Motor vehicle manufacturers are having a tough time. Over the five years through 2011-12, industry revenue is forecast to contract by 7.8% annually to reach $11.1 billion.
Car manufacturers’ woes started when consumers began switching to smaller, more fuel-efficient vehicles because of environmental concerns and sky-high petrol prices. This proved an issue for domestic manufacturers, particularly for Holden and Ford, as their core market consists of big and powerful, fuel-inefficient vehicles. Truck manufacturers also noticed the shift towards cleaner trucks, but their troubles lie more in the slowdown of truck-freight demand than in environmental factors.
When domestic manufacturers continued to produce cars that consumers were demanding less of, car buyers turned to imported vehicles. Import penetration has been rising in the past five years, with Toyota’s imported cars leading the pack. To make matters worse, the Australian dollar’s dramatic appreciation has led to a fall in the price of imported cars.
Faced with falling demand, domestic manufacturers have been struggling to make profit over the past five years. In March 2008, Mitsubishi gave up entirely and exited the market after years of trying to prop up production and efficiency.
Car demand was dismal in 2010-11 due to cautious customers preferring to save rather than spend income on big-ticket items. Component supply issues caused by the Japan tsunami also drastically affected production in 2010-11, adding to the industry’s troubles. Demand and output will improve in 2011-12, with revenue forecast to grow by 8.8%.
Import competition will continue to be an issue; however, manufacturers will be manufacturing fuel-efficient vehicles during the year to remain competitive.
The next five years will be more positive for manufacturers, with all three car makers producing at least one fuel-efficient vehicle; Toyota is already manufacturing the hybrid Camry domestically, and Holden the Cruze. Pent-up demand will ensure some growth in production while the business tax break to be introduced in July 2012 will promote demand from small businesses in 2012-13.
Over the five years through 2016-17, industry revenue is forecast to grow by 3.1% annually to $12.8 billion.
The already fragile motor vehicle manufacturing industry really did not need an economic crisis added to its list of problems.
Even if operating conditions are expected to improve over the next five years, the industry will be growing off a low base. Demand for cars will pick up, but domestic manufacturers will continue to face tough competition from imports.
Despite the forecast revenue growth, there is some bad news ahead. Oil prices have been playing havoc on the industry over the past five years. After rapidly plummeting in the second-half of 2008, oil prices are forecast to rise over the five years through 2016-17. On the other hand, the price of steel is expected to grow minimally, which will help keep production costs in check. The Australian dollar will continue to be strong over the next five years, which could cause some more trouble for domestic manufacturers.
Motor vehicle manufacturers are looking at an eventful five-year period. Strong demand is expected in 2012-13, backed by better economic conditions and more certainty. By then, manufacturers will have a better range of fuel-efficient vehicles on offer, which will promote demand and support production.
The business market will also fare well, with demand backed by business tax breaks. Export markets will also recover during the year, despite the strong dollar. Having said that, the size of the industry will still be well below pre-financial crisis levels although manufacturers will welcome any upward trend or signs of recovery.
The production shift towards green cars, however, may be too late for domestic manufacturers. Vehicles more fuel-efficient than those made locally have been available on the global market for years. As a result, imported green vehicles may be more price-competitive than domestically made cars.
The government has introduced a mandatory emission standard for vehicles in Australia to be phased in from 2013 to 2018. This will lead to higher research and development costs for domestic manufacturers. IBISWorld does not expect these higher costs to be crippling though.
Producing green cars is not an easy decision to make, as it requires a significant amount of investment. Domestic manufacturers were reluctant to manufacture small cars at first for various reasons, including the difficultly in making a profit out of green cars without proper government support. Fuel-efficient vehicles are relatively more expensive with no mass-market for them yet. Manufacturing will be slow at first, which radically diminishes any hope of profit as large-scale production is crucial to make money in the industry.
However, the good news is that the Australian Government is willing to help make the industry greener.
The Australian Government’s continued support of the automotive sector over the next five years will work to stimulate industry growth. Even though the government cancelled the green car innovation fund in early 2011, it could potentially introduce similar subsidies in the next five years.
However, the full benefits of government intervention and assistance can only be reaped if producers can achieve industrial harmony, reduce employee turnover and invest in automated production equipment.
Industry players should also strive to have reliable supply links with specialist component producers and to contain costs through economies of scale in production runs. Cost reductions should then be passed on through efficiencies to model pricing for domestic consumption and exports. By pumping money into the pockets of motor vehicle manufacturers, the government will ensure a rise in production over the next five years. Volumes will also be supported by financial incentives (as opposed to outright handouts) to generate investment schemes for green car manufacturing.
Government intervention alone will not be enough to jump-start the industry. However, it will encourage manufacturers to start making cars that consumers actually want to buy. Manufacturing smaller cars and fuel-efficient vehicles will help to drive industry demand. The industry will also see limited growth in the SUV and large-vehicle segment, as the price of petrol will be high, but still lower than it was at the start of 2008.
Government assistance packages announced in 2008 contain restructuring programs that aim to make the industry profitable again. With the reduction in industry protection already announced, there is going to be a shakeout among vehicle producers under pressure to become competitive or exit the industry.
IBISWorld forecasts some consolidation to occur over the next five years, as companies eliminate inefficient units. Establishment numbers will fall by 1.9% annually over the five years through 2016-17.
As manufacturers strive to become more competitive, labour productivity will be one of the first issues to be addressed. Industry operators are likely to invest in state-of-the-art production machinery over the next five years and improve labour productivity through leaner production methods. Employment is forecast to rise thanks to higher demand for production workers, while labour costs are forecast to fall due to productivity gains.
These gains, along with the development of green car production and a shift away from manufacturing big cars, will lead to a rise in industry profitability over the next five years. IBISWorld anticipates that by 2016-17, the manufacture of small and fuel-efficient vehicles will be well-established in Australia, which will drive profit margins. However, losses will continue initially as it will be difficult for car manufacturers to make profit when they first launch the vehicles in the market and due to the relatively small scale of car manufacturing in Australia.
The slow greening of the automotive sector has already started, with an alternative fuel made up of 10% ethanol and 90% petrol (E10) being offered at various petrol stations. E10 is cleaner than 100% petrol fuel and is the first step towards the introduction of fuels with higher levels of ethanol. The higher the ethanol blend, the lower the emission. Car engines need to be manufactured specifically to run on ethanol-blend fuels that contain over 10% of ethanol. Consumers’ acceptance of ethanol-blend fuel is an important trend that car manufacturers need to monitor over the next five years.
One of the reasons Toyota’s financial performance over the past five years has been better than Ford and GM Holden’s is that Toyota derives a significant amount of its sales from foreign markets.
Ford and GM Holden traditionally rely on domestic markets for sales. Ford and GM Holden will be following in Toyota’s footsteps by developing their export markets. Ford is already on the right track as it announced it would keep its Geelong engine plant open to manufacture export-bound engines. Holden lost the Pontiac export deal with GM in 2009, which has not left the company undeterred at all. Holden expects to continue exploring export markets, particularly for its engines and intellectual property regarding fuel-efficiency. Exports are forecast to grow by 3.7% annually over the five years through 2016-17.
Imports are also expected to rise over the next five years. Although domestic manufacturers will be doing their best to become more competitive by that time – restructuring is a long process. Importers of motor vehicles should be able to reap the benefits of a fall in tariffs fairly easily before domestic manufacturers start catching up. Over the five years through 2016-17, imports will rise by an estimated 5.4% annually.
IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:
Effective cost controls: Close relationships with suppliers and good distribution channels will help manufacturers succeed. These will ensure that car manufacturers have access to relatively cheap car parts.
Establishing motor vehicle export markets: Developing solid export markets with downstream motor vehicle buyers will help manufacturers secure demand and therefore income. Global expansion is also important due to the relatively small size of the Australian market.
Having an extensive distribution/collection network: Good distribution channels will assist motor vehicle manufacturers to succeed in this industry. The more networks a firm is involved in, the more opportunities exist for business.
Use of most efficient work practices: Improved labour productivity, including industrial relations, will help manufacturers succeed.
Ability to adapt to changes in consumer demand: Manufacturers need to adapt to new technology when consumer preferences change.
Successful industrial relations policy: Manufacturers that use effective industrial relations policies will benefit from improved labour productivity.
Access to the latest and most efficient technology and techniques: The degree of investment into improving motor vehicle manufacturing technologies and product development will determine the success of a company in this industry.
Optimum capacity utilisation: The level of plant utilisation of manufacturers in this industry will either help or impede business for motor vehicle production.
Complying with government policies: Players that do not comply with government policies can be fined or have their products removed from the market.
Karen Dobie is the general manager at leading business information provider IBISWorld.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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