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)

Potholes Ahead for Tesla

WASHINGTON, DC: Tesla Motors is on a roll. Last year its share price quadrupled and it sold over 20,000 cars. There’s a waiting list for every four-door sedan that rolls out of the Fremont, California plant.

But with a single factory and a more complicated SUV expected down the line later this year, can Tesla nearly double production as planned? Other potholes include batteries, dealer protection laws, and an organizing drive from the auto workers union.

The $100,000 Model S rules the luxury electric vehicle market. For the rich, famous and green, the quick-accelerating Model S is the vehicle to own. Aggressively expanding, Teslas are now on sale in China, the world’s biggest auto market.

 Model S at Tesla Washington, DC showroom 

The Model S is taking off in Europe where it’s been available less than a year. In environmentally conscious Norway Tesla was the best-selling car in December. Tesla sales get a huge boost in Norway because they’re exempt from taxes that can double the cost of gasoline-powered car.

The ten-year-old Silicon Valley start-up is on its way to becoming a viable 4th US-based car company. Detroit is paying attention. Mark Reuss, G.M.’s chief of product development, is extravagant in his praise, telling the Detroit Free Press he spends a lot of time in a Model S. “It’s highly creative and fun to drive,” he says. Referring to 42-year-old billionaire and Tesla CEO Elon Musk, Reuss says, “he’s basically created a brand, which is very hard to do in a mature industry.”

Tesla lithium-ion battery

Musk, the South African-born genius behind Space X, SolarCity, and Tesla, runs the car company much like Steve Jobs ran Apple. Technology and design are paramount. There’s a keen eye on media and like Jobs Musk was on stage near LA in June to introduce the automated battery swap stations that will be placed across the country. Replacing an entire panel of 7,000 reusable lithium ion batteries is meant to take only 90 seconds.

Tesla super-chargers, as of February 1, 2014 

Determined to prove that the Model S can perform well on highways, Tesla has constructed a network of free supercharging stations situated at 200-mile intervals on a transcontinental route linking Los Angeles with New York.

A half-charge, enough to zoom on to the next station takes about 30-minutes. Typically six charging posts are in the unmanned facilities situated in shopping mall parking lots near on-off ramps. Tesla says supercharging will be free forever, meaning that Tesla vehicles can scoot across the country paying nothing for fuel.

The Tesla business plan is simple, ambitious and on track. First establish the brand with a luxury car. Create a buzz. Widen the product line and boost production. Then produce a smaller sedan priced at about $35,000, within reach of the upper middle class.

Even if Tesla can produce 35,000 vehicles this year, that’s a tiny number equal to half the Ford F series pickups manufactured each month. Tesla’s gull-wing crossover is expected by the end of the year, but the much-touted generation three family car isn’t due until 2017. Musk speaks of eventual production of 500,000 cars per year.

Musk concedes that getting enough batteries is a problem. His sole supplier is Panasonic in Japan. To overcome the bottleneck Tesla contemplates making its own cells. In November Musk speculated that it would be a giant facility. “We’re talking about something that is comparable to all of the lithium-ion battery production in the world — in one factory.”

Tesla currently has four-dozen showrooms with more on the way. But all sales are online. Tesla’s direct to the consumer approach collides with a maze of state laws that essentially require all new cars to be sold through dealers. Jack Fitzgerald, an electric car advocate and president of Fitzgerald Auto Malls in Maryland, says as long as Tesla remains a bit player, the dealership rules may not be a problem. But complaints are already coming in and dealers don’t want the precedent of buying on line to take hold. 

Tesla’s manufacturing facility is in Fremont, California in San Francisco’s East Bay. Originally built by General Motors the Fremont plant in the 1980s housed Nummi, a cooperative venture between GM and Toyota. GM later withdrew and Tesla purchased the sprawling plant for a mere $50 million.

At its peak Nummi employed nearly 5,000 workers who were represented by the United Auto Workers. Tesla’s current workforce of nearly 2,000 is non-union but with decent pay and benefits. The UAW has already set up an organizing committee. While Musk says he’s neutral on the union, Tesla’s headquarters are nearby in Palo Alto in the Silicon Valley where unions have been neither popular nor successful.

Finally, what about sales and service? Will American customers be willing to wait months to get a car they ordered online? And things go wrong with cars, even those without engines. How fast will customers get a replacement mirror or fender? For now Tesla is employing mobile service vans, an operation that would be overwhelmed by increased volume.

If its success continues to build, Tesla will encounter competition with established car companies. The game then could become brutal. In short, Tesla’s viability is not assured.

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.