Parting manufacturing's sea of red

Parts and ancillary suppliers make up 80 per cent of the Australian automotive industry, and it is here that the government needs to focus its support to put us on the map in the global supply chain.

In the aftermath of the Prime Minister’s welcome announcement locking in the future of GM Holden in Australia, there remained a worrying question mark about what it meant for local parts manufacturers and ancillary suppliers – the small and medium-sized businesses that represent 200,000 jobs and roughly 80 per cent of the local automotive industry.

A South Australian government report tabled on March 28 officially confirmed what we suspected: that the $275m taxpayer-funded rescue package for Holden will not save the Australian parts manufacturers.

The funding is to help Holden produce vehicles that are part of a global platform, which, the report stated: "will lead to a smaller local supply chain footprint in Australia”. This is bad news for the long-term future of the Australian auto industry.

These parts manufacturers are both the industry’s biggest employer and, potentially, the one sector of the local industry that could put Australia on the map in the global auto supply chain. While there is no question the departure of Holden from the local market would have been terminal for some of these businesses, the move to a global platform will put them in a chokehold.

The local parts suppliers have long been the whipping-boys of Australian car makers and the strength of the dollar has made it even more attractive to replace domestic suppliers with cheap imports. The truth is, with nearly 80 per cent of this country’s automotive jobs in this sector, this is where the government needs to focus its support, with funding to help these players diversify, restructure, engage in critical R&D and access global supply chains.

One of the key issues for our local parts manufacturers is a lack of awareness amongst the global car makers – something the government has acknowledged through its plan to establish a working group with Holden to leverage global opportunities for local suppliers. But for this to work, the government needs to play an active role in ensuring Holden makes it happen. The government, Holden and the other car makers need to work together to create a roadmap that leads parts suppliers from participation in local models to participation in global model supply chains. That is where the future lies.

The government has also launched a separate $35 million 'Automotive New Markets' initiative aimed at helping component manufacturers, but what they really need is to see more government funding promoting Australian capabilities through inbound and outbound trade and investment missions (like the Victorian Government’s recent 'Super Trade Mission' to India) as well as strengthening and expanding the network of overseas support offices.

Some parts manufacturers need help transitioning to a more sustainable business structure. A big step in reducing overheads is rationalisation of the workforce, but many of these manufacturers have a large base of long-serving employees subject to generous redundancy provisions. As a consequence, rather than managing a strategic downsizing to reshape the business into a more efficient and competitive organisation, some of these suppliers may be forced to simply shut down operations. Government funding could help address this.

There needs to be more focus on the commercialisation of Australian automotive R&D. While there is a reasonable level of funding for research through grants and tax breaks, the sector suffers from a lack of commercial success – the 'D' in R&D. The government needs to adopt a results-based approach to industry funding that focuses on sustainability and accountability, rewarding parts suppliers that deliver more fuel efficient and innovative products for both local and export markets. It needs to reward suppliers that pursue advanced high-tech, high-value-add manufacturing strategies and demonstrate innovation through new technology.

There are four key areas for innovation where Australia already has a significant edge: vehicle electrification; gaseous fuels; lightweighting; and data and communications. There is a huge appetite for these technologies from growth markets like China and India.

Achievements by Bosch in Australia on battery technology, by Orbital on computerised engine management system technology and by CSIRO in the fields of material processing, electric vehicle technology and performance coatings, could open the door for Australian parts manufacturers to play significant new roles in the global auto industry.

The Australian automotive sector is at the core of advanced manufacturing technology and innovation and, if supported with a comprehensive plan, will deliver well above its weight in the local economy. If we lose our parts manufacturers and the dollar cycles down – which it will – the cost of manufacturing imports will rise and Australia will be left with an exposed and fragile economy built purely around commodities.

To avoid this, government funding needs to be applied to positioning the local parts manufacturers as key players in an advanced manufacturing strategy encompassing auto research, innovation, design and manufacturing. If parts makers are able to maintain a seat at the global automotive table in the current market, they will thrive on increased production volumes when the dollar returns to traditional levels.

Andrew Whittaker is the head of Ferrier Hodgson’s Management Consulting division.