Car sector spluttering

If the Reserve Bank wanted yet another reason to slash rates next week, it received it yesterday when car parts maker CMI Industrial and transport and logistics group 1st Fleet went into administration.

The collapse of 1st Fleet could be particularly ugly, given the company has a fleet of 1,000 vehicles and a staff of up to 1,200. High fuel prices and weak business sales appear to have crimped cashflow – it appears to be a reasonably common story in the transport sector.

But the collapse of CMI Industrial has already had wider implications. Ford will stand down 1,800 workers for three days, with two days of half pay and one rostered day off.

The halt to production at Ford could well have a ripple effect across the industry, given the entire industry works on a just-in-time basis, where parts must be delivered just days (or often hours) before they need to be used. When the production line stops, the delivery of parts needs to stop too, so there could be many other suppliers shutting down (or at least slowing down) in the coming days.

Ford has been working with CMI to try and resolve its issue, which started the week being described as a leasing dispute but clearly run much deeper.

Ford is actually the secured creditor which called in receivers to CMI Industrial, which suggests Ford may have been propping up the parts maker in recent times.

Whether Ford has actually extended cash for CMI or not, the fact that the car giant was working hard to keep the firm alive underlines the complexity of the relationships between the car makers and their suppliers.

On the one hand the car makers need to keep reducing their costs and they are famous for pushing “cost downs” onto their suppliers – edicts that say, quite simply, you need the price of your components down by 5% or 10%.

But as the collapse of CMI, APV and a host of other suppliers show, the components sector simply doesn’t have much fat left. Indeed, big sections of the car parts community appear to be near breaking point.

That creates a real problem for the car makers. Once upon a time, they could find alternative suppliers if one went under. Today, that’s just not possible – hence why a giant like Ford needs to scramble to keep a minnow like CMI on life support.

The question is: How long can this situation continue for? The Australian car making industry is clearly going to shrink further, putting more pressure on parts suppliers. Will a strong components sector soon become a thing of the past?

The episode at CMI raises some more questions about the Government subsidies we are providing for the car sector. One of the primary reasons given in support of these subsidies is that without the car makers, the components sector would shrivel and die.

But what’s happened as CMI and other suppliers suggests that pumping taxpayer dollars into companies like Ford, Holden and Toyota might not actually be enough to save the parts makers. Has the sector shrunk to a point where the much-vaunted indirect benefits of supporting the car sector are going to be very difficult to realise?

If the answer is yes, then the subsidies are more about propping up a few thousand jobs than an entire sector.