TOKYO -- Toyota will end Australia's run as an automaking nation when it pulls the plug on local assembly in 2017. The move follows similar cut-and-run announcements by Ford and General Motors and triggered an outcry Down Under about the demise of local manufacturing.
But the real question isn't why automakers are closing shop. Rather, it is this: Why were they building there in the first place? Not surprisingly, the answer has a lot to do with tariffs.
The small Australian market hardly warranted local output in an industry where economies of scale matter. So for years, Australia protected local automakers with sky-high import duties. When the tariffs dwindled, so did the appetite to keep making cars there. Australians should have seen it coming.
Warning to others?
The collapse of the local industry post-tariffs might serve as a warning to other markets that still protect local vehicle producers with tariffs. The list includes Malaysia, China and, yes, the United States.
As Washington contemplates the Trans-Pacific Partnership free-trade agreement, might it witness a similar shock if the United States' 25 percent tariffs on pickups are suddenly expunged?
Probably not. Why? Size.
Pickups built in North America compete in a 2 million unit segment.
In contrast, Australia's market is tiny. Last year, domestic sales reached just 1,136,227 units. The country's three remaining manufacturers made just 210,538 cars there.
For comparison, Toyota produced 1,760,792 cars and trucks in North America last year -- more than the entire industry sold in Australia.
'Build where you sell'
For the Japanese especially, "build where you sell" is the mantra of modern manufacturing. But at those paltry volumes, it hardly makes sense.
Toyota made 106,300 vehicles at its factory outside Melbourne, Australia, last year: the Camry sedan, Camry Hybrid and the Aurion, a larger Camry-derived sedan. The only Toyota plant in North America that makes fewer vehicles is the Tijuana factory, which assembles Tacoma pickups from kits for the Mexican market.
Toyota exported 66 percent of its Australian-made cars, while importing another 185,458 units to meet local demand last year. Why bother making cars there at all?
Once there was a very good reason: Australia's tariffs on imported cars were 30 percent as recently as the 1990s, down from a peak of a blistering 54 percent in 1984.
But those barriers were whittled to 5 percent in 2010. Today, Australia's Federal Chamber of Automotive Industries calls it an "effective rate" of 3.5 percent, when free-trade pacts with countries such as the United States, Thailand and Malaysia are considered.
As a result, vehicle production in Australia has nearly halved in the past decade from about 409,000 in 2004.
Other factors are undermining the business case for local production. Toyota cited the increasing value of the Australian dollar, for example.
That has made imports that much more affordable. It has also undercut the competitiveness of cars exported from Australia. Exports had been a key component of the government's plan to pump up local production levels and keep plants open.
Shifting tastes for small cars also undermined sales of the bigger vehicles made locally. Smaller cars, with their thinner margins, are better made in lower-cost countries such as South Korea and Thailand. Indeed, Thailand accounts for about 17 percent of Australia's auto imports.
The end of government subsidies also hurt. And as one automaker after another shut down, local parts makers who supplied components to multiple automakers lost their economies of scale, pushing up those costs and making the remaining Australian automakers less competitive against imports.
But the overall impact on local manufacturing was clear. As tariffs fell, so did local jobs.
Nissan ended Australian production in 1992. Mitsubishi halted output in 2008. Ford said last year that it would shutter its plants there by the end of 2016. And GM followed in December with plans to end Australian production by the end of 2017.
Toyota's retreat -- which will terminate at least 2,500 jobs -- rounds out the lot.
As Tony Weber, CEO of Australia's Federal Chamber of Automotive Industries, summed the general feeling when Toyota broke the news Feb. 10: "This is a very sad day for Australia."