The end of the Australian car industry?

Aussie car makers under pressure

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 8, 2012 11:12 am AEDT

While yesterday's Bathurst 1000 might have been a celebration of Holden versus Ford, Australian car makers are struggling as sales of locally manufactured vehicles fell by 16% in August to just 11,926 units, according to a recent report by Ferrier Hodgson. Ford's Falcon sales have hit a 50-year low with just over 1,000 cars sold per month.

There is now a very real risk that Ford, General Motors Holden and Toyota could cease local manufacturing if volumes decrease further, putting at jeopardy 55,000 direct and 250,000 indirect jobs.

Local car sales have fallen 50% in the last four years, driven by cheaper imports, consumers shifting away from large passenger vehicles to SUVs and more fuel efficient vehicles. Falling resale values (as imported model prices fall and add more features), a shift in corporate fleet policies from locally made models to a 'user chooses' model, and government vehicle purchases falling as well as switching to imported cars, have all added to the woes of the local industry.

This all comes at a time when the Federal government is facing increasing criticism for billion-dollar handouts to car companies and its legal action to keep the details secret. The Commonwealth doled out $34 million to Ford and $275 million to Holden earlier this year according to the Australian Financial Review, and is expected to dish much more to local car manufacturers over the next 10 years. No-one really knows how much the government gives the car industry, as the information is kept private between the government, Ford, Holden and Toyota.

Economists have long held the belief that the Australian car industry is uncompetitive, and the grants could have been better spent. The Ferrier Hodgson report suggests that component manufacturers for Ford, Holden and Toyota are being forced to close, and government subsidies to the three encourage them to build cars people don't really want.

This is a scenario much like the government support for local steel manufacturers BlueScope Steel Limited (ASX: BSL) and Arrium Limited (ASX: ARI) ex-OneSteel, to prop up the companies and keep thousands employed, despite the two being unable to compete against imported steel.

Last week we wrote that the Australian Customs Service had recommended that imported steel should attract a tariff of up to 15.45% to protect BlueScope – a decision that would severely impact on the local car manufacturers, by driving up their costs.

The future for the local automotive industry is likely to be in the hands of after-market manufacturers such as ARB Corporation Limited (ASX: ARP), and the likes of car dealers including Automotive Holdings Group (ASX: AHE) which supply and sell both local and imported models makes.

The Foolish bottom line

Whilst the government's intentions to protect local industry are well intentioned, history has shown that over the long term, tariffs, handouts and subsidies don't work out all that well, and usually delay the inevitable collapse or death of the industry. Maybe we should be looking 'outside the box' for better ideas.

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Motley Fool writer/analyst Mike King doesn't own shares in any stocks mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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