The Death Of An Auto Industry: Ford, GM Pull Out Of Australia, Toyota May Follow

December 12, 2013

Two days ago, General Motors announced plans to stop manufacturing cars in Australia -- or, as GM put it in a carefully worded statement:

As part of its ongoing actions to decisively address the performance of its global operations, General Motors today announced it would transition to a national sales company in Australia and New Zealand. The company also said it would discontinue vehicle and engine manufacturing and significantly reduce its engineering operations in Australia by the end of 2017.

GM's current CEO, Dan Akerson, added that:

"The decision to end manufacturing in Australia reflects the perfect storm of negative influences the automotive industry faces in the country, including the sustained strength of the Australian dollar, high cost of production, small domestic market and arguably the most competitive and fragmented auto market in the world."

Sound familiar? It should. That's pretty much what Ford said earlier this year when it, too, ended production in Australia, blaming "increasingly challenging market conditions – including market fragmentation and the high cost of manufacturing".

And with Ford and GM out of the picture, that leaves just one automaker building vehicles in Australia: Toyota.

At first glance, that might sound like great news for Toyota. As the only rooster in the hen house (or however that saying goes), you might think Toyota would be in prime position to do some bang-up business.

But you'd be wrong. In response to GM's announcement, Toyota has issued its own statement that sounds suspiciously like someone searching for his keys just before dashing out the door: "We will now work with our suppliers, key stakeholders and the government to determine our next steps and whether we can continue operating as the sole vehicle manufacturer in Australia".

Recently elected prime minister Tony Abbott has since vowed to do everything in his power to keep Toyota's Australian division up and running, but the tea leaves aren't terribly auspicious. Making vehicles in Australia is already an expensive proposition, and the situation is likely to get worse.

The cost of parts alone could be Toyota's deciding factor. After all, if Toyota's the only company purchasing from Australian suppliers, economies of scale go flying out the window. Add to that reduced tariffs on import vehicles -- which once gave domestically manufactured a slight edge in the marketplace -- and it becomes very hard for Toyota to justify keeping its Australian doors open.

The one difference, the one thing that could keep Toyota hanging on, is that most of the autos Toyota builds in Australia are meant for export -- around 70 percent, in fact. As a result, Toyota isn't terribly dependent on domestic sales for its profits, which may explain why the company had a nearly $200 million (U.S.) profit earlier this year.

Of course, that doesn't do anything to change the fact that the high cost of doing business in Australia will continue gnawing away at Toyota's profit margin. And not only will those costs likely rise in the future, but there's also Toyota's workforce to consider: if there's only one automaker doing business in the country, how many young Australians are likely to consider preparing themselves for a career in that industry?

Should Toyota pull out, it would mean the death of Australia's auto industry and huge problems for the country. With the closure of Ford and GM, Toyota's retreat would leave the government with an $18.8 billion (U.S.) shortfall and a loss of around 45,000 jobs, according to auto industry insiders.

The situation is still very touch-and-go, but without serious incentives from the Australian government, Toyota's future down-under looks increasingly unrealistic.


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