Study: GM Holden, Ford Cutting Oz Losses No Surprise

Facing the termination of production by two of Australia’s three biggest automakers, a government study finds the industry has been hobbled by high labor costs and barriers to exports.

The Productivity Commission's 81-page interim report on the auto-manufacturing sector says GM Holden, Ford and Toyota are producing well below the 200,000 to 300,000 units required annually for an assembly plant to be cost-competitive.

The commission’s interim study, ordered before GM Holden announced plans to shutter its sole assembly plant, located in South Australia, in 2017, says labor costs are substantially higher in Australia than in countries such as China and Thailand and, despite continuing efforts by automakers, a big cost gap remains.

The report says Ford told the Productivity Commission it decided to stop building cars in Australia in 2016 because it was unable to find a viable business model.

The study appears to back the decisions by Ford and GM Holden to end manufacturing in the country with its finding that increasing vehicle production in Australia for local consumption and exports is challenging, and automakers have been losing domestic market share.

“Increased Australian production encounters many constraints due to the nature of the domestic and global markets,” the commission says in its report. “Because all three vehicle producers…are subsidiaries of foreign companies, this means (they) compete against other affiliates in the global group for the right to supply international markets, as well as against other competitors in such markets.”

The Australian new-car market with annual production of a little more than 1 million units is competitive but small by global standards and fragmented, with top-selling models delivering only about 40,000 units a year. “Thus, while some Australian-made vehicles are still among the highest-selling in the domestic market, their total sales volumes are limited,” the report says.

Australia’s new-vehicle deliveries represented just 1.4% of the 82 million passenger and commercial vehicles sold globally in 2012, the study notes. Additionally, imports account for nearly 90% of the country’s sales, with locally built models having lost considerable share over the past decade.

The report says Australia’s vehicle production of slightly more than 200,000 units is about 0.25% of the global total, and about 40% of this is exported.

A high level of import competition with few trade barriers to those imports has left the Australian auto market highly fragmented. In 2013, 66 vehicle brands were competing for annual sales of about 1 million units, up from 56 in 2003.

“As noted by Toyota, countries such as the U.S. and regions such as the European Union have a similar number of brands and models competing for annual sales of 16 (million) to 18 million vehicles,” the report says.

Australia has reduced its import tariff on motor vehicles and parts since 2000 from 15% to 5%, and there is a zero tariff rate for countries with which it has bilateral or regional trade agreements.

Australia exports almost 90,000 vehicles a year, primarily to the Middle East, New Zealand and Southeast Asia. But the report says export opportunities are limited by the high cost of production, competition from lower-cost countries, the high value of the Australian dollar, trade barriers and capacity exceeding demand in some countries.

“Export markets are highly competitive,” it says, (and this) is likely to increase as global automotive firms seek to increase export volumes to employ the excess capacity in many plants globally to achieve economies of scale. This applies particularly to…Europe, South Korea, Japan and Thailand.”

Toyota was Australia’s largest vehicle producer in 2012 with more than 100,000 units, followed by GM Holden with more than 80,000 and Ford with nearly 40,000.

“Most analysts and some participants to this inquiry (determined) that a cost-competitive scale for an assembly plant for the types of vehicles manufactured in Australia is at least 200,000-300,000 vehicles annually,” the report says. “Existing vehicle-assembly operations in Australia are currently operating at a daily rate significantly below these scales and that of the majority of imported competitors.”

Ford told the commission its manufacturing costs in Australia are about twice as high as those of a similar facility in Europe and nearly four times greater than a comparable production operation in Asia.

Additionally, “(General Motors) pays a significant premium to manufacture in Australia,” the report says. “It is approximately twice as expensive as Europe and four times as expensive as Asia. It costs Holden, on average, A$3,750 ($3,347) more to build (a car) in Australia, compared to some other GM plants.”

GM Holden told the commission the higher expense is a result of input costs (including wages), more-costly domestic components and imports of foreign parts. High utility costs are another factor.

While the commission recognizes the industry’s ongoing drive to reduce the cost of vehicle production in Australia, the report says this needs to be seen in the context of automakers relentlessly pursuing cost reductions across their global operations.

Australian automakers, in particular, must make significant cost cuts to close the current gap with vehicle manufacturers in other countries, and having done so, they will need to “keep reducing their costs to keep pace with the ongoing reductions that history suggests will be achieved by those overseas producers,” the commission says.

The cost of making components in Australia also is more expensive than in other countries, such as China and India, and the local automakers increasingly are sourcing parts from overseas.

The report cites Australia’s complex logistical supply chain of about 160 businesses involved in the engineering, design, tooling and production of auto components and says there are at least 260 producers of parts and accessories for the aftermarket.

Automakers increasingly are demanding that their key component suppliers have a global presence, locating near major production regions, the report says. But while the greater use of global platforms may provide opportunities for some Australian suppliers, it may lead to the closure of others.

The commission quotes a 2012 analysis by global accountancy firm KPMG suggesting Australia was the second most-expensive country, behind Japan, to manufacture components out of a sampling of 14 countries. Australia also had the highest transportation and utilities costs and the third-highest labor costs behind Japan and Germany.

The high Australian dollar, which has appreciated 42% in the past 13 years, has significantly harmed the competitiveness of domestically produced vehicles in local and export markets, the commission says in its report.

Fierce competition also limits the scope for higher profits. After sustained increases throughout the late 1980s and 1990s, 1998 to 2012 saw average retail prices of all motor vehicles rose less than 5%.

Within that average, the study found a slight decline in the price of imported vehicles and a 21% increase in the average recommended retail price of Australian-built cars.

The final Productivity Commission report is expected to be sent to the government by March 31.