Car parts sector stalling on profit margins of just 3%

A new survey from Australian Industry Group and accounting firm Deloitte of 150 automotive industry chief executives reveals an industry being buffeted by increasing costs, falling demand and the rising Australian dollar.

Think you’re doing it tough in the downturn? Spare a thought for the companies in Australia’s automotive component sector.

A new survey from Australian Industry Group and accounting firm Deloitte of 150 automotive industry chief executives reveals an industry being buffeted by increasing costs, falling demand and the rising Australian dollar. From 2004 to 2007 – a time when Australia’s economy was booming and car sales were growing at double digit rates – the sector’s average profit margin halved to about 3%.

“The study shows an industry responding to intensifying global pressures. The impact of the higher dollar in particular has resulted in a loss of competitiveness, higher import penetration, weaker export returns and lower margins,” AIG chief executive Heather Ridout says.

Not surprisingly, the industry is rushing to restructure. The survey reveals 50% of firms have switched parts of their supply chain to lower cost Chinese suppliers in the past three years, while a staggering 52 firms have exited the automotive sector all together and are now manufacturing goods in other sectors.

Despite pleas from industry groups and governments for the parts sector to increase exports, around 90% of sales by the sector are made in the Australian market. The report also argues that those companies that are exporting may be looking in the wrong places: while 18.4% of respondents expect sales growth in the United States and the Asia-Pacific region over the next three years, only 11.2% expect sales growth from the booming Chinese market and just 9.2% anticipate growth from the giant Indian market.

Deloitte’s Australian leader of manufacturing and automotive industry groups, Tom Imbesi, says parts companies must look outwards, given the position of Australian car markers. “The local industry also needs to develop a greater focus on building markets overseas given that local vehicle production is expected to be flat in the near term.”

The AIG survey comes just days before the Rudd Government’s automotive review, headed by former Victorian premier Steve Bracks, releases its report into automotive sector assistance. There’s no doubt Australian parts makers will be hoping for a boost from the report.

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