The Australian Automotive Manufacturing Industry - Assignment Example

Table of Content Executive Summary…………………………………………………….2 Introduction ……………………………………………………………2-3 Body……………………………………………………………………3-5 Conclusion and Recommendations……………………………………..5-6 References………………………………………………………………7 Executive Summary The Australian automotive manufacturing industry has been in a state of decline for decades, but now it seems that car manufacturing in Australia is leaving for good. Decades ago the automotive manufacturing industry was booming in Australia and at the time it made sense for car manufacturers such as Ford and GM to build locally. After years of languishing due to low sales and even with hefty governmental financial aid and spending all three auto manufacturers in Australia are closing operations. There have been a lot factors that have contributed to the demise of the automotive manufacturing industry. Although global and local economic conditions have played a major part in the death of the manufacturing industry, blame has also been placed on the many parties and factors involved. By studying the current state of the industry and using porter’s five forces analysis, we can better discern as to what the main drivers were that caused the ultimate death of the Australian automotive manufacturing industry. Introduction The Australian car manufacturing industry has become far too small to be sustainable for any particular manufacturer. Australia’s three car manufacturers Holden, Ford and GM all announced they would shut down their local manufacturing operations within nine months of each other. With the local economy facing harsh times it seems that with current size of the market and increased competition from imports has simply gotten too small to be profitable. As a matter of fact, the size of the market had gotten so small that all three companies began to rely on each other just to survive and stay afloat. It has been a long time coming, the death of the Australian auto manufacturing industry. Although, there have been many interrelated reasons that have caused the slow demise of the industry many individuals put the most of the blame on the federal government. It has been blamed for much of the troubles that have negatively affected local manufacturers from their low import tariffs. Many of the federal government initiatives such as their Free Trade Agreements with China and India, low import tariffs, and the controversial automotive financial bailouts have created an industry that cannot sustain itself. Others place the blame to the car manufacturer themselves that used the Australian government like their own piggybank to bail them out financially. Additionally, the federal government and their economic policy itself have created a nation with relatively high wages, strong currency coupled with the extremely low import tariffs make it impossible to profitably export their cars (Couriermail, 2014). Body By using Porter’s five forces analysis we can better understand the competing forces that together caused the failure of the Australian automotive manufacturing industry. Supplier Power In the 1950’s manufacturing accounted for over 27% of the workforce, in 1966 it was still over 26%. For local Australian manufacturers, the erosion of their size, influence and negotiating power has been steadily increasing. By the year 2010 the figure of Australian manufacturing employee base had declined to less than 9%. Therefore, the Australian manufacturers have lost market share to cheap imports from China, Japan, India and other countries with cheaper manufacturing and labor costs. Given their lack of economic leverage as in the past to influence the federal government, cheaper imports have taken over their market destroying their businesses as a result. In 2002 the three top selling cars were built in Australia. By 2012 the top three top selling vehicles were Japanese and the Holden Commodore, previously ranked #1 in sales had been booted to the fourth position. The loss of their buyer base caused Australian car manufacturers be in a state of constant decline and struggling to survive due to their low sales numbers. Buyer Power Australia as a nation enjoys a strong economy with a strong currency and high wages. The buying power and economic influence of the Australian consumer is very high and the market responds to their needs and demands accordingly. As a nation, Australians need to take into consideration that their buying choices are the main reason why local auto manufacturers have had to shut down for good. The constant demand of consumers for lower prices and the complicity of the federal government through low import barriers and tariffs have caused the local market to be flooded with cheap imported alternatives for all their locally made consumer goods, including cars. Experts estimate that the loss of jobs due to the shutdown of the Holden, Ford and GM plants could cost the Australian economy over 200,000 jobs and over $29 billion in revenues lost (Biddle, 2013). Competitive Rivalry, Threat of Substitution and Threat of New Entries All of Australia’s car manufacturers Holden, Ford, GM and Mitsubishi have all collectively bailed out of the car manufacturing industry citing that in this country where the currency appreciation and inefficient production methods make local car manufacturing ultimately uncompetitive despite considerable government aid. As the number of car sales declined rapidly as a result of the dollar appreciating, local manufacturers facing increasing production costs, and low margins were faced with a business model that was ultimately unsustainable financially (Telegraph, 2014). The Australian economy has enjoyed great progress and prosperity during the last two decades due to high level of commodity exports and high prices. Countries like China, Japan, India and Korea have become major global manufacturers and are responsible for most of Australia’s cheap imported goods and the decline of local manufacturing. The Australian dollar constant appreciation in value because of the U.S. dollar has directly caused locally produced goods and cars to go up over 60% in cost during the last 10 years (Biddle, 2013). Conclusion and Recommendation The government should intervene on behalf of the Australian people and enact a new tariff system. For example, in the 1960’s Australia’s import tariff was over 27%, today it is rare to have a 5% tariff. By raising their tariff rate on imports and allowing market forces to increase the cost of all imports will help their local manufacturing base by bringing import prices more inline with locally manufactured products. Those simple policy changes will bring a more level playing field for all local manufacturing, not only in the automotive industry but across their whole economy. As consumers, local Australians need to take advantage of their strong economy and high standards of living to support and buy locally manufactured products in order to help drive their own local economy and not buy cheap imported alternatives, unless absolutely necessary. By choosing “not to buy” a locally produced car because it is slightly more expensive the consumers themselves have created the problem and have directly caused the demise of their own automotive manufacturing industry. At the federal government level, unless major structural changes are made to the Australian manufacturing industry, no amount of government aid and handouts would save the failing industry from its own inevitable demise. The car industry would have cost taxpayers over $1 billion in additional handouts and we would still have ended up with the same situation a few years later. Changes to the tariff system and increasing government spending to create and drive local manufacturing will be the key to getting unemployed manufacturing workers back in the workforce. References Biddle, I. (2003). Blue Collar Blues The Demise of Australian Manufacturing. BusiDate, 21(4). [Accessed 5 May 2014] Couriermail.com (2014). Why Australia’s car manufacturers – Toyota, Holden, and Ford and Conked Out. < http://www.couriermail.com.au/news/why-australias-car-manufacturers-toyota-holden-and-ford-all-conked-out/story-fnk1378p-1226827493012> [Accessed 5 May 2014] Telegraph.co.uk (2013). GM drives Australian car manufacturing to the brink. [Accessed 5 May 2014] Read More