Two basic economic propositions underscore Ford’s decision to withdraw from manufacturing in Australia: returns to scale; and factor costs.
At the peak of Falcon and Holden Commodore production, the local manufacturers could count on 100,000 sales annually. But with the Falcon counting only around 14,000 units annually, its continued production does not justify the enormous R&D expenditure (supported only to a relatively small degree by subsidies) required to develop a new model, which would also need to comply with forthcoming emissions standards.
There’s the rub. One of the core reasons for Ford’s decision to wield the axe is Australia’s adoption of the Euro 5 vehicle emissions standard, which will come into effect in November 2013. The more stringent Euro 6 standard, which Australia has also adopted, will be implemented by mid-2018.
Euro 5 would have required major re-engineering of Ford’s six-cylinder engine, which would be costly and an unviable proposition, given Falcon sales have fallen by around 75% over the last few years.
Sales have not been not helped by the four-cylinder EcoBoost Falcon, which received $230 million in government subsidies and has proven a sales failure, with few consumer or government orders.
The other contributor to Ford’s decision to shut down local production is cost. Ford Australia’s CEO, Bob Graziano, noted that it cost twice as much to build a Ford in Australia as it does in Europe. And Australian production costs four times as much as building a Ford in Asia.
The loss of 1,200 jobs in Broadmeadows and Geelong is only the tip of the iceberg. Victoria, the manufacturing hub of the country, is in recession. The high Australian dollar is killing the manufacturing sector. Sectors of the farm industry are in huge trouble. Much of the world economy is in an extended state of recession and austerity.
If the mining super-profits boom has plateaued or, worse, disappeared, as some pundits have predicted, then Australia is in for a long winter of discontent.
Neither side of politics has any solution to these problems. Future Australian governments face a hollowed-out manufacturing sector, declining revenues from resources and an ageing farm population facing import competition as never before.
Australia rode out the GFC on the back of virtually unprecedented mining boom and a fiscal revenue position that was Made in China. But that was a thin, glossy veneer on what was – and is – in reality a deficit-ridden, Dutch-diseased, debt-financed bubble.
Shell is selling the Geelong refinery. BAE Systems is getting out of Australia. Ford will be gone in 2016.
Who will be next?
Remy Davison is Jean Monnet Chair in Politics and Economics at Monash University. This article first appeared on 
The Conversation.
