Australian Auto Industry Braces for Tough Times

UNCLAS SECTION 01 OF 03 MELBOURNE 000125

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EIND ECON ETRD AS
SUBJECT: Australian Auto Industry Braces for Tough Times

REF: Canberra 100; Canberra 1079

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Summary
--------------


1. (SBU) The Australian automotive industry, headquartered in
Victoria, is in for tough times. With Toyota worried, GM/Holden
pressed and Ford on the ropes, industry leaders are expressing
concern over the future of Australia's biggest manufacturing
industry. A perfect storm is brewing for an auto industry facing
tightening credit, changing consumer tastes, lower tariffs, a
domestic components market on the rocks, trouble in the U.S. parent
headquarters all compounded by what was already a cyclical downturn
in the industry. Pessimistic predictions of the end of the
Australian auto industry still appear to be premature, but there is
anxiety in Port Melbourne. End Summary.

Trouble Ahead
--------------


2. (SBU) Contacts at GM/Holden, Toyota and the Victorian Government
told ConGen pol/econoff and visiting Embassy Canberra econ officer
on October 29 that the Australian automotive industry is in for
tough times. According to GM/Holden's Associate Director for
Government Affairs, Samantha Read, the automobile market in
Australia is "softening" in part due to the international financial
crisis and concern over what it will mean for Australia. She said
GM/Holden, which celebrates its 60th anniversary in November, has
seen a 10 percent drop in sales over the last quarter and
anticipates that third quarter figures will be worse yet.


3. (SBU) Toyota's Manager for Government Affairs, Peter Griffin was
more upbeat in expectations for his company. Griffin anticipates
that the global financial crisis may result in reduced consumer
spending over the next few years, but said that he is uncertain how
this will affect the Australian auto industry. He believes that the
total Australian market for cars (sales exceeded one million in 2007
for the first time) will contract in 2008-09. The very strong
(until recently) Australian dollar hurt Toyota (and Holden) exports,
so the recent drop in the Australian dollar (ref B) was welcome;
Griffin said the "sweet spot" for the Australian dollar from
Toyota's perspective was around US80 cents. Griffin was concerned
about Ford and GM/Holden; Toyota needs other auto manufacturers to
maintain a sufficiently large platform for the auto industry.
"Having four companies was really good," Griffin said, alluding to
the now-expired Mitsubishi Australia, "we don't want to have fewer
than three."


4. (SBU) Ray Doyle and Geoff Susans of the Industry and Trade
Division in Victoria's Department of Innovation, Industry and
Regional Development (DIIRD) painted a far grimmer picture. Doyle
said Ford, which announced that it will scale back production in
Australia by 20 percent starting November 4, is in a "weak position"
to come through the current downturn. Difficulties in obtaining
financing for new car sales have clogged dealership floors and
reduced franchise profits; Doyle said sales are so poor that there
are ships with new cars waiting at the port because there is "no
room" for additional cars in the receiving facilities. The
automotive industry is anxiously awaiting the Commonwealth
government's response to the report of the auto industry chaired by
former Victoria Premier Steve Bracks (which could be out this week).
Analysts within the Industry and Trade Division, however, predict
that any government assistance to Victoria's automotive industry may
be "too little, too late."

Keeping Up With a Changing Market
--------------


5. (SBU) The six cylinder sedan - the iconic Holden Commodore and
Ford Falcon - has traditionally been Australia's car of choice;
GM/Holden and Ford are heavily invested in these models. But higher
fuel costs and concern over greenhouse gas emissions are leading
more Australians to prefer smaller and more fuel efficient vehicles,
(these same factors made Mitsubishi's six-cylinder M380 model
unprofitable from the beginning, reftel),while growing SUV sales
have squeezed the six cylinder sedans at the top end of the market.
Ford Australia and GM/Holden are poorly positioned to keep up with
changing consumer demands. Neither manufactures a four cylinder
model in Australia (the Toyota Camry is the only locally produced
four cylinder car). While Ford Australia hopes to begin producing
the four cylinder Focus model in Victoria in 2011, some observers
worry that it might be too late. Toyota will begin producing a
hybrid Camry in Australia in late 2009, taking advantage of a new
GOA "green car" incentive program. Griffin told us that, contrary

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to media reports from earlier this year when the award was made, the
A$35 million grant was "decisive" in Toyota's decision to produce
those hybrids in Australia.

Finance Drying Up
--------------


6. (SBU) Responding to the international financial crisis and credit
crunch, both GMAC (General Motors Acceptance Corporation) and GE
(General Electric) announced in October that they would cease to
provide car financing services in Australia. According to
GM/Holden, GMAC provided 45 percent of financing for new Holden
purchases and their withdrawal is already having an impact. The
limited financing available to dealerships and franchises has led to
a sharp decline in new car sales. Dealers, according to Doyle at
Victoria DIIRD, are considering auctioning some of their stock at
below-market prices in order to move inventory and stay afloat; this
sort of move would not help pull through additional vehicles from
factories. In a private forum held on October 13, Steve Bracks
noted that access to finance will be a "major challenge" for the
auto industry due to the tightening of credit.


7. (SBU) Scarce credit is also impacting Australia's fragile
components manufacturing sector. Criticized for being too
fragmented and lacking the scale necessary to compete with foreign
manufacturers, Australia's automotive component sector is in "real
trouble" says the Australian Industry Group (AIG). According to
Innes Willox, AIG's Director for International Relations, automotive
components manufacturers cannot access capital to fund mergers and
carry out business because banks consider these companies to be too
"risky." One component manufacturer employing 300 people has
already gone under and Willox fears that others may follow suit.
(Note: The components sector is a key part of Australia's vertically
integrated automotive industry. Many components for domestically
produced vehicles are sourced locally from these companies. If they
go under, there would be little economic reason to assemble autos in
Australia from foreign-sourced components. End note.)

Importance of the Middle East
--------------


8. (SBU) Foreign markets are critical for Toyota, which exports 70
percent of its Australian production, and GM/Holden, which exports
50 percent (by contrast, Ford only exports 5000 cars a year, to New
Zealand - leaving it nearly 100 percent reliant on the small
Australian market). For both Toyota and GM/Holden, the Middle East
is the primary export destination for domestically manufactured
automobiles. This was a key reason Australia began negotiations
with the Gulf Cooperation Council for an FTA. But, according to
DIIDR's Doyle, Saudi Arabia has held up a potential FTA with
Australia even though it has no domestic automobile manufacturing
sector to protect because they are thinking of making cars in the
future. Should a major car producer like Japan win a preferential
trade deal with Saudi Arabia and the GCC, AIG's Willox said,
Australia's share of that significant market would find itself in
very rough waters.

Snapshot of the Australian Auto Industry
--------------


9. (SBU) Automobiles are Australia's largest manufactured export
(US$4 billion). The industry employs approximately 64,000 people.
In 2007, Australian parts and accessory imports from the United
States were valued at $402 million, an increase of 12 percent from
2006, and total car sales were approximately 1,049,000. Currently,
81 percent of automobiles sold in Australia are imports; domestic
industry produces approximately 300,000, many of which are exported.
The collapse of Mitsubishi Australia in February 2008 (reftel) left
Australia with three car companies: Ford, GM/Holden and Toyota.


10. (U) The automotive industry is of strategic importance to the
Australian economy. Major macroeconomic factors such as growth,
employment, technological progress and the rate of innovation are
all strongly influenced by the automotive industry. It is a key
driver of economic growth and provides large benefits to the economy
through the education and training of employees; the introduction of
new technologies; design and engineering capabilities; operational
and managerial concepts; and its contribution to further global
integration.

Comment
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11. (SBU) Most observers expect that Australian tariffs on

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automobiles will be lowered in 2010 according to schedule from 10
percent to 5 percent. Industry leaders expect some measure of
government assistance to accompany the reduction in tariffs, but
some are expressing concern over a perfect storm in the auto
industry. Tightening credit, changing consumer tastes, lower
tariffs, a domestic components market on the rocks, and trouble in
the U.S. parent headquarters are compounding what was already a
cyclical downturn in Australia's automotive industry. While
pessimistic predictions of the end of Australia's auto industry
still appear premature, anxiety and uncertainty about the industry's
future are pervasive.

THURSTON