Australian automotive industry: grounded or shifting gears?

Back view of automobile in sales salon

Back view of automobile in sales salon

The imminent closure of Holden and Toyota’s manufacturing plants are expected to have massive effects down the automotive supply chain.

The Australian Automotive Aftermarket Association (AAAA) has estimated that 25,000 workers in automotive supply chain businesses will lose their jobs within the next 18 months as a result of these closures. The automotive components industry is expected to be the hardest hit, with more than 50 per cent expected to close according to a recent report by The Australian.

The future of automotive industry does not look bright. However, some automotive component manufacturers have been able to adapt to the momentous change by repositioning into other markets such as defence manufacturing. Other component manufacturers are still having issues repositioning themselves in the market. To make matters worse, the federal government looks to be reportedly reluctant to provide repositioning guidance.

Manufacturers’ Monthly (MM) spoke to University of Technology, Sydney’s Business School dean and economics professor Roy Green about future opportunities for the automotive sector, the risk of intellectual property loss and how automotive component manufacturers can use their expertise to reposition their operations to serve new markets.

MM: How do you think the collapse of the car industry will affect Australia’s GDP?

Professor Roy Green: I don’t think it is possible to say accurately how much GDP will be affected. However, there will undoubtedly be an impact on unemployment and output. This impact will be felt not just because of the car assembly closures but also because of the collapse of a lot of suppliers.

Australia may also lose some of the associated services – the automotive engineering and design. However, despite folding up most of the operations, Ford and Holden have promised to keep some of their design capacity in Australia for their global branches.

MM: What intellectual property (IP) will Australia lose because of the closure of the car industry?

Professor Roy Green: I think that the purpose of Holden and Ford keeping the automotive design function in Australia is to retain and develop the IP here. There will be an element of supplier IP that will be lost.

MM: Will be there any future opportunities in automotive manufacturing for Australia?

Professor Roy Green: There are future opportunities in automotive manufacturing for Australia. We have capacity here. It can take one of two forms. A major foreign investor could take over the existing facilities and upgrade and reuse them. Purchase of existing automotive facilities by Chinese companies has been a matter of discussion. Whether it would work is another question.

Another option is that Australia repositions the automotive industry to component suppliers completely. We would do what we should have done 15 years ago, and that is redirect industry policy to the extent that it provides enabling factors including financial investments in research and development and skills-related opportunities to the components industry.

UTS Business School did some work for the automotive cooperative research centre on the impact of closure of car assembly in Australia on automotive component suppliers.

It found out that in 2017, just over 50 per cent of component suppliers planned to close without any repositioning assistance, while 10 to 15 per cent already have repositioned in the global car industry or diversified into medical technology, electronics, renewables or in aerospace like Marand. There is clearly a great deal of ingenuity in these companies who reposition.

We also have the balance of component suppliers who have stayed in the global car industry. They are simply plugging into the value chain. Whereas the car assembly sector has had A$30 billion in financial repositioning assistance over the last 15 years, the car component sector has had minimal support.

The remaining 35 per cent of car component suppliers would like to reposition their operations but don’t know how to change or what area in which to diversify.  This is where industry policy and public intervention can be most cost effectively directed to create future automotive opportunities.

We should be focusing heavily with all the resources left in the industry policy space to ensure they do what they like to do – which is to find a new market, use their capacity and existing investment in technology to reposition into new activities. They can do it, they just don’t know how to access those markets, or what the technology match is or with whom they should collaborate.

There is no point spending money on the 50 per cent of component manufacturers that are going to close and the 10-15 per cent that have already repositioned or know how to don’t need it. In the middle is the 35 per cent which is where the opportunities are.

Actually, automotive manufacturing is moving to where most of the value-add is in engineering and design, marketing and customer experience. Production is in fact a very small component.

Even the biggest and most powerful manufacturers are about to find, as Apple and Google move into their space, they are in danger of ‘becoming smartphones on wheels’.

Where does a production manufacturer fit into that story? As the chief executive officer of Volkswagen mentioned: do we want to become suppliers of widgets to Google? 

MM: What form would repositioning assistance take? Should the remaining $1.2 billion from the Automotive Transformation Scheme be deployed?

Professor Roy Green: I think automotive transformation means just that. We haven’t lost our positioning in the world market entirely but we have a long way to go to ensure that automotive manufacturers and the component suppliers who are very locally focused, become globalised and understand Industry 4.0 and understand how they fit in the global value chain they can best serve.

Many United Kingdom (UK) manufacturers have worked out their position in global value chains. The UK industry was on the ropes and through very cleverly designed industry policy over the past decade, the UK has retrieved a place in the world auto market. They are no longer large-scale manufacturers. They are the suppliers of precision, high knowledge intensive component, especially to German carmakers. That’s why Brexit worries these people a lot. They have also used their shift into advanced manufacturing to enter new industries.

A very good example is McLaren Advanced Technologies (MAT), that is the company that supplies components for the McLaren Formula 1 sports car.

The UK government set up the Catapult Centre with McLaren. They set up assistance around Formula One, because that is an area where Britain still continues to do very well. They started producing at the high-end, including in passenger cars.

However, interestingly, as they developed their technologies people in the UK health sector thought that their pit stop technologies could apply to the operating theatre. Now the McLaren MAT technology is a key input to hospital technologies and is exported around the world.