joined the European Union in 1973, and its focus on trade shifted to the regional bloc. This created the need for Australia to cultivate new export markets for its agricultural products.

In return for getting access to foreign markets, the country had to open up its domestic market. Policies to protect its auto industry were revised, resulting in import tariffs on finished cars falling from 57.5% to 45% in 1988, then to 37.5% in 1991.

Canberra also said they would cut import duties to 15% by the year 2000. This was enough to convince Nissan to end car making in Australia and the Japanese automaker hit the exit door in 1992, but the tariffs have been reduced further, with the current figure standing at just 5%.

To make matters worse for the auto industry, the Australian government started negotiating bilateral FTAs. Following an announcement in 1997 that it would begin shifting its attention to bilateral trade agreements, the country has signed such deals with a total of 10 economies so far.

The FTA with Thailand, which came into effect in 2005, hit the Australian car industry particularly hard. Thailand was already becoming a major export hub for Japanese and U.S. automakers, when the agreement eliminated Australia's import traffic on vehicle imports from the Southeast Asian country. Car imports from Thailand surged. And Mitsubishi stopped making cars in Australia in 2008.

Lucky country?

Production costs in Australia are twice those in Europe and four times higher than those in Asia, Ford said in May 2013 upon announcing its decision to end car making in Australia in 2016. High wages are not the only cause. Powerful labor unions make it difficult for businesses in the country to adopt a flexible employment strategy.

Australia ranked 16th in the world as an auto market last year, with new-car sales reaching 1.18 million units. Since 90% of those vehicles were imported from Japan, Thailand, South Korea and other FTA signatories, consumers will hardly be affected by the end of domestic car manufacturing.

However, many have expressed concerns over the potential fallout in the job market. A government estimate shows that as many as 40,000 jobs in related industries may be impacted by the end of production by Toyota and Holden, the Australian unit of American automaker General Motors.

Despite the gloomy projection, however, the overall sentiment remains calm, because the recent unemployment figures have remained low at around 5.6%.

The jobless rate is trending down despite the demise of the car manufacturing industry, thanks to infrastructure investments in the energy and other fields, John Spoehr, a professor and director of the Australian Industrial Transformation Institute at Flinders University, said.

As the FTAs have also lifted Australia's natural resource exports, the country has gone 26 years without a single two-consecutive quarterly contraction through the April-June quarter. Such solid economic performance is another reason the Australian job market has been coping well with auto factory closures.

Wider issues

One worrying factor is the country's growing reliance on the primary industry, since it makes Australia more vulnerable to the ups and downs in the global economy.

Prime Minister Malcolm Turnbull said that several thousand jobs will be created in the defense industry in the future. But the number of workers in the manufacturing sector has been declining since 2008.

Another widely held concern is that factory closures mean more than just job losses. Years of manufacturing skills and experiences that have been accumulated in the auto industry will be lost, Dave Smith of the Australian Manufacturing Workers' Union said.

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