Collapse of Australian car manufacturing will harm R D in other sectors: study
- Written by Abbas Valadkhani, Professor of Economics, Swinburne University of Technology
By the end of next year, car manufacturers Mitsubishi, Ford, Holden and Toyota will all have largely exited Australian manufacturing, taking their assembly lines overseas where the cost of production is significantly lower. This will create a vacuum for 260 businesses that supply accessories and components to the Australian automotive sector.
But beyond the direct impact to suppliers, our research shows there will be a significant impact on output and tens of thousands of job losses in downstream and upstream industries, and in particular, the Professional, Scientific and Technical Services (PSTS) sector. This sector, defined by the Australian Bureau of Statistics, currently employs more than one million people, or around 8.5% of the total workforce.
There are several reasons for the closure of Australia’s car manufacturing industry. The Australian market is too small and the industry cannot fully exploit economies of scale. To remain solvent they have no choice but to use cheaper foreign production inputs including both labour and parts. The domestic market conditions in Australia has become untenable with a) the lowering of import tariffs and the signing of Free Trade Agreements; b) higher wages and better work conditions demanded by the unions; and c) the appreciation of the Australian dollar. It is very difficult to compete when labour costs in some Asian countries are only one-fourth of that of Australia.
But the car manufacturing industry does not operate in isolation. In 2009-2010 there were approximately 73,772 full-time employees in the motor vehicle industry (which includes the production of other transport equipment as well as parts), producing a total gross output of approximately A$20 billion. The output and employment multipliers in this industry are two and seven respectively, suggesting that $1 million in additional final demand can directly and indirectly generate $2 million extra output and seven jobs in the economy.
Importantly, the collapse of the motor vehicle industry could adversely impact the viability of the PSTS industry. This industry provides services in scientific research, architecture, engineering, computer systems design, law, accounting, advertising, market research, management and other consultancy, veterinary science and professional photography. Scientists in this sector, including CSIRO staff, are mainly involved in R&D activities.
Depending on the extent of sectoral linkages, the number of resulting full-time job losses varies across industries. Assuming the closure of the entire car industry, Figure 1 shows the number of job losses in ten of the hardest-hit sectors. Many of these workers may have already found employment in other related industries, but this data serves to illustrate the way different sectors are impacted.
Authors: Abbas Valadkhani, Professor of Economics, Swinburne University of Technology