1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Rahul Chattaraj
Rahul Chattaraj
Articles (59) 

Toyota’s Announcement: More of a Compulsion than a Choice

February 16, 2014 | About:

World’s top auto-maker Toyota Motor’s (NYSE:TM) announcement to stop vehicle and engine manufacturing in Australia came as a shock as well as a reason to be worried for several, particularly those who are directly or indirectly linked to the Japanese automaker or the industry. The decision to exit Australia will have a long lasting repercussion, especially because Toyota was the only remaining global automaker still carrying on manufacturing in the country after the exit of Mitsubishi, Ford (NYSE:F) and General Motors (NYSE:GM). The proposed exit will mark the end of an association that had begun way back in 1963. So, what caused this and what are the likely aftereffects of this decision? Let’s take a look.

What made Toyota come out with this announcement?

Analysts who are constantly tracking the updated of the industry are not very much shocked with the announcement. Automakers in Australia have been struggling for a very long time now as their cost of production kept on escalating compared to that in other countries. Global car makers who had plants in Thailand, US and other locations were enjoying low manufacturing costs and reporting good margins, opening up new facilities and expanding. The labor in Australia is anything but cheap and that coupled with the strengthening Australian Dollar resulted in this disastrous situation. Importing cars became easier for the Australian consumers and they happily opted for that instead of buying cars manufactured and assembled in their own country.

Mitsubishi was the first one to announce winding up of operations in Australia in 2010, followed by announcements from Ford and General Motors in 2013 where the companies mentions plans to exit the country by 2016 and 2017 respectively. And now Toyota, even after deeply trying to keep operations running, came out with the wrap-up announcement. Production of automotives in Australia fell from 4 million in 2004 to 2 million in 2012

Apart from the already mentioned macro-economic factors, Australia’s work policies can also be partially blamed for this painful decision. Last year Toyota found itself involved in a dispute with its plant workers over a proposal to bring about certain changes, in order to meet the requirements to offer pay-rises. While the Australian auto industry was in the death bed, Toyota was still going to provide two pay raises and the cost for that was estimated to be around $17 million. To meet this figure, the auto maker had proposed that the workers should drop the long Christmas holiday and reduce the leaves and stop claiming overtime. This was not well received by the worker’s union and the matter was dragged to the court which made matters more difficult for Toyota. All of these factors came together and made the functioning for the company very difficult, resulting in its announcement to exit the country.

How will Toyota’s decision affect Australia?

Like I said, this decision is going to have a long lasting repercussion and many fear a possible recession also. When Ford decided to leave, jobs of 1,600 Victorian workers was at risk. Next, with GM’s announcement, jobs of another 2,900 employees including 1,300 Victorian workers was at risk. But now, when Toyota leaves in 2017, 2,500 Toyota employees will be out of work along with another 30,000 to 45,000 employees involved in the entire supply-chain, out of which 18,000 will be from Victoria. The car industry in the country includes almost 150 companies involved in the entire supply chain.

Despite several appeals from Tony Abbott, the Australian PM, Toyota came out with the announcement citing impossible functioning circumstances due to forces beyond control. The worried PM in a comment said "Nothing we say or do can limit the devastation that so many people will feel at this point". Even the Australian Manufacturing Workers Union (AMWU) fears a possible recession as it calls the decision to be “devastating”.

Concluding thoughts

Toyota is one of the last remaining carmakers in Australia and its exit would be a huge blow for the Australian auto sector. Though the auto-maker will be selling cars in the geography, it will not provide employment anymore and not contribute to Australia’s GDP. This surely is a big step back for the entire economy and especially for the government under Abbott. The exit of four major auto makers can surely bring down the economy on its knees and result in a partial recession.

Rating: 3.0/5 (4 votes)


Please leave your comment:

Performances of the stocks mentioned by Rahul Chattaraj

User Generated Screeners

charliebatteninside + price
DBrizanROTAg16nov2017 1105p
DBrizanROTA16nov2017 1105p
bdietzLow Debt Fundamentals - Asia
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat