Australia’s car component makers turn to the East

For car parts manufacturers, the centre of gravity has shifted to Asia. Some have already grabbed the opportunity and are being handsomely rewarded.

December 11 will go down in history as one of the darkest days for the Australian manufacturing industry after the Abbott government decided to switch off life-support to the car industry.

The death of GM Holden as a car manufacturer will also spell gloom for hundreds of auto-component makers who employ the majority of the estimated 50,000 workers in the Australian car industry. The remnant car-making industry lacks the critical mass required to support a viable auto component industry.

Is there a future for Australia’s auto component industry without GM Holden, Ford, and now possibly Toyota?

One car component maker has shown the way for its struggling peers – Futuris. The car seat and interiors company, which was formerly a subsidiary of agribusiness company Elders, took a huge gamble in Asia which paid off handsomely for the company.

However, it must be said from the outset that as a tier one supplier, Futuris’ international strategy may not be readily replicable for smaller players, which may not necessarily have the resources to pursue overseas markets.

The company took its plunge into China in 2004 when the Australian car industry was still relatively healthy. At the time, there were four vehicle manufacturers producing 420,000 units a year. Now there is one car maker left in the country making less than 200,000 vehicles a year.

Futuris saw that the centre of gravity for the industry was shifting to Asia and it wanted to follow its customers like Ford and GM into the fast growing region. The company then visited 180 car makers and suppliers to understand who the competition was, according to Manufacturing Monthly.

It decided to form a joint venture with Chery, a niche Chinese player that was only making 70,000 units a year back in 2004.  The business took off. Chery expanded its production capacity 10 times to 700,000 units, which is more than three times the size of the Australian industry.

Futuris has been riding the biggest car boom in modern history ever since. China has transformed itself from being a bicycle kingdom into the largest car market in the world, overtaking the United States in 2010.

The Chinese car sector grew at a compound average rate of 24 per cent a year between 2005 and 2011, according to McKinsey. Sales are forecast to reach 22 million units in 2020, which is likely to turn major cities like Beijing and Shanghai into the largest open air car parks in the world.

The company also turned its attention to Thailand, an automotive manufacturing hub for Southeast Asia. Futuris established two new plants at the Hemaraj industrial estate, dubbed the “Detroit of the East”, an ironic moniker considering the state of Detroit now.

It doubled its production within the first eighteen months. Early this year, I visited its new site, which is right next to a giant Ford factory that is operating at only 30 per cent of capacity. David Chuter, head of Futuris’ operation said, “We see this enormous growth opportunity. We don’t have to be greedy, just a fair share of this is going to get us into millions of products a year. “

Apart from the lure of the world’s fastest growing market, Asian governments also offer tempting incentives to lure foreign manufacturers to set up shops there including generous tax holidays lasting years.

Thai officials also try to make life easier for foreign manufacturers looking to set up operations by streamlining visa applications to finding skilled workers. In contrast, Australia offers very few incentives for new car makers.

“Unfortunately, Australia competes in a global marketplace and there is hardly a country elsewhere in the world that does not throw money at incentives, particularly in Asia,” Chuter said.

A Melbourne-based manufacturer also told Business Spectator, “From government departments to suppliers such as gas and electricity it is impossible to minimise the cost impact on the business while operating. We had an electricity supplier that took 6 months to provide us with power. Our gas supplier is still setting our contract 9 months later.”

Back to Futuris’ Asia strategy, the company is also eyeing growth opportunities with another Asia giant – India. Carl de Koning told BRW that “By the end of the year we’ll be in a joint venture”.

Futuris has not only survived but prospered in the tough industry by integrating itself into a part of global supply chains that feeds the fast growing Asia demand. It is a textbook case of how to do business in the Asian Century.  

In an integrated global market, the company who dares wins.

Follow Peter Cai on Twitter: @peteryuancai

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