Today’s GLOBAL downturns are the fault lines around which our automotive industry has always reinvented itself. In theory, managers should restructure their businesses and businesses should change hands whenever it improves productivity.
Alas human nature intervenes. Corporate dreams are dreamt and restructuring is delayed … until the alternative is collapse. Way back in 1931, as the Great Depression savaged output at a South Australian automotive body manufacturer called Holden, US giant General Motors came to the rescue. The rest, as they say, is history.
VW, Leyland, Chrysler, Nissan and Mitsubishi all withdrew from car making in Australia – VW handing over to Nissan, Chrysler to Mitsubishi – long after they’d ceased to be healthy, all during crises for their parents and/or amid global downturns.
And here we are again.
After a ritual acknowledgment of the conventional wisdom that Australia is no good at making cars, the pundits peel off into ”protectionists” (sometimes dressed up as ”innovation” buffs) – who want to keep the industry alive with additional assistance – and ”free traders” who don’t. Count me among the free traders. But I’ve never bought the line that Australia couldn’t make cars without assistance.
Yes, some low-wage countries are gearing up production and, yes, our domestic market isn’t huge. But while lower-income countries will continue to grow market share in smaller, lower-quality cars, the bulk of production continues to be in high-income countries, particularly for larger, better cars. And though our market is small, so is Sweden’s. But Sweden has provided a volume base on which unique products have been built, which have then acquired export niches.
Toyota and Holden’s Australian operations have tapped into their parents’ global brands and marketing networks permitting rapid export growth. Rather than slaving away for decades building one’s presence in foreign markets, subsidiaries of global giants can win contracts with head office to supply specific market niches.
So far Toyota’s been the star, focusing all Australian production on one car line – the Camry/Aurion – manufacturing up to 150,000 units annually (right now it’s below 100,000) and consistently exporting more than half its production. Yet the Camry car line is produced in Japan and the US and if it comes to be produced in lower-cost locations, they could become preferred suppliers, first to our export markets, and ultimately to Australia.
Holden seems better placed because it manufactures unique vehicles around which more durable export niches might be able to be built. Our high exchange rate and the termination of the Pontiac brand have cruelled Holden’s exports recently, though it retains a monopoly on producing large rear wheel drive cars within GM’s network.
And then there’s Ford. Since the embarrassment of exporting the small, leaky, poorly finished convertible Capri to the US in the early 1990s, Ford US has shown scant interest in its Australian subsidiary’s entreaties to get serious about export from Australia. To utilise its assembly capacity it did some fine re-engineering of its Falcon car line to also produce the Ford Territory. But with flagging domestic Falcon sales and no serious exports, total volume is now around a third of Toyotas and Holdens which is hopelessly unviable. In fact Ford Australia still has great automotive assets, but they are not – and cannot be – strategically important for its current parent. Nevertheless they could be really valuable to up-and-coming Chinese or Indian car makers.
And while new Asian car makers gear up to export millions of small and medium-size cars, they’ll have little interest in making large cars like Falcons and Fairlanes. If they owned Ford’s Australian assets they’d get a foothold in our market and, more importantly, a large, sturdy, luxurious, rear-wheel drive car to badge with their own global marque. Would it be good public policy to subsidise such a transfer? Probably not. But since the current plan is to keep throwing good money after bad, let’s make that assistance conditional on a new owner or at least major equity partner and a global sourcing plan.
This idea was high-risk politics for as long as Ford was muddling through. But now the writing’s pretty much on the wall, the indignity of begging Ford to do us the favour of taking our money to hang around a little longer looks politically riskier still.
Nick,
You might look at what happened to Saab, and what the Swedish goverment did in response to its troubles.
A model to emulate, in my view.
s/goverment/government
SAABs story is more complex than that of subsidies or lack of. One factor was that they built cars that were very engineered , a lot of the build quality( and expense) was not obvious, until you had a roll over type prang.
Nicholas
Some interesting figures on another subsidised sector:
Whoops Link
http://www.theaustralian.com.au/national-affairs/opinion/what-price-is-too-much-for-a-cultured-society/story-e6frgd0x-1226442485746
And here’s a letter that the AGE didn’t print (submitted August 3):
HOW TO SAVE FORD
The Federal Government shouldn’t be throwing money at Australian manufacturers. It should be removing the tax component of the cost of labour and abolishing other taxes that act as reverse tariffs. If we confine our attention to Federal taxes, the process has four steps:
(i) Allow employers to keep the PAYG income tax that they withhold from employees and contractors — while the employees and contractors still receive credit for the withheld tax as if it had been paid to the ATO on their grossed-up wages/salaries/fees. Thus personal income tax is not abolished, but is removed from employers’ labour costs. Employees don’t see any reduction in their take-home pay.
(ii) Abolish compulsory superannuation contributions and the Superannuation Guarantee Charge (the penalty tax that enforces super contributions), and fund the contributions out of general revenue.
(iii) Abolish company tax (except capital gains tax, which is more of a resource rent than a reverse tariff).
(iv) Replace the revenue with a border-adjusted VAT, calculated by the subtraction method, at a rate specified on the VAT-inclusive, GST-exclusive base (so that the VAT interfaces with the GST as company tax did).
When economists say that replacing income tax by a VAT would raise prices, they assume that the PAYG income tax withheld by employers would instead be paid out in gross wages and salaries, so that the income required to pay the VAT would need to come from elsewhere, i.e. higher prices. My proposal avoids the price rise by making the withheld PAYG income tax (and super and company tax) available to pay the VAT. It also satisfies the political requirement of not touching the GST.
The reduction in labour costs from steps (i) and (ii) would far exceed that from WorkChoices and would be achieved without any erosion of take-home pay or working conditions. Unemployment and welfare expenditure would fall. Hence not all of the forgone revenue would need to be replaced. Hence the required VAT rate would actually lead to a one-off FALL in prices. What’s not to like?
… Gavin R. Putland …
I love magic since magic always works.
Yes, I agree that that its possible for a small high income country to find a profitable niche making specialised and quirky cars.
But I think the opportunity for Australia to go down that path has long passed. That opportunity was missed precisely because we spent our time and energy propping up multiple manufacturers attempting to fill a non-existent mass domestic market. Button needed to be say something like “We’re going to help only one manufacturer build a niche export market, exporting no more than two models. So lodge your tenders gentlemen”. But even by Button’s time it was probably too late.
And just because we subsidise, rightly or wrongly, some other sector is no argument at all for subsidising cars. That’s like the other faulty argument that “others subsidise their car industry so we should”.
dd
“the best car in the world at 100 miles per hour”.
Sadly making specialised and quirky cars does not seem to be profitable these days- though the coming era of 3D printing might possibly change that, there are already people ‘printing’ things like new 1960s jaguar parts.
Did you see the top gear tribute to SAAB? They dropped a 1980s model on its roof from 5 meters and you could still open the doors!
DD, We seem to be closer together here than when previously discussing this topic (though mostly because previously you misunderstood me to be proposing assistance which I’m not – I’m only debating the form that assistance takes if it’s given)
However you’ve really swallowed the Cool Aid regarding economies of scale. For cars these turn up in textbooks at around 250,000 (or did a decade or so ago) but against the completely arbitrary definition of MES as that scale at which doubling production would reduce unit costs by less than 2% (or 5% depending on what book you read).
Compare that to the difference in pricing of a Mercedes in Germany and Australia or any number of similar disparities. Consider that the Pontiac branded Commodore SS was acquiring a reputation in the US as a poor man’s BMW M5 before the brand was terminated. Just like the Datsun 240Z was a poor man’s E-Type Jag. A good way to build an enduring market presence. Note the Monaro ended up being exported after unanticipated export demand materialised following displays at motor shows etc. So there needs to be consistent experimentation and perseverance to succeed here. None of this means that the firms will show the perseverance (and/or perhaps luck) necessary, but I don’t agree with you that we obviously can’t do it.
Meanwhile on scale in the industry, if you’ve got a parent doing most of the technology development and sending you machine tools and presses and components at reasonable prices etc, people in the industry say that you can get costs down to reasonable levels at around 30,000 units per annum. If that’s right – and say you were manufacturing at a 10% disability at that level, you might be able to survive here on 5% tariffs plus a bit under 10% transport costs, though you’re unlikely to have anything to export.
With more engineering and design input you may not need more than 100,000 units per annum with some national protection (ie transport costs to Oz) and some uniqueness in domestic demand – then parlayed into niche export marketing, though it would be nicer to have 150,000 units and perhaps hope to get to 200,000 over the longer term. Given that Australia could support two producers, possibly three (though that last number is fast losing relevance.)
I suspect you also (still) think that Oz cars are low quality affairs and that Volvos are really much more sophisticated. But it’s not true – it’s mostly marketing. So while we need to be as supportive of scale as we can, I don’t think it’s true that we can only support one manufacturer, especially when you consider that if Ford or Holden closed, they’d displace most of their domestic production with imports – their Australian competitors wouldn’t capture much of the volume of the exited manufacturing capacity because it would mostly be supplied within the brand from offshore.
Nick, with respect, that’s not the way the car industry is going.
Ford and GM are desperately trying to catch up to where Toyota and VW have been for some time – investing big bucks in developing global models that are essentially the same in every market.
Robert’s right – you’re proposing a strategy of tight integration into global chains. But:
a) that’s not the pretext on which the manufacturers sold the latest round of business welfare to gullible governments. It was all about “our specialty – no-one else does large rear wheel drive sedans, we can fill a niche”, and “only 12 countries in the world can do the full range from initial design to marketing” – ie the opposite of us just being one of a large number of countries with a factory producing an identical global car.
b) if you’re a multinational looking for one or more southeast Asian hubs to produce your one size fits all car, why on earth choose Australia when there are plenty of nearby cheaper places? If its a one-size-fits-all car, what does Oz offer that others can’t? We don’t even have an advantage in government gullibility – there are plenty of others keen to donate their citizen’s taxes to Ford et al.
“our specialty – no-one else does large rear wheel drive sedans, we can fill a niche”
‘niche’ : hole in cemetery wall
The old identical cars marketed the world over has been the dream of automotive manufacturers for thirty years. Remember the J-car? That’s what got us the engine plant at Port Melbourne with Holden (then GMH). We were going to fit into this network of global production. But the world is more complicated than that and virtually all the manufacturers go through cycles of centralisation and decentralisation. That’s just as true of Toyota as it is of the American companies.
Yes the American companies are talking about world cars again – though I expect I could show you speeches made by the American companies’ CEOs every five years for the last thirty that say that this is where their company is headed, more than ever etc etc. And in any event, in between occasional disasters that may well be the direction the industry is heading in. But it’s a kind of fallacy of composition to think that this will be applied to our market in a Procrustean way. If it makes sense to preserve the Australian rear wheel drive platform then it will be preserved and pretty obviously it is worthwhile to look at what export opportunities that might give us.
And the key fact about our market is that neither Ford nor Holden find it easy to import the kind of car that they know still has a substantial market here – the kind of car they have built here forever. So the question is, can they hang onto that capability and then parlay it into an export base. The answer, looking at Holden is obviously yes, but it’s still unclear whether they can do it economically. The point is that we’re a small country, with a substantial demand for an unusual car. And if we can combine making it and servicing our own market with the establishment of a small niche in larger markets than ours we have a reasonable chance of having a viable industry.
Nicholas
suggest the market here is a lot more fragmented than most, from memory Australia’s market has more makes and varieties of models than many other much bigger car markets. Not that surprising given the very diverse terrain of Australia.
Rear wheel drive (or AWD) is necessary for big heavy cars, it is not possible to put more than about 150 KW through the front wheels.
AWD is more costly (and heavier ) than rear wheel drive.
Nick, have you had a look at the sales figures for Falcons, Commodores and Aurions lately?
I don’t have the private buyer figures to hand, but I’d bet London to a brick that the vast majority of those are going to fleets, most of them to government fleets who are de-facto obligated to buy Australian.
Large rear-drive sedans used to be a distinctively Australian consumer preference, but that no longer appears to be the case. “Small” cars are now big enough, fast enough, and luxurious enough for most applications, and for those that genuinely need or want the space it seems that they prefer the innumerable “crossover SUVs” now on the market.
Incidentally, we haven’t even begun to talk about what’s going to happen to the car industry in about a decade’s time when autonomous vehicles start to roll out onto Aussie roads.
Yes, I’m aware of the sales figures. They confirm what I’m saying. You seem to think I’m saying that there’s something unique about Australian car demand in toto. I’m saying that there’s a pocket of demand which is very difficult to service from offshore. It used to be a large share of the market, it’s now probably below 10% but it’s a million unit market. So it remains an enduring pocket of non-trivial demand that’s hard to service via imports. Not something that Detroit or Nagoya execs will lie awake at night worrying about, but a pocket of demand that, for historical reasons we service well from the Holden and Falcon platforms.
So that creates the scope to build a niche – or looking at it from a risk management perspective – it creates a theme around which one can think about what kinds of strategies would give one the best possible chance of emerging with a competitive car industry. American police want large rear wheel drive cars – so we’re supplying them. Pontiac buyers wanted over 20,000 of them when supplied in both two door and four door variants. I expect 50,000 units sold domestically (Holden’s nearly doing that now) and 50,000 exports is getting near to internationally competitive when it’s done within a large international company on a unique platform with a capacity to be marketed as a luxury. That describes our large cars, but not the Holden Cruze.
And we make a large SUV built on the platform of a large rear wheel drive car, though it’s never had export development so may not have anything particular to offer export markets.
The last owner of SAAB is currently suing GM (it looks like a long shot)
“As part of the deal selling Saab, GM retained say over GM technology used by Saab……The lawsuit alleges that GM unfairly used its leverage over its own technology licenses to prevent the sale of Saab to a Chinese company, notably its ownership of chassis technology.”
It is interesting that GM Australia needed government help to develop the kinds engine technology needed to make smaller, fuel efficient and grunty , engines.