Toyota to Close Oz Plant, Eyes Better Prospects

Toyota topped the Australian auto market in 2013 and is the largest exporter in the region -- will its decision to shut manufacturing units Down Under make any difference?

Feb 19, 2014 at 12:49PM

Toyota (NYSE:TM) will close its Australian factories by 2017. The decision, although sudden, is not surprising as the Japanese carmaker is following in the footsteps of its compatriots. Ford (NYSE:F) and General Motors (NYSE:GM) have already decided to pull their manufacturing facilities out of Australia by 2016 and 2017, respectively.

The Japanese car giant has a strategy of "sell-'em-where-you-make-'em" to avoid currency fluctuations. Toyota was quick to set up a manufacturing base in Australia, as the country offered the required capabilities to mass produce cars from scratch, but this market has suffered losses in the past 10 years. Now that Toyota will be leaving Australia, what could be the Japanese automaker's road map?

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Source: Toyota

Timely decision
Toyota dominated the Australian market for years, both as a local manufacturer and an exporter. Last year, it sold 214,630 vehicles in Australia while GM's Australian arm, Holden, sold 112,059 units and Ford sold 97,006 units, both lagging the Japanese giant by far.

Toyota is also the largest exporter in Australia and exports roughly 80% of its annual production. It shipped more than 1 million cars in 27 years, while Holden took 58 years to reach 900,000 units. Ford has been able to move only half-a-million vehicles overseas in the last 51 years.

But it was getting very difficult for Toyota to make a profitable venture in the last decade as a strengthening Australian dollar made manufacturing unprofitable in the country. Aussies preferred buying Toyota's imported cars instead of the locally made cars, and exports squeezed profits. The automaker was losing almost $2,500 for each car that it made in Australia, and operating losses accumulated to the tune of $1.6 billion.

Government subsidies could not cover the loss, and Toyota finally had to take the harsh decision of closing its facilities. This is a severe blow to the Australian auto industry and to the fate of Toyota's 2,500 workers. The company may also reduce the size of its R&D base in the country.

Ford and GM also suffered the same fate and lost approximately $600 million and $576 million, respectively, in five years. The Detroit automakers declared their departure plans last year, citing higher manufacturing costs, currency headwinds, and inadequate support from the Australian government.

Toyota will continue to sell cars in Australia
Australia is a big market for new vehicles and saw a record 1.136 million sales last year. The sales forecast is even higher for the current year at 1.145 million units. There are more than 67 brands available in the market. Toyota holds the maximum market share among foreign automakers and one out of every five cars sold carries a Toyota nameplate.

The company has maintained its sales lead for the last 17 years, and has no intentions of giving up its position. Although the Japanese carmaker will be washing its hands of production, it will continue with its selling and distribution activities in Australia. Aussies are big fans of the Corolla, which was the country's best-selling vehicle last year, and Toyota will continue to cater to this demand as well as that of its other vehicles from production bases outside the country.

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Source: Toyota

An alternate production base
Now that Toyota will stop production in Australia, it has to look out for an alternate manufacturing site. It will need to send cars not just to Australia but also to Middle East, which has a soft spot for Australia-made Camrys, and consumes nearly 97% of total exports since 1996.

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Toyota Camry; Source: Toyota

One option could be Thailand -- the region has been Toyota's manufacturing and export hub for years. Currently, Australia sources nearly 20% of its total vehicles from Thailand, mostly because of the free trade agreement between the two countries. Toyota will start sourcing Thai-made Corolla sedans for the Australian market during this month. But things are a little uncertain in Thailand due to ongoing political unrest, and so the company will need to weigh its decision carefully.

The next best option would be Indonesia where the automaker's three manufacturing plants give it wide exposure. Toyota produces roughly 200,000 vehicles and targets to add another 50,000 by the end of year. It intends to invest around $1.1 billion through 2017, and is already on track to develop an engine manufacturing plant by 2016.

Parting thoughts -- "saddest days in Toyota's history"
CEO and President, Akiyo Toyoda, describes the company's exit plan as the "saddest days in Toyota's history". Toyota's departure would hit the Australian auto industry, as it was the only global automaker left, after GM and Ford announced their plans to end production. But it seems wise for the world's largest carmaker to make an exit before it's too late, and ramp up capacity elsewhere.

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