Much has been written about the auto industry’s globalization and the impact on its various participants: OEMs, suppliers and governments. Many countries who once were major players from a vehicle production/export perspective are finding it difficult to even find their niche today. A recent family trip to Australia and New Zealand drove the point home.
Seemingly every continent has a vehicle production superpower (Western Europe has several) seeking to refine itself in the midst of an industry which is quickly globalizing, seeking to reduce currency risk and attempting to move closer to the final consumer. Australia still has three OEMs with vehicle production facilities resident in the country’s South-East industrial breadbasket. Ford, Toyota and General Motors (Holden) all have various levels of stand-alone operations, including vehicle build, powertrain production, and vehicle development capabilities. Mitsubishi dropped out a couple of years ago. The remaining companies are struggling to define an equation which ensures long-term profitability and viability. In 2012, Australian light vehicle output stood at ~228,000 units, an average of less than 80,000 units for each of its three full-fledged production companies.
Other countries finding difficulty fitting within the new global reality include Sweden, Belgium, France, Italy, Taiwan, Canada and even Japan. What has changed to drive a more treacherous path for Australia and this unlikely lot of cohorts? The list includes scale economies, converging global regulations, risk mitigation, shifting end markets, logistics costs escalation, and evolving trade regimes. While history has shown that nothing can be considered constant in our fast-paced world, the events of the last decade with respect to the surge toward globalization from that of a regional context has been unkind to these countries. Except for Canada, France and Japan, these production locations have fallen below 1-million annual production units. Each one has witnessed a quick decline in the production to sales ratio (typically well over 1 for ‘export’ focused countries) – a measure of the success of a country’s export program.
An evolution from an industry centered on regional vehicles driven from regional platforms to that of global platforms with regional variants is a subtle though critical difference. Regional platforms block any real production flexibility between regions while escalating total global development costs. The adage that regional platforms were required due to the unique characteristics of a particular market are quickly washing away as global emissions, fuel economy and safety standards converge and thus enable fewer unique combinations.
Appropriate scale is beginning to call the efficient continuation of operations into question. This is the case for Sweden, Australia, and, to an extent, Canada. For years, scale economies were brushed under the rug as industry participants learned few lessons from the true heavyweights of global scale: Toyota, Honda and Volkswagen. As successive platforms shift to a global basis, new potential competitors emerge for exports. In the case of General Motors, exports of Holden vehicles have declined due to the increase of options Middle East customers are now offered and the growth of more efficient choices from other OEMs.
An ugly byproduct of declining production is the impact on the supply base. The lack of scale also impacts tier I/II suppliers domestically due to scale and costs to import the appropriate inputs, and also handcuffs their ability to be competitive outside their market – a double-edged sword.
All industries must evolve, though the only constant of change in the auto industry is that it will never cease. New production locations have emerged due to growing domestics markets, the ease of global platform integration. China, India, Thailand, and South Africa are just a handful of examples. Mexico can also be included in this club due to enhanced trade access to key export markets. Countries witnessing a decline in output are faced with few alternatives to support this critical industry. The march of time is cruel to many, kind to few.
Michael Robinet has been a managing director of IHS Automotive Consulting since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade flow/sourcing strategies, and OEM footprint/logistics trends.