EXCLUSIVE: Australia: diving currency poses threat to car industry
Importers to Australia who do business in US dollars are already exposed to losses they will find difficult to sustain. The Aussie dollar has plunged below the US50c barrier and is dangerously close to the 60yen level, psychological pressure points from which recovery could be slow and expensive for the major players. Economists point to a quarter of negative growth and key indicators to support their prognosis that Australia is sliding into major economic difficulties. Many big names in the money world are using the dreaded R (recession) word.
Business blames the introduction of a goods and services tax (GST) for stalling the economy and reducing consumer confidence to its lowest level in 25 years. Prime Minister Howard insists the economy is in "good shape" and says any possible recession would be a technical one. Carmakers have little time to debate the cause of their current demise. They are too busy working on strategies if, as is feared, profitability drops to critical levels. Toyota Australia's soon-to-be-released financials will tell an unabridged story of an industry in trouble.
Toyota Australia's financials will show signs of any industry in trouble
TA ran out 2000 market leader, toppling the all-powerful Holden in the process, and selling a company record 158,908 units for 20 per cent of the local market - 618 cars and commercials more than it sold in the industry's record year in 1998. For the first time, the brand exported $A1 billion worth of CBU (completely built up) and CKD (completely knocked down assembly kit) cars and parts - kicking spectacular goals home and away.
Yet Toyota senior executive vice president John Conomos warns that when the results are published some time in April, the bottom line will be lucky to fall over the line into profit. And he says with characteristic wit: "You wouldn't want a bad year in this game."
The epicentre of the problem is the always erratic, but now free-falling Australian dollar. The local currency has plunged 13 per cent this year alone. The currency is down from US90.2 cents when floated in December 1983 against a basket of international units. It was at its all-time high a decade earlier at $US1.48. Conomos said fierce competition in the marketplace had allowed carmakers and importers to recover only meagre sums in price increases. The result: heavily reduced margins for the Big Four - and, in some cases, net losses every time certain vehicles are driven out of a showroom.
"Let me put it this way," Conomos says with usual frankness. "We have CBU cars and commercials which are not earning us any money at all." Factor in the massive cost of pump priming the industry and countering fierce competition from cheap imports and you get an idea of the cost of doing business. He adds, "The whole industry is used to new challenges, but we can't control the dollar. Every time it drops in value by a yen, we take a bath. One less yen to the dollar equals a cool $A10 million at Toyota."
MMC needs to turn in a break-even result this year
In the past few weeks, the dollar has dropped from 66 yen to its now perilous position - even though the Japanese currency is in deep trouble against the greenback. Toyota is the only company prepared to flag up-coming price increases - on April 1 - of between 1.5 percent and 4 percent. Ford, Holden and Mitsubishi have retreated to the well-worn line about maintaining a close watch on the market.
This time it's not clear whether that means the money market or the car market.
TA is a rich and powerful fledging of a super powerful Japanese parent and can weather low or no profit Down Under. After all, sky-high sales of imports give TMC a net consolidated profit back home on its Japanese balance sheet. But what of the other three Australian carmakers?
Mitsubishi Motors, struggling for survival after two years of record losses, simply has to turn in a break-even result this year to stave off the displeasure of DaimlerChrysler-controlled Mitsubishi Motors Corporation. The business plan is simple and surely attainable: 30,000 Magna/Verada sales in the domestic market and 20,000 exports, mainly to the United States, New Zealand and the Middle East. There is little margin for error as the Adelaide-based car maker battles to prove itself a viable entity which deserves a future, perhaps building one or more right hand drive Chrysler models for South-East Asia alongside Magna/Verada and Diamante/Sigma-badged export models.
Ford Australia are making money on the Mazda-made Laser
The big problem is that the business plan, which Mitsubishi managing director Tom Phillips presented recently to MMC chief operating officer, D-C's Rolf Eckrodt, adds up only if the Australian dollar remains at 58 yen - a figure it is threatening to dip below. On current exchange rates, Mitsubishi has no cushion between profit and another damaging loss its parents may not be prepared to accept.
Tom Phillips is a good manager and a skilled salesman who has nothing to prove following many years as No 2 to Conomos at Toyota. He is filling Mitsubishi's order books nicely with some handy orders from car rental companies and fleets in Australia, New Zealand and the United States. The Mitsubishi dealer network in Australia like him and are responding to his sleeves-up/let's-work-together approach. But, like his long-time personal friend Conomos, Phillips is powerless against a currency that won't hold its value. Mitsubishi put up prices on March 1 and will increase prices again, but only as a last resort.
Ford Australia imports about 15 percent of the value of its locally produced Falcon, the biggest item being the engine management control module from the U.S. FoMoCo exports about 5000 Falcons a year to South Africa, New Zealand and Hong Kong but that does not off-set the additional cost of components from the U.S. The Kangaroo division of the Blue Oval has not been celebrating too many smart plays in recent times, designing a radically different big car which too many people disliked at first sight. But whoever negotiated supply contracts with Mazda in Australian dollars deserves a bronze bust of his image in a prime position at Ford's head office in Melbourne. At least Ford can continue to make a dollar on the Mazda-made Laser (a 323 derivative) and Escape SUV.
GM's Holden has a huge financial safety net, but is still experiencing currency problems
Holden has a huge treasure chest at its disposal, having recently booked a handy $A237 million profit for calendar 2000. It exported close to 30,000 Chevrolet-badged vehicles, mainly to the Middle East, all written in US dollars to sweeten the pot. Even so, General Motors' Down Under affiliate is not without currency problems as it imports from the US V6 and V8 engines in huge numbers. GM has given the go-ahead for Holden to build a V6 engine plant in Australia, at its engine division in Port Melbourne - a facility which also will produce V8 motors as well to slash costs and reduce the company's exposure to currency fluctuations. But the locally built engines are at least three years away and many dollars can be lost in the meantime if the Australian dollar makes too many visits to the pits.
Of course, it can be argued if the dollar plunges further, prices of ALL cars and commercials will have to rise, maintaining a status quo between competitive models and segments. Quite so. However, higher prices surely will slow if not stall the market that only recently has recovered from the turbulence of the switch to a consumption tax.
As is usual, influential figures in the car industry manage to maintain their sense of humour in the face of adversity. One said recently, to the amusement of all within earshot: "I don't know any more whether I'm in the car game or the finance industry." And another said: "Nice to hear from the Prime Minister we're heading for technical recession. Does that mean we only going technically broke?"
Author Mike Duffy is Motoring Editor of The Advertiser and the Sunday Mail in South Australia.