GM Withdrawal Risks Production Collapse

The news that General Motors Company (GM) will stop producing vehicles and engines in Australia in 2017 is not entirely a surprise given the difficult operating conditions in the country's production industry, as previously highlighted by BMI (see 'GM Holden Can't Use Yen Excuse To Mask Uncompetitiveness', April 12). The question now is whether Toyota Motor, the lone domestic producer following the withdrawal of Ford Motor in 2016 and GM in 2017, will continue manufacturing and whether the domestic supply base can adapt to survive.

Closure Always On The Cards?

GM's Australian operations have been gradually reduced throughout the year. In April, the company said it would be cutting 500 manufacturing jobs, while in August it closed its Opel division after returning to the market just a year earlier. Volumes were not as high as expected, and the European brand found it hard to compete on price.

Margins Narrowing Rapidly
Input And Output Sub-Indices For Australian Manufacturing Sector

GM Withdrawal Risks Production Collapse

The news that General Motors Company (GM) will stop producing vehicles and engines in Australia in 2017 is not entirely a surprise given the difficult operating conditions in the country's production industry, as previously highlighted by BMI (see 'GM Holden Can't Use Yen Excuse To Mask Uncompetitiveness', April 12). The question now is whether Toyota Motor, the lone domestic producer following the withdrawal of Ford Motor in 2016 and GM in 2017, will continue manufacturing and whether the domestic supply base can adapt to survive.

Closure Always On The Cards?

GM's Australian operations have been gradually reduced throughout the year. In April, the company said it would be cutting 500 manufacturing jobs, while in August it closed its Opel division after returning to the market just a year earlier. Volumes were not as high as expected, and the European brand found it hard to compete on price.

Sales have also been a problem for the Holden brand, falling from over 132,000 units in 2010, to just over 114,000 in 2012. Meanwhile, the wider total vehicle market has been achieving record volumes, surpassing 1.11mn units in 2012, up 10.3%. GM CEO Dan Akerson has attributed the closure to the 'perfect storm' of conditions in the domestic industry, which includes a relatively small market, as well as the sustained strength of the Australian dollar and high production costs.

Symptoms Of A Bigger Problem

Indeed these are problems facing the manufacturing sector as a whole in Australia and ones which are unlikely to be resolved overnight. The divergence between input and output prices is closing in on highs last seen in 2010 and 2011, and this is further exacerbated by the strong Australian dollar. BMI's macroeconomic team believes that even if there were some downward movement in wage costs, there is a long way to go before reaching the same levels as some of Australia's global competitors (see 'Weakening Demand To Eventually Weigh On Wages And AUD', December 2).

Margins Narrowing Rapidly
Input And Output Sub-Indices For Australian Manufacturing Sector

For GM specifically, this has meant a 65% increase in production costs over the last decade, based on the currency appreciation alone, according to Akerson. The carmaker had considered staying in the country over the longer term, but had requested financial assistance from the federal government to support plant upgrades needed to bring in two new models to continue production beyond 2016.

Previously, the company had managed to secure AUD275mn (US$261mn) jointly from the Victorian (AUD10mn), South Australian (AUD50mn) and the then Labour-led federal government (AUD215mn), but the new Liberal-National coalition has taken a more hardline stance toward industry subsidies. In early December, Prime Minister Tony Abbott said the government would not offer any more assistance than the AUD500mn (US$452.6mn) promised to the auto sector at the time of the September election.

What Now For Toyota?

The number of carmakers producing in Australia has been dwindling since Mitsubishi Motors left in 2008, leaving just the current three. With Ford ending production in 2016 and now GM planning its departure the following year, this will leave Toyota in a difficult position, particularly given the government's stance on financial assistance. This has not gone unnoticed by the Abbott administration, which is holding talks to keep the Japanese giant in the country.

A Sustainable Model?
Toyota Australia Production For Export And Domestic Sale (CBUs)

Toyota responded to GM's announcement saying it had put 'unprecedented pressure' on the company's production operations. BMI has already pointed out that the lack of other manufacturers means suppliers would be unable to achieve the economies of scale required to be profitable, which could force them out of business and have repercussions for Toyota's domestic production (see 'Auto Industry At A Crossroads', November 5). The Australian Broadcasting Corporation estimates the size of the supplier industry at 33,000 workers.

On the other hand, we have also suggested that Toyota would be the carmaker most able to survive without financial assistance, as it exports far more of its output than the other firms. This is a point also noted by the Australian Prime Minister heading into talks with Toyota, and it is possible that any arrangement to keep the company there could focus on its export operations, although talks are in the initial stages.

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