Ford Motor Company of Australia Limited A.B.N. 30 004 116 223 Registered Office: 1735 Sydney Road, Campbellfield, Victoria 3061 1

3 August 2009

The Executive Officer Economic Development and Infrastructure Committee Parliament of Victoria Spring Street EAST MELBOURNE VIC 3002

Submission via email to [email protected]

Dear Sir/Madam,

Subject: Submission to Inquiry into Manufacturing in Victoria

We write in response to a public invitation for comment regarding an inquiry into manufacturing in Victoria, to be undertaken by the Economic Development and Infrastructure Committee on behalf of the Parliament of Victoria. Our contribution will provide some background material and address those specific terms of reference where Ford Australia has particular knowledge and expertise.

Background

Ford Australia is a leading automotive manufacturer. Its core products are the Ford Falcon and the Ford Territory, for which the company has full design, engineering, manufacturing and sales responsibility. Ford Australia employs approximately 4,000 people in Geelong and Broadmeadows, Victoria. In 2008, Ford Australia sold more than 104,000 locally manufactured and imported vehicles, and exported a further 4,000 vehicles. Ford Australia is also a significant exporter of design and engineering services. A leading project presently underway is the design and engineering leadership of a new light commercial vehicle to be sold in more than 100 countries. This project represents one of the most significant automotive R&D initiatives undertaken in Australia.

In July, with the support of both the Australia Government and the Victorian State Government, Ford Australia announced a $230 million investment in a suite of forthcoming sustainability initiatives for its locally manufactured vehicles. These sustainability actions included the addition of a new two litre four cylinder 'EcoBoost' engine to its Falcon model, an advanced liquid injection LPG system for the Falcon, and the introduction of a clean diesel engine to its Territory model. The introduction of the 'EcoBoost' engine to the Falcon is the first global application of this engine in a rear-wheel drive vehicle, and this new technology will deliver up to 20 per cent better fuel economy and 15 per cent fewer CO2 emissions. These initiatives due in 2010 and 2011 will provide Australian consumers with an affordable range of locally assembled vehicles that are more fuel efficient and have fewer carbon emissions, thus helping secure the future for Ford and its employees by better utilising the capacity of Ford's Victorian manufacturing facilities.

Head Office Private Mail Bag 6 Campbellfield, Victoria 3061 Telephone: 03 9359 8211 Facsimile: 03 9359 8200 Internet: www.ford.com.au

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This investment is in addition to a previously announced investment amount of $21 million in ongoing development work of the company's locally manufactured I6 engine to become Euro IV compliant by mid-2010. These continued investments into its local manufacturing operations, coupled with the decision last year to continue operations at Ford's Geelong engine plant beyond its planned closure in 2010, have significant benefits for Ford's domestic component supplier base.

Competitive Environment

In recent times, the Australian automotive industry has migrated from one of relatively high protection to an open manufacturing economy. This transition has resulted in an emphasis by industry participants on lean manufacturing principles and the pursuit of cost elimination wherever possible. The industry operates on very fine margins, with the ability to recover increased costs through increased pricing significantly curtailed due to the competitive pressures within the market. The industry is also exposed to currency movements and fluctuations in commodity and oil prices which are subject to prevailing global market forces. These elements, and their interaction, often result in a volatile environment in which leading industry participants are seeking to transform their businesses; from production focused to consumer focused, from inflexible to agile. The industry is increasingly at the forefront of a dynamic, innovative and outward-looking Australian economy where technology, knowledge and speed are imperative in facilitating transformation.

The automotive manufacturing industry in Australia has however, been confronted by difficult economic conditions for some time. This situation has been exacerbated in recent months by the impact of the global financial crisis and the associated economic downturn. As a result, the Australian new vehicle market in the six months ended June 2009 is down 87,472 units compared to a year ago. Sales of locally produced vehicles are down over the same period by 18,241 units, a decline of 21%. This represents a significant loss of cash flow to the local industry. Already scarce cash resources available for investment are impacted, with local vehicle programs competing for parent company investment funding with global vehicle programs.

Additionally, the Australian automotive market is one of the most open and highly competitive automotive markets in the world. Tariffs will also be further reduced from 10 per cent to 5 per cent in 2010. For a relatively small volume market by global standards, it is extremely fragmented with around 60 brands offering more than 350 models from 26 different source countries, with more to come. Vehicles produced in such countries as China and India are due to arrive during 2009 and 2010. The fragmentation of the new vehicle market means average model volumes, particularly for smaller cars, are relatively low as Table 1 below illustrates. The lack of a viable volume base makes it extremely difficult to introduce such smaller cars to local manufacture.

Head Office Private Mail Bag 6 Campbellfield, Victoria 3061 Telephone: 03 9359 8211 Facsimile: 03 9359 8200 Internet: www.ford.com.au

ACC 71 11/00 Ford Motor Company of Australia Limited A.B.N. 30 004 116 223 Registered Office: 1735 Sydney Road, Campbellfield, Victoria 3061 3 Table 1

Average Model Volume by Segment – Full Year 2008

Segment Av. Model Vol.

Light Car 6,029 Small Car 6,923 Medium Car 2,645 Large Car 16,390 SUV small 4,076 SUV medium 3,774 Source: Dec 2008 VFacts report

The Global Industry Challenge

Australia is now very much part of the global automotive industry, which is undergoing sustained and dramatic change. This change is strategic, structural, technological, environmental and economic. It is evidenced by the recent changes in size, structure and ownership of many automotive companies both in the US and in Europe. It is placing immense pressure on all industry participants – vehicle producers, component suppliers and material and service providers. Australia is not immune to the challenges presently confronting the industry and must position itself to take best advantage of global opportunities. As most investment decisions are now made globally, Australia's ability to participate in these decisions will be based on its competitiveness, capability and profitability.

A key element to a robust, dynamic and efficient automotive manufacturing sector is the establishment of a sustainable volume base – a critical mass – for domestic production which enables scale economies and efficiencies to be achieved. Ford Australia has been actively working to identify innovative ways of addressing production volume challenges and associated cash flow challenges confronting domestic vehicle manufacturers and component suppliers. The earlier mentioned investment in new fuel efficient engines is an example of where Ford Australia has worked to meet the prevailing challenges, and sustain and transform its core business while providing economic benefits to the broader Australian automotive manufacturing industry and national economy.

The Environmental Challenge

Ford acknowledges the challenge of climate change and is working with industry participants to be part of the solution. Ford Australia's preference for a market based abatement mechanism is consistent with that of the broader industry as articulated by its peak body, the Federal Chamber of Automotive Industries. Ford Australia has also long advocated the inclusion of transport into any proposed emissions trading scheme as the primary fuel efficiency mechanism used in Australia, and as part of a true multi-sectoral approach to the issue of carbon emissions abatement.

It also acknowledges, however, that the proposed emission trading scheme could well impact on its manufacturing activities by way of increased costs, and in a difficult trading environment. This could be offset by the introduction of energy efficiency initiatives.

Head Office Private Mail Bag 6 Campbellfield, Victoria 3061 Telephone: 03 9359 8211 Facsimile: 03 9359 8200 Internet: www.ford.com.au

ACC 71 11/00 Ford Motor Company of Australia Limited A.B.N. 30 004 116 223 Registered Office: 1735 Sydney Road, Campbellfield, Victoria 3061 4 Cost Efficiency

Cost management has always been a fundamental driver of business viability, but it has become of critical importance in the face of the present economic conditions confronting the automotive manufacturing industry. It is therefore imperative that the costs of doing business are minimised wherever possible, and that unnecessary costs are eliminated. In instances where additional regulation of business is proposed, a rigorous regulatory impact statement process must be undertaken to determine the additional costs of compliance likely to be incurred by business versus the benefit the regulation purports to achieve.

Ford Australia is also supportive of a national based approach to issues of policy development in areas such as consumer policy, taxation, OH&S, vehicle safety regulations and matters of road safety. The proliferation of such tools as the internet means that now more than ever a national perspective to these issues is warranted as opposed to a state by state approach, as consumers and motorists increasingly ignore state 'boundaries' in their purchase and usage habits. From a compliance cost point of view, a national agenda is preferred as a means of reducing unnecessary costs and eliminating duplication of effort. An example of this is the introduction of a national emissions trading scheme as the primary mechanism for achieving improvements in fuel efficiencies and carbon emission reductions, as opposed to a state based approach of alternative, and additional, fuel efficiency measures.

Conclusion

The automotive industry is undergoing significant and sustained change on a scale which is unprecedented. Despite this, and in the face of the most severe global financial crisis in living memory, both the industry and Ford Australia continue to invest heavily in R&D into new technologies and new model programs, and in new facilities designed to improve competitiveness and capability. However, they key to attracting new investment funds from its parent company resides in the development of profitable business cases. A competitive cost structure is crucial, and Ford Australia welcomes and encourages any effort to remove or reduce costs associated with conducting business in Victoria.

We trust the matters raised in our submission are of assistance to the Committee. We would be happy to discuss these issues in greater detail. The writer can be contacted on (03) 9359 8211 or at [email protected].

Yours sincerely

Elly Haug Government Liaison Manager

Head Office Private Mail Bag 6 Campbellfield, Victoria 3061 Telephone: 03 9359 8211 Facsimile: 03 9359 8200 Internet: www.ford.com.au

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