Toyota's hard brake was a long time coming

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While blame for Toyota’s decision to cease manufacturing cars in Australia will be directed at government and unions, the core realities that forced the decision are exactly the same as those that forced Ford and General Motors to the same conclusion.

The head of General Motors’ international division, Stefan Jacoby, summed it up best last month when he said it was impossible to build cars competitively in Australia and that no amount of government incentives could have saved GM Holden.

“Local production, even if it would be pure assembly, really doesn’t make sense. Our automotive business is driven by scale of economics, of productivity, of an efficient supply industry, of sufficient and optimised logistics. That means the automotive industry will be focused only on core markets, as it is today. Australia is just too small,” he said.

As it is with an entire industry that produces less vehicles – around 200,000 a year and falling – than some individual plants offshore.

As the carmakers have said, this is one of the most open, most fragmented, and most competitive markets for cars in the world.

It doesn’t help that other governments subsidise their industries more, or that Australian labour costs and workplace conditions – costs generally – are higher than in competitive jurisdictions, or that the Australian dollar makes exports uncompetitive.

In Toyota’s case, its inability to talk to its own employees about restructuring workplace arrangements would have been a final, frustrating straw. But the declining economics of the industry are at the core of the decision and nothing less than an ongoing blank cheque for subsidised production from taxpayers would have altered the decision announced today.

Ultimately, however, in industries involving mass production, scale is what matters.The market for Australian-made cars simply isn’t big enough to sustain local manufacture within the open market environment of this economy and against the backdrop of the changes occurring within the global industry.

With the entire market for locally-made cars less than the minimum production capacity needed to make a single plant viable, there was an inevitability about the loss of the industry.

The Productivity Commission, in its recent position paper on the auto industry, put the developments occurring within the global industry into perspective.

Globally, production capacity exceeds demand and is forcing significant rationalisation of that capacity and the shift of production to regions with low labour costs and high demand growth like China, Eastern Europe, India, Mexico and Thailand.

It is also creating "relentless” pressure on manufacturers to reduce costs and fierce competition that is holding down prices. Among the big international manufacturers their regional affiliates are themselves competing for the right to produce vehicles for global platforms.

Components makers are experiencing almost identical sets of pressures.

The dominoes in the local industry started with Ford, which will cease production in 2016.

General Motors’ decision to cease production in 2017 bore out the forecasts of former Ford global president, Jac Nasser, who said the loss of one carmaker would, because of its impact on component maker volumes and their loss of scale, flow onto the others, undermining their viability.

Toyota alone wouldn’t be able to make and sell enough cars to sustain the existing components sector, let alone improve its – and its own – competitiveness.

Toyota said today that it had done everything that it could to transform its business but the reality was that there were too many factors beyond its control that made in unviable to build cars in Australia, echoing earlier comments from Ford, General Motors and the Productivity Commission.

There will, obviously, be further bad news to come – beyond the unfortunate fate of the employees directly involved – as the impact of the withdrawal of the three companies over the next three years flows through the components sector.

Ultimately, however, it is not in the longer-term interests of the economy to try to maintain unviable industries through subsidies. It would have made no sense to continue to shower even more billions of dollars on the sector in trying to delay the inevitable.

If there is to be a large-scale future for advanced manufacturing after the carmakers are gone, it will have to be in more specialised products in which we have some form of international competitive advantage.

It is impossible to predict with any precision where that might be. The continuing evolution and progress of the Australian economy over the past three decades – despite, or more likely because of, massive and dislocative reforms like the tearing down of tariff walls and the floating of the dollar, both factors in the eventual demise of the local car industry – does suggest it is at least possible.