Inevitable end of the road

For at least a decade and a half there has been a sense of near-inevitability about the demise of Mitsubishi Australia's local production, so the closure of its Tonsley Park plant in South Australia ought to come as no shock to anyone in the industry. The only surprise is that it held on for so long.

Mitsubishi's Australian operation has haemorrhaged red ink for most of its recent history. Once the year to March 2008 report card is in it would be a surprise if, in the last four years alone, it hadn't lost more than $1 billion. Those are losses without purpose, given that its locally-produced product, the Mitsubishi 380, failed almost from its launch to make any kind of mark on the market.

The 380, which represented a $600 million-plus investment, was Mitsubishi's last chance of locally-manufactured success in this market. The original production target of 2500 a month, however, turned out to be wildly optimistic from Day One. The plant has been turning out less than 700 cars a month recently from a plant with the capacity to produce nearly 3500 vehicles a month – it was operating at a little more than 20 per cent of capacity.

The economics of making cars is pretty straightforward. It is an extremely capital-intensive business and one where scale really matters. Sell enough cars to do better than break even and the profits are leveraged. Don't sell enough and the leverage works in the other direction.

Mitsubishi simply didn't sell anywhere near enough 380s, despite the reputation of the 380 as a very good car. (Some say the quality of the vehicle was first-rate because Mitsubishi's 1150 employees at Tonsley Park had so much time and attention to lavish on so few cars).

There are a number of factors that led to the closure of the fourth-largest local manufacturer – one of which was that it was the fourth-largest.

In a market that – even at its record level of just over a million units last year – is tiny by global standards and increasingly dominated by imports, there hasn't been sufficient volume to sustain four domestic manufacturers, particularly as Mitsubishi, unlike some of its competitors, wasn't able to create incremental volume by manufacturing for export.

The small volumes in turn forced Mitsubishi to bet its future on the 380, a large car. There isn't sufficient margin in small cars to sustain a domestic manufacturing platform.

Unhappily for the group, the launch of the 380 in 2005 coincided with two developments. One was a rapid steepening of the rise in oil prices and the other was an accelerating shift in large-car buyer preference from conventional sedans to sports utility vehicles. That has adversely impacted all the local manufacturers.

Unfortunately for Mitsubishi, the 380 was launched even as the rate of decline in large car sales worsened. The large car market fell about 37 per cent from 2000 to 2007, but the steepest part of the decline occurred from mid-2005 to December 2006. The 380 was launched in September 2005.

For Mitsubishi, there has been a silver lining in developments within the market, one that would have confirmed what the group must have known ever since the 380 launch failed to excite the market.

Its own sales of small cars and SUVs have exploded in an overall market that has been growing strongly – the Lancer and Colt models have being doing very good numbers in the smaller car segments while the Pajero, Outlander and Triton models have had similar success in the SUV segment. In 2007, its sales were up more than 20 per cent – even though the 380's sales were down 12 per cent – because sales of its imported brands rose more than 32 per cent.

The brands that are growing are all imported vehicles, reinforcing a growing conviction that Mitsubishi's future in this market would be, like Nissan (which shut down its manufacturing operation in 1992) purely as an importer.

The export option for creating scale wasn't available to Mitsubishi because the 380 was a global design and the wider group already has plants producing cars on the same platform in its major markets. Mitsubishi explored a ''stretch'' or long-wheel-base version of the car that could have been locally built for the US market, but problems within the wider group killed that project. The strength of the Australian dollar would also have undermined the economics of exporting.

Mitsubishi has no doubt been preparing for the withdrawal from manufacturing for a long time. More than a year ago it furiously denied reports based on leaked documents (labelled ''Project Phoenix'') that it was preparing for an exit by March this year at the latest. Having progressively reduced its manufacturing presence – a decade ago it had more than 5000 employees, or nearly five times as many as today – it would hope to ease out quietly.

The death of a car maker, even one as modest as Mitsubishi in this market is, however, bound to attract attention and, in South Australia, dismay – even though it has been obvious for so long that it couldn't survive.

Shifting from manufacturer to pure importer won't be cheap, as Nissan discovered, but it can't be any more costly than producing nice cars that no-one wants to buy.