David Wu | International Economy Fellow
In February, American automotive company General Motors announced that the iconic Holden brand would be retired by 2021. Prime Minister Scott Morrison said that he was “angry” about the decision, “like I think many Australians would be”. This decision will mean the end of Holden sales, design and engineering by the end of the year given that domestic manufacturing of the vehicles ended in 2017. Considered by many as the quintessential Australian car and the country’s leading manufacturer, what should policymakers learn from the rise and fall of Holden?
Holden was founded in 1856 as a saddlery manufacturer and by the early 1900s had transitioned into the production of car bodies, assembling over 34,000 units in 1925. The company suffered during the Great Depression, producing under 2000 units in 1931, but production gradually recovered, with over 32,000 units being produced in 1937. Prior to World War II, interest grew in an Australian-made car, but the company’s attention and production capabilities were redirected to assist with the war effort.
Following WWII, this interest was pursued in earnest with the government’s backing and the Holden 48-25 was produced in 1948 and unveiled by then prime minister Ben Chifley. Through the 1950s, the company dominated the Australian market and by the end of the 1960s had sold over 200,000 vehicles in 1970, over two million vehicles in total, and employed more than 23,000 employees country wide. Exports surged to more than 41,000 vehicles across 73 markets in 1973, but tumbled during the oil crises of the mid-1970s. With increasing import competition, from Japan and South Korea in particular, exports did not recover until the early 2000s.
From 1997 to 2012, the Australian car industry received A$30 billion of government assistance and over this period Holden’s domestic market share surged to over 20 per cent in the early 2000s with sales reaching nearly 180,000 vehicles. But this was not to last. Over 2019, Holden’s market share had shrunk to under five per cent with only 43,000 vehicle sales. And in January 2020, the company sold only 2600 vehicles and was ranked 10th in market share with the leader being Japanese car manufacturer Toyota with over 20 per cent market share.
For policymakers, the rise and fall of Holden suggests three important takeaways.
First, industries that are unable to sustainably grow and retain their customer bases will inevitably shrink and prolonging this shrinking is costly. Holden received more than A$2 billion of government assistance over its lifetime and when this assistance ended the company soon began winding down its domestic operations. While this assistance was able to prolong the life of the company, it wasn’t able to change Australians’ penchant for Japanese and South Korean cars that were increasingly affordable, reliable and fuel efficient. Without a competitive offering, Holden was unable to survive without assistance.
Second, industry-specific government assistance must be carefully considered on a case-by-case basis. In 2014, the Productivity Commission completed its inquiry into Australia’s automotive manufacturing industry and concluded that the policy rationale for providing special assistance for the industry was weak. They claimed that the economic costs of assistance, taxpayer costs and dulled market incentives, outweighed the benefits, support for firms such as Holden and their employees. While industry-specific assistance can be justifiable where there is market failure, the need for such assistance is not always clear-cut and can be obfuscated by rent-seeking.
Third, the government can help to alleviate the adjustment pressures faced by employees and regions due to the winding down of industries. The reallocation of resources within the Australian economy is necessary for growth and presents both opportunities and challenges. Given the potential for hardship, both federal and state governments and businesses should work to alleviate these pressures. The record is mixed on the handling of the winding down of Holden’s domestic manufacturing in 2017. A year after the closure, although about 80 per cent of the 950 workers out of work had found employment elsewhere, many had yet to find new work or had only found precarious work.
Australia’s industries will change as the wants and needs of consumers in Australia and abroad change and as domestic and international governments and businesses aim to jostle their way to the front. Australian organisations are now at the global forefront of the natural resources, agriculture, tourism, education, financial technology, software and biotechnology industries. As organisations and industries rise and fall, policymakers will continue to have to make difficult decisions on whether or not to provide special government assistance. Perhaps most importantly, particularly as automation and the gig economy expand, policymakers will continue to have to ask themselves difficult questions about unemployment and the changing nature of work.
David Wu is the International Economy Fellow for Young Australians in International Affairs