Holden's desperate wage jettison to stay in the race

Had Ford not announced last month that it would cease local vehicle manufacturing in 2016, Holden’s request that its workers take a significant pay cut would probably have been greeted with some cynicism.

The Ford decision, however, made it very clear how fragile the position of the local car industry is, with its very high costs and a strong dollar making it uncompetitive against a tide of imports swollen further by the artificially depressed yen as Japan pursues its version of quantitative easing, ‘Abenomics'.

Holden said today it was asking its workforce for "support" to achieve significant annual cost savings and that it was working with its unions and employee representatives to achieve labour-related cost reductions and productivity improvements, with all options on the table.

Having seen what happened to their 1200 colleagues at Ford only weeks ago one would suspect that the Holden workers, who have to vote on any agreement, will be somewhat more receptive to their management's pleas than might have been the case earlier in the year.

There is some precedent for the sacrifices Holden is seeking. For an 18-month period during the financial crisis, with its US parent, General Motors, filing for Chapter 11 protection from its creditors, Holden’s workers accepted cuts to their working hours and pay. They subsequently received pay rises and one-off payments to compensate them.

Holden announced in April that it would cut 500 jobs from its operations in Australia and that followed the loss of 170 jobs within the group last November. In May it announced losses of $152.8 million for the 2012 year, although that included one-off losses, mainly writedowns of the value of its manufacturing plants, of $226 million.

Despite the job cuts and significant investment in the business by both Holden and the Australian taxpayer, Holden – like Ford – is fighting a losing battle against imports. The three local manufacturers sell less than 140,000 of the 1.1 million vehicles sold in this market each year.

Holden and Toyota (unlike Ford) do have export strategies but the dollar is killing off their offshore markets. The profitable bit of their business is in importing vehicles.

The dollar’s recent weakening would help at the margin but it would need to fall a lot further to make them, and indeed Australian trade-exposed sectors generally, competitive with imports from far lower cost countries with far higher levels of government subsidy and protection.

When Ford made its announcement its local president, Bob Graziano, said it cost four times as much to produce a car in Australia as it did in Asia and twice as much as in Europe.

While Holden had committed, as part of its most recent package of government assistance, to continuing to manufacture vehicles locally until 2022, its executive chairman, Mike Devereux, said today that the company would not survive as a local manufacturer if it wasn’t competitive and didn’t reduce its costs.

Holden has previously indicated that it will be asking for further financial assistance from the government when the current program winds down, although the Coalition policy is to scale back the existing program.

That could lead to a decision to cease local manufacture before 2022 – Devereux has indicated it could occur as early as 2016 – which would compound the damage done to the components sector by the Ford withdrawal and probably undermine the other manufacturer, Toyota, in the process.

Holden’s situation is somewhat different to Ford’s, given that it does have an export strategy and that is also manufactures the smaller Cruz model as well as its traditional Commodore range and therefore hasn’t been as affected by the big drop-off in large car sales. The V8 version of its new, much-touted VF Commodore will actually be exported to the US, rebadged as a Chevrolet.

Should the dollar fall further, as it well might if the US economy continues to recover, the initial massive impact Abenomics had on the value of the yen continues to wear off and the Australian economy continues to slow as the resources investment boom fades, that more balanced profile may provide some relief from the vice-like pressure the currency has been exerting on local manufacturers and give Holden access to the larger international market.

Without further weakening in the currency, and with only a relatively small share of a small domestic market to scrap for, it is doubtful whether cost cutting and/or taxpayer subsidies will be sufficient to make Holden competitive with rivals operating with far bigger domestic markets, weaker currencies and far bigger subsidies even though one of its historic domestic rivals will cede market share as it shuts down its local manufacturing.