Only sentimentalism could have saved the Australian car industry

There is much wailing and gnashing of teeth over the news that Toyota will follow its fellow foreign-owned carmakers GM Holden, Ford and Mitsubishi in ending car assembly in Australia. But at least from an economic point of view, there shouldn’t be.

The basic problem for the Australian car industry has nothing to do with unions or pay rates, despite the government’s outrageous lies to the contrary. It’s far simpler than that. Australia is a country of 23 million people, with a new car market of just under a million a year, while car manufacturing is an industry with massive economies of scale where the most efficient factories have annual production levels of more than half a million a year.

Less than half as many cars per worker…

Nissan Motor Manufacturing UK in Sunderland, which is famed for being one of the most productive plants worldwide, is about to increase production from 500,000 to more than 550,000. To knock out those half a million cars, NMMUK employs 6,000 people, and supports around 23,000 jobs in the UK supply chain. So that’s about 80 cars per worker (labour is not the whole story, but it’s a tolerable proxy, and accurate job data is easier to find than full input cost data at plant level).

Toyota Australia employs 2,500 people to produce 100,000 cars year, which is about 40 cars per worker. In the rest of the industry (as of now-ish, before Ford and Holden begin their shutdown), Holden employs 2,900, and Ford employs 1200. So carmaking in Australia employs 6600 people directly, for a total of 220,000 cars per year, or about 33 cars per worker (as you might have expected, Holden and Ford are less efficient than Toyota).

Scaling the supply chain in line with NMMUK employment (i.e. assuming Australian suppliers are as inefficient as Australian carmakers) would suggest that about 25,000 supply jobs will be lost when the Australian industry shuts down. Scaling it in line with Nissan output (i.e. assuming Australian suppliers are just as efficient as UK suppliers), you’d assume about 10,000 jobs will be lost.

…and 21,000 jobs, not hundreds of thousands

Data from IBISWorld suggests the actual number of jobs in the industry at risk is about 15,000, somewhere in the middle. So the total number of job losses when the car industry shuts down, including knock-on effects, will be about 21,000 [*]. This is roughly equivalent to the number of public servant jobs the federal government is currently cutting.

(the number of Australians in employment is 11.6 million, as of December 2013; the number of unemployed Australians is 716,000).

These 21,000 jobs are being lost because the Australian car market isn’t large enough to support an efficient domestic carmaking industry, even if every single car Australians bought were manufactured domestically. A large, remote, resource-rich and wealthy island of 23 million people has more productive uses of time and resources than subsidising industries that require greater scale than can possibly be achieved domestically, and where we’ve never excelled at exporting. Economically speaking, we would do better to buy new cars from South Korea, import second-hand cars from Japan, redirect the labour and capital involved towards things we are good at, and spend the subsidy money on things that we actually need.

But whence will come the V8 Supercars of the future?

Economics isn’t the whole story. It’s possible that having a carmaking industry is so important to Australia’s wider culture and self-image that it is worth protecting, whether by direct taxpayer subsidy or by higher import tariffs (which are a tax on everyone who buys a car, whether it is domestic or foreign-made). If Australia agrees as a society that this is the case, then continuing to subsidise carmaking is a completely legitimate decision – just as is the case for the large subsidies that go to farmers.

But if you think that the car industry has closed because wage rates are too high, you are wrong, and you believe the toxic bullshit the Liberals are seeking to peddle in order to erode everyone’s employment conditions. If you think that the decision to stop subsidising inefficient lossmaking industries will cost Australia money, you are wrong, and you believe the economically illiterate bullshit Labor is seeking to peddle in order to bash the Liberals. The only grounds on which to support a domestic car industry are sentimental grounds.

[*] Wider estimates of up to 200,000 job losses have been published in various ‘newspapers’. These are lies.