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Australian Auto Manufacturing Industry Collapses

Written By Briton Ryle

Posted February 11, 2014

Australia is known for its powerful dust storms, which can completely blanket an area for days at a time.
Yet there is a different dust storm forming on the horizon now – an economic one that threatens to engulf the island continent and block the sun from shining on its manufacturing sector. And this one will last for years.

“Australia’s car manufacturing industry ends,” proclaims The Sydney Morning Herald. “Australia’s auto industry is dead,” echoes The Car Connection.

Without a domestic car manufacturer of its own, foreign auto makers found the island to be a great production base from which to tap the auto market throughout the South Pacific and Southeast Asia, reaching as far as the Middle East.

But one by one, the automakers have started pulling out – Mitsubishi in 2009, Ford by 2016, and General Motors subsidiary Holden by 2017 after more than 80 years manufacturing GM cars in Australia.

The last of the foreign giants, Toyota, yesterday announced its withdrawal from Australia by the end of 2017.
What’s behind these withdrawals? Is this a sign of greater woes to come? Will anything ever grow again in Australia’s auto sector once this storm passes?

The Perfect Storm Brews

GM’s Holden division called it a “perfect storm of negative influences”, citing “the sustained strength of the Australian dollar, high cost of production, small domestic market and arguably the most competitive and fragmented auto market in the world”.

The Australian dollar has risen some 21% against the USD since 2011, and almost 12% against the Japanese Yen since late 2012. The AUD’s rise has increased labor and material costs, slowly cutting into auto sales profits, as the following chart indicates.

Australian Auto Industry 1

The fragmented auto market in the region has also hurt the top automakers as cheaper Asian competitors steal marketshare. GM Holden’s Commodore sales have fallen 70% from their 1998 high, while Ford’s Falcon sales have fallen 80% from their 1995 high, the graph below shows.

Auto Industry Chart Australia

Also influencing the automakers’ decision to leave is the rapidly approaching free trade pact among 12 Pacific rim nations from North and Latin America around to the Asia-Pacific and Australasia regions. The soon-to-be-enacted Trans-Pacific Partnership free-trade agreement will eliminate import tariffs on almost all imports from partner countries – including autos.

Yet the elimination of these tariffs is something of a double edged sword. Not only will it make exports to other countries cheaper and increase sales to foreign markets, it will also make imports cheaper and increase competition in domestic markets.

As the elimination of tariffs reduces a major expense and lowers the cost of production, auto makers will thus be able to return their manufacturing operations back home. GM and Ford return to America; Toyota back to Japan.

This is really what governments are aiming for – to return foreign manufacturing back to their homelands and create jobs back home.

The Australian government has seen this storm brewing for years, and has done what it could to entice foreign automakers to stay, offering generous subsidies and tax breaks totalling more than $4.4 billion from 2001 to 2012, which have reduced the cost of manufacturing by more than $2,000 per vehicle for Ford and GM, as the following chart shows.

Australian Auto Industry

But the automakers wanted more, with Toyota asking for incentives totalling as much as $3,500 per vehicle. But the Australian government would not oblige, Prime Minister Tony Abbott calling the demands “corporate welfare”.

The Storm Changes the Landscape

As any powerful storm often changes the landscape it passes over, so too this tempest blowing through Australia’s auto industry is expected to seriously alter the nation’s manufacturing sector.

“This is the collapse of an entire industry, not just Ford, Toyota and General Motors Holden,” University of Adelaide economics and workplace expert John Spoehr forecasted to the Sydney Morning Herald. “Those companies are the tip of the automotive industry. Underneath them is a massive components industry and thousands of other suppliers”, including transport, business services and advertising.

With Toyota’s exit costing over 4,000 jobs, GM Holden’s closure costing over 2,900 jobs, and Ford’s elimination of over 1,200 jobs, the grand total of lost jobs all the way down the nation’s supply chain is expected to top 50,000 terminations by the time the last maker Toyota leaves at the end of 2017.

The potential impact across the labor market is dire enough to prompt the secretary of The Australian Manufacturing Workers’ Union, Dave Smith, to warn, “The magnitude of this decision in the community cannot be underestimated. We are looking at a potential recession all along the southeastern seaboard.”

After doing all he could to convince the automakers to remain, Australian Prime Minister Tony Abbott acknowledged the impact these closures will have: “Nothing we say or do can limit the devastation that so many people will feel at this point.”

Yet Abbott isn’t calling manufacturing in Australia dead. It is merely in transition.

“The important thing to remember,” Abbott stressed, “is while some businesses close, other businesses open. While some jobs end, other jobs start. There will be better days in the future.”

Abbott underscored the need for low taxes and the tweaking of regulations to facilitate the growth of other industries in Australia, “because under those circumstances you maximise the conditions for new businesses to start and for existing businesses to expand”, he explained.

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Filling the Void

Although GM, Ford and Toyota will still be importing vehicles into Australia from other production bases around Southeast Asia, shipping and other expenses will increase the cost of their vehicles for the Australian consumer.

Both the manufacturing void left behind and the higher cost of these imported vehicles will undoubtedly leave plenty of room for the smaller auto producers around the Asian region to move in for a bigger share of the Australian auto market.

One such Asian automaker to keep an eye on is India’s Tata Motors (NYSE: TTM). Founded in India in 1945 as a locomotive manufacturer, Tata Motors has over the years expanded into the manufacture of trucks, busses, cars and military vehicles.

So successful has the company been that it has grown massively in scope, controlling some 18 subsidiaries around the world, including the U.K.’s Jaguar and Land Rover auto companies – now known as Jaguar Land Rover Automotive PLC.

The company even has specialty vehicles designed specifically with Australia in mind, including:

Tata Xenon

Tata Xenon: Powered by the Euro V 2.2L Turbo diesel engine, the Xenon is “a perfect combination of contemporary design, safety features and modern technology specifically designed for rugged Australian conditions”.

Tata Tuff Truck

• Tata Tuff Truck Concept: “Fusion Automotive, the Australian distributor of Tata Motors, has developed a unique and exclusively designed concept vehicle for the launch of the Tata Motors brand in Australia.”

“Tata Motors products are built to cater to some of the toughest and harshest conditions on earth, and with the launch of the brand new and uniquely configured Tata Xenon, we wanted to create a concept car that reflected Australians love of the outdoors and the ruggedness of our landscape,” Darren Bowler, Managing Director Fusion Automotive describes the aim behind their Tuff Truck.

• Land Rover: Tata’s subsidiary Land Rover also has a line up of 6 off-road sport utility vehicles that are seeing great sales performance throughout Australia.

Yet we mustn’t forget about Australia’s continued advancement in the development of clean energy vehicles, which could soon fill the void left by the top manufacturers when they depart in a few years’ time.

The University of Western Australia’s Renewable Energy Vehicle Project (REV) “hopes to revolutionise personal transport by building zero emission vehicles, powered by electricity from renewable sources, charged from any plug point and viable to both the performance and commercial markets,” the project introduces itself at its website.

“REV is tackling the problems created by rising fuel prices and vehicle pollution head-on. The REV team comprises Engineering staff and students from the University of Western Australia, fuelled by a passion for a sustainable future.”

The project’s achievements thus far are pretty impressive:

• “In 2008, we have completed our first EV, the REV ECO, a four-wheel, five-seater commuter vehicle, designed for sustained performance over typical commute distances.”

• “In 2009, we have converted the REV RACER, a two-seater performance car using a high performance AC motor and regenerative braking.”

• “In 2010, we have built a dual motor driven Formula-SAE race car.”

• “In 2013, we are developing a four-motor driven Formula-SAE race car with wheel-hub motors, an electric jet ski and an autonomous SAE race car.”

The team is also committed to “using Australian components, suppliers and manufacturers where possible”, doing its part to supporting the domestic parts and manufacturing industry.

So while the Australian auto manufacturing sector is being ravaged by this perfect storm of external factors, the island continent has plans to weather the conditions and come out alive. And when the storm passes, other smaller foragers will flourish where the giants once grazed.

Joseph Cafariello