Mr

Paper

presented

to the

Federal Chamber of Automotive Industries (FCAI)

Annual General Meeting

by

Stephen Smith MP

Member for Perth

Shadow Minister for Industry, Infrastructure and Industrial Relations

Wednesday 29 March 2006

Canberra

Introduction

Thank you for the opportunity to speak with you today.

I find it invaluable to both listen to and engage with representatives of Australian industry, particularly in an area as prominent and important as the automotive industry.

It is no secret that as a nation over the last 15 years we have enjoyed some of our best economic times.

However this strong performance has not been experienced throughout all parts of the economy.

Put simply, the favourable prices we receive for our commodities and resources are effectively sustaining the Australian economy.

China has been the key to delivering these historically high commodity prices and historically favourable terms of trade. It has also been a key factor in our declining manufacturing performance over the past decade, hand in hand with the complacency of the Howard / Costello Government.

Over the past 30 years manufacturing has been slowly declining as a proportion of GDP from 19 per cent in 1975 to less than 12 per cent today.

Comments earlier this month, at the Geneva Motor Show, from Bob Lutz, General Motor's head of global product development, emphasise the precarious nature of Australian manufacturing and the Government's complacency,

"I'll tell you the Australian manufacturing industry is in a difficult situation right now, if the Government doesn't do something about itÐ'...then I'm not sure what's going to happen. The Australian market really is at risk."

This has obvious ramifications in the automotive sector, many of which are being felt today.

The Global Automotive Picture

Over the last 20 years, the global automotive industry has experienced a frenetic pace of consolidation that has seen: General Motors (GM) takeover Saab and Daewoo, and take stakes in Isuzu, Subaru and Suzuki in Japan; Ford has taken over Jaguar, Aston Martin, Land Rover and Volvo, while also buying heavily into Mazda.

Today, the top five automotive conglomerates account for about 75 per cent of the global market, with the top ten accounting for 90 per cent, and producers in China, India and Malaysia making up the rest.

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Previously, the primary drivers underlying this industry consolidation were access to global markets and the ability of volume to achieve economies of scale. This was predicated on a business model of producing large numbers of relatively few vehicle models.

Increasingly, however, the industry appears to be shifting to a model based on lower volumes of a number of standardised vehicle derivatives. This Ð''platform engineering', seeks to create niches out of common platforms. Such changes have been driven by consumer demand for a wider range of vehicle types and the increased cost of product development.

During the 1990s, cost pressures also drove major rationalisation in the components industry, with the total number of component suppliers world-wide falling from 30,000 to just 8,000. Like the car makers, this consolidation has seen the emergence of larger players with greater global coverage.

As a result of these changes in location and structure, the automotive industry has become increasingly globalised. As well, there is little sign of pressure abating because of significant excess capacity in much of the global automotive industry. This will only be exacerbated by the continuing construction of production facilities in emerging vehicle markets.

As a consequence, industry profitability remains under acute and constant pressure. According to The Economist, the return on capital achieved by US car makers as a group during the 1990s was less than 3 per cent. Margins have been similarly squeezed in component and tooling activity. In 2000, the aggregate return on global sales by automotive suppliers was also in the order of only 3 per cent.

More recently, in the face of declining sales, both GM and Ford in the United States have announced significant full year losses and as a consequence, initiated massive restructuring initiatives.

Just last week, General Motors and its parts supplier Delphi sent a shockwave through the automotive industry with the offer of retirement and severance packages to all of its 130,000 blue-collar workforce. According to reports in the American press at the weekend, GM is also considering a rationalisation of its professional employees.

In the United States, GM is not alone in implementing such measures. Ford has also stated plans to eliminate approximately 30,000 jobs by 2012.

Meanwhile, in Europe, Volkswagen has announced that it will lay off 20,000 workers over the next three years, representing about 20 per cent of the German carmaker's entire labour force.

Put simply, the problem for carmakers in these traditional, mature markets has been related to issues surrounding domestic product competitiveness which has led to, too many vehicles chasing too few customers.

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The Australian Scene

Like the global industry, Australia has undergone major changes in recent years. There has been significant rationalisation of production in all segments of the industry. Productivity and quality levels have increased and innovation has become an important contributor to improved industry performance.

A central outcome of this improved performance has been strong growth in Australia's automotive exports. This was not always so, with the industry previously almost exclusively oriented to supplying the domestic market.

By the latter part of the 1970s, with protection rates at almost 58 per cent, the automotive industry had become entrenched as one of Australia's most highly protected and uncompetitive industries, supported by a complex package of measures which automatically provided increased assistance when the industry's