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Local manufacturing in Australia looks poised on a precipice, despite the best efforts of federal governments and the respective car companies over many years.
Toyota is a company not even widely regarded as a local manufacturer by the Australian populace -- yet it produces tens of thousands of Camrys and Aurions for export each year, quite aside from the cars built for local consumption. The company's senior director of sales & marketing, David Buttner, has frequently said in the past that the greatest threat to Toyota Australia's continuing local production is posed by other Toyota plants overseas.
There's Toyota's plant in Thailand, for instance. It's geographically close to Australia; builds variants including the Camry Hybrid and the Aurion; and could conceivably export products to Australia (and Australian export markets in the Middle East) at a competitive cost, thanks in part to the free trade agreement between the two countries.
Holden is about to open its order books for the locally built Chevrolet Caprice PPV (Police Interceptor)-- the company's great white hope for export to the massive US market in the aftermath of the GFC. It was the GFC and GM's slide into bankruptcy that ended the iconic Pontiac brand and consequently the previous Holden export program to the US, the Commodore-based Pontiac G8. The Caprice PPV will be Holden's third American export program, after the G8 and the Monaro-based GTO before that.
Holden has the strong support of former executives now working in the US, including Mark Reuss and Alan Batey. Potentially, the local GM subsidiary is on the cusp of a global marketing breakthrough, but if the Caprice doesn't take off across the Pacific, it's getting too late for the company to establish itself as an export arm catering to the needs of GM buyers in America. The current VE/WM platform is due for replacement within the next few years and export models sold overseas can't be profitable even as niche models if they're only sold into the market for a brief period.
While Holden has asserted the highest level of confidence in Commodore remaining a locally produced model into the future, it had to reduce the shifts at the Elizabeth plant from two to one during the recent downturn in the market and its production of the Cruze small car in the same plant provides some justification for a return to two shifts. That reads like a bet each way, presuming that export markets and domestic sales won't sustain Commodore production forever.
It also pre-supposes that Cruze production in Australia could remain viable if the Commodore's appeal dries up. Cruze would have to sell in the same numbers as the Commodore does currently -- or better -- and to mostly private buyers to be profitable. Are there 4000+ buyers a month in the VFACTS small-car segment who would outlay the money to buy a Cruze -- rather than VW Golf, Toyota Corolla, Mazda3, etc?
Ford Australia's local manufacturing program is often reported to be on a knife's edge. Under the global leadership of CEO Alan Mulally, Ford has expediently flogged off Jaguar, Land Rover and Volvo in recent years -- and retained just 10 per cent share in Mazda. Can you imagine the North American management team at Ford wringing hands and weeping over the loss of two indigenous designs (Falcon, Territory) sold in just the one principal market?
Even Ford Australia's about-turn, keeping the Geelong engine plant operating beyond 2010, is seen in some quarters as a stop-gap solution to keep Falcon alive until a better, more lucrative alternative -- with a different powertrain -- becomes available. That alternative need not be built in Australia.
And if you judge a company by its deeds rather than its words, consider this: Ford has ceased building Fairlane and, more recently, the Falcon wagon. There are rumours that the XR8 will not continue in the Falcon sedan range and the EcoBoost and LPI Falcon and diesel Territory variants seem like last-ditch attempts to improve market appeal of models that are sliding backwards.
Enter Tony Devers, Suzuki Australia general manager. Devers no doubt echoes the sentiments of dozens of other executives working in the head offices of vehicle importers around the country when he asks whether we need a local manufacturing industry in the automotive sector. Direct funding of the manufacturing industry here by the federal government costs over $6 billion and that plainly doesn't include the extras that the Victorian and South Australian state governments have pumped into the local manufacturers in the past. Devers estimates that's about $100,000 for every person employed in automotive manufacturing locally. We must really love the idea of locally manufacturing cars that few private buyers purchase, he argues.
Speaking during the launch of the Suzuki Kizashi Sport in New Zealand this week, the Suzuki boss took a logical and pragmatic view of the industry, one that was at odds with the passionate and earnest view expressed by David Buttner 2½ years ago.
In a long discussion with the Carsales Network, Devers suggested firstly that Australian manufacturers were building cars that lacked broader appeal to Aussie buyers. He was not opposed to local manufacturing -- as long as it can support itself commercially. His argument, based on sales primarily, is that people don't want to buy large sedans any more. They're either buying smaller cars or SUVs. This much we know already and his argument that the VFACTS large-car segment has been on the wane for around 15 years also rings true.
"From the point of what the consumer wants, quite obviously they're not buying locally manufactured cars, which represent around 14 per cent of total sales now," he offered by way of opinion.
"Consumers prefer the imported cars, not just because they're imported, but because the other manufacturers have read the consumer trends and built cars for those trends.
"Management after management of the local factories haven't read those trends properly, and there's no accountability for that. Holden got a grant to bring in a small car from Korea, the Cruze. Is that fair? What about the previous management? Why didn't they understand that and build a car?"
Devers has a number in mind to determine whether a factory is viable or not. It's 200,000 cars a year. That's about 30 or 40 per cent more than Holden's Elizabeth factory was producing at its peak -- during the years it was exporting the G8 to the US and about 10,000 or so units of the Caprice to the Middle East.
"I learned long ago that in order for a factory to be efficient, it needs to produce a minimum of 200,000 cars of the same model, to get that critical mass in efficiency. Now our guys are making 20,000 or 30,000 [of individual models]. You need factories that run 24 hours a day to get that efficiency. Now the Australian market will never be big enough to allow that -- especially when the consumers are moving away."
Controversially, he contends that the local manufacturers could close up shop and move to full-line importation, making more money in the process and retaining the services of most of their employees.
Mitsubishi provides an excellent example of this. In year to date sales, according to VFACTS, the Adelaide-based company -- now a full-line importer -- sold 37,401 vehicles. That's just 1550 cars shy of the same period in 2007, which was the last full year of local production. With the overall market for 2010 still short of the record-setting outcome in pre-GFC 2007, the company is selling similar numbers of vehicles without the added cost that goes hand-in-hand with production. In other words, Mitsubishi should be more profitable this year than it would have been in 2007.
During the migration from manufacturing to full-line importation, Mitsubishi planned its exit strategy with great care and few workers were ultimately thrown on the scrap heap.
That's what Devers says the three remaining manufacturers should be planning; a parachute to slow the descent. We're not convinced that they aren't already doing that anyway.
"I'm not saying tomorrow they shut the gates, but let's say in five years' time -- so they get their product line-up planned and ready, ADRs approved and things like that. It's a seamless introduction of new cars."
Holden's Caprice PPV program seems like a huge gamble to Devers -- and not one you would call a calculated risk either.
"Like, America's in the s... -- and they're going to import cars from Australia? I'll believe it when it happens."
The employees worst affected by an end to local manufacturing would be designers and engineers. It's Devers' contention that these workers, who are often vocational nomads, moving from one project to the next at short notice, could be supported by an automotive engineering institute based locally. This facility would maintain a pool of automotive engineers available to work on localising imported vehicles -- as happens currently with suspension tuning and steering calibration for Hyundai and Kia.
"Have an institute of automotive engineers, that can [undertake] projects for [importers] that are here. Australia has more bloody car companies selling cars here, per population, than any other country in the world. If we can develop that professionalism, that edge... the BMWs, the Mercedes, the Mazdas, Hondas, Suzukis will use them."
"Other countries have research and development operations that manufacturers use, so if Australia has that expertise... you don't have to be located in the place of production nowadays... that expertise can still be maintained.
"In the scheme of things, you have to weigh all that up. I agree that you have to maintain jobs, but at what cost? If it's a thousand jobs, at $100,000 a head, I don't believe that's a viable point."
Although he doesn't say as much or in so many words, Devers seems struck chiefly by the apparent hypocrisy of subsidising local manufacture of mainly large cars that use profligate amounts of fuel and emit CO2 emissions in excessive volumes -- through a device named the Green Car Innovation Fund. Where's the greenness and where's the innovation?
"Importers don't want any subsidies..." he says, "But in reality, perhaps the government should be spending money in supporting cars that are fuel-efficient, emissions-friendly and safe."
This is an idea that was also proposed in the past by the prestige importers when the government raised the luxury car tax from 25 to 33 per cent. But all that's by the by. The real problem is our blinkered view of our place in the automotive manufacturing world. According to Devers, Australia is staving off the inevitable without looking to the future. It's his view that manufacturing is a parcel that gets passed around to different markets as labour rates and economic situations change. While it's felt at the present that China will be a Centre of Expertise for worldwide manufacturing in the next few decades, Devers believes that the Chinese will be usurped after that by India. He cites the Japanese companies that are already outsourcing their vehicle production to China, Thailand and India. But they retain their engineering expertise. The same could be true of Australia too, says Devers.
"Ford would make more money importing cars from Thailand than making them in Australia."
That's not just the Fiesta and Focus either, it includes Falcon and Territory potentially. Ford's T6 light commercial vehicle project is arguably an early example of that already in place. The R&D work for the blue oval's new light commercial vehicle is handled here in Australia, but the production base will be located elsewhere.
"The world is so small now. Australia could be the centre point for Asia/Oceania. With everybody having factories [in Thailand], Australia, if we're good enough, we could be the centre point for research, development, engineering there. [Thailand is] nine hours away [by plane]."
Devers, running the risk of being shot for delivering the message, concludes that our desire to maintain a local manufacturing industry is driven more by emotion and a sense of history that has little to do with the modern business environment.
"Nobody's really done the sums, have they? They have an overriding idealism that we need [a manufacturing] industry. Now the facts indicate that we don't."
But he finishes on a positive note, albeit one somewhat confronting for the industry mavens.
"The Australian car market is ultra-competitive. We're all very good at it. In the scheme of things, I reckon Australian retailers and the factories have had to be very, very good over the years. They've been very successful, under trying conditions -- but let's review what we're doing."
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