Ford's departure is bad news, but not the end of the world

Sunday, May 26, 2013, 11:56 PM | Source: The Conversation

By Peter Gahan

Ford's departure is bad news, but not the end of the world

Ford's departure from Victorian communities will hurt - but it does not have to be devastating. AAP
Peter Gahan, University of Melbourne

There will be a lot of debate as to why Ford now finds itself in the situation it is in. Ford CEO, Robert Graziano, cited economies of scale as the primary factor that made continuing to produce cars in Australia unviable.

Australia simply does not produce enough cars to justify the investment it would need to make to upgrade its operations, which was scheduled for 2016. Ford has the smallest production runs of Australia's three remaining auto manufacturers. This position reflects a range of factors including their decisions as to what types of cars to continue to produce.

The fact is, the demand for large family passenger vehicles has been in terminal decline – and that has been the heart of Ford's manufacturing operations.

Ford Australia is also the victim of larger forces, including a seismic re-structuring in the global automotive sector. China is now the centre of world car making, not the United States.

This process was accelerated by the global financial crisis and continues today. In April last year, Ford announced a $780 million investment in its fifth Chinese-based manufacturing plant. This was part of a A$5 billion plan to double its Chinese operations by 2015. When it opens, this new plant in the industrial heartland city of Hangzhou, it will be able to produce 250,000 vehicles a year. This will boost Ford's production capacity in China to 1.5 million cars annually. This compares with just over 30,000 made by Ford Australia annually.

Other factors are, frankly secondary. Ford has not pursued the same market strategy as Holden and Toyota, which have invested in meeting changing consumer preferences for both smaller cars and SUVs. Both have managed to secure export markets and maintain them, albeit under strain.

No doubt the high Australian dollar has played some role – but only by way of adding fuel to a fire already out of control. Labour costs have also played some role. But again, this has been a secondary factor at best.

Nor is the cost of labour the killer here. The costs associated with bringing in new technology and equipment are a much larger factor shaping the competitiveness of this sector. Again, Ford simply does not make enough cars to make these investments worthwhile.

And the suggestion that this decision reflects the carbon tax is nonsense. In the face of the big shifts described above, the carbon tax plays no role whatsoever.

What then are the likely impacts of this decision?

In the medium-term, there will be considerable pain for both Broadmeadows and Geelong, but particularly for Geelong where Ford plays a more significant role in the health of the local economy.

A lot of people indirectly dependent on the automotive sector will lose jobs. It is estimated that when a large employer such as Ford leaves a location between three and six other jobs are displaced.

Businesses dependent on Ford will also go under. Other local businesses – retailers and service providers who rely on the wages of Ford employees and their families – will face an adjustment or, in many cases, closure.

There are also the wider implications for the automotive sector. Since the "Button Plan" was implemented in the 1980s, the Australian automotive sector has improved its productivity and efficiency through standardisation, adopting lean production and creating an integrated supply chain.

This means many of the same auto suppliers to Ford will make components for Holden and Toyota as well. Without Ford, it is not clear how the system will survive. Some of these component suppliers may go under, or at best face financial difficulty, thereby threatening the whole foundation of the industry's competitiveness.

The future of neither Holden nor Toyota can be assured beyond the current cycle of their investment in technology and equipment. Even then, these two remaining producers will need to make considerable adjustments if they are to survive into the future – changes which may well beyond their own capabilities, or the patience of their parent companies.

But it's not the end of the world. It needs to be kept in mind the closures will not take place until October 2016, so there is time to plan for adjustment and transition.

There are good models for how to do make this adjustment. In 1999, BHP shut the doors of its Newcastle plant for the last time. At its peak, the plant employed around 13000 workers – a number far greater in absolute and relative terms than Ford's employment numbers in Geelong. The prediction was for mass unemployment and the long term economic depression. Many feared the town could not make a transition after BHP left town.

There were of course many adjustment issues, but within a decade, Newcastle had emerged as a thriving regional city with a diversified economy. Today, it continues to grow and prosper without being dependent on a large employer in the same way it had been in the past. In many ways, it is a much improved place – economically, environmentally and socially.

In the end, BHP's departure from Newcastle was a great example of what economist Joseph Schumpeter saw as forces of "creative destruction". The same may be true of Ford's decision to leave two longstanding industrial communities. So, while the news of Ford's closure is hardly comforting for those experiencing its negative side, with careful planning, it may prove to the catastrophe many fear or predict. Instead, it may prove to be the catalyst for a new phase of growth and prosperity.The Conversation

Peter Gahan, Professor of Management in the Department of Management and Marketing, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.