A curtain has come down in Australia. General Motors’ Holden subsidiary closed its last major car assembly plant in the country on Friday, bringing to an end a century-old industry that forms the bedrock of Australia’s manufacturing industry.
It follows similar decisions by Ford and Toyota to cease local manufacturing as the carmakers failed to cope with reduced tariffs on cheaper Asian imports following the inking of free trade deals that flooded the market with cheap imports.
But the problems are not isolated to Australia. It is one of a number of developed economies struggling to compete as global car manufacturing increasingly shifts to the emerging markets such as Mexico, where the cost of production is lower.
The Holden closure raises questions and intensifies the debate over the long-term viability of production in the world’s richest nations.
“The global shift in production is one of the consequences of free trade deals between countries with big labour costs differences,” says Felipe Munoz, global automotive analyst at Jato Dynamics.
In North America, carmakers are still investing in Mexico, despite the threats by US President Donald Trump against carmakers that shift production out of the US.
Audi has begun using the country as the centre for global production of the Q5 premium SUV, while BMW is also opening a plant to produce 3-series sedans for the global market there.
Toyota will also move production of the Corolla to Mexico, while General Motors is expanding its plants in the country.
Ford had planned to make its next Focus model in Mexico, although it has shifted production to China.
Volvo, which is owned by China’s Geely, also uses China as a global export base for the S90 saloon.
In Europe, there has been a flurry of investment by Jaguar Land Rover, Volkswagen and Mercedes-owner Daimler in car plants in central and eastern nations Slovakia and Poland, where manufacturing costs are a fraction of those in Germany and the UK.
Manufacturing in high-cost countries such as Australia “only really makes sense when you have an export hub,” says George Galliers, an auto analyst at Evercore ISI.
Nations such as the UK and Germany are dependent on exports — close to 80 per cent of cars made in both countries are sold abroad.
This emphasis on exports puts the focus on free trade agreements, FTAs, which proponents of Brexit in the UK have cited as a way to open doors to selling the country’s cars to nations such as the US and China.
But in Australia, where a free trade deal with Thailand saw the market flooded with cheaper cars, and the US, there is more negative and hostile mood over the benefits of free trade agreements.
More than any other, the Nafta agreement between the US, Mexico and Canada highlights the perils of FTAs for the developed countries.
Nafta helped the Mexican car manufacturing sector boom from a cottage industry to a global powerhouse in two decades. But for the US, it saw jobs drain away to the cheaper south.
This pressure on jobs prompted Mr Trump to call Nafta the “worst deal in history” and also led to the US pulling out of the Trans-Pacific Partnership — a deal between 12 nations that border the ocean including Japan and America.
“It is crucial that an FTA actually works for businesses in practice,” says Jessica Gladstone, a London-based partner at law firm Clifford Chance.
“For without careful consideration, a deal could leave significant non-tariff barriers in place, which could see the benefits negotiated being neutralised altogether.”
Since Canberra signed a free trade deal with Bangkok in 2005, Australian consumers have bought 2.26m vehicles imported from Thailand, according to Australia’s Federal Chamber of Automotive Industries.
Yet when Holden and Ford attempted to export Australian-made cars to Thailand, they complained they often faced hidden non-tariff barriers that made exports unsustainable.
“The Thai free trade deal was a one way agreement. It didn’t provide a level playing field to our car manufacturers,” says Paul Bastian, national secretary of the Australian Manufacturing Workers’ Union.
Although a flood of cheap cars undoubtedly gave more people access to cars, a move with potential benefits to the wider economy, the measure took its toll on the industry, and car production halved between 2004 and 2012 to about 220,000 vehicles — Toyota 100,000, Holden 80,000 and Ford 40,000.
Scrapping high tariffs on imports also created a hyper-competitive domestic car market, where 67 brands sold 350 models in 2014 in a market with 1.1m annual sales worth A$40bn. This was more than in either the US, where sales were 17m, or China, with 23m sales in the same year.
“Competition is intensifying,” says Roy Green, dean at University of Technology Sydney’s business school. “Thailand is already a powerhouse in Asia and is absorbing almost all of Toyota’s Australian production. China is a new emerging global powerhouse.”
He says for carmakers to survive in high cost economies they need to embed a high level of robotics and automation in operations; fully integrate into global markets and supply chains; be able to customise products for individual customers; and provide world-class design.
The rising use of robots may help to tip the balance back in favour of developed countries, says Dr Sam Luttrell, an Australia-based partner at law firm Clifford Chance.
“The car industry is one of the most heavily automated industries in the world,” he says. “Robots perform most of the major steps in the production line. When robots do the work, wage costs start to be replaced by electricity bills.”
That will be little comfort to the final 900 workers at Holden’s Adelaide assembly plant or others in the industrial world where aggressive cost competition is having a similar impact.
“It is very rare to lose an entire industry and the demise of the auto industry in Australia is a salutary warning to other nations about what can happen if you are ambivalent about the industry,” says John Spoehr, director of the Industrial Transformation Institute at Flinders University. “It consolidates elsewhere.”
Holden brand will live on
General Motors may have stopped making cars in Australia but it is retaining design and engineering teams and the Holden brand — one of the oldest in the global automobile industry, writes Jamie Smyth.
“Holden’s lion and stone emblem is an iconic brand in Australia,” says Richard Ferlazzo, GM Australia’s design director. “We will still be selling Holden’s here. It’s just they will be sourced from other global GM plants.”
Holden’s next generation of Commodore, due to be launched next year in Australia, will be sourced from factories in Germany. The company plans to release a total of 24 car models by 2020, which the company says highlights its commitment to the brand.
“In today’s environment, it doesn’t make sense to manufacture here but it certainly makes sense to design cars in Australia,” says Mr Ferlazzo, who heads a team of 100 designers.
“The smarts and skills are already here and we have good links with universities.”
Holden was founded by James Alexander Holden, a saddle maker in Adelaide in 1856. The company diversified into coaches and built its first car body a century ago. In 1931 GM acquired the company, which began manufacturing the first Australian-designed car in 1948.
Generations of Australians have grown up with the Holden brand, which once commanded almost half of all car sales. But the brand has suffered from cut-throat foreign competition and in 2016 sold just 94,308 cars — one of its worst results on record equating to a market share of 8 per cent.
Holden’s team will work with half a dozen other GM teams in Brazil, US, China and South Korea to design commercial vehicles and other transport solutions.
It will also partner with GM’s Detroit design team to develop futuristic concept and show cars for global auto shows.
“Australia has high standards in industrial design, which is why the carmakers are retaining operations here when manufacturing ceases,” says Roy Green, dean at University Technology Sydney business school.
Ford, which closed its last car assembly plant in Australia last year with the loss of 600 jobs, is also retaining design and engineering teams in Melbourne.
This year it is investing A$450m in local research and development, up 50 per cent on 2016. It will have a 2,000 person strong team in Australia, including 1,750 engineers, designers and technicians.
Holden’s Melbourne design and engineering teams will be the only GM team, which do not have access to a manufacturing plant in the country.
“It’s handy to have production on site but not essential,” says Mr Ferlazzo.