The Day The Blue Team Dropped The Ball

Something was happening, and must have been very big or wrong for our office to became that noisy during the lunch break. In fact, the bad news were just a couple of clicks away.

Today is a sad day for the Australian automotive industry. Heck, I would venture to say it is a sad day for the country. I don’t know how sad or upset the street is, but happy is not the world I’d use to describe the mood I saw around the rest of the afternoon.

Ford’s announcement that it will close its manufacturing operations in 2016 may look like a surprise, but my gut tells me that this has been brewing for a long long time. For me it is kind of an expected outcome, because since we arrived here, I have yet to hear any of their leaders committing on the record to their production activities after 2016.

I can only speculate about what happened in Broadmedows (or Dearborn), however I have seen enough to try to draft an explanation.

The reduction of the tariffs and elimination of import restrictions since the end of the 90’s, created a situation of increased competition in both models and pricing for the local manufacturers. This situation has reduced the market share of locally made vehicles to around 15-20% (from >50%) of the total market. At those volumes, it is very very hard to sustain a manufacturing operation, specially if there are no export programs.

The increased vehicle choice, raising fuel prices and popularization of the SUV/CUV has had a strong effect in switching consumer tastes. A big sedan, comfortable as it is, loses points when compared with the increased practicality offered by a SUV. Higher fuel prices make big cars less attractive, specially in the cities where their higher weight penalizes the increasingly important lt/100 figures. Enter the small cars, and small is a relative term here, since most of them are of the C-segment variety. Adding 1+1, it is easy to see on the streets what VFACT’s numbers have been reflecting for some time: a market increasingly moving toward SUVs and C-segment cars. I saw this change happening before my eyes in my home country during the 90’s.

The cost of making business has had its fair amount of influence here. The high Australian dollar and the increasing energy, taxes and salaries costs are causing a loss of competitiveness for locally manufactured goods. That is hurting not only the auto industry, but the whole sector.

Ford also has itself to blame for some of its woes. A first easy shot is the AU Falcon, a self-inflicted blow from which they never recovered. The lack of an export program like the ones in place at Toyota or Holden means Australia is Ford’s main market for its locally made cars. With a dwindling big car market share that only means trouble. To Ford’s credit, they developed the terrific Falcon-based Territory CUV, a car that has been a top seller in its segment almost since its launch… constrained to local sales by the lack of an export program. The lack of investment, marketing and advertising for the car must have had its fair amount of influence too. It creates the impression that has been left to its own devices. The FG Falcon is a very good car, something I hear even from people with far more knowledge of the industry than me.

And then we have the perception of the product in the public. If the forums and comment sections of newspapers are any indication, there seems to be an image stigma associated with large domestic cars. The word bogan is usually thrown around when mentioning its owners. Past quality woes are also name on some of them. On top of that, the Falcon in particular suffers because it is the de facto choice of the taxi trade down here (and is easy to see why, it is good on LPG and is a tough car). Finally, large cars are considered gas guzzlers, despite the big advances in fuel consumption achieved in the last 10 years.

What comes next is uncertain.

An Aussie icon will be gone forever and Ford will almost surely face a severe backlash, hurting even more its position in the market (they were in 3rd position in 2011 and were sitting in 5th last time I checked). They are bringing some more product and eventually they will recover. I hope they maintain their promise of keeping their development activities here.

But the big elephant in the room is what will happen with the suppliers after 2016, which will lose an important customer and volume, and as Mr. Nasser said in a previous interview a couple of weeks ago, when lacking the necessary scale, a domino fall in the sector can take the whole industry down.

Indeed, a sad day for the industry.