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Why did Holden shut down?

Everyone and no one is right about the closure of car assembly manufacturing in Australia.

Everyone knows closure could have been avoided, though at a considerable ongoing financial cost to the taxpayer for co-investment with the car manufacturers. And everyone also knows that the benefit to the economy of retaining these manufacturers could outweigh the cost, if only they were prepared to transform to meet global competitive challenges.

Here lies the problem no one has wanted to discuss for at least two decades. The car assembly manufacturers never had an interest in transforming themselves, and any efforts they made to do so have been reluctant and self-serving. The renewed commitment to local design facilities is welcome, but how long can they last without a related manufacturing presence?

The problem is that car manufacturing in Australia was dominated from the start by large international companies establishing local assembly behind tariff barriers. The stated rationale was job creation through an “infant industry” development strategy, but the reality was a rent-seeking target rate of return in a captive market.

First came Ford in the 1920s, then General Motors in 1948 with its locally designed mass-production car, the Holden. And these were followed by a cavalcade of British Leyland, Rootes, Chrysler, Toyota, Mitsubishi, Nissan, Renault and VW. It seemed that the Australian consumer was spoilt for choice.

However, the choice was illusory. With 50 per cent tariff, imports were prohibitively expensive. And more ominously for the future, there was no incentive to develop an export competitive car manufacturing sector, as other countries were doing, integrating themselves with global markets and value chains.

A significant exception to this was automotive components, which were granted exemption from high tariffs as an input to car assembly. Components suppliers were under constant pressure to compete with imports, and with each other. So many suppliers developed export capability even if they did not take advantage of the opportunity.

As Australia globalised in the 1970s and 80s, tariff reductions exposed local car assembly for the first time to international competition, and a number of plants closed as a result. Those that remained were required to become more competitive, along with other industries, with a new Car Industry Plan providing “structural adjustment” support.

This plan was devised by then Industry Minister John Button as part of the Labor government’s microeconomic reform agenda. It made support conditional on a range of commitments by the industry, including stepped-up local research and development, rationalisation of models and a shift in focus to exports.

The plan achieved partial success but was put on autopilot as Australia entered another commodity boom in the early 2000s. It was only with a new Industry Minister Kim Carr from 2008 that the plan was updated, first to stem manufacturing job losses from a rising dollar, and second to set out further conditions for continuing public support.

These conditions included the development of smaller, more fuel-efficient models, and prototyping of electric vehicles as part of a “green car” initiative. Despite obviously changing consumer preferences and haemorrhaging of market share to imports, car industry head offices were slow to back their commitments with action.

Maybe greater persistence by the present Coalition government would have paid off. We will never know. What we do know is that abandoning car assembly will drastically reduce Australia’s future manufacturing capability, not to mention the jobs and careers of many thousands of employees.

What we also know in retrospect is that in spending $30 billion on car industry support over a 15-year period, we missed the opportunity to provide anything like that support to local components suppliers. Just imagine how well-placed these firms would be in global markets, and supply chains had we done so.

Our research tells us that while 50 per cent of components suppliers will be out of business by the end of the year, 10-15 per cent will have successfully diversified into defence electronics, aerospace, medical technologies, renewable energy, as well as alternative car industry supply chains. They don’t want or need any support.

However, this leaves around 35 per cent of components firms ready and willing to reposition into new markets, but lacking the strategic capability to do so. If the government’s innovation and science agenda are to mean anything, it must redouble its efforts to build the capability of these firms to succeed in the new world of “smart specialisation” beyond mass production.

In 2016, GM ceased local manufacturing in Australia. Two months ago, after dismal sales in 2019, GM announced it would kill the Opel-based Holden Commodore and Astra to focus on Holden-badged trucks and SUVs. And now, Australians are forced to confront GM’s termination of the Holden brand.

The US automaker apparently ran the numbers back in Detroit on investment and return. Just before 2 p.m. local time Monday in Melbourne, GM and Holden execs announced at a press conference that Holden would be shut down by the end of this year. GM President Mark Reuss released a statement saying, in part, “After considering many possible options – and putting aside our personal desires to accommodate the people and the market – we came to the conclusion that we could not prioritise further investment over all other considerations we have in a rapidly changing global industry.”

GM’s Australian design and engineering facilities “will be re-consolidated overseas” before closure in July 2020. The Lang Lang proving grounds will cease operations in August. Out of a total of 800 workers, 600 will be let go, the remaining 200 staying on to manage aftersales. Holden said it would honour all warranties, offers, and guarantees, and supply service and spare parts for ten years. Holden is locked into Supercars racing events for this year, but only plans to stay “as long as Holden vehicles are in dealers.”   

GM’s been pulling out of right-hand-drive markets for the past few years, and Australia, New Zealand and Thailand were the only three left. GM said it would wind down sales, design and engineering operations in Australia and New Zealand in addition to killing Holden. It also said China’s Great Wall Motor Co had agreed to buy GM’s Rayong, Thailand, car manufacturing plant and an engine factory, a transaction expected to be completed by the end of 2020.

The automaker absolved the Holden team of blame, which didn’t do much to placate the Australian government. Prime Minister Scott Morrison chastised GM with, “I am angry. … Australian taxpayers put millions into a multinational company. [GM] let the brand just wither away on their watch.” National Industry Minister Karen Andrews was upset Holden didn’t tell the government about the move until “just before” the announcement.

GM’s SVP for international operations, Julian Blissett, said, “It’s not firmed up, but our intent is to stay in the [RHD] market with GM Speciality Vehicles,” which would become a sub-brand to serve such markets, and, “We’re in negotiations with our partners to make this happen.” Local media think GM wants to sort out an RHD conversion pipeline with Walkinshaw and the company formerly called Holden Special Vehicles. Walkinshaw/HSV has spent the past two years converting the Camaro and Silverado for Oceana. The factory-built RHD Corvette remains on the menu for now, but Holden managing director Kristian Aquiliana advised, “We’re still working out how we will deliver it.”

The GM statement calculated the cost of exiting Thailand and Australia in “cash and non-cash charges of $1.1 billion,” and “net cash charges of approximately US $300 million.” A chunk of that will be used to settle accounts with 185 Holden dealers in Australia and 31 in New Zealand.

If anyone is interested in taking home a Holden keepsake, GM said, “We’re happy to take customer orders until the last Holden in sold.”

What about Holden’s highly regarded research and development operations?

Unfortunately, the design and engineering arm that employs hundreds of talented designers, technicians and engineers will also close. Holden’s Victorian team has developed vehicles for GM’s global portfolio, as well as designing several productions and concept models, including the famous 2005 Holden Efijy concept that was inspired by the iconic FJ Holden from 1953. 

Many of these functions will be absorbed by GM’s design and engineering operations in other countries, although there is a chance that a small number of employees will be offered positions at other GM R&D operations.

How many dealers are affected? What will happen to them?

Holden has 185 dealers in Australia and 31 in New Zealand. Each has been offered the chance to remain a Holden servicing and aftersales outlet beyond the closure, but they will steadily wind down Holden sales operations as stock runs out. It will be up to individual dealers and dealer groups as to what they do next. Some may close while others will look to replace Holden with another brand. Holden’s dealer numbers have been steadily dwindling over the past five years due to slowing sales.

When market share falls, fix the product, don’t cut quality.

Unfortunately, General Motors appeared to take the view that production cost efficiency was the path out of sales declines.

In the early 2000s, Holden’s product development was a well-entrenched process of taking cheaper models out of Opel to feed a manufacturing engine. This then shifted to Daewoo when GM upped its investment to a 70% ownership of the South Korean brand.

This enabled a rapid, panicked product strategy in response to the decline of V6/V8 passenger cars and the rise of small cars and SUVs.

From 2005 to 2010, Holden:

  • Rebadged the Daewoo Kalos as the Holden Barina
  • Replaced the Viva with the Holden Astra
  • Introduced the Holden Captiva, dropped the Frontera and Jackaroo
  • Replaced the Vectra with the Epica out of the Daewoo product book
  • Lost the Rodeo to Isuzu and relaunched it as Colorado
  • Introduced the Holden Cruze as a direct import from Daewoo unchanged.

Within five years, and to set up this last decade of sales, Holden had assembled a hodgepodge mix of products pulled together with a focus on ‘cheap’ to compete.

They’ve also dropped two quintessential Australian names: Jackaroo and Rodeo, replacing them with a mix of European and American names. On its own, this sell-out of cultural connection is likely to have irritated many thousands of Australian buyers.

In Holden’s own words they believed success came from great service and cheap products;

“Australia has one of the most competitive new vehicle markets in the world, in both model proliferation and price. More than 50 brands with over 350 models combined are vying for sales of approximately 1.1 million vehicles per annum. In this strongly competitive environment, a brand will not survive if it does not provide excellent service to customers and offer competitively priced products.” – Holden, ‘New Car Retailing Industry – a market study by the ACCC 2016’. 

The cavernous gap of brand beliefs was being put into action as these models were hitting the streets under powerful national advertising campaigns.

The product strategy even left different models of the Holden brand with conflicting user experiences on items such as cabin fit-out. There was no consistent brand experience like customers were used to with VW, BMW or Mazda. Where in the world, Holden had ‘grabbed’ the product, determining how your cabin or steering column was set up.

Customers, now educated on UX (User Experience) as a function of the overall brand experience by new technology brands like Apple and Google are noticing this UX fail and social media was starting to light up.

At exactly the same time that Australians were putting more and more cultural content and identification into Anzac Day, Holden was de-Australianising the iconic Australian brand.

It became clear people weren’t buying Holdens, they were buying a cheap import with a Holden badge.

You are probably wondering, well, what’s the problem? Isn’t this what Hyundai and Kia and other Asian brands were doing too?

Aren’t cheap imports the secret to new car sales?

Why can’t Holden? Aren’t they meeting the market?

Yes, but no.

The first problem is the dealer network is not making money. According to Holden’s own submission to the ACCC for the’ New Car Retailing Industry – a market study by the ACCC 2016′, dealers were making on average 2% margin across the industry.

Let’s assume Holden’s market performance of average to below-average puts a lot of their dealers in the network on the wrong side of the ledger.

The second problem, and the primary topic of this review, comes when product development does one thing, and marketing does something else.

In this instance, a brand promise that oversold a product reality.

The result, a gap appears and starts stretching out and out and out.

Marketing, sitting in an office in Australia needed to sell the Holden brand. So sell it they did, with enthusiasm, clarity and lots of money.

The problem is the mismatch—the brand promise in conflict with product experience.

A Holden brand, deeply connected to the highly successful Commodore brand had failed to leverage equity into the small car segments and the SUV and 4WD Ute segments – which by now were growing rapidly.

Will Ford continue to operate in Australia?

Absolutely. Ford experienced a sales downturn when it closed its Australian manufacturing operations in 2016, but it was nowhere near as dramatic as Holden’s slide. Ford also has the benefit of being a global manufacturer with a significant presence in other RHD markets, such as the United Kingdom, so it will continue to have access to RHD product. Ford’s product portfolio was strong at the time of the factory closure, and it has only strengthened since then, with high-quality model lines like the Focus, Mustang, Escape and Endura. The Ranger ute is widely regarded as one of the best vehicles in its segment and is the second-best-selling vehicle in Australia.

Will Holden still be a part of the Australian Supercars Series? 

Holden has a contract to compete in the 2020 Australian Supercars Championship, but its future beyond this year is unclear. Holden executives say they will sit down for discussions with the Supercars organisers in the coming days. The death of the Holden brand would make it very difficult to compete beyond 2020, given there will be no retail presence. Whether GM chooses to be involved with the series through its specialty vehicle business remains to be seen.

Is the Chevrolet Corvette still coming to Australia as planned? And is the Chevrolet Silverado still going to be available?

Holden confirmed last year that it would import the new-generation C8 Chevrolet Corvette high-performance sportscar in 2020/21, with GM committed to producing the vehicle in right-hand-drive (RHD) configuration for Australia and other RHD markets. GM is not saying too much about whether it still plans to build the Corvette in RHD at its Kentucky (US) factory.

However, the company has committed to retaining an Australian brand presence through a GM “specialty vehicle business”. While they are yet to announce plans, they are likely to include Holden Special Vehicles (HSV) which currently converts left-hand-drive North American models such as the Chevrolet Camaro coupe and the Chevrolet Silverado full-size pick-up to right-hand-drive at its Clayton facility.

Will they still make Holden cars?

No. Production of the cars will have ended by June.

General Motors has basically said that the investment required to keep Holden alive is greater than the return it is getting, so it will no longer be making that investment.

But you can still buy Holdens that have already been built and are currently for sale. GM Holden’s interim managing director Kristian Aquilina said this process might take “several months”, with a few thousand cars either currently for sale or about to come out of the production line.

So if you want to buy a new Holden before the closure, the clock is ticking — they’ll all be gone by the end of the year.

What happens to Holden I already own?

GM says it will continue to support its cars with “warranty, spare parts, servicing and recalls for at least the next ten years”.

Mr Aquilina says all of these services will “work in exactly the same way as they do today”.

GM says no current Holden owners will experience any changes, and the company will be keeping a number of staff in place to make sure the transition is smooth.

How exactly that will work remains to be seen — although Holden has said it will “establish a national after-sales network” to support existing customers — but Daniel Gardner from WhichCar magazine told the ABC GM had a legal obligation to make good on its promise.

“If the words of the executive team are to be trusted — and they must be, because Holden is legally obliged to support existing owners for a number of years — Holden’s saying ten years [ongoing support],” Mr Gardner said.

“If you own a Holden and have only just bought one, you’ll be able to service it, buy parts, and there’ll be after-sales care there for ten years at least. Not a lot will change.”

How many people will lose jobs?

Of the approximately 800 people currently employed by Holden, around 600 will be out of a job by June. The rest make up the after-sales teams who will be required to fulfil the commitments made to current owners.

“Every individual is being thought of as part of this transition,” Mr Aquilina said.

“For those whose roles are impacted, we will provide an appropriate separation package, we will provide placement support, and we will provide transition support.”

There are 185 Holden dealerships in Australia and 31 in New Zealand. GM is holding a “Q&A session” with dealers today, and says it will formulate a transition plan and “treat them fairly”.

Here’s why there is no recovery plan: it would have cost General Motors $1 billion to develop the next Colorado ute, of which 50,000 a year are sold in the Asia-Pacific region. Or General Motors can allocate that same $1 billion to the next Chevrolet Silverado and GMC pick-ups, of which more 750,000 are sold annually in the US, at substantially more profit.

“It’s a no-brainer,” said a car industry veteran speaking on condition of anonymity. “Car companies don’t have endless supplies of cash, so they need to allocate their money where they are going to get their best returns. The cost of keeping Holden alive must be prohibitively expensive. Time for nostalgia is over. As much as Holden fans will be sad about this, General Motors is a business. Holden is not making money, and there’s clearly not much chance of recovery.”

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