In a huge island continent of 19 million, are four car manufacturers a luxury that Australia can’t afford? Will the lifeline tossed to ailing Mitsubishi Australia prove to be a millstone? Peter McKay looks at the survival prospects for the smallest of the four carmakers and agrees it’s a case of export or perish…
The clock is ticking for Mitsubishi Motors Australia Ltd, the recent recipient of a timely 10 billion yen (A$172 million/US$90 million) rescue package which ends the short-term uncertainty at the troubled Adelaide-based car-making subsidiary.
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Mitsubishi Motors Corporation in Japan agreed to bail out its loss-making Australian subsidiary, after pleas from MMAL’s managing director Tom Phillips.
Though some critics have suggested this lifeline may become a noose, Phillips is nevertheless now confident Mitsubishi Australia will survive – even thrive – as a manufacturing operation.
But he keeps an eye cocked on the calendar – MMC has talked of March 2001 being when it will reveal its global operations plans and Phillips desperately hopes his Australian operation will be invited to fulfil a role.
“The long, tough climb back to secure long-term manufacturing prospects – and profitability – is not assured.” |
Never a wearer of rose-coloured glasses, Phillips has aspirations for MMAL to assume a significant manufacturing role as part of the global strategies of DaimlerChrysler, which in July assumed a 34 per cent controlling interest of Mitsubishi Motors Corporation.
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By GlobalDataHe was less than four months into his job at MMAL when he flew to Japan to see his new bosses at MMC with an ambitious five-year plan, and a request for immediate financial assistance.
Phillips convinced the new management team (and DaimlerChrysler, which was part of the approval process) that its under-performing Australian outpost could be knocked into shape swiftly, and return a profit in the near future.
Better still, MMC bought Phillips’ view that MMAL can also become a vital cog in its manufacturing future in the Asia-Pacific region.
While the bail-out was warmly welcomed by Phillips, who declared the company’s 3,500 workers (and many more employees of components suppliers) now have a secure future, any celebrations are premature.
The long, tough climb back to secure long-term manufacturing prospects – and profitability – is not assured.
MMAL, the fourth-ranked Australian manufacturer in a field of four, has never enjoyed the sales popularity or the profits of Toyota, Holden (a General Motors subsidiary) or Ford – the other three carmakers.
In a total vehicle market of about 780,000 units in the year 2000, Toyota and Holden dominated with 19.8 and 19.6 per cent respectively. Ford slipped to 14.8 per cent with Mitsubishi hovering around 9.3 per cent. By comparison the leading importer, Nissan, had a 5.9 per cent slice.
Though MMAL’s locally produced Magna/Verada range is well regarded for its finesse and solid engineering, without the marketing clout of its three rivals, it has struggled to reap consistently strong sales.
Tucked away in cosy Adelaide, the staid capital of South Australia, MMAL is a long way from the big markets of Sydney, Melbourne and Brisbane.
The company’s innate conservatism has rightly or wrongly earned its executives the tag of “cardigan wearers”.
To finally shake free of that lingering “beige” image, MMAL has formed a performance car division with motor sporting operation, Ralliart Australia, to co-produce exciting sporty models. A Ralliart Magna shown at the 2000 Sydney International Motor Show will be the first car of the liaison (probably later in 2001).
MMAL’s recent life-threatening predicament was created by a number of factors, a major one being currency related. A steady depreciation of the Australian dollar against the yen has sent costs of imported components soaring, leading to pricing pressures in a very competitive market.
Ongoing speculation about MMAL’s future as a local manufacturer, culminating in negative comments attributed to Takashi Sonobe, the president of Mitsubishi Motors, did not help consumer confidence or sales. With friends like Sonobe…
After the end-of-year bail-out, more than one analyst was quick to suggest that Mitsubishi could be tossing good money after bad, that even after the injection of money, prospects of making money will be no rosier.
Critics have also suggested that with the parent company losing money, the ¥10bn could have been better used elsewhere.
But the reprieve means breathing space for Phillips, a candid and forthright chief executive who midway through 2000 gambled on leaving buoyant Toyota Australia, where he was the sales and marketing director, to accept the top job at Mitsubishi.
He and his troops now have some much-needed time to implement a strategy to bring the viability to convince their bosses in Japan and Germany that MMAL should live.
His immediate priorities are to further reduce costs, extend the existing modest export program to serious volumes, improve quality (already very good), and trim the cost of the imported components used in the Magna/Verada models.
And by around mid 2001, MMAL must ultimately determine a replacement for those two cars.
The chief executive’s vision is to establish MMAL as a flexible, low-cost, high-quality and world-class manufacturer and distributor. It’s a noble, difficult aim.
But he was and is buoyed by MMC’s statement made at the time of the cash injection: “MMC decided to make the capital increase because of MMAL’s position as a unit vital to the company’s global business strategy, and in order to make MMAL more competitive in international markets, to bring greater stability to company profits, and to strengthen the Mitsubishi brand on the Australian market.”
This suggests Australia will be part of the global strategy and supports Phillips’ earlier assertion that it is not a matter of if MMAL will build another car here, it is a matter of which car it will build.
“What I’m trying to achieve is for Australia to become a supplier of a right-hand drive model for several markets around the world.”
The possibilities to play a role for the Japanese-German-American conglomerate are broad, and Phillips won’t rule out MMAL producing Chrysler-Jeep models for sale in Australia, with exports to the region.
DaimlerChrysler, he reminds us, has a target for the Asia-Pacific region to lift its revenue from the present three per cent, to 25 per cent.
Despite its isolation and a perception that it is largely a country of primary producers, Australia does have a number of advantages as a manufacturing base.
Very stable politically, it also possesses a skilled engineering and manufacturing workforce, an experienced, modern and efficient infrastructure of component suppliers, and a proven ability to become viable on comparatively small volumes.
Australia’s labour rates, though uncompetitive against others in the Asian region, are way better than those in the United States and much of Europe.
Though not as compliant as those in Japan, Australia’s unions have become increasingly understanding and supportive in recent years.
“Holden and Toyota in particular have established strong export programs. Both have concentrated on the Middle East, a business move now also taken by MMAL.” |
All four carmakers readily declare that strikes are simply no longer an issue in the local car industry.
High shipping costs and fixed working hours are negatives, though. Holden has begun quietly suggesting that unions should be prepared to follow European flexi hours – depending on whether business is slow or strong, workers may spend anything from 31 to 49 hours a week at their jobs.
Holden and Toyota in particular have established strong export programs. Both have concentrated on the Middle East, a business move now also taken by MMAL.
Toyota moves an annual total of 40,000 vehicles – Camry fours and V6s – to 26 countries, mainly to the Middle East and New Zealand. Revenue is a useful $A900 million a year.
In 2000, Holden exported $A1.3 billion worth of cars and engines – four-cylinder engines accounted for $A900 million of this windfall. This Family II engine is the only four cylinder produced by GM in the region.
Commodores – left-hand drive and right-hand drive – went to the Middle East, Latin America (rebadged as Chevrolets) and Asia-Pacific markets.
There is more good news on the engine front.
Just before Christmas, Holden announced a new V6 alloy engine plant for Melbourne. As well as producing engines for future family car models for Australia, this plant also figures heavily in Holden’s export plans.
It could take the value of exports to $A2.7 billion by 2008.
Currently shipping 5,000 Falcons a year to nearby New Zealand and a handful elsewhere, Ford too is attempting to shift more metal overseas and is seeking further opportunities in South Africa.
Unlike the other three Australian carmakers, Ford boss Geoff Polites insists his company doesn’t need big overseas business.
“We can build a very viable business based totally on domestic business,” Polites said. “You won’t do it with just one car line though, and we are working to expand choice here.”
Despite the controversy over the financial lifeline tossed to MMAL, the reality is that, in industry terms, $A172 million is a comparatively modest figure.
Handouts from parent companies are not unheard of in Australia. Nor should they be – after all, in the good times, the four car makers have repatriated massive amounts of money to their rich parents in the United States (Holden and Ford) and Japan (Toyota).
It’s fair then that they should be ready to kick the tin in tougher times. In 1986 Holden was effectively bankrupt when General Motors threw it more than half a billion dollars to get it off life support.
Holden duly came good in spectacular fashion and is now consistently profitable.
MMAL’s Phillips says $A60 million has already been removed from the Adelaide plant’s cost base as MMAL chases a break-even volume target of 30,000 cars a year. In 2000, it couldn’t make money on greater volumes than that because of restructuring costs in the first half of the year, and the sudden and large currency fall in the second half.
MMAL did its initial budgets on an exchange rate of 68 yen to the dollar, and then reforecast at 64.
With each negative movement in the yen/A-dollar relationship worth $A13 million in a full year to the bottom line, MMAL was in trouble when the exchange rate settled at about 56-58.
Mitsubishi’s local production for 2000 was 39,000-40,000 units, of which about 11,000 were exports. This is a slight improvement on the 38,215 cars produced in Adelaide during 1999 (28,239 domestic; 9,976 export).
In 2000, Mitsubishi Australia’s total sales finished at around 70,000 – a little above the 69,923 units it shifted the previous calendar year.
While MMAL was expected to lose about $A200 million in 2000, Phillips believes his company can fight out of its troubles and expects MMAL can “at least” break even during 2001 after some solid new exports contracts involving Middle East and US markets take hold.
The Australian dollar has also started to show tentative signs of recovery, which should also help MMAL’s finances. Conversely, though, a weak Aussie dollar would be useful should MMAL crank up its export program, as planned.
MMAL’s export program has never been huge. Efforts to export the Diamante – a rebadged Verada – to the US have been hampered by Mitsubishi’s modest reputation in North America.
But Phillips sees great potential there and in the Middle East as he pursues a target of 30,000 exports within three years – and a similar number domestically.
The Adelaide plant can produce around 70,000 units a year without needing a lot of money spent on an upgrade.
“In 2003, the present Magna/Verada will be given a complete makeover and the plan is for a completely new model in 2004 or early 2005” |
“This year (2000) we will do about 10,000-11,000 in the US and a few hundred to the Middle East,” said Phillips.
He says MMAL already has 15,000 sales to the States “in the bag”, and he wants to work that up to 20,000 in 2001.
In early December, a group of eight distributors from the Middle East visited Adelaide to look at a re-specified Magna, designed to compete with popular regional models such as Australian-built Toyota Camry and Holden Commodore models, and the Japanese-built Nissan Maxima.
Because fuel consumption is not a significant issue and also because Middle East motorists have a preference for big engines, the Magnas offered for export will have the bigger of the engines offered domestically, a 3.5-litre V6. It can be stretched to 3.8 litres if overseas consumers demand even more power and torque.
The distributors were receptive to MMAL’s entreaties and indicated increased volumes of 3,000-5,000 for the first year (with production commencing in July 2001). Phillips wants to ramp-up these numbers to 10,000 the year after.
He is sufficiently confident in the response to his export campaign to suggest MMAL will have representatives in both Dubai and the US in the near future.
The strong yen has also been hurting the cost base of the Magna/Verada, which has an average local content of 75 per cent.
The more significant imported components include transaxles, transmission, climate control, some engine components, and door-mirror switching. Currently, all come from Japan, and are bought in yen. Ouch!
“We now have agreement from MMC to source parts other than from Japan, as a way to reduce the cost of our imported components,” Phillips said. “We are working on that now.”
He hopes to secure transaxles – a big ticket item – from Korea’s Hyundai, which is now 10 per cent owned by DaimlerChrysler.
In 2003, the present Magna/Verada will be given a complete makeover and the plan is for a completely new model in 2004 or early 2005. It will be a choice based on both export potential and Australian tastes.
However, Phillips says that if he can fulfil his promises relating to costs and profits, then Mitsubishi Australia will be able to fund the new model investment program itself. MMC and DaimlerChrysler will be pleased to hear that.
If all proceeds according to (his five-year) plan, Phillips is a shoo-in for the job of Premier of South Australia.
Peter McKay writes for the Australian car magazineWheels, He is also a columnist and feature writer for the Sydney Morning Herald, editing the Saturday ‘Mixed Grille’ pages and contributing features to the weekly ‘Drive’ tabloid.
Imports pressure Australian makers to perform Australia, a nation of 19 million people in a land mass about the size of the US, has four local motor vehicle manufacturers – Toyota, Holden (a GM subsidiary), Ford and Mitsubishi. Holden, which uses the slogan “Australia’s Own” even though it is wholly owned by GM, once famously held 50 per cent market share. These days, the salad days are over. No carmaker manages to sell one of every five vehicles marketed in Australia. Today, the domestic carmakers are under pressure from a changing tariff regime and the growing popularity of lifestyle vehicles imported from Japan, Korea, Austria and the US. With relatively cheap fuel and long distances to cover, Australian consumers have shown a traditional preference for big and powerful six-cylinder cars. Holden’s big six, the Commodore, remains the nation’s most popular model in the face of the growing appeal of imported “soft roaders” like Honda’s CRV, and Toyota’s RAV4 and a bevy of afforable minis. But demand for the Commodore and other large local sedans – Ford Falcon, Toyota Camry and Avalon, and Mitsubishi Magna – is coming mainly from fleets and governments. The majority of users are not paying their own petrol bills. The most popular model among private buyers is the more thrifty Hyundai Excel/Accent. The small-car segment is one of the few showing real growth. Big all-terrain wagons such as the Toyota LandCruiser and Nissan Patrol have sold strongly for many years although their appeal lately has been affected by a leap in the price of fuel. Historically, tariff walls have protected the local manufacturing industry. But the implementation of an open-market doctrine in recent years has eroded the market share of the Australian car makers. Duty on imported cars has been reduced at a rate of 2.5 per cent every year and is currently at 15 per cent. In 2005, duty will drop in one leap to 10 per cent, where it will remain unless an industry review set for around 2003 decides to vary this figure. Commercial vehicles (including most of the “soft roaders” and big four-wheel drives) attract a token five per cent tariff in Australia, despite widespread acknowledgment that many off-road wagons are passenger car substitutes benefiting from that lower import duty.) Despite notable improvements in quality and the excellent value of the local passenger vehicles, their market shares have been dropping steadily as Australia’s market frees up. There is constant pressure on the four manufacturers to remain profitable. Conjecture that one – usually Mitsubishi – may elect to become a pure importer is never far from the surface. The last car company to close its production line in Australia was Nissan, which pulled out of manufacturing in October 1992. There is a cautionary tale here for any other manufacturer facing a similar closure. Nissan’s market share in 1992 was 7 per cent. Though it expected to maintain this share after the factory closed, its slice shrank to just 4.7 per cent in 1993, its first year as a fully-fledged importer. In 2000, it bounced back close to 6 per cent. Prior to that, Leyland had a major local manufacturing operation, until it was brought to its knees by the ill-fated P76 model, which failed to find acceptance with Australian consumers. Leyland closed its factory in 1974. At different times, Volkswagen, Volvo, Peugeot and Renault have assembled completely knocked-down (CKD) models from kits in Australia. |
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