It didn’t take long for the first of Jac Nasser’s dominos to fall.
Ford’s announcement today that it would cease manufacturing vehicles in Australia from 2016 will trigger a shock wave through the automotive industry and its supply base that will undermine the fragile viability of the two remaining local manufacturers, General Motors and Toyota, and the base of component manufacturers that supply the domestic industry.
Nasser, chairman of BHP Billiton but speaking from his long-term experience of the auto industry at Ford, where he was global president, outlined just over a month ago the likely scenario for the industry if one of the three carmakers stopped local manufacturing.
"As soon as you have a reduction in the scale of domestic manufacturing – let’s assume one of the three decides to exit Australia – then you end up potentially with a sub-scale supplier infrastructure and, once that happens, I think it’s a domino effect," he said.
Well, despite federal and state government assistance of more than $400 million a year – a planned $5.4 billion of subsidies until 2020-21 – one of the big three will now exit and the dominos will topple.
Despite the desperate attempts by successive federal and state governments to prop up the industry there has been a sense of inevitability about this moment for several decades, from the moment the tariff walls that had sheltered the domestic industry started falling in the 1970s.
The Button car plan in the mid-1980s did produce some rationalisation and consolidation within the industry and its supply base but the local manufacturers’ relevance in the local market has diminished steadily. Nissan was the first to go, pulling out of local manufacturing in the early 1990s, followed by Mitsubishi in 2008.
Given our open borders, it was probably only a matter of time before the others followed. While the Australian car market is reasonably large, at over a million vehicles a year, the share of it held by the domestic carmakers is modest, at less than 150,000 vehicles a year.
While it hasn’t helped that in recent times the strength of the Australian dollar has made imports even more competitive – Ford, in announcing a $141 million loss today said its imported vehicles turned a profit – the underlying economics of the sector argue against its viability.
In an industry that is driven by the scale of its production volumes, the modest production in the local industry made it uncompetitive with offshore manufacturers producing far greater volumes for much bigger markets. There are single plants in Asia producing nearly twice the entire volume of vehicles sold in Australia each year.
Despite billions of dollars of government assistance and very substantial investment by the carmakers themselves, the industry’s survival to this point has defied its economic reality. Ford, for instance, has invested nearly $2 billion over the past six years but lost about $600 million over the past five years.
The only realistic chance the industry had to create a viable model was to plug itself into the global industry, and there have been modest but unhappily fleeting examples of that, with exports to the Middle East and some very limited and short-lived exports of niche models into the US.
But Ford’s Bob Graziano said today that it costs about four times as much to produce a car in Australia as it does in Asia, and twice as much as in Europe. Such high costs, along with the strength of the Australian dollar amid a world of devaluing currencies – and particularly the aggressive monetary policies adopted in the big auto production zones of Europe, the US and Japan – mean that even that limited relief valve has been shut down.
Ford will now shift, as Nissan and Mitsubishi have before it, to an all-import business model, ending almost 90 years of local manufacturing. One suspects that General Motors won’t be that far behind it.
Today’s announcement does tend to validate the arguments of many that the massive support the industry has received over the years to protect jobs has been a waste of taxpayer funds.
What it has done has been to maintain a critical mass of engineering and manufacturing skills. Australia is one of a relative handful of countries, perhaps 15 or so, that can start with a blank sheet of paper and design and build a complete car.
Now that valuable skill and knowledge base will either have to be redeployed elsewhere in the economy or it will be lost. It might have been inevitable but it hasn’t been a good day for the future of real, valued-added manufacturing in this country.