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Australia: what went wrong, and right, in 2013

Tony Lemmo, CEO of Autoteam Australia Consulting, discusses the factors at work behind the scenes. By Megan Lampinen

Australia’s automotive industry grabbed the headlines for much of 2013, with news of upcoming plant closures for both Ford and Holden, job cuts across the board, the withdrawal of the Opel brand and urgently sought labour concessions. Lost to many, however, was the fact that sales were booming. In fact, the country ended 2013 with a new record number of vehicle sales.

Full year sales of new vehicles in Australia rose from 1,112,032 units in 2012 – a record itself at the time – to 1,136,227 units last year. “A number of things were instrumental in the achievement of this new record volume,” notes Tony Lemmo, Chief Executive Officer of Autoteam Australia Consulting. “A stable Australian economy with modest growth rate, stable unemployment rate and record number of people employed. There was also a record low official interest rate for the majority of the year.”

The country’s low tariff regime and lack of import quotes were also of benefit: imported passenger cars are charged at just a 5% rate, and vehicles from the US and Thailand are exempt thanks to free trade agreements. In addition, tariffs are not applied at all to SUVs, light commercial vehicles and heavy trucks. “The 5% on the affected passenger cars equates to about 3% at retail. In the near future, Australia is looking to extend countries with which it has a free trade agreement,” Lemmo explains.

Lemmo believes the most important factor when it comes to purchase decisions among Australian consumers is cost, and observes that the “market is very price sensitive”; the strong Australian dollar compared to its trading partners has resulted in competitive pricing.

There has been an “aggressive push by manufacturers and dealers to achieve what could be regarded as unrealistic full year sales targets. As such, manufacturers and dealers have been offering large incentives to attract retail customers. These incentives range from deferred payment plans to cash back to a low or nil interest rate. These actions have made vehicle prices very attractive. In fact the ‘real’ price of an average vehicle in Australia is at about the same level as it was in 1990,” Lemmo states.

Meanwhile, OEMS are fighting for sales in what Lemmo describes as “one of the most competitive automotive industries in the world, with 68 different brands competing for volume in a market of just over one million units.” Some manufacturers are “putting pressure on dealers to pre-record vehicles in order to achieve overseas sales targets. While the number of units in this category is not known it is certainly in the tens of thousands,” he adds.

Manufacturing challenges

General Motors has repeatedly blamed the strength of the Australian dollar for the high manufacturing costs in the country, claiming that currency factors alone have pushed the cost of making things in Australia to 65% higher than just a decade earlier.

Lemmo agrees that local production is costly: “In terms of a manufacturing location, because of all the compliance and workplace issues in place, Australia would have to be one of the most, if not the most, expensive manufacturing locations in the world.”

There is also the issue of model choice. “Apart from the manufacturing costs, Ford and Holden are building vehicles that consumers do not wish to purchase. In the passenger industry, 70% of all sales are light/small vehicles. The locally manufactured Falcon and Commodore are large segment vehicles which account for just 9.3%. This compares to 35% of the passenger market just 10 years back.”

Sales of such locally built large models have plunged. For instance, Falcon and Commodore sales – along with their commercial derivatives – stood at 197,196 units in 2003. As of last year this figure fell to just 48,996 units. “Consumers have been deserting these brands in large numbers over recent years,” Lemmo states. “Consumers no longer require a large vehicle as average family numbers have come down, and with low air fares at present the number of consumers who travel long distances has reduced.”

Overall, locally built vehicles accounted for a mere 10.4% of total industry volumes last year. Ford’s locally built vehicles accounted for a hefty 76% of its Australian sales in 2003; this dropped to just 34% last year. For Holden, locally-built vehicles made up 64% of its Australian sales in 2003. Last year, they made up 53%. Excluding the Cruze, locally made Holden vehicles accounted for just 31% of the brand’s sales in its home market.

“In prior years, Falcon and Commodore were primarily sold with large factory incentives to fleets, rental companies and governments. These historical buyers have, to a large extent, also deserted these products in favour of smaller, more fuel efficient vehicles with better resale value and green credentials,” Lemmo explains.

Overall, buyers in Australia are not concerned with purchasing locally-made models. “The Australian consumer either does not know, or does not care, where their vehicles are manufactured. Consumer loyalty does not exist in most cases and it is just what represents the best value. Australian-built vehicles are of outstanding quality, as are most of the vehicles imported, and as such consumers do not have a preference for locally manufactured vehicles,” Lemmo says.

Total vehicle industry - December 2013

Last OEM standing

Whilst Ford and Holden were both preparing to wind down production, Toyota warned that their departure only put it under greater pressure – despite leading the market in terms of unit sales for 11 consecutive years, and the fact that its Corolla was the top selling car in the country last year. By December 2013, the Japanese OEM’s year-to-date sales were down 12.7%, falling by 5.4%.

The OEM had said, before announcing that it would leave the country by 2017, that changes to its manufacturing operations were essential if it was to remain viable. It had attempted to introduce changes to the current workplace agreement covering its Elizabeth plant in Adelaide, but workers objected.

Like GM, Toyota has said that the decision to end production was based on several factors, including “the unfavourable Australian dollar that makes exports unviable, high costs of manufacturing and low economies of scale for our vehicle production and local supplier base.” It also highlighted the upcoming FTAs Australia was poised to finalise, which would have further increased competitiveness in an already heated market.

Government support

At present, Australia’s government provides the local automotive manufacturing industry with about AUS$500m (US$447m) in funding each year. Last September, however, Prime Minister Tony Abbott warned of possible changes: “There will continue to be a high level of assistance to the motor industry, but we expect the motor industry, in return for that high level of assistance, to provide us with a reasonable indication of how it is going to increase volumes, particularly export volumes. I accept that government has a role in bringing this about but I also think the industry has a role in bringing this about.”

The future of government funding is yet to be decided, but it will partly be based on a December 2013 report by the Australian Productivity Commission. The document examines the global context and trends in automotive manufacturing, and the factors affecting the competitiveness of the local automotive manufacturing industry. The Commission also released a position paper on 31 January 2014, considering potential options for government assistance to the automotive industry.

“Over many years, the Australian government has provided large incentives – into the billions of dollars – to Ford, Holden and Toyota, to encourage them to remain in Australia. The present government, while still providing incentives, is not inclined to provide the level of financial support the manufacturers are requesting,” warns Lemmo.

Prior to Toyota’s announcement, Autoteam Australia Consulting forecast a modest rise in full-year volumes for 2014 to 1,140,000 units. “The Australian economy is sound, interest rates are forecast to remain low, unemployment level is also forecast to remain low and housing prices are on the up. We may see a slight weakening of the Australian dollar versus our trading partners but not significant enough to impact vehicle pricing,” Lemmo said at the time. Toyota’s announcement, however, means that around 2,500 plant workers will now lose their jobs.

However, there are positive indications from key trading partners, as Lemmo adds: “The global economy is also forecast to grow and one of our major trading partners, China, should see growth of about 8%. A good sign for the Australian economy.”

This article was first published in the Q1 2014 issue of Automotive World Megatrends Magazine. Follow this link to download the full issue

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