The Productivity Commission Reveals Why Australian Car Manufacturing Has Collapsed

Employee parking at Holden’s Elizabeth manufacturing facility / Getty

The Productivity Commission has blamed high labour costs and low production volumes for the Australian car manufacturing industry’s collapse, in a preliminary report commissioned by the Coalition Government in October.

Treasurer Joe Hockey initially asked for preliminary findings today and a final report by 31 March, to inform negotiations between the Government, Holden and Toyota about industry subsidies.

But the report comes days too late for Holden, which last Wednesday announced plans to stop making and assembling cars in the country by 2017, putting almost 3,000 Australians out of work.

From the Productivity Commission’s preliminary report, here’s why local car makers have suffered:

Limited economies of scale

Car manufacturing plants need to produce 200,000 to 300,000 cars a year to be cost competitive. Australia produced a total of 200,000 units in 2012.

Toyota Australia told the commission that it aimed to break even by producing 80,000 vehicles in Australia a year. In 2012, Holden produced just over 80,000 vehicles while Ford produced fewer than 40,000 vehicles.

High labour costs

Despite new wage agreements, like what Toyota now wants to negotiate, Australian car makers just can't bring labour costs down to the levels of those in China and Thailand.

Holden and Ford told the commission that making cars in Australia costs two times more than in Europe and four times more than in Asia.

According to Holden, it costs $3,750 more to build a car in Australian than in other General Motors plants. That includes about $1,600 in labour costs.

No manufacturing clusters

Car assembly plants tend to be located in low-cost clusters. In the US, that's Michigan and the south; in the EU, it's in eastern Europe; and in Asia, that's China, India and Thailand.

The Productivity Commission notes that related businesses, like component suppliers, have been merging in recent years and major suppliers have moved to be closer to major car-making clusters.

Australian car makers incur higher import costs when their major component makers are located offshore. Of Holden's $3,750 cost gap, $1,500 was attributed to higher cost local components and $250 to logistics costs for imported components.

Fragmented demand locally

Australia accounted for just over 0.25% of global car production that year, with about 40% of the locally assembled units exported. Meanwhile, Australian demand for cars accounted for 1.4% of world sales.

That means that Australians are buying cars - just not the six models assembled onshore. ABS statistics have shown a growing preference for small cars and SUVs in Australia, but of the locally made models, only the Holden Cruze is a small car and the Ford Territory is an SUV.

A high dollar driving exports down

Australian car makers primary export markets are Saudi Arabia, New Zealand and the US, but export volumes have fallen sharply in the past 10 years.

The industry highlighted the high AUD as a key issue, with the dollar rising about 42% in trade-weighted terms between 2000 and 2013.

Further, the Productivity Commission found that demand in a number of developed economies had been slow to rebound from the GFC, and many assembly plants globally were operating below capacity.

Now read: These 10 Charts On The Australian Car Industry Show Why Holden Was Doomed

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