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Australia rolls the fluffy dice on stalling autos sector

A Holden logo is displayed at a dealership located in the Western Australian city of Perth in this December 12, 2013 file photo. REUTERS/Dav
A Holden logo is displayed at a dealership located in the Western Australian city of Perth in this December 12, 2013 file photo. REUTERS/Dav

By Jane Wardell and Maggie Lu Yueyang

SYDNEY (Reuters) - Harrington Industries Ltd, a 94-year-old privately-owned car parts maker, should be crushed by the coming implosion of Australia's auto manufacturing industry.

But Harrington is one of a savvy breed of engineering firms that saw the writing on the wall long before General Motors announced last week it would follow Ford Motor Co , Mitsubishi Motors <7211.T> and Nissan Motor <7201.T> in halting manufacturing in Australia.

Harrington recently completed work on a new plant in Thailand, where there is a strong car manufacturing sector, and from there plans to produce parts for GM, Ford, Futuris SA and others. "We have tried to work around the fact we knew the Australian auto industry was very vulnerable," Managing Director John Harrington said. "We've sought to pick up extra opportunities."

Similar diversification by Harrington's peers and solid growth in the aftermarket sector - supplying anything from fluffy dice to racing stripes - suggest fears that the collapse of the auto industry will trigger economic Armageddon are overplayed.

Australians have been bombarded with doom and gloom scenarios since GM's affiliate Holden said last week it would stop making cars in Australia by 2017 due to high costs and a strong currency.

Ford announced in May it would shut its two Australian auto plants for similar reasons in October 2016, while Mitsubishi shuttered its assembly plant in 2008 and Nissan quit in 1992, leaving Toyota Motor Corp <7203.T> as the last man standing.

But the dark mood belies a quiet transformational shift in Australian manufacturing over the past decade or two.

While the number of vehicles manufactured has halved from 2003/04 to a projected 200,000 this year, automotive aftermarket manufacturing is growing at 3 percent year-on-year, according to independent advisory firm Grant Thornton.

"The industry has been transitioning for a while," said Mark Phillips, a partner at Grant Thornton in Sydney. "It's just that the pace of the transition has got a little bit faster than people anticipated."

SOUPED-UP CAR BOOM

The aftermarket sector is a significant growth area as more Australians, flush with cash from the country's boom years, customize their vehicles - from performance enhancing parts for sport utility vehicles and 4-wheel drives to retrofit components such as suspension for towing caravans.

Reflecting a passion for soup-ed up cars, Australians elected an independent from the Australian Motoring Enthusiast Party to the Senate this year. He has vowed to push for rights to customize cars and to drive in national parks.

The aftermarket sector represents 36 percent of all automotive manufacturing in Australia, providing direct jobs to 16,000 of the 45,000 people employed by the auto industry, according to the Australian Bureau of Statistics.

With A$4 billion ($3.6 billion) in annual sales, it is less exposed to factors driving the decline of the vehicle manufacturing supply chain, including the strong Australian dollar and phased tariff reductions.

"We have almost got a two-speed economy when it comes to auto manufacturing," said Phillips, who produced a report on the aftermarket for a government review into the industry this year.

"You have got the long-run suppliers that will suffer when Holden goes. And then you have got the very nimble, short-run innovative manufactured products where Australia still has a massive competitive advantage."

Despite its small size, Australia ranks alongside Japan, the United States, China and South Korea in production and innovation in the subsector.

Its complex auto market - some 62 brands of vehicle are sold in Australia, double the number on offer in the much larger U.S. market - makes it adept at delivering products that work across a large range of vehicles.

It is also a forward-looking industry, spending 1.4 percent of sales on research and development, leading many companies to branch out into non-automotive sectors, such as rail, defense, mining and marine.

Harrington now makes products including hot water heater components and lawnmower base plates. It also won the design and manufacture tender for the Sydney 2000 Olympic torch.

Around half the company's sales are to the automotive sector, of which 25 percent go to Holden. But John Harrington is confident that both diversification at home and the company's new facility in the Thai province of Rayong - an area dubbed the "Detroit of the East" - will pick up much of the slack.

EXIT ROUTE

Car parts maker MTM Pty Ltd is also looking overseas, deciding during Australia's last recession in 1992 to reduce its reliance on local automakers and the boom/bust cycle they were enduring even then. MTM took five or six years to win its first export order, but now makes an all-terrain vehicle called the Tomcar, sold to military forces, and Steelsafe, a device that protects trucks from being stolen when parked.

"If we hadn't done anything for over the past 20 years, we'd be in the same situation as everyone else," said MTM Managing Director Mark Albert. "Thankfully, we've taken a lot of steps to move outside the automotive industry in Australia."

Carbon Revolution, the maker of the world's first one-piece carbon fiber wheel for cars, has signed a supply contract with a global carmaker to start in early 2015, and is in talks with airplane manufacturers. CEO Jake Dingle declined to give details, citing client confidentiality, but said the company planned to boost its workforce to more than 300 people in 3-4 years from just 40 today.

That's good news for GM and Ford workers.

"Their discipline, their understanding of automotive manufacturing quality standards and manufacturing processes mean it's very easy to train people to do the sort of work we need," Dingle said.

GOVERNMENT SUPPORT

Still, the experts say government support is needed to ensure diversification.

"The priority is to direct resources that might be available to the component supplier companies, to prevent as much as possible the collapse of the supply chain on the back of Holden collapsing," said John Spoehr, executive director of the Australian Workplace Innovation and Social Research Centre at the University of Adelaide. "A good number of the component suppliers, with support, hopefully, will be able to withstand the shock."

Grant Thornton's Phillips said some simple policy changes, such as harmonizing federal and state laws covering aftermarket products, could boost the sector's value by around 27 percent to A$6.6 billion.

As in most advanced economies, manufacturing accounts for a declining proportion of Australia's GDP, reflecting the growing influence of services and information-based industries.

Australia's manufacturing sector has fallen to around 7 percent of GDP, according to World Bank figures, well below the 25 percent levels seen in the 1960s, and contrasting with 11-12 percent in the United States and Britain, and around 30 percent in China.

But it remains a major employer, with 88,000 manufacturing businesses employing some 940,000 workers - far more than the mining industry, and similar to levels five decades ago.

($1 = 1.1195 Australian dollars)

(Additional reporting by Sonali Paul in MELBOURNE; Editing by Jeremy Laurence)

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