Carmaking in Australia: Toyota’s move to the off-ramp signals the demise of a prized industry

Carmaking in Australia: Toyota’s move to the off-ramp signals the demise of a prized industry

Feb 15th 2014 | SYDNEY | From the print edition

WHEN Australia’s first locally made car, a Holden FX, rolled off the production line in 1948 it was greeted with an excitement that befitted a symbol of a youthful nation taking its place among advanced economies. Such was the enthusiasm for an indigenous car that around 18,000 punters paid deposits to buy one without even seeing it.

Toyota’s announcement on February 10th that it would join Ford and Holden in pulling out of carmaking in Australia, closing its assembly line in 2017, was greeted with commensurate dismay. Yet beneath the obligatory political blame-mongering was an acceptance that everything has turned against carmaking in Australia.

The departure of the last big carmaker is as inevitable as an argument at a barbecue over the merits of a Ford versus a Holden. Mitsubishi closed its plant in Adelaide six years ago. The latest exodus began last May, when Ford said it would go in 2016. Holden, part of General Motors, said just before Christmas that it would quit in 2017.

The industry has been in decline for years. A decade ago Australia produced 400,000 cars a year; in 2013 it churned out just over 200,000. Although Australians bought a record 1.14m cars in 2013, the market is small in global terms, and fragmented, with the three most popular models each clocking up just 40,000 sales. Sadly, none of these was assembled at home.

Australia makes the wrong sort of motors. As in most rich countries, drivers increasingly want smaller fuel-efficient vehicles and fashionable SUVs. Of the six models made in the country only two, the Holden Cruze and the Ford Territory, fall into these categories. For cheap mass-market vehicles, on which profit margins are slender, high-volume, low-cost production is vital. But Australian factories are small: the biggest, Toyota’s, makes just 100,000 cars a year. As a rule, plants making mass-market vehicles need to turn out at least 200,000 a year to have a hope of making them cheaply enough.

Australian plants lack economies of scale but not employees with bulging wage packets. Only German car workers earn more. The lack of scale works its way down to local component-makers. These are also small by global standards, so parts are pricey. The result, according to both Ford and Holden, is that manufacturing costs are four times those in Asia and even twice European levels. That is a death sentence in a global market with plenty of spare capacity, even before considering the added burden of Australia’s strong currency, buoyed by commodity exports. This hits locally made cars’ competitiveness both at home compared with imported ones and abroad, where two-fifths of production ends up.

Decades of generous state handouts have “forestalled but not prevented” the car industry’s problems, concluded a recent report by the government’s Productivity Commission. Since it came to power last September, the conservative administration led by Tony Abbott has declined to prop up struggling firms. It refused Holden’s plea for more subsidies in December. Last month it rejected an A$25m ($22.5m) bail-out for SPC Ardmona, a fruit-canning business that Australians regard with a sentimentality matched only by that for Holden. Mr Abbott says the role of creating jobs belongs to business, not government.

One commentator lamented that Australia will join Saudi Arabia as the only G20 countries without a car industry. But carmaking is a small and unprofitable part of a shrinking manufacturing sector, employing relatively few, in an economy dominated by services and resources. The main damage caused by the carmakers’ departure is to Australians’ self-esteem.

 

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 (www.heroinnovator.com), 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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