AUSTRALIA: Pressure Down Under

Vehicle sales Down Under continue to push upwards toward the 1 million mark this year, following four record-smashing years.

But industry critics say success could sour if the current administration under Australian Prime Minister John Howard continues to engage in free-trade agreements, inviting a plethora of foreign competition into the market and prompting domestic auto makers to move their auto-parts business to low-cost Asian countries.

Indeed, the country's automotive suppliers already are finding themselves at a disadvantage, as OEMs pressure for ongoing cost concessions.

Lawmakers have rushed in with the lure of tax rebates and manufacturing grants to convince the Big Four — GM Holden Ltd., Ford Motor Co. of Australia Ltd., Toyota Motor Corp. Australia Ltd. and Mitsubishi Motors Australia Ltd. — not to drop their support of local suppliers.

A clear demonstration that the parts makers are on the edge came with Ion Group's bankruptcy in April. Ironically, Ion's Adelaide plant was to be the sole supplier of blocks to GM Holden's V-6 engine plant, which was due to begin exports to the U.S. for Buick vehicles and to Europe for Saab models early next year.

Industry observers said at the time pressure from OEM to cut costs was driving suppliers to the brink. Analysts now are predicting portions of the auto supply chain may not survive, particularly smaller companies that provide specialty products.

Even a partial supplier collapse would mean more parts would have to be imported, which would impact Australia's trade balance to the tune of hundreds of millions of dollars annually.

Further confirmation of a supply-line sea change came in September, when The Australian national newspaper revealed GM Holden's eagerly awaited, next-generation Commodore sedan, to be launched in 2006, would be less Aussie than ever.

The auto maker, whose U.S. parent General Motors Corp. is in financial distress, reportedly is outsourcing more vehicle parts to low-cost Asian suppliers than in the past, reducing domestic content from 75% with the current-generation VZ Commodore to 55% on the new VE model.

Other auto makers are following the trend. Mitsubishi Australia, for example, has replaced its locally built V-6 with a Japanese-made engine for the newly launched Magna/Verada replacement, the 380. The vehicle now carries 62% local content vs. 75%-80% for the former generation.

Such moves have set off alarms at the government level, as Australian auto parts suppliers warn they are facing insolvency.

“Pressure of global competitiveness has set the clock ticking on the Australian automotive industry,” says industry veteran Ivan Deveson. “The need for some radical initiatives has become hard to ignore.”

Deveson recently authored a 94-page report, funded by the Victorian government and the Automotive Products Manufacturers, that calls for the auto industry and government to join forces to protect one of Australia's largest and most lucrative industries.

Nevertheless, Australia's proximity to China and the low-cost manufacturing countries in Southeast Asia make it relatively easy to source less-expensive parts.

For GM Holden, the list is long. For instance, instead of sourcing the VE Commodore's engine cradle from local Dana Corp. operations, the auto maker now purchases the component from Japanese supplier Yorozu Corp.'s Thailand subsidiary (see chart, right).

The company's decision to use windshields made in Thailand at a plant owned by French supplier Saint-Gobain brought an angry reaction from union workers at the current windshield supplier, Pilkington plc, who fear the loss of 120 jobs at their Melbourne plant.

GM Holden says it gave Pilkington “ample opportunity” to invest in new technology that would produce windshields with quality equal to that of the Thai-made windshields. Nevertheless, at least seven Australian suppliers have been replaced with overseas companies for the new Commodore, The Australian reports.

The auto maker sees no need for apology.

“It should be noted that (GM) Holden's policy is, all things being equal, (that) we prefer to use Australian suppliers,” a company spokeswoman tells Ward's. “But our primary objective is that we have to remain globally competitive.”

Australian Industry Minister Ian Macfarlane in July called for meetings with local suppliers and the Big Four to stave off a crisis-in-the-making. While encouraged by the general health of OEMs, he said the drop in the Commodore's local content was troubling.

But the meeting accomplished little. Mitsubishi says it will have to wait 12 months before it could re-source any of the 380's content. Toyota, a top-selling brand in Australia with only one vehicle-assembly plant, located in Melbourne, says its Camry model already has 79% local content. Macfarlane wants more.

In October, he traveled to Tokyo to meet with Toyota Motor Corp. Chairman Hiroshi Okuda, urging the use of Australian-made parts for the auto maker's regional production. But Okuda reportedly told him Toyota has a long-standing policy to buy where it manufactures.

Losing patience, the Australian government now is warning that favors to the Big Four might have to be called in, as taxpayers have contributed A$7.2 billion ($5.4 billion) in subsidies to the OEMs over the last 15 years.

And in his quest to convince domestic auto makers to buy Australian parts, Macfarlane plans to visit the U.S. early next year.

“This is about promoting ‘one’ Australian auto-and-components brand, based on our ability to produce quality and innovative products,” he says. “I think it's a message which needs to be heard firsthand in the overseas head offices.”
— with Alan Harman in Australia

Commodore suppliers, then and now

Engine cradle supplier:

Then: Dana Corp., Australia

Now: Yorozu Corp., Thailand

Differentials:

Then: Dana Corp., Australia

Now: ZF, U.S.

Glass

Then: Pilkington plc, Australia

Now: Saint-Gobain, Thailand

Electronics

Then: Arrow Pty. Ltd., Australia

Now: Denso Corp., U.S.

Plastics

Then: Socobell OEM Pty. Ltd., Australia

Now: Weidmann Plastics Technology North America Inc., U.S.

Trim

Then: Silcraft Pty. Ltd., Australia

Now: Minth Corp., Taiwan

Wipers and rubbers

Then: Trico Pty. Ltd., Australia

Now: Unnamed Chinese supplier

Hoses and belts

Then: Gates Rubber, Australia

Now: Unnamed Chinese supplier

Safety systems

Then: Autoliv Australia Pty. Ltd., Australia

Now: Unnamed South Korean supplier