Globalization and the Australian Car Industry

It’s been a devastating 18 months for the Australian auto industry and its 50, 000 workers. One by one, the country’s automakers declared that without import protection they couldn’t be profitable and had to close.

Ford is the first to go.  Its local CEO Bob Graziano observed that Australian manufacturing costs are four times Asian levels and double those of Europe.  Having lost $600 million over five years, he said local production would end in 2016.  Ford has made cars in Australia since 1925.

General Motors Holden, the biggest manufacturer, will cease Australian production in 2017. And Akio Toyoda told Toyota workers near Melbourne that with current and future free trade agreements, “it is not viable to continue building cars in Australia.” Toyota’s modern Australian plant will close in two years.

Analysts say economies of scale killed the Australian auto industry. With only 23 million people and a vehicle market that barely exceeds 1 million sales annually, unfettered competition did in high cost domestic manufacturers.

Successive Australian governments have embraced globalization and abandoned the discredited import substitution model of economic development.  Domestic producers used to be protected by quotas and tariffs that in the mid-1990s were as high as 30%. Market opening measures brought auto tariffs down 2.5% each year to their current 5% level.  To soften the effects of competition the government lavished hug subsidies on domestic producers but they are being phased out.

Low tariffs triggered a surge of lower priced imports, which now dominate the market. Even with the car market growing and the local economy booming, domestic car production fell by 50% over the past decade. Last year a mere 210, 000 cars were produced in Australia, an amount equal to the output from a single assembly plant in many places. Domestics now account for less than 18 % of the Australian auto market.

As foreign visitors know well, Australia is a high cost economy. During my two-week visit in November, I was shocked to pay $8 for a hamburger and fish sandwich at McDonalds, or $6 for a donut and coffee at Krispy Kreme, and $20 for a burger and beer at a Brisbane restaurant.

A McDonalds menu in Adelaide, South Australia

Australian autoworkers—those still working--are well paid. Many earn over $100,000 per year and even with the recent depreciation of the Australian currency, the basic industry wage exceeds $20 per hour.  Australia’s minimum wage is US $15 per hour.

Australia is a treasure chest of minerals. China is its biggest trading partner and after hosting last month’s G20 summit in Brisbane, Prime Minister Tony Abbott signed a landmark free trade agreement with China’s president Xi Jinping.

Riding the commodities boom of the 1990 and 2000s, Australia got rich from exporting iron ore, coal and natural gas.  Unemployment remains low and Australia hasn’t had a recession in 20 years. On a per capita basis it is one of the world’s 20 richest countries.

But with the commodity boom over, Australia faces a growing competitiveness problem. Because of strong capital inflows from mining, the Australian dollar rose to levels well beyond what could be sustained. The Aussie dollar soared well above parity with the US dollar, making the cost differential even more severe.  Since 2013 that trend has reversed and the Aussie dollar has recently given up half of its 40% advance of the past decade.

But even at current levels, Australia is uncompetitive.  The Boston Consulting Group designates Australia as the worst-performer of 25 economies in its global manufacturing cost-competitiveness index. Manufacturing costs in Australia, it says, are higher than in Germany, Holland and even Switzerland. Manufacturing wages, it says, rose 48% over the past decade while productivity fell.

Australia has become a service and resources economy, or as former GM Australia CEO Mike Devereux bluntly put it, Australia is now “a farm, a hotel and a quarry.”

Manufacturing has a bleak future in the land down under. But some observers, lamenting the passing of the Australian auto industry, wonder how did it manage to survive as long as it did? 

(this story originally appeared on marketwatch.com)

Optimism in Detroit as Autos Lead Recovery

For the first time in a decade there is optimism in Detroit. Not only is the blighted city slowly beginning a turn around, the industry that gave it life is restructured and fit, having climbed back from near collapse in 2009. In 2013 US brands accounted for 46% of domestic sales, outselling their Japanese, Korean and German competitors.

Light vehicle sales climbed to 15.6 million, the highest level in six years. A resurgent General Motors held top place with an 18% market share. Ford followed with 16% and Chrysler had 12%. Toyota and Honda led the Asians with 14% and 10% shares respectively. The Detroit 3 outpaced the competition with sales gains of over 9%.

For the Detroit Three the watchwords in 2014 are change and transition. From January 15,th General Motors will be headed by an engineer, Mary Barra, who will be the first female CEO of a global car company. She has spent over 30 years moving through the ranks at GM.

Mary Barra 

With the Treasury having sold its remaining shares in GM in December, the chapter on the $80 billion bailout of GM and Chrysler is closed. GM is no longer ‘government motors.’ Ford, which sold assets and mortgaged its future to avoid bankruptcy, is keeping its management team in place.

Alan Mulally, 68, the former CEO of Boeing Commercial Airplanes, has led Ford since 2006 and presided over its revival. On Tuesday Mulally ended months of speculation that he would take the top job at Microsoft and said he would remain at Ford until the end of 2014.

 

Alan Mulally                                                          Sergio Marchionne 

 Big news came to Chrysler on New Year’s Day when Sergio Marchionne sealed a deal that gives Fiat outright ownership of the US firm. Marchionne, who grew up in Canada, heads both companies. He is credited with bringing the struggling US company back from near death. Fiat is paying $4.3 billion for the Chrysler shares owned by the healthcare trust of the United Auto Workers that the union received at the time of the bankruptcy. Incredibly, with newly profitable Chrysler providing much of the cash, Fiat’s payment is a mere 10% of the $38 billion Germany’s Daimler paid for Chrysler in 1998.

Analysts expect the auto industry recovery to persist as the market is benefiting from low interest rates, longer-term loans, and rebounding consumer confidence. Edmunds consultancy predicts 2014 sales of over 16 million, only one million units below the year 2000 sales record. Kristin Dziczek, a specialist at the Center for Automotive Research in Ann Arbor, says the post-great recession US auto industry is now highly competitive versus all global rivals.

It is also much smaller. The US based auto industry is 35% smaller than ten years ago. Where it used to employ 1 million people today it is 650,000. In Michigan auto industry employment is down 50% in ten years even as over 100,000 jobs have been added since 2009.

Wages are also lower as new hires earn about $15 per hour, half the level of a decade earlier. However, the booming sales of 2013 have set the table for record profit sharing. In the next few months an estimated 130,000 unionized workers are likely to receive per person bonuses of up to $12,000.