Aussie Dollar Is Villain as Ford Ends Mad-Max Land Output

Aussie Dollar Is Villain as Ford Ends Mad-Max Land Output

Ford Motor Co. (F) Falcons, driven by Mel Gibson in Australia’s 1979 movie “Mad Max,” have rolled off a Melbourne production line for 53 years. Now, like Max’s “last of the V-8s,” their days are numbered. Ford, in Australia since 1925, said yesterday it will close its local manufacturing plants in October 2016, resulting in 1,200 job losses. General Motors Co. (GM)’s Holden unit, which traces its roots to 1856 when it started as a saddler business, said on April 8 it will cut about 500 workers as currency devaluations overseas make its operations among the world’s costliest.

The villain has been Australia’s dollar: Up 76 percent versus the yen since October 2008, it has helped send Japanese car imports to a record and sales of domestically made vehicles down 18 percent in four years. Ford’s local President Bob Graziano yesterday said that costs are double those in Europe and four times those of its Asian divisions, and that even twice as much government aid couldn’t make the unit sustainable.“Manufacturing is not viable for Ford in Australia,” he said. “Our locally made products continue to be unprofitable, while our imported products continue to be profitable.”

After meeting management yesterday, workers in fluorescent yellow and blue jumpers bearing the Ford logo patted each other on the shoulder at the Broadmeadows plant in Melbourne’s northern suburbs. BMW, Lexus and Toyota models were parked alongside Ford’s own vehicles in the company’s car park.

‘Devastating’ End

“I’ve worked 34 years here, so this is like my second home,” 54-year-old vehicle painter Paul Boulos said. “I thought that the government would do more — give us more subsidy to keep this company alive here. It’s devastating.”

The industry’s decline is worsening as Japanese Prime Minister Shinzo Abe’s campaign against deflation drives down the yen. Cars made in Australia slumped to 12.6 percent of total sales in 2012 from 80 percent in 1984, according to data from Ford and the Federal Chamber of Automotive Industries. Purchases of locally made cars fell 18 percent in the four years to Dec. 31, the Chamber’s data shows.

Since Abe was elected leader of Japan’s Liberal Democratic Party on Sept. 26, the Aussie has jumped 22 percent versus the yen to trade at about 98 yesterday in Sydney.

“With Abe’s yen policy, we’re seeing a fight for exports in a global economy where consumption has fallen, and the losers are countries like Australia,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “There’s a cage-match of ‘two men enter, one man leaves,’ and the Australian car industry is unlikely to come out.”

Political Pain

That’s hurting Prime Minister Julia Gillard, whose ruling Labor Party trails Tony Abbott’s Liberal-National coalition by 12 percentage points, according to a Newspoll published May 20. Gillard, whose electorate borders the Altona factory where Toyota Motor Corp. (7203) employs about 2,500 people, has set aside A$5.4 billion ($5.2 billion) to support the domestic car industry until 2020 while refraining from policies to rein in the dollar’s surge.

“Great manufacturing states like South Australia, Victoria are undoubtedly feeling the pressure of a high Australian dollar,” the prime minister said during an April 22 interview in Sydney with Bloomberg News in which she endorsed Japan’s efforts to boost its economy. “I want to make sure that we emerge from this period of adjustment in our economy with a diversified economy with many sources of strength.”

Gillard yesterday detailed government packages totaling A$51 million to support suppliers and communities affected by the Ford plant closures, saying the elevated Aussie “obviously bears down on Australian manufacturing.”

Price Shifts

Attempts to support the industry have been outweighed by the Australian currency’s strength, industry pricing data show.

The Australian retail price of Honda Motor Co. (7267)’s Civic hatchback fell as much as 15 percent from July through January, while no Australian-made car dropped in price by more than 1 percent, according to Red Book, a data service owned by Ltd. (CRZ) Sales of the Civic rose 4,943, or 76 percent, last year to 11,442, the highest since 2008, according to the Federal Chamber. Holden’s Cruze, a similar-size competitor, dropped by 4,623 to 29,161 in the same period.

Imports have boomed also because Australian automakers failed to keep pace with changes in consumer preferences for smaller cars and sports-utility vehicles instead of larger models. Sales of Japanese-produced cars, Australia’s largest import from the country, climbed 18 percent in 2012 to 390,289, the most on record, according to the Federal Chamber’s data.

‘Lost Patriotism’

Mazda Motor Corp. (7261)’s 3 model became Australia’s top seller in 2011, breaking a 15-year run for Holden’s Commodore. Hyundai Motor Co. (005380)’s i30 sales have almost tripled since 2008 to 28,348 last year, more than double the Falcon, Chamber data show.

The Commodore and Falcon, large cars that together made up 18 percent of sales in 2003, accounted for 4 percent in 2012. The Falcon, which the Commodore eclipsed as the biggest seller in 1995, was 17th on the Federal Chamber’s 2012 list.

“People have lost patriotism in a sense where they’re no longer committing to buying Australian; they’re looking elsewhere to getting the biggest bang for their buck,” said Lee Mammarella, president of the Falcon GT Club of Australia, who drives a 2011 supercharged V-8 GT model. “It really breaks my heart.”

In the 1979 film, Mad Max drives a yellow V-8 Falcon Interceptor in the early sequences, then switches to a black supercharged Falcon Pursuit Special as he hunts down a motorcycle gang that killed his wife and son. Max and the latter car return in the 1981 sequel, this time to a post-apocalyptic world starved of oil.

Fury Road

“Mad Max Beyond Thunderdome” followed in 1985, and a fourth film, “Mad Max: Fury Road,” is scheduled for release next year. A receptionist at the offices of producers Kennedy Miller Mitchell said she couldn’t confirm what car Tom Hardy, who plays Max, will drive.

The value of Australia’s car exports also has slumped, hitting its lowest level since 1998 during 2011, according to government data. A rebound last year still left export income 29 percent below the average of the previous 10 years.

The weakness in domestic and export markets has eaten into earnings. The local manufacturing operations of Ford, Holden and Toyota reported a combined operating profit margin of only 0.4 percent in the five years through 2010, according to data compiled by Bloomberg from estimates by Ibisworld Inc., Australia’s largest supplier of industry-based research. Sales will fall by 0.2 percent a year during the next five years, according to the group.

‘Domino Effect’

Ford posted an after-tax operating loss of A$141 million in the 2012 financial year and lost A$600 million over the past five years, Graziano said yesterday, citing a lack of scale, high local costs, competition with a greater range of imported models and the elevated currency.

The removal of one of Australia’s three remaining automakers could spark a “domino effect” as the industry as a whole becomes too small to support its own supply chain, Jac Nasser, chairman of the world’s largest miner BHP Billiton Ltd. (BHP) and former chief executive of Ford globally, told an event in Melbourne on April 11.

Toyota, which said in January 2012 it was laying off as many as 350 workers amid a 36 percent fall in Australian output since 2007, will continue making cars locally even as conditions are “extremely tough,” the company said in an e-mailed statement yesterday. Holden will invest A$1 billion to ensure production until 2022 and believes the industry “can survive,” Managing Director Mike Devereux said by e-mail.

Honda Factory

Australia’s woes contrast with conditions in Japan, where Honda is planning to open its first domestic car factory in nearly 50 years. In the U.S., March output hit a seasonally adjusted annual rate of 10.8 million vehicles, the highest since before the 2008 financial crisis drove Ford to its biggest-ever loss and pushed GM and Chrysler LLC into bankruptcy.

Ford’s cuts come in an economy already slowing as growth in mining investment moderates, said Matthew Circosta, an economist at Moody’s Analytics in Sydney.

“A decline in the car industry and associated parts makers hits southeastern Australia, where state economies are already at recessionary levels,” Circosta said. “It makes it more challenging for policy makers to rebalance” growth.

While the automotive industry employed just 2 percent of Australia’s workforce and 29 percent of manufacturing workers in 2012, it supports research and innovation across the entire economy, according to the Australian Industry Group, which represents more than 60,000 businesses.

“The Australian auto industry is worth fighting for,” said Innes Willox, chief executive officer.

Rate Cuts

The Reserve Bank of Australia, while eschewing intervention to weaken the currency, cut its benchmark interest rate to a record low 2.75 percent on May 7. The Aussie slumped 5.9 percent against the U.S. dollar since the reduction.

The currency needs to drop by about another 20 percent to stoke exports to the U.S. for Holden’s Caprice, a police patrol car sold under the Chevrolet marque, according to the company.

“If the dollar was 75 to 80 U.S. cents, we’d be selling many thousands more,” said Matt Hobbs, Holden’s general manager of public policy in Melbourne.

Authorities in Austin, Texas, and Kansas City, Missouri, have cited cost in rejecting the Caprice. GM sold just 3,734 of the vehicles during 2012, according to a company filing, less than half the sales of Ford’s Chicago-built Police Interceptor.

World’s Costliest

Holden, with plants in Adelaide and Melbourne, will eliminate about 12 percent of its Australian workforce, Devereux told reporters last month. Costs were up 60 percent from 10 years earlier, making the operation “one of the most expensive, if not the most expensive” in the world for GM.

“The value of the Australian dollar and, importantly, the currency plays being made by other countries, mean that we are not competing on a level playing field,” he said April 8.

Government help to date hasn’t turned the car makers’ fortunes around. Funding for Australia’s auto sector amounted to A$9.1 billion in the 15 years ended June 2011, about 40 percent of all industry assistance during the period, according to the Productivity Commission, a government advisory body.

Public subsidies “have managed to keep the industry afloat,” but don’t change the “bleak” picture for domestic manufacturers, said Naren Sivasailam, a Melbourne-based analyst for Ibisworld. “The economics simply don’t make sense.”

To contact the reporters on this story: David Fickling in Sydney at; Michael Heath in Sydney at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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