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Apr 4, 2013

Car subsidy sums: should Australia just keep Holden on?

Holden claims it's giving back billions in "spill-over" benefits for the economy in return for its government subsidies. Does this stack up? And is it a good use of taxpayers' money?

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Over the past 12 years, General Motors Holden pocketed $2.2 billion in federal government handouts. The figures, released by Holden following a legal tussle to prevent the publication of confidential documents about subsidies accidentally released to The Australian Financial Review, work out to around $150 million a year. Last year, Holden Australia made a profit of $87 million — about half the average amount it receives in subsidies each year.

Holden says the figures demonstrate its ongoing value to the Australian economy. The company defends the subsidies, providing figures that show it has spent $32.7 billion in Australia over the 12 years, including $5.9 billion on wages. The largest portion of Holden’s investment in the country is its spend on suppliers of $21 billion over 12 years, suggesting many smaller Australian companies have benefited from taxpayers’ largesse. Company chairman Mike Devereux said:

“For the $150 million a year, you get $2.7 billion of economic activity generated by having Holden make things in this country. It is 18 times the investment.”

Does this $32.7 billion in investment mean the government got its money’s worth? Most Australian economists don’t buy it. Sinclair Davidson, an economist at RMIT, says Holden’s analysis “doesn’t make sense when you drill down into it”.

“That $2.2 billion is being taken away from Australian taxpayers,” he told Crikey. “It’s not like those taxpayers are getting back $32 billion. You’d have to look at how much tax revenue the government raises from Holden. Also, if they’re investing back that $32 billion that they’re claiming, it begs the question of why they need that $2 billion in the first place?”

Read the pronouncements of some of our biggest economists, or newspaper editorials, and there’s widespread concern about the huge sums doled out to Australia’s perennially struggling automobile industry. The Productivity Commission doesn’t like it. The Coalition plans to cut subsidies, causing Devereux to describe 2013 as “the year that Australia decides whether it wants to have a car industry or not”.

But there are a few voices of dissent, and in recent months they’ve been increasingly vocal. One of those voices is Philip Toner. He’s a senior research fellow at the University of Sydney and has spent years studying the role that manufacturing plays in broader economic development. He says every country in the world that produces cars heavily subsidises the industry. The orthodox response is because auto companies are particularly skilled at rent-seeking, the dark art of wheedling money out of governments contrary to the public interest.

“But to my way of thinking,” Toner said, “that begs the question: why are governments the world over so open to rent-seeking approaches from this industry, and not others?”

“Australia is not a high-tech country. It’s a low-to-medium tech country. We can’t afford to lose medium-tech industries such as the motor vehicle industry.”

The reason governments around the world subsidise automobile industries has little to do with political clout or saving Australian jobs, Toner says. Rather, subsidies are about what economists call “spill-over effects” — all the external benefits having a particular industry in a country does for the economy.

“Automotive manufacturing is unique in terms of the number of industries it draws upon. It needs a variety of really advanced services and products, and needs huge volumes of them … Car manufacturers aren’t really manufacturers. Rather, they’re assemblers. The only things they don’t typically outsource are the engines and the designers,” he said. Toner reels off some of the technologies used in automotive manufacturing: various types of ceramics, advanced alloys, carbon composites, electronics, rubbers, plastics, paints, advanced technical skills, logistics and ordering systems.

“All these technologies are applied in other industries,” Toner said. “When you look at manufacturing in Australia, there are five key industries — minerals processing, food processing, construction, defence, and the auto sector. They’re the major nodes. The one that has the greatest degree of import competition, and the one that tends to be the most efficient, is the auto sector. Australia is not a high-tech country. It’s a low-to-medium tech country. We can’t afford to lose medium-tech industries such as the motor vehicle industry. We don’t have much else.”

So how much do we gain from supporting the car companies? “There’s been a vast number of academic and management consultant studies that try to quantify the spill-over effects. These include direct demand effects, multiplier effects, second-round effects and all that. And there’s also the intellectual spill-overs — of knowledge and the like. It’s extremely difficult to quantify. But typically, governments are convinced these spill-over effects are real and substantial,” Torner said.

Toner cautions he’s not advocating the government writes car companies a blank cheque. “Australia could be screwing the car companies a bit harder for the support it does provide, in terms of technology transfer, for example,” he said.

What does Toner think of Holden’s argument it gives back $32 billion in investment for just $2 billion in subsidies? “Well, it’s hardly ‘an investment’ is it, just a cost [of doing business]. Nonetheless, I can’t see anything wrong with the underlying logic. Devereux is fantastic about this — he’s really upfront, and says, ‘Listen, there’s global competition for this industry among Asian states. If you don’t want it, somebody else will, and these are the benefits they will gain, and these are the losses Australia will incur’.”

*This article was first published at SmartCompany

Myriam Robin — Media Reporter

Myriam Robin

Media Reporter

Myriam has been Crikey’s media reporter since 2014. Before that, she was a business journalist with sister site SmartCompany, covering economics and corporate strategy.

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4 comments

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4 thoughts on “Car subsidy sums: should Australia just keep Holden on?

  1. Sanjay

    Thailand has a free trade agreement with Australia and every asian auto maker is using this to setup low cost and tax free plants there. This is a gift to the asian auto makers, so if we want to have a local industry which employs mainly first generation unskilled migrants, we need to keep this payoff going. How I dont know

  2. Kevin Tyerman

    Quote:”Over the past 12 years, General Motors Holden pocketed $2.2 billion in federal government handouts. The figures, released by Holden following a legal tussle to prevent the publication of confidential documents about subsidies accidentally released to The Australian Financial Review, work out to around $150 million a year.

    Which figure is wrong? If it is $2.2 billion over 12 years, the average works out to a bit over $183 million a year…. which would put last year’s profit less than half the average.

  3. Pedantic, Balwyn

    Why not indeed? If the Government of the day can hand out $2 billion per year to the rent seeking mining industry in diesel subsidies, and a lot more in tax breaks for development, bearing in mind that 80%+ of that industry is owned overseas, why not spare a few bob for GM, Ford and Toyota? However there are other options such as increasing the import duties on imported vehicles, especially SUVs at 5%, and give the local manufactured product a fighting chance to increase sales, without us taxpayers contributing a cent.

  4. klewso

    Why not? Look to what tune Howard subsidised the US armaments industry a la the purchase of those “F35’s”?

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