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Winter of discontent

The world has changed in a week.

A sustained period of hero-worship of yield stocks finally turned and has rapidly shifted to watching the A$ decline against the US$ as the beginning of the end of ‘quantitative easing’ in the US economy comes into view.

In between, the Australian government Budget did nothing to boost the confidence of wary consumers, in fact causing the Westpac-Melbourne Institute gauge of consumer happiness to go backwards.

Also going backwards was a clutch of mining services companies’ earnings with a raft of such businesses confessing that their profits will be weaker this year as mining companies wind back their project investments.

This was confirmed by the government’s Bureau of Resource and Energy Economics which said about $150 billion of planned investment had been shelved due to a range of factors including lower commodity prices, the higher A$ and rising development costs.

Finally, the closely watched HSBC Flash PMI for China dipped to 49.6 in May suggesting the party-poopers in Beijing have perhaps stepped off the gas a little too much. Watch for policy reaction sometime soon to ensure growth remains on target for 7.5%.

Ford parks the Falcon

The high A$, operating costs four times above Asian competitors, $600m of losses in 5 years despite massive government industry assistance, a lack of production scale and a shift of preference from large to small cars are among the reasons why Ford has chosen to permanently close its manufacturing doors in Australia.

Just a month ago, former global Ford President Jac Nasser said the demise of the Australian car manufacturing industry was “inevitable” due to the high A$, high costs and excess overseas capacity.

Yes, Ford’s production workforce of 650 in Broadmeadows assembly plant and 510 in the Geelong engine plant have received the worst news about their livelihoods, but they will at least enjoy a three year window and more than $30m of government assistance (approx. $25,000 per employee) in addition to their redundancy packages to contemplate life after Ford.

Interestingly, Ford intends to maintain its sales and distribution workforce (about 1,500 staff and 200 dealerships) as well as its research and development unit in Australia. Associated with that, Ford will increase its product line-up with a 30% increase in the number of new vehicles by 2016, suggesting a wider range of models to be imported.

The iconic Ford Falcon brand will, however, send the end of its run in Australia after 2016 as the brand is only synonymous with this country.

Indeed, post 2016, Ford will simply be another vehicle importer competing against 65 brands and 365 different models in the country today.

A few more random thoughts on the car industry:

  • About ¾ of locally produced cars are bought as fleet purchases
  • In 2003, total production of locally made cars was 408,186. In 2012 it was 221,404.
  • In 2003, the A$ was US64 cents. Today it is around US96 cents.
  • Total sales of new vehicles in Australia has exceeded 1m for the last 3 year

 

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