Toyota in Altona.

Toyota factory in Altona. Photo: Wayne Taylor

Australia's car makers are struggling to compete with the lower labour costs of developing countries, the Productivity Commission has found.

With 1.1 million new cars sold last year, Australia was ''a very small player in a global context'' where 82 million passenger and commercial vehicles were sold in 2012, the commission's initial car manufacturing review said.

Treasurer Joe Hockey asked the commission to undertake the review, and its inquiry follows the decision by both Ford and Holden to quit local car production in Australia.

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Both will be gone by 2017, and Toyota may follow them if it also decides next year to stop making cars in Australia.

On Friday, the commission released the first of three reports on the beleaguered sector - the final paper is due in March - and said the local industry was being hit by factors largely beyond the control of local car and parts makers.

Of the 1.1 million sold in Australia, nearly 90 per cent were imported, the report said.

It found car assembly plants in the developed world had stalled since 2008's financial meltdown, while growth had boomed in developing countries, especially China, where demand for new cars had exploded.

In China in 2005 there were almost 6 million cars sold; last year more than 19 million were purchased.

An increasing amount of the world's cars are now built in countries such as Brazil, China, India, Mexico and Thailand, while countries such as Australia, the US, the UK and Belgium have shed workers since 2008.

The report finds labour costs in Australia ''relatively high'', although not substantially different to Germany or Japan. ''But [they] are four times or more those of China, Thailand and other developing countries where motor vehicle production is expanding,'' it found.

The production capacity of the world's car factories also far outweighs the consumer demand for new vehicles.

The report concludes that a ''substantial increase in the volume of production in Australia'' from its current level of around 200,000 cars a year would be needed to survive and thrive here.

The report finds that many governments subsidise their car industries, or offer them incentives to maintain a car manufacturing sector, and says Australia's manufacturers must continue to slash costs.

The commission found there was ''relentless pressure'' on car makers across the globe to reduce manufacturing costs.

Industry Minister Ian Macfarlane said the report, ''reveals in a factual way how the Australia automotive industry compares with the global market''.

But the Australian Manufacturing Workers Union said there were no surprises in the report, which a union official said had been designed by the Abbott government ''to cover its backside over its intention to cut funding from the industry''.

With PETER KER, TOBY HAGON