Australian Automotive Industry Paper 2 – Vernier Society May 2013
The Australian Automotive Industry
Paper 2
Automotive industry is vital to Australia’s future – but it requires a whole new mindset!
Yet another announcement of job cuts at Holden has lead to ex Ford leaders announcing that further reductions will inevitably create a domino effect on the supply base as it tries to fight the reduction of scale and the increase of costs. These views support the economists who believe free market pressures should just be allowed to play out and government subsidies could be far better spent in other areas of the economy such as university spending as suggested on Q&A recently.. While SA unionist’s march for manufacturing and construction, Michael Filazzola, Director and GM of Global Purchasing at Holden’s publically attempts to justify, the economic benefits of the continued support for the industry. Is the money, said to be over $4.5b from 2008 to 2020 really going to save the automotive industry? Is it time to give up on manufacturing all together and move to a service driven economy? This paper, on behalf of the Vernier Society, argues that an automotive industry is vital for the whole of the manufacturing sector, but it is not this current industry. It is an industry with a future, of the future that will lead the manufacturing sector of the future.
The industry is a vital sector in manufacturing
The view that the industry should be left to free market forces is easy to understand. The industry produces gas guzzling, mediocre quality, dated models in a high cost, low productivity environment and Labor’s justification of jobs at any price just seems another form of union patronage. The GM Holden’s Chairman’s statement that, “Our current agreement with the Federal Government does not include minimum employment levels. [The assistance] is designed to generate the capacity to build things… and jobs flow from that.” (Manufacturers Monthly 10/4/13) makes job protection just a chimera rather than reasoned and justified economic benefit. Death seems inevitable so let’s find a better use for the palliative money.
Yet there are strong arguments for, as Shakespeare says, ‘not going easily into this grey dawn’. First is the market potential. According the CEO of Renault in 2012, while the current world market is 600m cars he forecasts demand will rise to 3 billion by 2050. The second is that 75% of the world’s trade is in manufactured goods; innovative products drive the world economy and leading industries like automotive drive innovation. Then there is the state of the current economy in Australia and the recognition that the industry does employ about 47,000 jobs across the sector. While the economic rhetoric on the relativity of Australia’s financial support per capita is confused, the conclusion as Filazzola points out is that virtually all of the 15 countries in the world that produce automotives heavily sponsor their vital industry, including Germany who it could be argued to have the most vitalised and envied car industry of any country. Our industry without continued financial support will die. The Vernier Society believe a successful automotive industry is vital to the future prosperity of Australia. However, the current state and the real challenges facing the current industry must be acknowledged by all the players; the government, the car companies themselves, the unions, the employees and the public. What has to be accepted for certain is the industry has to dramatically change to sustain.
The argument for subsidies
Holden, Toyota and Ford each face their own particular challenges in the global market, let alone in Australia. Domestic car sales are dropping and as Filazzola rightly states, over the last couple of years there has been a structural shift in the small car market but this cannot all be blamed on the high dollar. It has a significant contribution but environmental issues, city congestion and a younger purchasing demography are additional pressures for change. One only has to look at the car profile in the UK and the US to see the compact has changed the middle market and certainly two of the three makers have been slow to react. At the same time, reliability has played an increasing role and increased warranties have been a clear market penetration strategy for new entrants. Quality across the higher end market has also played a significant role and as Filazzola admitted in 2009, Holden’s plans to develop the Middle East export market had been affected by their quality problems. The domestic market share will inevitably continue to reduce and result in even further job losses. The writing is on the wall for Ford in 2016 if both anecdotal evidence and lack of visibility in the current debate is an indicator.
What does the loss of 47,000 jobs from the auto industry mean to the economy? There are those like John Daley from the Grattan institute who says that traditional supporters of manufacturing, like Vernier, should not be concerned because job losses will be replaced by newly created jobs as the economy adapts to a more service based economy. Curtin University’s labour market economist stated in the AFR recently that 1000’s of jobs are lost and created in the market every week and while the loss of 50,000 jobs may sound a lot, it will be barely noticed as far as the unemployment rate goes. This sounds rather preposterous; because the beach has ebb and flow tides each day, high storm tides don’t do any damage? Tell that to the seawall! What is also not fully appreciated in this argument is existing skill levels. In the 2008 Bracks Automotive Report it was acknowledged that nearly 50% of the employees had no formal qualification and while government funded training has been utilised, the challenge of transitioning to new skills and industries is severe. At the same time, automotive companies cannot and should not guarantee employment. All businesses need to manage their bottom line and their productive cost base and companies must ensure their revenues and cost ratio’s are at least maintained. The discussions between the government, the unions and the companies were confidential but it is incredulous to believe that the automotive companies did not clearly state that these subsidies in no way guaranteed jobs. The outcome was not job security. The makers got continuation of necessary subsidy support, the unions got increases pay rates and the Labor government got silent compliance for a false message that endorsed their political rhetoric. Bandaging the patient will only prolong the situation; only major surgery and lifestyle change will save life.
The case for change
Manufacturing across a wide range of sectors drives the world economy. Michael Porter’s ‘Competitive Strategy’ analysis states that companies need to differentiate in one of three areas; cost, service or innovation. The emerging nations are the leaders in a cost commodity strategy, as was shown initially by China and SE Asia and now as companies like IKEA are showing production will migrate to new lowest cost economies. So we have to compete with service and innovation. The automobile is a relatively high priced necessity of life; nowhere more so that Australia with its huge land mass. While Australia has a small share of the current sales market, the growth potential is enormous. By 2050, car sales will grow to 3 billion with much of that growth, right on our doorstep, as part of the Asian century. The economic share of this capability alone is staggering. The automotive industry is a major contributor to our economy. Holden alone put $32b into the Australian economy over the last 12 years. It provides nearly $5b of added value to the economy, employs around 5% of the total manufacturing workforce and most importantly over 20% of the R&D investment in manufacturing. Transport is the future. In every futuristic movie made, innovative transport is ubiquitous, on auto guided highways or flying between skyscrapers. Spaceships reach for the stars, shuttles make routine visits to neighbouring planets. The future is an automated world of alternative energy sources. The climate change debate shows that we need to start moving towards alternative energy sources and so the hybrid, the electric or other forms of power sources are the future differentiators and these require radical and highly innovative thought about the whole industry. Other countries have already got this message. Every month a new book preaches the need for high cost countries like America to lead a manufacturing renaissance. For real innovative success one only has to look at the Swiss achievement in a manufacturing economy driven by leading edge products. South Australia has already recognised this with the bold recruitment of leading academic on innovation, Goran Roos, to head their new manufacturing initiative. Australia’s future must include a thriving manufacturing sector with automotive a major component. However, it will require a much changed industry. We need to build a new innovative model for our future automotive industry; the current one is atrophied.
How do we change?
Our current situation is like asking someone in the street for directions only to be told “Oh if you want to go there I would not start from here”. But this is where we are and so to have a futurist leading automotive industry we need to do three things. First have an honest assessment on the current state of the industry; secondly create a vision of where we want the industry to be in the future and finally develop a plan to get from where we are to this future vision. Each of these tasks requires radical thinking by experts from all the aspects of the industry and will require time and an in depth evaluation with honest and realistic admissions. This analysis must take a radical approach, traditional thinking will not take the industry to where it needs to be. This is the approach we must take to building a new automotive industry. Sinecures like increasing government purchases of Australian made cars, waiting for the dollar to fall, iterating design rather than innovating it, are not sufficient. We need to follow the Tom Peters old management maxim- if it not broke, break it.
Effectively, no real decisions on the industry can be made until after the election in September. One of the first steps would hopefully be to appoint an expert taskforce to set out a ten year roadmap for the industry. In a year we need to have the blueprint action plan. This would seem to fit with the current horizons establish under the current regime and so existing support financial plans will need to stay in place even with a resignation to further labour losses. A new innovative model for the automotive industry needs to be conceived on a number of building bricks. The leading edge types of product being produced and the research technologies required to support this edge; the radical production processes that can produce cars at relatively competitive prices and support the total productive competitive advantage and a totally new industrial climate with a new paradigm in management and worker collaboration instead of the old adversarial industrial relations division. All of this has to be underpinned by a government that clearly understands such industries need judicious and targeted government support.
What are some of the broad brush strokes that should be considered in this new age? The vehicles of the future will not be solely oil powered, so research and development into new forms of power has to be a priority. It would seem that investing in a dedicated Centre for Automotive Power Innovation in accordance with the Labor Manufacturing plan would be and ideal way to start. It would also seem that identifying a leading university and TAFE institute to develop knowledge and skills for the future industry should be given impetus with appropriate incentives. As electronics is already a crucial, competitive differentiator in today’s car and all of this technology is outsourced overseas, there is going to have to be major technology partnerships set up with the world’s leading companies. While this sounds easy, the issues around intellectual rights will be extremely complex and these types of joint venture will new considerations. Government has to do more that passively make funds available as with the latest funding for Innovation Centres; the government has to direct funding to specific organisations and technologies. It has to force collaboration. This is an area currently that Australia is not good at. Government has to have the courage to direct spending in collaborative technologies but this requires a level of courage not seen in governments of either persuasion.
The second major area of change is in the total automotive process. Currently manufacturing is driven by scale. But the new industry will not have scale and so will require a new process concept based on some form of cellular production with tiered suppliers much more integrated into the total process, both by Geographics and status. Tiered suppliers will share in the total process rather than the current methodologies where hierarchical power, forces pricing pressures down the tiers and futures are only proportional to the length of contract. There will need to be a new level of integration rarely seen in the current processes. This extends the concept recently put forward by Manufacturing Focus’s Mark Fusco, based on collaboration projects that already exist in other countries with companies sharing facilities and resources. Productivity is another key driver in manufacturing and while there it is suggested there has been recent improvement in this area; Australia does not have a good record. Australia’s industrial relations climate is a major deterrent and while management performance must also be improved as leading economist Saul Eslake recently suggested in the AFR, this is a chicken and egg argument as to which came first? A new management – worker paradigm cannot wait until we have a new industry as further job losses will just enforce traditional divisions. A new industrial relations climate needs to start now. One way would be to scrap the current EBA system and introduce management/worker boards on the lines of what happens in Europe. These boards work together without third party unions to negotiate across a whole range of productivity issues. With a more enlightened attitude from all sides Industry, Unions and Government could then work together on the bigger strategic issues. Finally, what role should government pay in this? The almost ubiquitous cry from businesses is the need to reduce the regulation of industry and the automotive industry must surely benefit from taking positive action in this regard. Of course, the folly of the carbon tax with its increased costs for no benefits must be addressed. The Alternative energy fund should be focused on to the industry in recognition that car pollution is a major issue. Utilising Australia’s natural energy resources to assist the industry as Dow Chemical’s Andrew Liviris’s suggests would again provide further assistance to a new industry.
A brave new world
These are but a few suggestions from a society of passionate manufacturing people who believe that both a manufacturing industry and an automotive industry are crucial to the future prosperity of this country. One of the Victorian Government’s new principles is collaboration and much of this paper builds on a new regime of collaboration within the industry. It also relies on a new form of positive and supportive government. The existing automotive industry is heading to the extinction cliff edge and we will lose much more than an automotive industry, we will lose the bedrock of a manufacturing industry that will never to able to be replaced. But it requires action not complacency. As the CEO of the CPA Institution stated at their launch of building a ‘Competitive Australia’ the government’s plan for another innovative and key manufacturing industry, ‘Fast Rail’, took 32 months to produce a plan that will take 65 years to implement while China actually planned and built theirs in just 38 months! It requires a quantum change of mindset to create this brave new world.
Automotive industry is vital to Australia’s future – but it requires a whole new mindset!
Yet another announcement of job cuts at Holden has lead to ex Ford leaders announcing that further reductions will inevitably create a domino effect on the supply base as it tries to fight the reduction of scale and the increase of costs. These views support the economists who believe free market pressures should just be allowed to play out and government subsidies could be far better spent in other areas of the economy such as university spending as suggested on Q&A recently.. While SA unionist’s march for manufacturing and construction, Michael Filazzola, Director and GM of Global Purchasing at Holden’s publically attempts to justify, the economic benefits of the continued support for the industry. Is the money, said to be over $4.5b from 2008 to 2020 really going to save the automotive industry? Is it time to give up on manufacturing all together and move to a service driven economy? This paper, on behalf of the Vernier Society, argues that an automotive industry is vital for the whole of the manufacturing sector, but it is not this current industry. It is an industry with a future, of the future that will lead the manufacturing sector of the future.
The industry is a vital sector in manufacturing
The view that the industry should be left to free market forces is easy to understand. The industry produces gas guzzling, mediocre quality, dated models in a high cost, low productivity environment and Labor’s justification of jobs at any price just seems another form of union patronage. The GM Holden’s Chairman’s statement that, “Our current agreement with the Federal Government does not include minimum employment levels. [The assistance] is designed to generate the capacity to build things… and jobs flow from that.” (Manufacturers Monthly 10/4/13) makes job protection just a chimera rather than reasoned and justified economic benefit. Death seems inevitable so let’s find a better use for the palliative money.
Yet there are strong arguments for, as Shakespeare says, ‘not going easily into this grey dawn’. First is the market potential. According the CEO of Renault in 2012, while the current world market is 600m cars he forecasts demand will rise to 3 billion by 2050. The second is that 75% of the world’s trade is in manufactured goods; innovative products drive the world economy and leading industries like automotive drive innovation. Then there is the state of the current economy in Australia and the recognition that the industry does employ about 47,000 jobs across the sector. While the economic rhetoric on the relativity of Australia’s financial support per capita is confused, the conclusion as Filazzola points out is that virtually all of the 15 countries in the world that produce automotives heavily sponsor their vital industry, including Germany who it could be argued to have the most vitalised and envied car industry of any country. Our industry without continued financial support will die. The Vernier Society believe a successful automotive industry is vital to the future prosperity of Australia. However, the current state and the real challenges facing the current industry must be acknowledged by all the players; the government, the car companies themselves, the unions, the employees and the public. What has to be accepted for certain is the industry has to dramatically change to sustain.
The argument for subsidies
Holden, Toyota and Ford each face their own particular challenges in the global market, let alone in Australia. Domestic car sales are dropping and as Filazzola rightly states, over the last couple of years there has been a structural shift in the small car market but this cannot all be blamed on the high dollar. It has a significant contribution but environmental issues, city congestion and a younger purchasing demography are additional pressures for change. One only has to look at the car profile in the UK and the US to see the compact has changed the middle market and certainly two of the three makers have been slow to react. At the same time, reliability has played an increasing role and increased warranties have been a clear market penetration strategy for new entrants. Quality across the higher end market has also played a significant role and as Filazzola admitted in 2009, Holden’s plans to develop the Middle East export market had been affected by their quality problems. The domestic market share will inevitably continue to reduce and result in even further job losses. The writing is on the wall for Ford in 2016 if both anecdotal evidence and lack of visibility in the current debate is an indicator.
What does the loss of 47,000 jobs from the auto industry mean to the economy? There are those like John Daley from the Grattan institute who says that traditional supporters of manufacturing, like Vernier, should not be concerned because job losses will be replaced by newly created jobs as the economy adapts to a more service based economy. Curtin University’s labour market economist stated in the AFR recently that 1000’s of jobs are lost and created in the market every week and while the loss of 50,000 jobs may sound a lot, it will be barely noticed as far as the unemployment rate goes. This sounds rather preposterous; because the beach has ebb and flow tides each day, high storm tides don’t do any damage? Tell that to the seawall! What is also not fully appreciated in this argument is existing skill levels. In the 2008 Bracks Automotive Report it was acknowledged that nearly 50% of the employees had no formal qualification and while government funded training has been utilised, the challenge of transitioning to new skills and industries is severe. At the same time, automotive companies cannot and should not guarantee employment. All businesses need to manage their bottom line and their productive cost base and companies must ensure their revenues and cost ratio’s are at least maintained. The discussions between the government, the unions and the companies were confidential but it is incredulous to believe that the automotive companies did not clearly state that these subsidies in no way guaranteed jobs. The outcome was not job security. The makers got continuation of necessary subsidy support, the unions got increases pay rates and the Labor government got silent compliance for a false message that endorsed their political rhetoric. Bandaging the patient will only prolong the situation; only major surgery and lifestyle change will save life.
The case for change
Manufacturing across a wide range of sectors drives the world economy. Michael Porter’s ‘Competitive Strategy’ analysis states that companies need to differentiate in one of three areas; cost, service or innovation. The emerging nations are the leaders in a cost commodity strategy, as was shown initially by China and SE Asia and now as companies like IKEA are showing production will migrate to new lowest cost economies. So we have to compete with service and innovation. The automobile is a relatively high priced necessity of life; nowhere more so that Australia with its huge land mass. While Australia has a small share of the current sales market, the growth potential is enormous. By 2050, car sales will grow to 3 billion with much of that growth, right on our doorstep, as part of the Asian century. The economic share of this capability alone is staggering. The automotive industry is a major contributor to our economy. Holden alone put $32b into the Australian economy over the last 12 years. It provides nearly $5b of added value to the economy, employs around 5% of the total manufacturing workforce and most importantly over 20% of the R&D investment in manufacturing. Transport is the future. In every futuristic movie made, innovative transport is ubiquitous, on auto guided highways or flying between skyscrapers. Spaceships reach for the stars, shuttles make routine visits to neighbouring planets. The future is an automated world of alternative energy sources. The climate change debate shows that we need to start moving towards alternative energy sources and so the hybrid, the electric or other forms of power sources are the future differentiators and these require radical and highly innovative thought about the whole industry. Other countries have already got this message. Every month a new book preaches the need for high cost countries like America to lead a manufacturing renaissance. For real innovative success one only has to look at the Swiss achievement in a manufacturing economy driven by leading edge products. South Australia has already recognised this with the bold recruitment of leading academic on innovation, Goran Roos, to head their new manufacturing initiative. Australia’s future must include a thriving manufacturing sector with automotive a major component. However, it will require a much changed industry. We need to build a new innovative model for our future automotive industry; the current one is atrophied.
How do we change?
Our current situation is like asking someone in the street for directions only to be told “Oh if you want to go there I would not start from here”. But this is where we are and so to have a futurist leading automotive industry we need to do three things. First have an honest assessment on the current state of the industry; secondly create a vision of where we want the industry to be in the future and finally develop a plan to get from where we are to this future vision. Each of these tasks requires radical thinking by experts from all the aspects of the industry and will require time and an in depth evaluation with honest and realistic admissions. This analysis must take a radical approach, traditional thinking will not take the industry to where it needs to be. This is the approach we must take to building a new automotive industry. Sinecures like increasing government purchases of Australian made cars, waiting for the dollar to fall, iterating design rather than innovating it, are not sufficient. We need to follow the Tom Peters old management maxim- if it not broke, break it.
Effectively, no real decisions on the industry can be made until after the election in September. One of the first steps would hopefully be to appoint an expert taskforce to set out a ten year roadmap for the industry. In a year we need to have the blueprint action plan. This would seem to fit with the current horizons establish under the current regime and so existing support financial plans will need to stay in place even with a resignation to further labour losses. A new innovative model for the automotive industry needs to be conceived on a number of building bricks. The leading edge types of product being produced and the research technologies required to support this edge; the radical production processes that can produce cars at relatively competitive prices and support the total productive competitive advantage and a totally new industrial climate with a new paradigm in management and worker collaboration instead of the old adversarial industrial relations division. All of this has to be underpinned by a government that clearly understands such industries need judicious and targeted government support.
What are some of the broad brush strokes that should be considered in this new age? The vehicles of the future will not be solely oil powered, so research and development into new forms of power has to be a priority. It would seem that investing in a dedicated Centre for Automotive Power Innovation in accordance with the Labor Manufacturing plan would be and ideal way to start. It would also seem that identifying a leading university and TAFE institute to develop knowledge and skills for the future industry should be given impetus with appropriate incentives. As electronics is already a crucial, competitive differentiator in today’s car and all of this technology is outsourced overseas, there is going to have to be major technology partnerships set up with the world’s leading companies. While this sounds easy, the issues around intellectual rights will be extremely complex and these types of joint venture will new considerations. Government has to do more that passively make funds available as with the latest funding for Innovation Centres; the government has to direct funding to specific organisations and technologies. It has to force collaboration. This is an area currently that Australia is not good at. Government has to have the courage to direct spending in collaborative technologies but this requires a level of courage not seen in governments of either persuasion.
The second major area of change is in the total automotive process. Currently manufacturing is driven by scale. But the new industry will not have scale and so will require a new process concept based on some form of cellular production with tiered suppliers much more integrated into the total process, both by Geographics and status. Tiered suppliers will share in the total process rather than the current methodologies where hierarchical power, forces pricing pressures down the tiers and futures are only proportional to the length of contract. There will need to be a new level of integration rarely seen in the current processes. This extends the concept recently put forward by Manufacturing Focus’s Mark Fusco, based on collaboration projects that already exist in other countries with companies sharing facilities and resources. Productivity is another key driver in manufacturing and while there it is suggested there has been recent improvement in this area; Australia does not have a good record. Australia’s industrial relations climate is a major deterrent and while management performance must also be improved as leading economist Saul Eslake recently suggested in the AFR, this is a chicken and egg argument as to which came first? A new management – worker paradigm cannot wait until we have a new industry as further job losses will just enforce traditional divisions. A new industrial relations climate needs to start now. One way would be to scrap the current EBA system and introduce management/worker boards on the lines of what happens in Europe. These boards work together without third party unions to negotiate across a whole range of productivity issues. With a more enlightened attitude from all sides Industry, Unions and Government could then work together on the bigger strategic issues. Finally, what role should government pay in this? The almost ubiquitous cry from businesses is the need to reduce the regulation of industry and the automotive industry must surely benefit from taking positive action in this regard. Of course, the folly of the carbon tax with its increased costs for no benefits must be addressed. The Alternative energy fund should be focused on to the industry in recognition that car pollution is a major issue. Utilising Australia’s natural energy resources to assist the industry as Dow Chemical’s Andrew Liviris’s suggests would again provide further assistance to a new industry.
A brave new world
These are but a few suggestions from a society of passionate manufacturing people who believe that both a manufacturing industry and an automotive industry are crucial to the future prosperity of this country. One of the Victorian Government’s new principles is collaboration and much of this paper builds on a new regime of collaboration within the industry. It also relies on a new form of positive and supportive government. The existing automotive industry is heading to the extinction cliff edge and we will lose much more than an automotive industry, we will lose the bedrock of a manufacturing industry that will never to able to be replaced. But it requires action not complacency. As the CEO of the CPA Institution stated at their launch of building a ‘Competitive Australia’ the government’s plan for another innovative and key manufacturing industry, ‘Fast Rail’, took 32 months to produce a plan that will take 65 years to implement while China actually planned and built theirs in just 38 months! It requires a quantum change of mindset to create this brave new world.
