Why Holden has made a U-turn | comment

Something has happened at Holden in the four weeks since Ford announced it would shut its Australian factories in 2016. This is what Holden boss Mike Devereux said a month ago: “Despite Ford's announcement to end local manufacturing we believe the industry can survive in Australia and has already adjusted in large part given Ford's relatively low production volumes.”

Devereux went on to reaffirm Holden’s 10-year manufacturing plan that would see Holden “inject $1 billion in this country and secure production of two all-new global vehicles all the way out to 2022”. But last week Holden sounded like it might shut its local factories at the same time as Ford.

“If we don't accomplish [factory worker pay cuts] it is highly likely we will not make cars in this country. We have to reduce the cost to make each car, which is too high in this country. If we keep losing money making cars, we won't be able to make cars here anymore. The cost base is too high, it is unsustainable, it has to be reduced.”

Devereux went on to explain it costs Holden $3750 more to make a car in Australia than it does in other General Motors factories. When announcing its financial loss of $152 million for 2012 last month Holden admitted it makes a loss on locally-built cars and only makes a profit from imported models.

General Motors makes the Cruze small car in nine other factories around the world, one of which is in Thailand, which has a free trade agreement with Australia. It’s not too hard to figure out Holden could import the Cruze into Australia from Thailand and actually make a profit rather than build it here at a substantial loss.

It is therefore hard to figure out why, against the odds, Holden is fighting so hard to keep its loss-making factories. If you level out the peaks and troughs over the past 12 years Holden has made an average annual profit of just $28 million from an average annual turnover of a massive $5.5 billion. And that’s after receiving $1.8 billion in taxpayer assistance over the same 12-year period.

The car business is brutally pragmatic when it needs to be: history and compassion take a back seat to economic realities. In North America, Detroit’s big three car makers shut factories at the stroke of a pen (or, in these modern times, with the delivery of an email confirmation).

Holden nobly says it is fighting to save its car assembly line in Elizabeth and engine factory in Port Melbourne because it believes Australia should maintain its “hi-tech” manufacturing capability.

Holden also says it is also concerned about the likely social destruction if 1700 jobs were wiped out at Holden’s vehicle operations, and the knock-on effect on the supplier industry -- and what would become the sole remaining car maker: Toyota.

It is widely believed if Holden goes Toyota would likely follow. For its part, Toyota publicly and steadfastly insists it is “committed to building cars in Australia”.

But Toyota insiders tell a different story, revealing to News Limited that Toyota has been doing cost estimates on shutting its Australian factories for the past five years. Toyota posted a $149.1 million profit in its latest financial reporting period but insiders say it lost more than $400 million on locally-made cars.

Early last week Devereux said Holden would not be able to survive without Toyota (because parts suppliers need the scale and output of Toyota and Holden to remain viable). Last Friday Devereux inched one critical step further: “[Manufacturing] is viable with two of us, I don’t think it’s viable with one of us.”

Devereux is being uncharacteristically open about the plight of the industry (Ford gave not a single clue until the morning of its factory closure announcement) because he wants to know if Australian taxpayers are prepared to pay to help keep it alive.

In the process Devereux wants to educate the public and politicians. If possible Prime Minister Tony Abbott thinks exports are the answer (as he has repeatedly stated) the industry really is in trouble. At current exchange rates Toyota loses about $2500 on every Camry it ships.

One of the key points lost in the hype is how Australia has kicked an own goal by reducing tariffs while other countries have not -- and establishing free trade agreements with countries that then create hidden, non-tariff barriers such as tax audits of buyers of foreign cars and higher insurance premiums. The high Australian dollar has only magnified the problems and accelerated the local industry’s decline.

As evidenced by Holden’s financial figures it would be easier -- and more profitable -- for General Motors to shut Holden’s factories and turn its back on the employees that pulled it through the Global Financial Crisis by working one week on and one week off, among other sacrifices.

Which is why it’s laughable some politicians believe this is all a bluff. Why would Holden risk damaging its brand image and the launch of the new Commodore for some perceived leverage?

In fact, Holden’s brand image is one of the key reasons it is fighting so hard to keep its local factories alive. Holden believes its reputation is inextricably linked to manufacturing and a shutdown of its factories would spark a sales slump of its imported line-up. I beg to differ. Switching purely to imported models would barely leave a dent on Holden’s sales. Most Holdens sold in Australia already come from Thailand or South Korea as rebadged Chevrolets.

There is one more worrying element to all of this. Holden gave its factory workers until the middle of August to come back with a plan to cut costs -- but even then that is no guarantee it will be enough to keep the factory running in the medium to long term.

When asked at a business lunch last Friday if Holden manufacturing operations would survive if factory workers did indeed swallow a pay cut and find new efficiencies Devereux said “wages are just one part of the equation”. When asked if he had a gut feel for how this whole ordeal would play out Devereux said: “I honestly don’t know”.

At least we know a locally-made SUV has been ruled out (contrary to suggestions by some union officials). Although there are more than 80 SUVs on sale in Australia, none are top-10 sellers. And Holden must have two top-10 contenders because it must rely on local sales to maintain factory throughput (because exports are unviable, especially when a South Korean factory can bang out a Captiva SUV for thousands less than Australia).

When asked if he had received a warning from General Motors head office in Detroit -- to wind-up the local factory in the wake of Ford’s announcement -- Devereux insisted he had not. That only leaves one option for the change in Holden’s tune over the past four weeks. Perhaps Holden has finally put more weight in preliminary polling which shows the federal opposition is likely to be elected into government on September 14.

The Gillard Labor government is a strong supporter of the car industry but the Coalition has said for the past year it will pull $500 million from industry assistance by 2015. But Holden doesn’t have that long to wait. Its first multi-million-dollar investment in the early groundwork for its new-generation cars are scheduled to happen between now and June 2014, according to federal budget documents.

Holden doesn't want to spend that first instalment -- estimated to be more than $150 million -- if it's not going to need the factory upgrades after 2016.

This reporter is on Twitter: @JoshuaDowling