TOYOTA
AUSTRALIA
IN
PERIL

On
Wednesday,
Decem
ber
11,
2013,
General
Motors
Holden

(Holden)
announced
its
plan
to
exit
car manufacturing
in
Australia
by the
end
of
2017.

2

Immediately
after
the
exit
announcement
by Holden,
Toy
ota
expressed
its
fear

t
hat
it
was
in
peril:

This
will place
unprecedented
pressure
on
the
l
ocal
supplier
network
and our
ability
to
build
cars
in Australia.

We
will now work
with
our suppliers,
key stakeholders
and the government
to
determine our next
steps
and whether
we can continue
operating
as
the sole
vehicle

manufacturer
in
Australia. We
will
continue
with
our

transformation
journey
as
planned.

3

Other
stakeholders
in
the
autom
otive
industry
also
expressed
similar
fears.
Apprehensive
of
Toyota’s ability
to
continue

manufacturing, the
Australian
Manufacturing Workers
Union
(AMWU)
national vehicles
division
secretary, Dave

S
mith,
said,
“It’s
now
highly
likely
that
Toyota
will
leave
Australia. In fact
it’s
al
m
ost
certain.”
4

Why
did
Toyota
fear
that
Holden’s
exit
would
put
unprecedented
pressure
on
the
local
suppliers?
How was
Holden’s
exit
related
to
Toy
ota’s
ability
to
build cars?
Why

were
observers
contemplating
an
exit
by Toy
ota,
the
best-selling
and

m
ost
trusted
brand
in
Australia,

especially
when
it
had
been
planning
to
continue

its

transfor
mati
on
journ
e
y?

What

had

gone
wrong
with
the
co
m
pany
that
had
such
a
glorious
long

histo
ry

of

product
i
on?

Shou
ld

T
o
y
ota
stop
manufacturing
in
A
ustralia?

TOYOTA

AUSTRALIA:
A
GLORIOUS
LONG

HISTORY
OF
PRODUCTION


5

Toy
ota
Australia
(Toyota;
see
Exhibit
1),
a
subsidiary
of
Toyota
Motor
Corporation
Japan,
was
founded in
1958
in
Port
Melbourne, Victoria,
Australia.
It
started
assembling
vehicles
in
Australia
in
1963
in
the Melbourne
factory
of
Australian
Motor
Industries.
The
first Toy
ota

model
assembled
in
Australia
was
the Tiara.
Between
1964
and
1968,
Toy
ota
began
assembling
three
more

models
—the
Corona,
the
Crown and
the
Corolla.
At
its
new Altona
plant
in
Melbourn
e,

it

started

producing

eng
i
nes

in

1978,

and
car
body panels

in

1981.

In

1986,

for

the

first

ti
m
e,

To
y
ota
started
exporting.
In
1987,
Toyota
began
the
local

manufacture
of
the
Camry,
which
replaced
the
Corona,
at
the
Melbourne plant.
In
1988,

Toyota’s
local operations
were
unified
to

f
orm
Toy
ota
Motor
Corporation
Australia.

In
1994/9
5,
To
y
ota
sto
p
ped
manufacturing
in
its

Port
Melbourne
plant
and
shifted
all
its

operation
to
its Altona
plant

in
Melbourne.
The
Corolla
was
the
first

model to
be
built
there. As
a
strategic
shift,
in
1996, Toy
ota
expanded
its
reach
to
foreign

markets
by
exporting
the
Cam
ry
to
the
Middle
East,
where
it
became the
area’s
num
ber-one
selling
car.
From
the
Altona
plant,
To
y
ota
also
started
producing
the
Avalon

model in
2000.
Its

journey
with

innovative products
continued
in
the
subsequent perio
d.
In
2010,
it
released
the Camry

hybri
d,
the

first

hybrid
car
manufactured
in
Australia.
It
launched

the
New
Generation
Camry Model
in
2011.

To
y
ota
emerged
as
the
market
leader
in
Australia
for
the
first
time
in
1991.

It
registered record
sales

of
m
ore
than
186,000
cars
in
2003
and
remained
the
overall

market
leader
for
the
subsequent 11

years
(see Exhibit
2
and
Exhibit
3).

T
he
co
m
pany
also
registered
a
huge
success
in
the
export
market,
and
emerged as
the
leader
in
this
segment.
It
exported
al
m
ost

two-thirds
of
its
production
(see
Exhibit
4)
from
the Altona
plant
to
13
countries
worldwide. In
2011,
To
y
ota
Australia,
the
countr
y’s
biggest
auto
m
otive exporter,
exported
nearly
60,000
units

w
orth
$1.004
billion

6


(including
parts
and

accessories).

7

As
per
a
poll
conducted
by
Readers’
Digest
Australia
in
2013,

To
y
ota
was
the

m
ost
trusted
autom
otive brand
in Australia.

8


A balanced
business

model
and
innovative
quality
products
were
the
keys
to Toyota’s past
success

and
had
helped
to
build
its
brand.

BUSINESS
MODEL

Toy
ota
Australia
followed
a
balanced
business

model
(see
Exhibit
5),
which

i
ncluded
a
three-pronged strategy
of
manufacturing
vehicles

d
omestically, exporting
some
of
its

d
omestically
manufactured vehicles
and
importing
some
co
mponents
from
cheaper
sources.

In
the
domestic

manufacturing
process,
Toy
ota
followed
the
“just
in
tim
e”
9


approach
to
production,
which allowed
the
entire
production
process
to
be
regulated
by the
natural
laws
of
supply
and
demand.
Customer demand
stimulated production of
a
vehicle,
which,
in
tur
n,
sti
mulated production and

delivery
of
the necessary
parts.
The
just
in
time
approach
resulted
in
the
right
parts
and
materials
manufactured
and provided in

t
he
exact
am
ount
and
place
where
they
were
needed.
Along
with

t
he
just
in
time
approach, Toy
ota
also
followed
“Kaizen,”
1
0

the
practice
represented
by
employ
ees
making
day-to-day
i
mprovements
in
their
working
practices
and
equipment.
“Jidoka,”

1
1


automation
with
a
hu
man
touch, was another
process
adopted
by
Toy
ota.
Such
approaches
to
the
dom
estic
manufacturing
process
strengthened To
y
ota’s
brand
image
by
contributing

to
Australian
society
in
terms
of
value-addition and
employ
ment, and
good
quality
products,
and
supported
its
position
as
the

market
leader.

However,
Australia’s domestic
market
for
cars
was
very

t
hin.
To
overcome
the
constraint
imposed

by domestic
demand,
Toyota
pursued
an
export-oriented strategy.
As
a
part
of
this
strateg
y,
it
started exporting

domestically
manufactured

vehicles
to
neighbouring New
Zealand
in
1986.
In
1996,
it
further expanded
its
export
reach
by
starting
to
export
to
Middle
East
countries,
and

in
the
subsequent period, began
exporting
to
the
South
Pacific
Islands,
Malaysia
and
Thailand.
To
y
ota’s
export-oriented strategy provided
a
larger
demand
base,
which
helped
Toyota,
to
some
extent,
to
overcome
the
constraints imposed
by
the
lower
domestic
demand.
Exports
constituted alm
ost
70
per
cent
of
Toyota’s
total production
(see
Exhibit
4).

Similar
to other
car

manufacturers,
Toy
ota
Australia
operated
with
a
small
scale
of operation.
This
lack
of scale
at
the
car

manufacturing
stage
affected
even
local
auto
component

manufacturers,
by
keeping
their costs
higher.
Importing
cheaper
inputs
helped
To
y
ota
to
manage
the
costs
of
components. This
business
model
had
made
Toyota
the
m
ost
successful
car
brand
in
Australia.

ADVERSE
EXTERNAL

ENVIRONMENT

Toy
ota,
along
with
other
players
in
the

a
utom
otive
sector,
operated

in
a
growingly
adverse
environment.

Competiti
ve
Fragmented

Market
Structure

In
2013,
apart
from
Toy
ota,
Australia
had
two
car
manufacturers:
Ford
Motor
Co
m
pany

of
Australia (Ford)
and
General
Motors
Holden
(Holden).
Like
Toy
ota,
these
manufacturers were

foreign-owned subsidiaries of
global
companies
that
had
affiliates

in
many
countries.
But,
for
Toy
ota,
competition was not
limited
to
these
domestic

manufacturers.

Australia’s
low-tariff
barriers
and
highly
open
trading
environment since

mid-1980s
provided
consumers with
easy
access
to

i
mported
cars.
Approximately 65
brands
and
365

models
—
co
m
prising
passenger vehicles,
sport
utility
vehicles
and
light
commercial
v
ehicles
—
co
m
peted
for
Australia’s
total
market
of approximately
1.1

million new
car
sales
per

year,

1
2


m
a
king
the
Australian
auto
m
otive
market both
highly co
m
petitive
and
the

m
ost
frag
mented
in
the
world.

Structural Changes and
Declining Demand

Australia,
with
a
population
of
23.1
million,
representing
0.33
per
cent
of
total
world
population
in
201
3,

1
3


represented
a
small
market
for
cars.
In
the
same

year,
Australia’s
new
vehicles’
sales
accounted for
just
1.3
per
cent
of
the

t
otal
global

market.

14

In
the
aftermath
of
the
global
financial
crisis,
demand
for
autom
obiles in
developed
countries
remained subdued
due
to
slow
recovery
and
shifted
to
emerging
markets
such
as
China,
India
and
Brazil.
Not
only were
there

structural
changes
in
the
geographical
distribution of
demand
but
also
changes
in
the co
mposition
of
demand,
in
favour
of
small
fuel-efficient
cars,

1
5

which
was
counter
to
the
types
of
cars manufactured

by Toyota.

Small
Scale
of
Operations,
Underutilization
of
Capacity
and Higher
Cost
of
Manufacturing

Australia
was
also
a
very
small
player
in
the
global

a
utom
otive production sphere.
It
produced
just

m
ore than
200,000
units
of
passenger
and
commercial vehicles,
which
accounted

for
approxim
ately 0.25
per cent
of
global
production.
Together,
the
three
Australian
auto
manufacturers
produced
well
below
the global
optimal
scale
of
operation,
which
was
estimated
to
be
200,000
to
300,000
units
of
vehicle
per
year.

1
6

Toy
ota,
the
largest
Australian
manufacturer,
with
an
annual
installed
capacity
of
150,000
unit
s

17

produced
j
ust

m
ore
than
100,000
vehicles
in
2012.

In
the
same
year,
Holden
produced
j
ust

m
ore
than 80,000
vehicle
units
and
Ford,
fewer
than
40,000
units.
The
small
scale
of
production
kept
the
average cost
of
production of
vehicles
in
Australia
at
a
higher
level
and

led
to
an
adverse

i
mpact
on
the
scale
at which
the
component

m
anufacturers operated
in
Australia
and
the
cost
at
which
they
could
supply
the co
mponents.

18

In addition
to the
lack
of scale
econo
m
ies,
the
higher

labour
costs
and
other
costs,
1
9


such
as the
carbon
tax and
the
luxury
car
tax,
contributed
to
the
high
cost
of
manufacturing
cars
in
Australia.

Government Policies and Declining Protection

The Australian
government
had been
following
liberal
trade
policies
since
the

m
id-1980s.
As
a
part of
the opening-up
strategy,
quantitative
restrictions
were
phased
out
and
were
co
mpletely
eliminated
by
1988. At
the
same
time,
tariffs
were
brought down

to
5
per
cent

by
2010.
Though,
to
help

the
autom
otive industry
to
adjust
to
the
declining
tariff
levels,
the
governm
ent provided
direct
assistance
to
the manufacturers,
it
was
linked
to
investment

and
to
research
and
development
expenditure.

2
0


Gradually,
m
ore
and

m
ore
governm
ent assistance
was
redirected
from
the
assem
bly
of

cars,
the
least
com
petitive activity,
to
exports,
the

m
ost
co
m
petitive
activity
.

21

Free Trade Agreements
and Unbalanced Trading
Environment

To
improve

the
trade
and
capital
flows,
Australia
had
signed
various
free
trade
agreements
(FTAs),
such as
the
Thailand–Australia
FTA,
the
Association
of

South
East
Asian
Nations-Australia-New
Zealand
FTA and
the
Australia-Gulf
Cooperation
Cou
ncil
(GCC)
FTA. Although
the
FTAs were
expected
to
result in
a win-win
situation
for
all
the
countries
involved,
the
FTAs
signed
by
Australia
with
countries
such
as Thailand,
Japan
and
South
Korea,
had
turned

o
ut
to
be
bad
news
for
the
Australian
car
industry.

2
2

The partner
countries had
either
retained
high
tariff
rates
on
imported cars
or
used
subtle

methods
to
keep
the imported
cars
out
of
their

d
omestic
markets.
For
example,
although
Thailand
did
not
impose
import
tariffs on
Australian
cars,
it
did

i
mpose
an
engine-size
duty
that
was
as
high
as
80

per
cent,
which
discouraged the
importation of
the
Australian
cars.
Japan
not

o
n
ly
imposed
a
10
per
cent
tariff
and
a
5
per
cent consumer
tax
on
imported
cars
but
also

i
mposed

several
technical
specifications, which
made
it
almost impossible
to
gain
regulatory
approval
for
foreign-made cars.
Similarly,
in
South
Korea,
Australian
cars faced
a
10
per
cent
tariff
and
a
clumsy
registration
process,
which
deterred
exporting.

23

Adverse Currency
De
velopments

Since 2001,
t
he
dramatic
strengthening
of
the
Australian
dollar against
the
U.S.
dollar (see
Exhibit
6)
had significantly
reduced
the
profitability
of
Toy
ota
Australia’s
exports,
which
were
primarily

to
the
GCC countries
and
were
committed
in
U.S.

dollars.

In
a
highly
open
globalized
econom
y,
these

various
high-cost
and
low-demand

factors,
vario
us government
policies
and
other
external
developments
affected
the
viability
of
Toy
ota
Australia
(e.g.,
the co
m
pany
reported
losses

of
$32.6
billion
in
2011/12

24
)
and
co
m
pelled
it
to
revisit
its
manufacturing and marketing
strategies.

TOYOTA’S
EFFORTS
TO
COUNTER
ADVERSE
EXTERNAL
DEVELOPMENTS

To
y
ota
Australia
practised
the
philosophy
of
steady
improvement in
productivity
and
continuous reduction
in
cost,
as
envisioned
in
the
To
yota
Production

S
ystem.
2
5


However,
the
realization
of
the gravity
of
the
problem,
in

the
event
of

sharp
adverse
developments
in
the
external
environment
in
the
late 2011,
necessitated
bold
steps
and
urgent
actions,
to

substantially

i
mprove
productivity
and

reduce
costs, in
an
effort
to
retain
Toy
ota’s
com
petitiveness
in
the
domestic
and
international
markets.

Accordingl
y,
to
counteract
the
impact
of
adverse
external
developments,
for
the
period
2012
to
2018, To
yota
implemented
a
co
m
pany-wide transformation project,
referred
to
as
the
Toy
ota
Australia
Future Business
Transformation.
2
6


The
project
ai
med
to
improve
efficiency, to
reduce
the
cost
of

m
anufacturing cars
by $3,800
per
car,
to
improve
organizational
and

manufacturing
efficiencies
and
to
maxi
mize
sales
of the
domestically built
Camry
and
Aurion

models.
The
project
adopted
both
internal
and
external
cost- reduction
strategies. It
addressed its

internal
costs
in
early
2012,
by
reducing
its
workforce
by
350 employees
in
the
Altona
plant,
which
had
beco
me
redundant
in
the
downturn
in
the
aftermath
of
the Global
Financial
Crisis,

the
Japanese
earthquake
and
subsequent
tsunami,
and
the
floods
in
Thailand. External
costs
were
addressed
by
reviewing
the
sourcing
of
im
p
orted
components and
vehicles,
and
the local
supplier
capability
development
and
diversification.

The project
introduced
a

radical
transfo
r
mation
to
the business
practices
of
Toyota
Australia.
As
stated
by the
com
pany’s chief
executive
officer
(CEO),
Max
Yasuda,
“Our
business
is
being
radically
changed
to counter
both
internal
and
external
pressures
impacting
us.
We
are
doing
ever
ything we
can
to
strengthen To
y
ota
Australia
and
ensure
our
long
term
future
in
this
country
as
an
importer
and

manufacturer.”

27

In
the
subsequent
period,
the
co
m
pany
also
tried
to
further
reduce
its
labour
costs
by
proposing
a reduction in
overtime payments on
work
done
on
Sunda
ys from
2.5
times
of
the
base
hourly
wage
to
just 2
times;
eliminating allowances such
as
the
$0.71
per
hour
respiratory
allowance
paid
to
paint
shop workers
and
the
“dirt
mone
y”
allowance
for
perform
ing work
considered to
be
dirty
or
offensive; eliminating
the
eight-hour
day

for

maintenance
workers
and
including
Saturday
shifts
as
part
of
the normal
hours
of
work.
2
8


The
co
m
pany

CEO
Yasuda
tried
to
justify
the
proposed
measures
by
indicating that
the
co
m
pany
would
be
able
to
gain
approval
for
further
investment at
the

Altona
plant,
necessary
to maintain
production
of
the
Camry

model,
only
if
production
costs
were
slashed

by
$3,800
per
vehicle
by
201
8.

2
9


But,
under
the
strong
protest
from
the
AMWU,
which
blocked
the
vote
from
proceeding
by
taking the
issue
to
the
Australia’s
Federal
Court,
3
0


it
failed
to

garner
the
required
support

from
its workers.

W
H
A
T
SHO
ULD
TOYOTA
D
O?

Demand
and
cost
conditions
in
Australia
seemed
to
be
unfavourable
for
Toyota.
Given
these
adverse situations
and
manufacturing
losses,
should

To
y
ota

follow
the
route
adopted
by
Ford
and
Holden?
Many people
would
be
directly
or
indirectly
affected
by
Toyota’s
decision.
Its
closure
would
result
in
job
losses not
only
for

its
employees
in
the

manufacturing unit
but
also
for
those
who
were
supported
by
Toyota vehicle
manufacturing through
supply

c
hain
linkages.
For
example,
many
component

manufacturers that depended
on
To
y
ota
as
their

major
buy
er
would
be
further
constrained
by
low

d
e
mand,
and
may
be
even required
to
shut
down

t
heir
manufacturing units.

The
resulting

u
nemploy
ment
would
greatly
affect
the Victoria region,
where
the
Altona
plant
was
located.
Should

To
y
ota
consider its
social
responsibility separate
from
its
consideration of
its
business
sense?
Would
it
be
better
to

wait
for
so
me
time
to
pass, which
could

lead
to
changes
in
the
demand
and
cost
conditions? If
Toy
ota
decided
to
exit,
would
it
be
a hasty
decision?
What
should
Toyota
do?

EXHIBIT 1:
TOYOTA
AUSTRALIA’S
KEY CONTRIBUTIONS

Source:
Compiled
from
Toyota
Australia,

Initial
Submission
to
Productivity
Commission
Review of
the
Automotive

Manufacturing
Industry,



w
w
w
.p
c.gov.au/



data/assets/pdf_file/0011/130124/sub031-automotive.pdf,
accessed
September 20,
2014.

EXHIBIT 2:
TOP-SELLING
CAR
BRANDS IN AUSTRALI
A, 2012–2013

Source:

VFACTS,
Vehicle
Sales,
Federal
Chamber
of
Automotive
Industries,


w
w
w
.
fcai.com.au/sales/2013-ne
w-vehicle-

market,
accessed
April
1,
2015.

EXHIBIT 3:
AUTOMOBILE
MANUFACTURERS’ AUSTRALIANMARKET SHARE BY
BRAND (IN PER CENT), 1998–2012