SYDNEY (Bloomberg) -- Australia’s century-old automotive industry is stepping closer to extinction after General Motors Co. joined Ford Motor Co. in deciding to stop making cars in the country.
Seven months after Ford announced it would pull out, GM said Tuesday its Holden unit will cease production in 2017. That prompted Toyota Motor Corp. to say the move will place “unprecedented pressure” on parts makers and questioned the merits of remaining in the country. An appreciating local currency and falling import tariffs have driven down sales of Australian-made cars by almost half since 2007.
The hollowing out of the nation’s auto industry has implications beyond the three companies as carmakers have about 150 suppliers that employ an estimated 42,000 people. The departure of Australia’s biggest carmaker also adds pressure on Prime Minister Tony Abbott, who’s facing rising unemployment and deteriorating consumer sentiment three months after winning an election by pledging to restore confidence in the economy.
“The Australian dollar has claimed an iconic brand of cars,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “The announcement will be a major blow to confidence in the run-up to Christmas, as job losses will exacerbate an already heightened sense of insecurity.”
Australia’s auto industry, which traces its roots to when land surveyor Harley Tarrant built an early petrol car with an imported Benz engine in 1901, won’t survive GM Holden’s departure, said Dave Smith, head of the vehicles division at the Australian Manufacturing Workers’ Union.
“A lot of older workers are going to be consigned to the unemployment scrap heap,” Smith said by phone. “This is what happens when you open up the borders” to imports, he said.
The flood of imports, mainly from Asia, has resulted in locally-made vehicles only accounting for 10 percent of total auto sales in the country this year, versus 80 percent three decades ago, according to data from Ford and the Federal Chamber of Automotive Industries.
For example, Holden’s Commodore was the country’s best-selling car for 15 consecutive years before it was overtaken by Mazda Motor Corp.’s 3 in 2011. Commodore sales point toward the vehicle’s ranking falling to third this year, behind the Mazda 3 and Hyundai Motor Co.’s i30.
Tariffs on South Korean auto imports, halved to 5 percent in 2010, will be scrapped under a free-trade agreement between the two countries announced Dec. 5.
“Building cars in this country is just not sustainable,” Mike Devereux, managing director of the Holden unit, told reporters in Melbourne Tuesday. “We have looked at every possible option.”
The decision to shutter Holden, bought by GM in 1931, was taken during a call with GM management on Dec. 10, hours after Devereux had told the government that the company was still assessing the unit’s future, he said. The timing of the Holden announcement came within a day of parent GM’s own disclosure that Mary Barra will succeed Dan Akerson as CEO of the carmaker starting next year.
Manufacturing in Australia has been a victim of the commodities boom that helped drive the value of the local currency to $1.11 in July 2011, the highest level in the 30 years since exchange controls were dropped. While the Australian currency has since depreciated to about 0.90 to the U.S. dollar, that’s still higher than at any point in the 23 years running up to 2007.
“The Aussie dollar has been a major headwind for Australia’s trade-exposed sectors for a number of years,” said Tom Kennedy, a Sydney-based economist for JPMorgan Chase & Co. “When you combine that with Australia’s quite-high labor costs, it makes it uncompetitive to produce automobiles here.”
GM estimates it costs about A$3,750 more to produce a car in Australia than elsewhere. Ford said in May that its costs in the country are double those in Europe and four times those of its Asian divisions.
Such costs have made automakers depend on government aid to keep Australian plants running. Enter the new prime minster, who pledged to cut A$500 million from auto subsidies by 2015 instead of “waving a blank check” at carmakers before winning a general election in September.
The prime minister is now facing an unemployment rate that’s climbed to a four-year high and falling consumer confidence as the fading mining investment boom leads to slower-than-expected economic growth. Abbott’s ruling Coalition is trailing the Labor party for the first time in three years, according to an opinion poll published in the Australian newspaper Dec. 10.
“This announcement is a bit of a gift for Labor and its support in the union movement,” said Stephen Stockwell, a political analyst at Griffith University in Brisbane. Labor and the unions “will be making a big deal about this from now until the next election” due in 2016, he said. Ford’s plants will close during that year and Holden’s by the end of 2017.
The three carmakers’ suppliers, which account for the majority of the jobs in the country’s automotive manufacturing industry, are already planning for a future without their biggest customers.
“We’ve had this on our radar for a long time,” said Craig O’Donohue, managing director of Australian Arrow Pty., a wiring manufacturer in Melbourne’s western suburbs that’s supplied Toyota since 1975 and Holden since 1983. “You have to be realistic in this industry.”
Since 2011 the company has been trying to move into businesses such as wiring for slot machines, solar panels, and the military, using a government fund set up to support diversification. Toyota and Holden still account for almost all its revenue, O’Donohue said.
“If Toyota follows Holden, we would close,” said Pat Aughterson, managing director of Melbourne-based Excellent Plating Works Pty., which provides protective coatings to about 100,000 Toyota Camry bumpers each year. “If automotive goes, manufacturing is finished.”