Chapter 4
Automotive manufacturing
4.1
This chapter examines the future of automotive manufacturing in
Australia and some policy responses to ensure that as much manufacturing
capacity is retained and utilised following the cessation of vehicle production
in 2017.
Future of automotive manufacturing
4.2
As noted in chapter 2, the manufacturing industry is an important
contributor to economic growth and development. It is the fifth largest
industry employer in Australia and employed 922,400 people in February 2015, which
represented 7.8 per cent of total employment.[1]
However, this contrasts with February 1995 when the industry was the largest
employer in Australia—employing 1.08 million people and accounting for 13.4 per
cent of all employment. The level of manufacturing in Australia is set to
decline further with the cessation of passenger motor vehicle production.
4.3
Automotive manufacturing is an integral part of advanced manufacturing activities
more broadly as the technologies and skills associated with automotive manufacturing
are readily diffused into other manufacturing applications, such as defence,
aerospace materials, renewables, biopharmaceuticals and medical devices (to
name a few).
4.4
In contrast to much of the doom and gloom associated with the cessation
of motor vehicle production, the committee was pleasantly surprised to learn
that there were many businesses actively taking on the challenge of seeking new
markets and/or diversifying their manufacturing activities to improve the
viability and sustainability of their operations after 2017.
4.5
Even in a highly competitive international environment, some automotive
manufacturers have been able to secure new work. Nissan Casting Australia is an
example of one such business which exports all of its production:
What sets us apart is a drive to exceed our customers'
expectations on new project works, in regard to innovation, offer solutions to
their problems, manage the complexity, be reliable, deliver a quality product
the first time and achieve the shortest possible project-introduction
timing...Our factory has been awarded more manufacturing work, and we have not
won this based on cost.[2]
4.6
But even a successful operation like Nissan Casting Australia needs to
fill a funding gap of $1 million (of a total investment of $4 million) to
cover the capital investment required to make castings for the next generation
LEAF electric vehicle.
4.7
Some component makers have seen the writing on the wall for a number of
years and sought new applications for their processes and workforce. For
example, Mr Brian Hughes, Managing Director of Composite Materials
Engineering, described his business diversification process:
With the announcement of the decision of GM [General Motors],
which was our major customer, in December 2013 to close, we decided that we
needed to ramp up a diversification program that we had been on for a number of
years. At that time we were 70 per cent automotive...Our business is now split
through a number of industries—building around 40 per cent and autos 30
percent. We are the No. 1 in the world and we export over 30 per cent of
product—of our business and total exports—to the confectionary industry. In the
last six months we have signed all of the leading multinational and
international confectionary companies...We are making it all here in Melbourne
and exporting it...[3]
4.8
In addition to expanding its production of diodes for the global group, Robert
Bosch Australia has had some success in diversifying its engineering
activities:
We are now undertaking R&D [research and development] for
non‑automotive third parties, we have established a global centre of
competence in Melbourne for trailer safety, and we are beginning to work on the
application of automotive technologies into adjacent industries, for example
rail and marine.[4]
4.9
Indeed, the future of automotive manufacturing may not just be limited
to component production. There are a number of different organisations working
towards the establishment and manufacture of low-volume, niche motor vehicles
in Australia. For example, RED Automotive Technologies, a spin‑off from
Applidyne Australia, is seeking to build a premium off-road capable sports
utility vehicle, with an electric propulsion system that places a motor on each
wheel.[5]
Similarly, Simmonds Global is in the process of developing a detailed business
plan for the production of a specialist vehicle in Australia.[6]
4.10
Some stakeholders indicated that one of the main barriers to the
development of a niche motor vehicle is the nature and application of the
Australian Design Rules (ADRs).[7]
Tomcar Australia advised the committee that it:
...faces an incredible amount of bureaucracy and legislation
trying to get our vehicles compliant for general road use...The current ADR
scheme is expensive and limited to vehicle manufacturers who can afford to
carry the testing and crash tests on their vehicles.[8]
4.11
A number of stakeholders urged the committee to continue and increase
government support for those parts of the manufacturing industry (including
business that have diversified and new entrants) that will continue to operate
after 2017. For example, Mr Gavin Smith, President of Robert Bosch Australia,
reflecting on the experience in other countries of rebuilding automotive
manufacturing, commented that:
...don't let it all go. If it all goes it will likely never
come back. Hold onto all that can be possibly retained, because from the ashes
something can rise. If the ashes are scattered on the four winds then it is
much harder.[9]
4.12
The Australian Automotive Aftermarket Association (AAAA) noted the significant
potential for the component manufacturers supplying the aftermarket to expand
production and absorb some of the workforce if assistance was available.[10]
4.13
Given the right policy settings and incentives, there would appear to be
a relatively bright future for Australian automotive manufacturing, and
advanced manufacturing more broadly, if some of the current barriers to
investment can be overcome.
Policy settings are important
4.14
Realising the potential of the automotive manufacturing industry
requires the government to set policies that give businesses the certainty to
invest and assist them to overcome some initial challenges to realising new
opportunities. As such, the policy environment for encouraging manufacturing
and innovation more broadly is an essential element of a diverse economic base.
4.15
A number of stakeholders highlighted the interactions between policies
to support automotive manufacturing and innovation in manufacturing more
broadly, particularly advanced manufacturing. For example, the Ai Group
advocated for government policy to support innovation across a range of
manufacturing activities, not just automotive activities:
While the imperative to innovate extends well beyond
manufacturing, transformation and innovation in this industry is particularly
urgent for Australia...Australia requires a coordinated and clear government
policy, aimed at promoting opportunities for new industrial directions.
4.16
And, along with other stakeholders, Business SA highlighted the
importance of commercialisation to drive the outcomes of innovation into
tangible goods and services:
The future of advanced manufacturing will also rely heavily
on Australia's ability to increase the commercialisation of research for
industrial purposes...Enabling the auto-component supply chain to better leverage
university resources to diversify will also help provide a future beyond auto
related manufacturing.[11]
4.17
Stakeholders provided mixed reviews of the outcomes of partnerships with
universities. Mr Paul van de Loo, Technical Director of Applidyne Australia,
noted that:
Where we tend to fall over with our university engagement is
the sense of urgency and timing. In our business, we live in a very fast moving
segment, where clients come and want results even more quickly than we think is
possible. Where it would be very tempting to get a university postgraduate
student or final year project running on a particular aspect of that project,
we find that generally the timeframes preclude it.[12]
4.18
By contrast, Precision Component, a 50 per cent joint partner in the
Heliostat SA solar thermal electricity generation project, considered
their relationship with the University of South Australia to be excellent:
...the experience that Precision Components and Heliostat SA
have through research and industry collaborations is an excellent one. It is
not very common, and there should be a lot more done to support those
initiatives.[13]
4.19
The committee notes that a Senate inquiry into Australia's innovation
system is underway. The issues paper for that inquiry highlighted that collaboration
'between universities and business is firmly on the innovation agenda'.[14]
As such, the committee believes that the recommendations from the innovation
inquiry may also be relevant to automotive manufacturing.
4.20
Policy consistency was also highlighted as an important factor in encouraging
long-lived capital investment in manufacturing processes. For example, the
political stoush over the funding associated with the Automotive Transformation
Scheme has created a level of uncertainty that is not conducive to a smooth
transition. According to the Federation of Automotive Products Manufacturers:
The industry urgently needs funding certainty to maximise its
chances of charting a path to the cessation of Australian volume production without
an uncontrolled collapse of the supply chain...
As the industry operates on a just‑in‑time
basis...certainty of funding provides a fundamental cornerstone of this
requirement.
Further, with the commercial banking system employing ever
more stringent lending practices to this industry, the importance of the
certainty that ATS funding provides to the supply chain is even more important
than ever.[15]
4.21
As a relatively small part of a large multinational, Robert Bosch
Australia is largely dependent on the decisions of its international parent,
which is starting to ask questions about the policy regime in Australia:
...I am answering more questions in the last six months about
the outlook for Australia, the policy stability in Australia and the extent we
can accept the risks of investing in Australia. I was called to a
teleconference recently and asked what is going on with the legislated scheme
for automotive transformation being killed off five years early despite
activity continuing. I was asked why Australia is, up until recently, looking
to reduce spending on R&D rather than increasing it.[16]
4.22
Policy makers also need to be cognisant of possible unintended
consequences arising from assistance measures. For example, the AAAA noted that:
There is a genuine concern from our members, and other
sectors of the automotive industry, that an easy (but ineffective) option is to
simply pay the PMV [Passenger Motor Vehicle] [component] producers to diversify
into our segments. This would be the ultimate insult. To replace the dominant
paradigm of a narrow focus on PMV with a program of funding these companies to
compete against us is unfair, anticompetitive, unwise and insulting.[17]
4.23
The availability of raw materials and other inputs into the
manufacturing process is a limiting factor in the decision for many businesses
to invest in manufacturing in Australia. Many of the inputs to Australian
manufacturing are imported, despite the raw materials coming out the ground
here. Mr Gavin Smith outlined the problem well:
The case for manufacturing complex products in Australia will
fail if the components are predominantly coming from overseas. It is far more
sensible to ship in a finished product produced in a lower cost country than to
bring in all the parts and assemble it at high cost for a relatively low‑volume
domestic market.[18]
4.24
On this point, Mr Smith urged the government to 'pick winners' and make
strategic decisions about how to facilitate globally competitive conversion of
raw materials into semi-finished products that are inputs needed to support
complex manufacturing in strategic industries or sectors.[19]
Policy options to support automotive manufacturing
4.25
This section seeks to take a broad view on how government can best
support automotive manufacturing and secure the jobs that depend on it.
Automotive Transformation Scheme
(ATS)
4.26
The interim report focused on the Automotive Transformation Scheme (ATS)
which is the main government support program to the local automotive industry.
The ATS is a legislated and funded government program that requires redefining
and updating to ensure that it can continue to support local manufacturers to
grow and prosper.
4.27
In the interim report, the committee made various recommendations to
amend the ATS rules and eligibility requirements to support manufacturers to
continue to secure complex design and engineering work, and provide greater
support for diversification activities.
4.28
Stakeholders supported the committee's recommendations to redefine the
ATS and widen eligibility for support under this program. Mr Gavin Smith
outlined the opportunities of a reformed scheme:
The industry does not end because three vehicle manufacturers
leave. There are still component companies here who are doing things, who will
continue doing things and they should be supported through that period, as was
legislated. But there are also companies today that may not be eligible who
perhaps could be and they can grow, they can introduce new development and new
manufacturing with the support that that scheme could provide.[20]
4.29
The committee believes that the funding allocated to support the
automotive industry should be spent, in full, on supporting the industry and
its constituent businesses. It is disappointing that the government continues
to shirk its responsibility to the sector and refuses to support local
manufacturing by widening the eligibility criteria for the ATS. As such, the
committee reiterates its support for Recommendations 2 to 5 from the interim
report and calls on the government to implement them as a priority.
Automotive Diversification Programme
(ADP)
4.30
The Automotive Diversification Programme (ADP) is a $20 million
programme that provides grants to assist Australian automotive supply chain
companies to diversify out of the domestic automotive manufacturing sector. The
ADP is planned to run for four years, commencing in the 2014–15 financial year
and has $20 million in funding, including $18 million in competitive
merit-based grants.[21]
4.31
The Federation of Automotive Products Manufacturers (FAPM) raised a
number of concerns about the operation of the ADP. It was concerned that
funding constraints may lead to high merit projects not receiving the funding
needed. Funding could be sourced from reallocating some of the projected
underspend from the ATS.[22]
4.32
FAPM was also concerned that a number of activities essential to a
successful diversification process—such as research and development,
commercialisation, feasibility studies, site relocation and/or site
consolidation, and marketing activities—are not rewarded through the ADP.[23]
4.33
A number of stakeholders noted the significant costs associated with
building export markets. For example, Mr Hughes indicated that Composite
Materials Engineering invested significantly to establish the market supplying
confectionary businesses:
In relation to exporting and finding a new market... you do not
just wake up and find it. You have to actually invest in the time to go and do
it...To create that market we put a guy into Europe last year for six months,
full‑time. We covered every bill and we spent just under $100,000 because
we needed the work.[24]
4.34
Recognising the significant costs associated with establishing export
markets, FAPM also called for funding under the ADP to be available for the
appointment of export and marketing managers on a 50:50 basis.[25]
4.35
The committee considers that the ADP is an important support initiative
for component suppliers to diversify. Refinements to the ADP, in conjunction
with the recommendations previously proposed to the ATS, would better assist
the industry transition.
Recommendation 16
4.36
Subject to any changes to the Automotive Transformation Scheme after
2017 and providing no existing registered companies are adversely affected by
changes to the scheme, the committee recommends that a proportion of the
funding available under that Automotive Transformation Scheme (for example,
from underspends in the scheme) be allocated to manufacturing diversification
programs such as the Automotive Diversification Programme.
Recommendation 17
4.37
The committee recommends that the activities eligible for assistance
under the Automotive Diversification Programme be expanded to include support
for research and development, engineering and product development,
commercialisation, feasibility studies, site relocation and/or consolidation
activities and marketing activities. In particular, the committee recommends
that grants for the appointment of export managers plus on-costs on 50:50
matched basis be included as an eligible activity under the Automotive
Diversification Programme.
Retaining engineering and
development skills
4.38
The retention of core skills and capabilities, particularly engineering
and product development, is essential if Australia is to maintain and grow its
manufacturing activities. Crucial to this is the ability to transform ideas into
tangible outcomes. Traditionally, however, Australia has not been successful at
doing this as described by Mr Smith:
We do lots of good research but we are no good at
commercialising it.[26]
4.39
Recognising this problem, FAPM proposed an approach based on the German Fraunhofer
method of application‑oriented research as a way to increase the
collaboration between research and development centres (including universities)
and industry. According to FAPM:
This concept involves utilising the core knowledge and skills
of displaced (or soon to be displaced) automotive engineering and purchasing
staff to identify opportunities and build business cases for new product
development. This process is designed to provide SMEs [small and medium
enterprises] with access to skills and know-how previously beyond their reach.[27]
4.40
These specialist skills are expensive to develop and maintain, and
retaining and redirecting them wisely could be considered a prudent investment
in Australia's manufacturing sector. The proposal is to establish a mechanism
by which opportunities for engineering services or componentry supply suitable
for the Australian industry can be identified and fostered. Industry Growth
Centres, especially the Advanced Manufacturing Growth Centre, would be well
placed to support such a model for industry and research and development
collaboration.[28]
4.41
The proposal would address two pressing policy objectives:
-
the efficient identification of diversification opportunities;
and
-
support to preserve, nurture and grow the high‑end
engineering capability of the Australian automotive industry.
4.42
The committee agrees that there is merit in exploring alternative
options for improving links between automotive manufacturing businesses and
research and development organisations. It also acknowledges that this issue
should be considered in conjunction with the recommendations from the broader
inquiry into Australia's innovation system.
Affected regions may need
additional support
4.43
The Australian and Victorian Governments have provided some targeted
support for the regions most heavily affected by the closure of local vehicle
production, most notably in North Melbourne and Geelong. Some stakeholders
argued for more government assistance to support affected regions to manage the
transition.
4.44
The South Australian Government noted the concentration of automotive
manufacturing in the northern suburbs of Adelaide and the relative disadvantage
this region already experiences. As the closure of GM Holden effectively
represents the closure of an entire industry in the region, affected workers
are likely to have great difficulty being absorbed by the labour market.
4.45
The South Australian Government is in the process of developing a
Northern Economic Plan to build on existing strategies to build the South
Australian economy and create employment. In their submission, the South
Australian Government concluded that:
Northern Adelaide requires a coordinated and collaborative
approach across all levels of government, the community and industry to adjust
and recover from the closure of the automotive industry.
The South Australian Government recommends that the
Commonwealth Government [use] unspent ATS funds to establish a targeted
Commonwealth Government structural adjustment program in consultation with the
State and Local Government and local communities, which would focus on the
hardest hit areas such as northern Adelaide.[29]
4.46
Further, LeadWest submitted that Melbourne's west will be significantly
affected by the exit of Toyota Australia's Altona manufacturing plant but, as
yet, this region has not been supported like neighbouring regions, such as
Melbourne's north and Geelong.[30]
4.47
In order to ameliorate the effects of the local vehicle manufacturing
ceasing, it may be necessary for governments to evaluate whether further
targeted regional assistance programs are required.
Aftermarket testing facility
4.48
In addition to providing direct industry assistance, the AAAA put
forward a proposal for an 'Automotive Aftermarket Lab' to support the
maintenance and growth of automotive engineering and research and development
activities. The Lab would assist aftermarket manufacturers to reduce product
development costs and time to market.[31]
4.49
The Automotive Aftermarket Lab would be modelled on an existing facility
in the US, the Specialty Equipment Market Association (SEMA) Garage. This
facility provides access to the high-tech tools and equipment required to take
products from initial concept through to product launch, and has facilities for
aftermarket‑part certification.[32]
4.50
The AAAA noted that most testing of Australian components occurs in the
US and Europe as there is no such facility in Australia.[33]
4.51
Various stakeholders, including component manufacturers and motorsport
workshops, indicated that they would be interested in utilising an Automotive
Aftermarket Lab if it were available. Mr Peter Langworthy, Managing Director of
Dana Australia, reflected on a recent development experience:
Certainly an entity such as this would provide a forum for
companies like ours, at an efficient cost, to go in and develop products
specifically for local and imported vehicles. We would certainly utilise it
greatly.[34]
4.52
While the committee can see the potential benefits from establishing a
specialised Automotive Aftermarket Lab, it considers that the development of
such as facility should be developed and funded by the industry itself.
Enhancing truck manufacturing
4.53
Automotive manufacturing extends beyond the production of cars and
automotive components. Australia has a robust and sustainable truck
manufacturing industry with three local manufacturers building just over 5,100
cab chassis in 2014. These trucks are not merely assembled in Australia but
manufactured, as the local content, by value, exceeds the imported content.
This local content is designed and tested specifically for Australian
conditions.[35]
4.54
Unlike high volume car manufacturing, truck production lines are less
automated and allow for a high degree of customisation to suit the end task of
the vehicle. According to the Truck Industry Council,
...a heavy truck plan can be profitable when production levels
are in the order of 1,000 units per annum, with each unit value (retail cost)
averaging more than $150,000.[36]
4.55
In addition, at least a further 29,000 trucks sold each year require
second stage modification to supply ancillary equipment and complete their
on-road configuration. There are hundreds of second-stage manufacturing
companies—from major trailer manufacturers and tanker builders to the smaller
companies making everything from specialist bodies to hydraulic for tippers and
garbage collectors.[37]
4.56
And the truck manufacturing industry has prospered without government
assistance for at least 3 decades.[38]
4.57
Recognising the need to expand manufacturing activity in Australia, the
Truck Industry Council (TIC) put forward a proposal to modernise Australia's
truck fleet:
The Truck Industry Council proposes a policy option that
could be considered to ensure Australia's future capacity to engage in advanced
manufacturing, while at the same time modernising Australia's truck fleet,
making the fleet safer, cleaner and greener.[39]
4.58
The TIC highlighted that around 30 per cent of the truck fleet, or some
175,000 trucks were manufactured before 1996 and, as a result, predate any
Australian exhaust emission laws or regulations. Indeed, it would take 60 of
today's trucks to equal the exhaust emissions of one pre-1996 truck.[40]
4.59
To achieve this, the TIC proposed the provision of investment allowances
to accelerate the adoption (and local manufacture) of new trucks that are
compliant with current emissions standards (that is, ADR 80/03 based on Euro 5
standards).[41]
4.60
The TIC acknowledged that these incentives would have to be funded and
proposes that a reprioritisation of the fuel tax credit rebate would fund much,
if not all, of the investment proposal. Currently, the fuel tax credit rebate
is payable to all on-highway truck operators, irrespective of the emissions
standard of the truck. There would also be substantial benefits arising from
avoided health costs, avoided fatalities, reductions in emissions and direct
savings by operators.[42]
4.61
As the demand for trucks would increase, the TIC estimates that:
Such a measure could reasonably lead to an additional 3,300
trucks being manufactured here in Australia each year for the next five years
and a 66 per cent increase in local production, providing a valuable
stimulus to Australia's automotive industry.[43]
4.62
Noting that not all operators would be in a position to invest in new
trucks, the TIC also proposed a scheme whereby a smaller investment allowance
could be provided to operators which upgraded fleets through the purchase of
used trucks that meet less onerous emissions standards (such as Euro 3 or 4
standards).[44]
4.63
Subject to further evaluation, the committee supports the proposal by
the TIC to modernise Australia's truck fleet. It is attracted by the broad
array of benefits across a variety of areas and by the redirection of existing
funding.
Recommendation 18
4.64
The committee recommends that the government undertake a feasibility
study of the proposal put forward by the Truck Industry Council to modernise
Australia's truck fleet. Pending a favourable evaluation, government should
seek to implement this proposal as a matter of priority to assist the
automotive manufacturing industry to adjust to cessation of passenger motor
vehicle production in 2017 and as part of the broader reform agenda to reduce
carbon emissions.
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