Wednesday, March 19, 2014

Death of the Australian Auto Industry

By 2017, the Australian Auto Industry will cease to exist entirely.  Will Mad Max have to drive a Corolla from now on?

I was recently chatting with an Australian associate, and they mentioned in passing that the Australian car industry is slated to die off in the next few years.  This was sort of a shock to me.

Most Americans are unaware that there is (or was) an Australian auto industry at all, or if they were, thought of it as merely a knock-down assembly plant for US makers.   But nothing could be further from the truth, and the Aussies have been designing and building cars for over a century.

Granted, many are similar in design to US makes, and share some component designs such as engines and transmissions.  But many others were unique to their market and truly "made down under".

GM briefly imported the Holden Commodore as the Pontiac G8, and it was a potential BMW-beater of a car, but was never marketed well, and the UAW was suspicious that GM was trying to cut jobs in the US by importing Australian vehicles.   With the demise of Pontiac, the car was nixed, only to return as the Chevrolet SS, with a 6.2 liter Corvette engine, which will be on sale from 2014 to 2017, at least as an Australian-built model (it is possible that assembly may move to Ontario if the car is successful).  The SS could end up as the new "full-sized Chevy" in America, ironically.

However, Toyota, Ford, Mitsubishi, and now GM are all pulling the plug on Australian production.  And it is not hard to see why, given the current state of worldwide auto production.

Auto production in Australia never really topped a half-million a year.   Australia is a large country, but most of the population is concentrated on the coastlines.   There is not a huge market.   Compare this to the United States, where eight million cars are sold every year - in a nation of 300 million plus people.

The lack of export capability sort of sealed the deal.  Sweden was able to have not one, but two car companies and successfully exported SAABs and Volvos for years, to the rest of Europe, and more importantly, to the lucrative US car market.

However, the staggering cost of developing new cars - with safety, emissions, and fuel economy standards, has meant that small players in the market can no longer afford to "go it alone" and as a result need to share platforms and designs with other producers within their extended families.

And so, these smaller car companies, one by one, bit the dust or were sold off to new concerns, which may or may not make a go of it.   Jaguar is now made by Tata motors, and while the new cars certainly look sexy, the underlying chassis is the same as the older ones.   How long they can play this game, in a competitive market, is uncertain.

Once cars become all alike, the bottom line becomes how cheaply they can be made, which is usually a function of labor costs and volume production.  (BMW and Mercedes can fight this trend as they sell unique vehicles that are not "clones" of lesser-cost brands, and thus can command higher prices despite limited production runs and high labor costs).

So, while Ford, GM, Mitsubishi, and Chrysler have all exited the Australian market, they have, at about the same time, entered the Chinese market, where a population of a Billion-plus people have all decided that they now need cars.   You have to go where the money is, the market demand is high, and labor is cheap.   And today, that's China.

And the US.  While US automakers have taken a beating in recent years (most famously, going bankrupt), many foreign makers have set up plants in the USA, including Mercedes, BMW, Volkswagen, Toyota, Mitsubishi, Subaru, and Nissan (Renault).   And by using non-union labor and locating plants in depressed areas of the country (where labor costs are low) they are able to sell to the US market very profitably.   Nissan pays about $15 an hour to workers in its Canon, Mississippi plant, or about what UAW workers were making in 1978, when I worked for GM.

When you look at the tiny size of the Australian car market, its proximity to Japanese and Korean exports, and the higher labor costs of the nation, the question becomes not "why is the Australian auto market dying?" but rather "what took so long?"

Protectionism no doubt kept the domestic industry alive for far longer than it would have ordinarily survived - as well as nationalism.   The same forces kept GM, Ford, and Chrysler afloat in the USA for years - people "buying American" for patriotic reasons, until they succumb to the inevitable and decide that maybe they too, deserve a reliable car like their neighbors.

Protectionism, ironically, is also what killed off the Australian car industry - that and an American-like focus on larger cars.   Exporting to Asian countries is problematic, as most have protectionist legislation that makes it harder to import vehicles into their countries.   Not only that, but it makes little sense to import a car to a country like Japan, which is awash in a sea of domestic production.

As with the US car industry in the 1970's, the Australians largely let the imports take over the smaller car market, concentrating instead on "full-sized" cars and trucks (utes).    The problem with this strategy, as the "Big-Three" discovered in the USA, is that by giving over a market segment to your competitors (and writing it off as unprofitable) you end up giving them a toehold in your market.  GM thought it could survive, in the 1990's on sales of Suburbans and Pickup Trucks.   After all, the Japanese couldn't make a "real pickup truck" like Americans, right?

But the Japanese (and Koreans and Chinese) are persistent and methodical, and they eventually came out with a "full-sized" T100 truck that everyone laughed at, but three generations later is now the monstrous "Tundra" truck that can go head-to-head with any American-made half-ton.  Nissan has similarly developed their "Titan" monster truck, and both companies sell correspondingly huge SUV models based on the same chassis.   US automakers no longer have a safe monopoly on any market segment, but have to compete on their merits.  And post-bankruptcy, they seem to be competing fairly well.

Some folks may see the demise of the Australian auto industry as a nefarious attempt by the Illuminati to screw the "workers" to increase the profits for "the 1%ers."  But the reality of the situation is, you can't really support an auto industry with sales of less than a half-million cars a year (dropping to a quarter-million rapidly) given that developing a new car design can easily cost over a billion dollars (as the new Holden Commodore was rumored to have cost).   That easily could work out to $1000 to $2000 per car in development costs - or more - even amortized over a decade.

So it is sad, but inevitable, that the unique and sometimes slightly strange designs to come out of Australia will disappear for good.   Well, that is, unless you truck down to your Chevy dealer this week, and put a deposit down on a new SS.


  1. An Australian reader writes that the death of the Australian auto industry is symptomatic of overall problems in the economy - high wages and high cost of living.

    Another reader notes that many "Japanese Cars" sold in Australia are actually MADE IN AMERICA and exported to that country.

    Our labor costs in America are rapidly becoming competitive with the rest of the world, if not already moreso. A line worker at the Nissan Canton plant in Mississippi might be making $15 an hour, part-time, with limited benefits - and happy to get what are the highest wages in the area.

    We gots a lot of poor people in America, who are willing to work for not a lot of money.

  2. On NPR this morning, a story that many firms in Europe are relocating to the United States. Why? Lower costs for energy and petrochemicals, thanks to fracking, as well as lower labor costs and taxes, compared to Europe (where every worker has "rights" and closing a plant literally requires permission of the government!).

    So, take that, China! The USA, thanks to a recession and depressed wages, is now the attractive place to invest for manufacturing!

    Who would have thought it? And maybe our Australian friends can take a tip from this.....

  3. This article from the NY Times illustrates what went wrong in Australia:


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