THE DISTILLERY: Ford disassembly

Scribes lament Ford's withdrawal from carmaking in Australia, pointing to economic pressures and strategic mistakes that triggered its demise.

The first Australian-built Ford Model T was built in in June 1925. The Geelong Football Club has been sponsored by the legendary carmaker for 88 years. The Falcon is an Australian-made icon. And this profound history is done.

Australia’s business commentators have seen this coming for some time. Everyone has, even the factory floor workers. Is Ford treating Australia like garbage? Is our carmaking industry a case of all or nothing, where if one falls they all fall? Were the $10 billion in subsidies over seven years for absolutely nothing? Our business scribes dissect all this, and more.

As such, there’s a lot to cover. But let’s start with The Australian Financial Review’s Laura Tingle, who notices something that no other commentator decided to put in their copy that just struck The Distiller as astute reporting from a class act.

“The headline on Thursday’s press release announcing Ford Australia was closing its Australian manufacturing operations was ‘Ford Accelerates Australian Business Transformation’. Canberra’s spin doctors could only have looked on in awe.”

Thousands of words have been written making a mockery of the spin from Canberra, so it’s worth focussing on the shameless language employed by a beneficiary of those taxpayer dollars.

Cars are emotional. Check out Fairfax’s Alan Stokes on the issue, particularly the demise of the Falcon, which became a great Australian icon…before becoming a car that hardly anyone wants to buy. Stokes doesn’t seem to mind.

More than disappointing demand from local consumers has been a major factor behind Ford's withdrawal, explains The Australian’s John Durie. Yet he says:

“Ultimately it was a failure to adapt to the small domestic market and plug into its global platform. Local manufacturers can rightly argue the rules were rigged when Thailand simply altered the trade barriers after signing a free-trade agreement with Australia. But at the end of the day, Thailand's a bigger market and cost of production is just 25 per cent of that in Australia. Australia has to play smarter where it has some natural advantages rather try to beat the mass-market game.”

The Australian Financial Review’s economics editor Alan Mitchell explains how it’s not just the carmaking professionals Down Under that have to adapt to a brave new world.

“Around the world, car manufacturing is migrating from high-income economies such as Australia’s to the new manufacturing economies of the developing world, where labour costs are lower and economies of scale are greater. Moreover, the combination of the expansion of Third World manufacturing and the reluctance of politicians in European countries to give up their car plants has created a global surplus of car-making capacity. That will keep pressure on prices and profit margins for years to come.”

This has been apparent for years in a variety of industries. So why have we thrown billions after a disappearing sector, asks The Australian Financial Review’s Jennifer Hewett?

“The rationale for these subsidies – reiterated by the prime minister – is that the automotive sector is unique in developing key skills and innovation which translates into other jobs and the broader economy. To the extent that was ever true, it’s no longer valid. There’s little point in hanging on to a business model that no longer works.”

This story has been inevitable for a while. But it felt imminent when a famous Australia businessman really laid it down. Here’s Business Spectator’s Stephen Bartholomeusz:

“Jacques 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.”

Will it be a domino effect? The Herald Sun’s Terry McCrann thinks so.

“This is the beginning of the end of the Australian car-making industry. It is an end that could now come rapidly. Holden, which yesterday recommitted to local manufacturing until 2022, could be the last one out of the factory, so to speak, turning off the lights. If it makes it that far.”

Fairfax’s Malcolm Maiden points out that Ford is not the first car company to walk this road out of Australia, but it had perhaps some better reasons than any.

“Nissan stopped manufacturing in Australia in 1992, and moved to an import-only model. Chrysler sold its remaining Australian manufacturing operation to Mitsubishi in 1981, and Mitsubishi moved to the import model in 2008. Groups including Mazda and Honda have always imported, and in 2016 Ford will join them. Its prediction that it will be employing 1500 people after the change in areas including R&D and design, where Australia is one of Ford's four global centres, is probably over the top, but the automotive industry will be a big employer in this country even if car manufacturing ends.”

Fairfax’s economics correspondent Peter Martin similarly observes that Ford had a business that wasn’t going to survive, compared to the last two automakers.

“Toyota is fully integrated with its overseas parent. At times more than half of its Australian production is exported. When the dollar is low Toyota makes more cars in Australia, when it is high it makes more cars offshore. Holden is nimble. Its parent, General Motors allows it to export. It sends rugged cars to South Africa, it makes police cars for the United States. But Ford Australia has hardly ever sent anything offshore. Its most spectacular failure is the stuff of legend. With no experience of such things it won the contract to make the Ford Capri sports car for the United States in 1989. It leaked. Production stopped after just 67,000 cars and its foreign parent has looked askance at it ever since.”

The Australian Financial Review’s Matthew Stevens notes that it’s more than Ford’s poor decisions that have brought about its departure.

“With grim predictability, [Ford Australia president] Rob Graziano identified the strong Australian dollar and our uncompetitive operating environment as triggers for the decision to shut down. Graziano noted too that it costs twice as much to make a car here as it does in Europe and four times more than it does in various Asia bases.”

Speaking of the dollar, The Australian Financial Review’s Washington correspondent Ben Potter says Federal Reserve chairman Ben Bernanke prefers a slow withdrawal of QE3, which is incredibly important for the outlook of the dollar.

Elsewhere, The Australian Financial Review’s Andrew Clearly has perhaps the best take on billionaire James Packer’s decision to sell out of rival Echo Entertainment.

“For almost two years, James Packer had made it very clear that he had no intention of launching a full takeover of casino rival Echo Entertainment Group. The 10 per cent stake in Echo held by Packer’s Crown was, it was put about, strategic in nature only. The fact that Crown has now dumped that bolthole in Echo – and less than one week after the Packer-controlled company was cleared to increase its holding after a frustrating year-long wait – indicates that the strategy has changed.”

Fairfax’s Elizabeth Knight is happy to entertain thoughts on just why Packer is selling out.

“Forget playing the tables or the slots. The biggest game in town is working out why James Packer's Crown is selling its 10 per cent stake in Echo Entertainment only a week after finally receiving regulatory approval to increase it to 23 per cent. The first conspiracy theory is that Packer's had the wink and nod from the New South Wales government that his Barangaroo casino proposal is in the bag. Well-placed insiders disagree, saying the government is at least a month away from that decision.”

And finally, The Australian’s economics correspondent Adam Creighton frankly lets himself down by pointing out that economists would mock Treasurer Wayne Swan for his claim that Labor has “created 950,000 jobs”.

“Quality economists would mock such a claim: governments only ‘create’ jobs to the extent they levy taxes and hire public servants, which in turn starves private enterprise of the money it needs to hire those very same people in a different, and probably more efficient, capacity.”

A fairer piece would point that all governments claim they create jobs. Tony Abbott says he’s going to create 250,000 of them when he’s prime minister. He made that promise just over a month ago.

However, Creighton does point out that about 60 per cent of Labor’s jobs have come from the public sector. That is a pretty good point.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles