Fears of a domino effect on the Australian auto industry and its component suppliers after Ford’s announcement today that it is ending local manufacturing in 2016 are shaking local governments and industry workers.

Ford plans to shutter its vehicle plant at Broadmeadows and engine facility in Geelong, as well as lay off 1,200 workers, citing losses in Australia over the last five years of about A$600 million ($581.5 million).

The decision comes despite a last-minute effort by Victoria State Premier Denis Napthine, who offered Ford a package of financial inducements to keep its local plants open beyond October 2016.

But Melbourne’s The Age newspaper reports Napthine's attempt was rebuffed by Ford's Shanghai-based Asia-Pacific President David Schoch and Ford Australia President and CEO Bob Graziano, telling the premier there was nothing the state government or anyone else could do to reverse the decision.

Earlier this year, former Ford President Jac Nasser, now chairman of mining giant BHP Billiton in Australia, made a forecast of what could happen next.

“As soon as you have a reduction in the scale of domestic manufacturing, let’s assume one of the three (Ford, GM Holden and Toyota Australia) 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.

Ford is ending production in Australia after 88 years, but says it’s not going away. Rather, it will become a full importer, with Graziano saying it costs about four times as much to build a car in Australia as it does in Asia, and twice as much as in Europe.

Free-trade agreements have seen Australia lower its tariff barriers to a flood of low-priced, imported vehicles from Asia and Europe at the same time the local dollar has been soaring.

The auto maker says it is transforming its local business by accelerating the introduction of new products, enhancing the sales and service experience and improving its business efficiency and profitability.

Nissan ended Australian manufacturing in the late 1980s and Mitsubishi left in 2008.

The Australian Manufacturing Workers Union says Ford’s decision brings the country to a tipping point where it needs strong, unified political will to retain a car industry and sustain a wider manufacturing base.

AMWU National Secretary Paul Bastian says the decision will put intense pressure on hundreds of component suppliers whose viability depends on making cars in Australia.

“This is a time of huge uncertainty for our members at Ford and 200,000 other workers in the associated industries which help Australia produce quality cars, a time when they need leadership which rises above political points-scoring,” Bastian says in a statement.

“We are at a crisis point that will need bipartisan support from both sides of politics to keep our car industry, which is a center for innovation and skills development vital to our prosperity.”

Ford will proceed with plans to launch updated versions of the locally built Falcon sedan, Falcon Ute (pickup) and Territory SUV in 2014. But once production ends in June 2016, the Falcon nameplate, inextricably linked with Australia, will be retired.

As it changes over to an import company, Ford says it will strengthen its product lineup with a 30% increase in the number of new vehicles offered to Australian customers by 2016.

Ford’s presence in Australia will remain significant with 1,500 on its payroll and more than 200 dealers nationwide.

The decision to end local manufacturing was driven by increasingly challenging market conditions, including market fragmentation and the high cost of manufacturing. However, Graziano says the auto maker remains committed to serving customers with vehicles that deliver cutting edge technology at an affordable cost.

“Unfortunately, due to challenging market conditions, we are unable to do that longer-term while continuing to manufacture locally,” he says in a statement.

Australia is one of four product-development hubs for Ford globally, and Graziano says the Australian team’s role as a global center of excellence for vehicle development will continue.

Given the changing dynamics of the auto industry, a number of business scenarios were reviewed during the past year to determine the next steps for Ford’s Australian operations, he says.

All viable alternatives were evaluated, including manufacturing various types and combinations of vehicles for local sale as well as the viability of a significant export program. The scenarios also included varying levels of government support, manufacturing-cost reductions and productivity improvements.

Australia has annual sales of about 1.1 million new vehicles with more than 65 brands and 365 models available in one of the most competitive and crowded automotive markets in the world.

“Given the fragmented marketplace and the low model volumes that result, we decided that manufacturing locally was no longer viable,” Graziano says. “We are proud of our role in Australia and we haven’t made this decision lightly. We are changing, but our commitment to Australia remains strong.”

Ford Australia announced an after-tax operating loss of A$141 million ($136.6 million) for the 2012 financial year, following a loss of A$290 million ($281 million) in 2011. It says last year’s loss was a result of the realignment of the company’s business in November, when production was cut from 209 vehicles a day to 148.

As a result, Ford has impaired its asset base by A$143 million ($138.6 million).

Chief Financial Officer Mark Rearick says the financial results mirror the restructure. “We had a 30% reduction in volume at the end of last year, and our financial results reflect that we had to revalue our asset base by a corresponding amount, accounting for the loss,” he says in a statement.

GM Holden Chairman and Managing Director Mike Devereux says Ford’s decision is a reminder of just how tough it is for manufacturers in Australia, even the most-committed.

“Despite Ford's announcement to end local manufacturing, we believe the industry can survive in Australia and has already adjusted in large part given Ford's relatively low production volumes,” Devereux says in a statement. “The industry needs swift action to make Australia’s automotive policy settings clear, consistent and globally competitive as quickly as possible.”

GM Holden is working closely with federal and state governments as well as the federal opposition coalition to ensure the viability of the industry in the face of the historically significant economic challenges facing the country, he says.

The Victoria Automotive Chamber of Commerce says while Ford’s decision was not entirely unexpected, even if delivered sooner than expected, it provides an opportunity to review Australia’s automotive manufacturing strategy.

VACC Executive Director David Purchase says the industry needs governments to recognize that even if manufacturing in Australia is reduced, the industry is a world leader in design and research and development, and that governments need to get behind the industry in a much more strategic sense.

“Ford’s situation in no way alters VACC’s view that automotive manufacturing is a significant contributor to the economy and community,” Purchase says in a statement. “We will continue to promote the industry and call on governments to provide support and assistance, even if we might need to adjust our sights.”

Prime Minister Julia Gillard and Napthine say they are working together to ease the pain.

“We will be contributing almost A$40 million ($38.7 million) to structural-adjustment programs to support the economic development and diversification of the Geelong and northern Melbourne regions,” they say in a joint statement. “The Australian government will contribute A$30 million ($29.1 million) and the Victorian government A$9 million ($8.7 million).

“We will be seeking a significant contribution to this effort from Ford Australia.”

The federal government also will provide another A$10 million ($9.7 million) to support the automotive supply chain through its Automotive New Markets Program. Victoria will give A$2 million ($1.9 million) to support Victorian component suppliers.

“The Australian and Victorian governments will continue to support Australian manufacturing, and the local car industry, as an important source of jobs, innovation and growth,” the statement says.

Minister for Competitiveness Craig Emerson says one of the considerations that affected Ford's viability is the fact that it operated on a relatively small scale by international, and even by national, standards. Ford Australia is building fewer than 40,000 vehicles a year and headed toward about 30,000.

“Ford has established a factory in China that is producing 250,000 vehicles per annum, so the economies of scale were not there for Ford's operations in Australia and that has been a major consideration,” Emerson tells a news conference. “I'd say that the weight of the Australian dollar has been borne very heavily by Ford.”

Gillard says A$34 million ($32.9 million) in assistance promised to Ford last year still will be paid because the money was for models that are going to be produced until 2016.