Manufacturing News

OPINION: The dollar has been a game changer for the auto industry

No-one should be surprised by what’s happening in the auto industry. Ai Group has been warning for some time about the pressures on domestic manufacturing from the high dollar and the auto industry is at the pointy end of these impacts.

Against the US dollar, the Australian dollar is at post-float highs and more than 40% higher than its post-float average of 73.5 US cents while the trade weighted index is currently almost 30% above its post-float average.  

The shift to the high-value currency has meant that, in a relatively short time period, Australia has become a high-cost country. On a comparative basis, Australian costs rise as our currency appreciates. This erodes margins for local exporters and makes competing against imports more difficult. 

The higher dollar also makes it more expensive to invest in Australia compared with other countries and local branches of global companies are finding it more difficult to argue the case for investing in Australian facilities.  

While the strength of the local currency is at the centre of the changed game, the challenges for the local automotive industry are not confined to the dollar. Exporting is made more difficult by tariff and non-tariff barriers in other countries. Domestic demand has been relatively sluggish for a number of years and our market is characterised by a huge number of mostly imported models.

Other factors compound these challenges. Productivity growth across the economy has been slow for over a decade. Energy prices are rising sharply and carbon pricing is set to add a new layer to these costs. Workplace agreements are becoming less flexible to the extent that changes need to be made to the Fair Work Act. 

Notwithstanding these challenges, the car makers remain committed to producing in Australia and they are continuing to invest in new plant and industry-leading product innovation. 

The car makers have very important links into the extensive network of automotive component suppliers found in Australia’s manufacturing heartland.  Car makers and the broader automotive supply chain invest heavily in domestic R&D and the benefits of this spill over to a wide range of other producers and other industries. 

Car makers make a very sizable contribution to workforce and management training in Australia and managers, engineers and tradespeople trained in the auto sector are found right across the economy. They apply the expertise picked up in the car industry to lift productivity and improve processes in a very wide range of other industries. These widespread benefits would be called into the question in the absence of a domestic auto sector. 

It is very important that Australia builds a long-term future for the auto industry and that this is done in a careful, systematic and forward-looking way and not merely as a knee-jerk reaction to latest developments. 

A central difficulty in shaping the long-term future of the local industry is the level of government support of one form or another available in just about every country with a local car industry. Alongside global automotive subsidies put at close to $50 billion, the level of assistance received by local car makers is relatively small. 

Nevertheless, it would be naive to think that domestic auto makers could survive a sudden withdrawal of government involvement in the industry. 

The challenge for Australia is to put in place a sensible long-term strategy that allows the car industry to work through the variety of challenges it currently faces – and in particular the threat to competitiveness presented by the strong Australian dollar. This approach should be complemented by a range of policy adjustments to lift national productivity.

The objective should be to build areas of global competitiveness in the auto industry so that this critical industry continues to play the pivotal role it has played for so long in generating widespread benefits across the manufacturing sector and, indeed, across the broader economy.

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