The Demise of the Auto Industry

There is a lot of angst about the demise of the auto industry in Australia.  It predominantly comes from people who have not bought an Australian car in decades.  Let’s look at it from a marketing/manufacturing perspective.

I hear people say

“Why don’t they build a car people want?”

Typically this means a small to medium 4 cylinder car.  The Hyundai i30, Mazda 3 or 6, or Toyota Corolla are good examples.

People buy these cars on features and price.  If the price is not competitive, market share drops.  All the overseas companies who send cars here understand this.  They trim their margins to ensure the price matches, or undercuts the opposition.  They use low wage countries, and high volume production to enable the manufacture price to be as low as possible.  It is basic economics that it costs less per unit to build 10 million cars than to build 100 thousand cars.  Add to this the wage difference between say Korea and Australia and the difference is even larger.  Even if we could produced 10 million cars here, it would be cheaper to produce the same 10 million in Korea.

So what should an Australian car manufacturer build?  The only option is to find a niche car that can be produced in low volumes, and which is not price sensitive.  Since the expertise in Australia has been six cylinder sedans, that is where Holden and Ford have concentrated.  What has happened over the years is that the niche has slowly contracted.  We cannot build and export a car like the Holden or Ford, and compete with American and European models.

Where could we find a new niche?  Think of some of the companies that do have that niche.  Ferrari, Morgan, Rolls Royce.  They are so different to mainstream cars that the major manufacturers just let them be.  They have no real incentive to compete.  To build up the expertise to make a Morgan, then build the brand image is not the place to make profits.  Some have tried, and almost all failed.

Australia has the inability to compete at  the volume end of the market, and no niche to exploit for low volume/high margin autos.

Should government continue to fund the industry?  If you are in the industry you would say yes.  Your reasons would not be based on economics.  They are based on keeping people employed, and retaining some expertise in manufacturing.  How much should the government pay to meet these two objectives?  Is it short term, or will the problem just get worse?  Would it be better to let the industry die, and spend the money we would have spent supporting it in moving the current employees into other jobs whatever that may be?  What are the impacts of the lack of manufacturing expertise?

If we look at manufacturing expertise, Australia don’t manufacture televisions but somehow we get by. Our clothing manufacturing is almost all gone but we still manage to survive.  Is it really that important, or is it nostalgia?

I don’t have the answer, but the key point I would make is that there is no sign of the Australian auto industry ever being able to exist financially.  Not now, nor in the future, without taxpayers money.  We don’t have the volume, we don’t have the low wages to make our products competitive, and we don’t have a niche product.