It’s the end of road for auto assembly Down Under

Australia has been home to automotive assembly for over 90 years, but by the end of 2017, the last car is expected to roll off the line. One by one, plants have been closing over the past several decades.

When the story actually began, it marked the evolution of a domestic market and local manufacturing where niche tastes were factored in. Iconic utility vehicles, or ‘utes’, and large sedans with equally large engines emerged in the latter half of the 20th century as the vehicles of choice for Australians.

As the market grew, light vehicle assembly followed in kind growing at a compounded annual growth rate (CAGR) of 5.05 per cent between 1992 and 2003, when volumes peaked at nearly 4.2 lakh units. Since then, output has been on a steady decline. OEMs (original equipment manufacturer) have all formally announced plans to shut down their engine and vehicle manufacturing operations in Australia.

So what happened Down Under? How has assembly gone by the wayside even as the domestic market continues to register record sales figures? Several global developments over the last decade and a half have led to the demise of light vehicle assembly in Australia. Perhaps foremost is the overall shift towards global vehicles with global platforms.

One of the hallmarks of the Australian market was the niche-like demand for the aforementioned utes and large sedans. As OEMs came out of the great recession, global platforms and powertrain offerings were a focal point in the quest for cost reduction. This in turn took them away from the unique tastes of the local market, rendering them untenable.

Concurrent with this development was the emergence of new assembly bases in ASEAN and China. It was only a matter of time before the market succumbed to the pressures of globalisation as labour costs continued unabated in traditional locations of the West.

Though the sun will set on automotive manufacturing by the end of the year, there is still plenty at stake for OEMs in Australia. A record 1.15 million light vehicles were sold in 2016. New sales records have been reached in four of the last five years, providing plenty of incentives for automakers to maintain their brand power and performance in the market. Utes and recreational vehicles continue to grow in demand, with less profitable passenger cars falling out of favour. The opportunities for profit remain enticing in Australia even as it becomes a pure import market. Perhaps other automakers could seize this shift as an opportunity to expand while former domestic assemblers forfeit their reputations as locally invested brands.

Automakers can also adjust their presence within the market, focusing emerging technology and R&D instead of manufacturing. Indeed, there is still a lot of opportunity for manufacturers even if they do not actually make vehicles anymore.

The country will become a pure import market with over one million units of annual sales, keeping Australia relevant even as regional OEMs will need to increase output to meet new demand.

Beyond the changing trends Down Under, a wave of nationalism is sweeping across developed nations. Automakers will have to think through this reality in their future strategies. This is equally true for regulators who also have to figure out how much employment gets added due to localisation of vehicle manufacturing in the respective countries. In today’s environment, there is no simple answer here for either the OEM or regulator.

This is getting increasingly evident lately in the US where big brands such as Ford, Toyota and Fiat Chrysler have reaffirmed their intent to invest big time over the next few years.

There is some concern that investments in Mexico will suffer as a result. Likewise, after Brexit, it remains to be seen if populism spreads across other parts of Europe. All these developments will have their fallout on the global automotive industry.

The writer is Partner, Price Waterhouse

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