In a new book, National Policy, Global Giants – How Australia Built and Lost its Automotive Industry, authors John Wormald and Kim Rennick analyse the lifecycle of Australia’s automotive history and its shifting relationship with the government that supported it.
Based in the UK, Wormald is managing partner and co-founder of Autopolis, which specialises in strategic assignments for the global automotive industry. He is co-author of two books about the automotive industry and previously worked for Booz.Allen.Hamilton, Renault and the Boston Consulting Group.
Rennick is Autopolis’ partner in Australia, consulting in the fields of governance, directorship and leadership. He has co-authored submissions and papers for the Australian Productivity Commission, the Australian Competition and Consumer Commission, and various state and federal government inquiries.
Piston Broke: What prompted you to write the book?
John Wormald: It came from our involvement with the FAPM (Federation of Automotive Products Manufacturers). In 2004 we started working with them regarding the future of component manufacturers and that led us to talk to people to try to understand the local industry.
Kim Rennick: We also did a lot of work with the auto makers, Ford, Holden, Toyota and Mitsubishi during those projects. We were interested to see how the industry formed here.
Wormald: It’s an unusual circumstance to be able to look at the birth, growth, life, decline and eventual death of a complete industry. We had a broad view of the industry and clearly there were difficulties. We became concerned that the attempts to keep the industry going were costing a lot of money, getting less and less effective, and the facts were not being faced. We were particularly concerned about ACIS (Automotive Competitiveness and Investment Scheme), and notably the ATS (Automotive Transformation Scheme) – it claimed to be a transformation, but a transformation to what? A viable future state for the industry was never defined. There’s a certain amount of ‘I told you so’ in the book but that’s not what we are trying to say. We wanted to document the situation.
What did you find?
Wormald: It was a great success initially. Holden became a national icon, Ford to some extent also and the industry functioned very well while the market was protected, but there was a change of policy. (Politicians) had to open-up everything, go for globalisation, free market, give Australian consumers more choice and that, in retrospect, was incompatible with preserving the industry given that it was so sub-scale.
That is why we wrote a ‘front-end’ about the structure, development and functioning of the global industry, and the enormous scale it is driven to, to put the Australian sector in context. The fact is Australia got relatively smaller and smaller, to the point of non-viability.
Rennick: Protection was being stripped away just after Europe hit its stride in a global sense. The big German manufacturers came on-song big time in the early to mid-’70s and that happened just before we took all the ‘fences’ down.
Wormald: (Prior to establishing a car industry) Australia didn’t want to go on being purely an exporter of commodities, which at the time was sheep wool, sheep meat and wheat. There were strategic concerns about being defenceless if the Japanese ever got naughty again, or somebody else. The feeling that you must be more than a commodities exporter has come around again (due to the COVID-19 pandemic).
This was a very valiant effort that didn’t work in the end, and the problem hasn’t gone away. Our view is it’s legitimate for government to support certain sectors, particularly new and developing ones, but you better be damn careful about which ones you pick. You try to pick ones in which you have some sort of natural comparative advantage and some chance of achieving a sustainable position. As it turned out automotive wasn’t one, even though it had a good run.
Rennick: One comment we make in the book is that when the 1948 Holden was released the population of Australia was around 7.5 million, a miniscule population spread over a mighty big land, yet various governments encouraged Ford, General Motors and Chrysler to set up here.
The Australian industry was essentially, what I call, a blacksmith operation, a cobbler’s shop. If you wanted a new front wishbone for an FJ Holden, you’d just take a large hammer down to the forge and hammer one into shape. That’s how cars were (built) then – it’s a bit of an exaggeration – but you get the idea. Cars have moved on in terms of complexity and sophistication, and therefore the cost of development has risen. Australia might have been able to supply a small market with a cobbler’s product, but there’s no way it could make a product for the global market.
Has the reason for making Australian cars passed?
Wormald: Yes, I think it has. The idea that you had a specifically Australian product, adapted to Australian conditions, worked very well at the start, especially as it was possible to take American designs more-or-less off-the-shelf and adapt them progressively, but Australia has changed. Most driving is pretty suburban, it’s similar to what you’ll see in any developed country, so the idea of a distinct Australian product would be an expensive and unaffordable luxury now, unless you could find some sort of niche. We tried to float the idea of only having one manufacturer with some sort of product that would be uniquely Australian in today’s context. The obvious candidate would have been to buy Land Rover. Range Rover is a genuinely niche product, is upmarket, and fits with Australia. It would have created a distinct identity.
Rennick: There was a real change in Australia, too. I remember, when I was a young lad in the ’60s, whenever a new model Holden was released there would literally be people lined up around the block to look at it in a dealership.
In the ’70s, in particular during the Whitlam years, Australia really opened up, took a far more international view, was becoming far more prosperous and people didn’t like the idea of driving the old Holden around the block.
Wormald: I think, particularly in developed economies, the enthusiasm for (new model releases) has, to a degree, faded. The industry hasn’t helped itself; with such a vast product offering, cars have become more of a commodity which creates more and more price pressure. It just became an industry which was not very attractive for Australia to try to compete in. In a way, the end was inevitable.
Our feeling was that there was a lot of self-delusion and frankly, a lot of public money thrown at it, which might have been better used for other purposes.
What were some of the other challenges for the Australian industry?
Rennick: It was undone by bad timing as much as anything else. Virtually every manufacturer in Australia failed when its parent got into deep strife, Toyota being the obvious exception. One of the reasons Ford failed in Australia is that they tried to make an Australia-only model, so there was zero sharing of any of their models with any other Ford in the world. They had to amortise all their design and engineering costs over a miniscule product run. Even in the heyday of Ford, they sold maybe 70,000 a year. There is no way you can develop an up-to-date product with those sort of sales. Holden was different in that it established quite a remarkable position in GM which would have led them onto greater things had GM not gone bankrupt in the GFC. Had the GFC not happened they would have been exporting Pontiacs and Chevys into the US. Mitsubishi failed because the parent behaved so badly, Leyland and Chrysler similarly.
Wormald: The industry is over competing on the product offering; everybody must have a wider and wider range of every vehicle manufactured. This bloats their costs, then you renew the product more frequently, which crushes your sales price. You try to maintain a list price, but people ask for more and more discount because there is so much competitive pressure in the market.
The fleet market also became increasingly important, which is where vehicle manufacturers go when they want to generate volume, but they always regret it because professional buyers negotiate down on price so it was a very dangerous sector to rely on.
Manufacturers tend to have a breakeven point that is much too high. The gross margins are too thin, the fixed costs are big, so they are absolutely desperate for volume all the time. They try to pull away from fleet buyers and concentrate on the retail market where the margins are better but then the volumes fall, the pressure returns, and they are unable to resist the temptation of chasing fleet sales. It’s like when you wake up on Sunday morning with a terrible hangover saying ‘God, I’m never going to drink again’, then next Saturday night… This is not an easy industry to be in.
Additionally, Australia’s official or implicit preference for buying Australian in the fleet sector went away with novated leasing. We went through this in the UK years ago – companies were expected to buy a British manufactured car but, as soon as people could choose their company car, they chose something else.
People seem to think the end happened over night, but it looks like it’s been coming since about 1980 when Chrysler fell over.
Wormald: You’re right Darren, there were rumblings from early on that things were not entirely well.
Rennick: The car makers knew, if they were in strife, all they had to do was make enough noise, pick up a baseball bat, go to Canberra, wallop the crap out of the politicians and they would get some money. For years, both political parties just rolled over.
Wormald: The industry historically, and not just in Australia, has been very good at saying to government, ‘I’ll come in and invest if you give me some support and if you don’t continue that support we’ll pull out and look at the job losses’. This terrifies politicians, particularly if you’re an MP in a constituency where an assembly plant or component suppliers are threatened. The industry knows how to apply pressure.
(The decision to cease government support) should have happened long before the Abbott government. In a way the Abbott government was honest. It said, ‘this simply can’t go on’. There may have been union bashing, there were political parts to it, but in a way, it was recognition that this couldn’t go on. I was interested in GM’s response. As soon as Joe Hockey made those statements in the House (of Representatives), bang, GM came back with, ‘oh well, we’ve been let down, Australia’s an impossible place to compete in, it’s an overly competitive market, it’s too expensive to produce in’. It was as though they had those answers teed up and were just looking for an excuse. The Abbott government gave them that excuse.
In the book you talk about the efficiency of Japanese car makers and relate it to US and Australian manufacturers.
Wormald: The Japanese invasion happened when I was working at Renault. We sent people to visit the Japanese factories and we found some quite extraordinary things, like changing the dies on the press line in 10 minutes whereas it took us 36 hours. They simply learnt how to perfect and balance the production process. It wasn’t a matter of technology or hardware, it was a matter of organisation, something I think was very deeply rooted in Japanese culture.
The development of the Just in Time (inventory system) – lean production – was their advantage. They were disadvantaged on scale compared to the Europeans or Americans, but they made this great leap in balancing production processes.
For example, because a press has a much faster cycle time than an assembly line, (traditionally) you would churn out large volumes of pressed parts, stock them, switch to another press part, run up a stock of that and then you would draw on those stocks. You had a huge pile up of inventory and if there was something wrong with one of the parts, you would run up a huge number of defective parts and then you would find your assembly line was stopped.
Rennick: Under the American system, if they had a stack of parts that were found to be faulty, it was in the interest of the line worker to just put it onto the car and let it go, because if you stopped the line for whatever reason, you would be lucky to have a job at the end of the day.
Wormald: Instead of churning out stuff and shoving it down the line to the next stage, the Japanese ran the presses and changed the press dies quickly and they only produced parts as the next stage needed it. That had enormous economic cost and quality advantages, but it was not an easy thing to learn culturally because it required a completely different relationship between management and the people on the shop floor. It was quite alien to the American, Henry Ford mass production approach.
Japanese cars took a long time to gain widespread acceptance, but they changed the industry.
Wormald: Japanese cars were boring, but they worked. For manufacturers like Porsche, image and technical differentiation matter, but if you’re in the volume market, the cars are all much the same; the add-ons matter more than the base car. I think the industry, for a very long time, grossly overestimated the extent to which cars are sold on styling and emotional appeal in the volume car market. Most people are concerned with something that’s economical, reasonably fuel efficient and above all, cheap and reliable – it gets you there. The Japanese, and the Koreans later, hit that. They hit an unsatisfied demand.
You also talk about the impact of women.
Rennick: I’ve got a set of car magazines from the ’50s and they always talk about the man buying the car. The ads were aimed purely at the masculine side of the business and the women were always an adornment to the car.
Wormald: That has totally changed in Europe, more women buy cars than men; they are the majority in the car buying market. Most of them don’t have an interest in the car itself, it’s a tool, a means, that’s all it is. That changes things profoundly.
The British industry also faded away. Are there similarities with what happened in Australia?
Wormald: I think there are some similarities. The British car industry survived while the market was protected. The kiss of death was Britain joining what’s now the European Union, which dropped the tariff barriers. (Prime Minister) Ted Heath said we need to be in this otherwise our exports will be constrained. What I think he failed to realise was dropping those tariff barriers opened the British market to a lot of imports. The British industry produced some interesting and sometimes some bizarre products and the standards of quality were not terribly good. There was a certain arrogance, a certain assumption that there’s a great attachment to the national product, but when it was put to the test, people bought something from Europe. There is something of that in Australia, relying too much on the traditional attachment to the distinctly Australian car.
That’s one of the points we make at one stage in the book – the writing was on the wall early (because) people were rushing to buy boring Japanese and eventually Korean ‘econoboxes’. I put one little jibe in the book about an industry review – why did (the Productivity Commission) only talk to the fleet market, which basically responded ‘well, yes, as long as there is Australian product we’ll go on buying your cars.’ Nobody, evidently, ever thought of interrogating the (retail) consumers, or the dealers who would have seen what was going on. There was a lot of complacency here, and in Britain.
Rennick: Maybe another problem is that the makers here had very close relationships with their respective parent and they really took their running orders from the parent lock, stock and barrel.
When (Prime Minister Ben) Chifley had the proposals from GM and Ford, the Ford one implied a co-contribution from the Australian government in terms of funding, ongoing finance and equity, and therefore control, whereas GM said ‘we don’t want anything from you, we will have total control of what we do here’. If Australia had gone for the Ford proposal and managed that control well, it might have ended up differently.
The pre-war Menzies government had the idea of setting up an Australian manufacturer but theirs was going to be totally Australian owned, totally Australian run. It was going to be run by ACI – Australian Consolidated Industries, so there was a real mutual interest. There was never a mutual interest with GM and Australia or similarly, with Ford or Toyota. They just stayed here for their pleasure and pulled the plug when they wanted to.
Had it been granted a stay of execution, would COVID-19 have shut down Holden?
Wormald: That’s a very good question. Yes, absolutely. All (of GM’s) peripheral operations would have to go. During the GFC with the GM bankruptcy, ‘Uncle Sam’ was supportive but at a real price. They had to cut marginal brands, they had to close assembly plants in North America and they also had to get tough with the union. The UAW was a very big force and extremely protective of its members. Anything that was marginal, loss making, doubtfully profitable in the future, would be ruthlessly cut off. I really don’t think Holden would have had a chance of surviving that.
National Policy, Global Giants – How Australia Built and Lost its Automotive Industry
John Wormald and Kim Rennick
Cambridge University Press
Published January 2020
Interview: Darren House