Scrap LCT and allow more grey-imports, says PC

Cars will be cheaper in Australia if the green light is given to two key recommendations announced by the government-appointed Productivity Commission today.

In its 326-page report on Australia's automotive industry, the Productivity Commission (PC) has recommended the controversial luxury car tax (LCT) be scrapped and laws restricting second-hand overseas (grey) imports be relaxed.

The PC was originally tasked with looking at all aspects of Australian automotive manufacturing, but changed its terms of reference after all three local manufacturers (Ford, Holden and Toyota) announced they will cease manufacturing by 2017.

It noted that up to "40,000 people may lose their jobs as a result of the closure of the motor vehicle manufacturing plants and the rationalisation of firms in the supply chain" but said it was "not feasible to make a precise upper bound estimate of the number of people who may lose their jobs" in the wider manufacturing industries.

Significantly, as a result, the PC has recommended that all federal and state automotive industry assistance (including taxpayer-funded subsidies for car-makers and component suppliers) be abolished – but only after the last Australian-made Commodores, Cruzes and Camrys roll off the production line in 2017.

"The Commission has considered a range of options for assistance to firms that manufacture components, including extending the Automotive New Markets Program (AMNP) and altering the design of the Automotive Transformation Scheme (ATS), but has not been able to identify an option that it considers would have net benefits to the community," said the PC report.

"In the case of the ANMP, while it is too early to fully evaluate its performance, there is little convincing evidence of additionality of investment being generated by the scheme, nor of the assisted businesses being likely to achieve longer term sustainability.

“Other reviews of assistance schemes in Australia have also raised concerns over the additionality, and thus the net benefits, generated by such schemes.

“Accordingly, the Commission considers that, on balance, the provision of industry-specific assistance to component manufacturing firms, beyond that already committed to the end of 2017, would not result in net benefits to the community.

“More generally, governments should not provide any further ongoing or ad hoc assistance, including capital subsidies, to firms in the automotive manufacturing industry beyond that already committed.”

In its mid-year economic forecast, the federal government proposed cutting $500 million from the Automotive Transformation Scheme each year between 2015 and 2017, reducing the fund's total coffers by more than half between now and 2020.

Senior industry figures have warned that although Ford is committed to manufacturing the Falcon and Territory until October 2016 (and Toyota and Holden have promised to keep building cars until 2017), cutting government subsidies before 2017 would put in jeopardy many already-struggling parts makers, potentially accelerating the demise of Australia's car-making industry.

Today the PC called for the government to repeal the Automotive Transformation Scheme after the end of local production in 2017, no replacement of the Green Car Innovation Fund after the final payments are made in 2014-2015, and the discontinuation of the Automotive New Markets Program at its scheduled closure in 2015-2016.

Chief executive of the Federation of Automotive Parts Manufacturers, Richard Reilly, said the maintenance of federal assistance levels prior to the May budget would not only reduce the number of industry redundancies but allow suppliers more time to diversify the skills on their workforces.

“Reducing funding of the ATS by 66 per cent in 2015 will have serious implications for the continued operations of many firms within the automotive supply chain”, he said.

"The ATS has been an integral part of the business planning processes and quoting mechanisms of companies for many years. To reduce the funds available mid-stream leaves companies in the supply chain vulnerable to more competitive international pressures."

However, Federal industry minster Ian Macfarlane indicated in a statement today that the ATS would be cut as announced in May.

"The Productivity Commission’s report includes a full assessment of the factors that have impacted on car manufacturing in Australia and includes nine recommendations. The Government supports, or supports in principle, the majority of the Commission’s recommendations," he said in a statement.

“The Government will continue to support domestic car manufacturing through procurement policies, through until the closure of the last local car manufacturer at the end of 2017.

“The Government is also supporting the transition in the automotive industry with a range of measures, including the $155 million Growth Fund which is made up of five elements that are designed specifically to assist workers, businesses and local communities impacted by the decision from GM Holden and Toyota to end local manufacturing by 2017.

“The $20 million Automotive Diversification Programme is open for applications to assist suppliers to diversify into other sectors. Automotive workers will receive personalised skills assessment and assistance to identify new jobs under the $30 million Skills and Training Programme and the $60 million Next Generation Manufacturing Investment Programme is being finalised.

“The Growth Fund also includes a $15 million boost to the Automotive Industry Structural Adjustment Programme and a $30 million Regional Infrastructure Programme.

“The Australian Government is also preparing a National Industry Investment and Competitiveness Agenda, to focus on long-term issues relating to competitiveness, productivity and job opportunities in the industries of the future.”

"The Automotive Transformation Scheme will continue until the end of 2017 at the level of funding set out in the Mid-Year Economic and Fiscal Outlook. This will help secure local manufacturing and give automotive businesses and workers time to adapt in the lead up to the closure of manufacturing by Ford, Holden and Toyota."

The PC also recommended the removal of the five per cent tariff on imported vehicles after local manufacturers close their doors, suggesting "more efficient sources of government revenue with which to replace these measures".

Such a move should in theory make all imported new vehicles either slightly cheaper or better equipped.

Other good news for consumers is the PC's recommendation to the federal government that it reduce its tax impost on expensive vehicles.

The report noted that the 33 per cent LCT, which from July 1 applies to the component of a vehicle's price up to $61,884 (or $75,375 if they consume less than 7.0L/100km), accounted for around $400 million in revenue for the government but "was arbitrary in its effect".

However, it cautioned that the LCT should not be scrapped if no revenue replacement is found.

"Given the effect on government revenue, if the LCT were not replaced by another revenue source, it is important that its removal be considered as part of a broader program of taxation reform measures," said the report.

Excluding new taxes, axing the LCT would make expensive vehicles (not necessarily 'luxury' vehicles) far more affordable – something for which luxury vehicle brands and even Toyota have lobbied for some time.

For example, the buyer of a new vehicle that costs about $100,000 but consumes more than 7.0L/100km, such as Toyota's mid-range LandCruiser VX, would save more than $20,000.

The long-awaited PC report also recommends the government embrace imported used vehicles, allowing the importation of 'grey imports' of used passenger and light-commercial vehicles – but not before 2018 "to ensure that reasonable advance notice is given to affected individuals and businesses, such as vehicle leasing companies".

The relaxing of restrictions on second-hand vehicle imports would require new regulations, asserts the report, which would include "measures to provide appropriate levels of community safety, environmental performance and consumer protection".

The PC has recommended only vehicles up to five years old and those with "consistent" design standards to Australia be given the green-light for importation.

The move would give car buyers more choice as vehicles previously not offered in Australia would become available here, and prices in the second-hand car market would reduce, it posits.

According to the report, Ford Australia was among several industry participants that "expressed concern about the effect of such a policy change on new vehicle prices", which it believes could harm its business.

Earlier this month GM Holden chief Gerry Dorizas said opening the flood gates to grey imports would cut Australia’s new vehicle market in half.

Some safety experts say relaxed grey-import laws could have an adverse affect on Australia's road toll, which is the lowest in almost 80 years partly thanks to record new-vehicle sales over the part decade.

The average age of Australia's 'carpark' is still higher than that of the US, UK and Japan, but recently fell to below 10 years for the first time. The average age of New Zealand's vehicle fleet increased from 11 to 13 years after its car industry closed.

The PC drew the ire of the Federal Chamber of Automotive Industries with a position paper released earlier this year, when it first proposed the relaxation of grey-import regulations.

The FCAI reiterated that stance today, but minister MacFarlane today said no decision has been taken to relax the restrictions relating to grey imports.

"We have no intention of allowing Australia to become the dumping ground for other countries’ old second-hand vehicles,” he said.

“This issue will be considered in detail as part of the government’s review of the Motor Vehicle Standards Act 1989, mindful of the need to maintain the highest safeguards for consumers and the impact of any changes on the domestic car retail market.”

Today's PC report also urges the government to ditch its $12,000 specific duty on imported second-hand vehicles and accelerate the harmonisation of Australian Design Rules (ADR) with European regulations and other vehicle standards from across the globe.