INDUSTRY REPORT FEATURE:

In November 2016 the Victorian Automobile Chamber of Commerce (VACC), in conjunction with the state and territory Motor Trades Associations of Australia, conducted a national survey of over 1,000 automotive business members. This is the final instalment of our three-part series dissecting the report, detailing the key findings, current state of play and recommendations for the future of our industry.

The 2016/17 Automotive Industry National Survey sampled all sectors of the automotive industry and collected detailed information concerning the business environment, labour market, skill shortages and other key issues affecting automotive businesses. The survey data, in conjunction with other data sources, formed a key input in the modelling of trends and projections for the automotive industry over the next three years.

The ‘Directions In Australia’s Automotive Industry’ report covers the size, scope, economic contribution, key trends and challenges shaping the direction of Australia’s automotive industry over the next few years, in order to generate a greater understanding and awareness of the industry beyond the era of passenger car manufacturing, including the broader impacts on the economy and society.

INDUSTRY DIRECTIONS

The VACC report notes that there is a great level of uncertainty and speculation concerning future directions and outcomes facing the automotive industry over the next few years.

“Inevitably there will be some industry contraction associated with the closure of manufacturing operations,” it says.

Employment trends

Aggregate industry employment data along with trend employment forecasts derived from VACC modelling show that the automotive industry has been on a declining employment trajectory since 2014/15, and this decline is projected to continue out to the end of the forecast period (2018/19).

Between 2015/16 and 2018/19 industry employment is forecast to decrease from 379,365 to 364,340 – a decrease of 15,025 people, or 4 per cent. This is comprised of a projected 1.2 per cent fall in employment in 2016/17; a 1.8 per cent fall in 2017/18, and a further 1 per cent reduction in 2018/19.

“The modelling shows that 88.2 per cent of the projected reduction in employment beyond 2015/16 is a direct result of the closure of local automotive manufacturing operations, with the remaining 1.8 per cent linked to a forecast decline in employment within Motor Vehicle Retailing and the Automotive Repair and Maintenance sectors of the industry.”

The projected decrease in industry employment of 15,025 between 2015/16 and 2018/19 is expected to comprise of:

  • a net decrease of 7,165 in employment in the Motor Vehicle Manufacturing sector – primarily due to the exit of Holden and Toyota from local passenger car manufacturing
  • a net decrease of 6,085 in employment in the Motor Vehicle Parts Manufacturing sector – primarily due to reductions in Tier 1 and Tier 2 component supplier companies to local passenger car manufacturers Holden and Toyota
  • a net decrease in employment of 1,000 in Motor Vehicle Retailing sector, and
  • a net decrease in employment of 775 persons in the Automotive Repair and Maintenance sector.

“Employment levels across all remaining automotive industry sectors are projected to remain relatively stable over the forecast period,” the report says.

“The results show that, apart from the impacts associated with the closure of local car and component manufacturing, there is only a marginal decline expected across the rest of the automotive industry and this is largely confined to a combined employment decrease of 1,775 within the Motor Vehicle Retailing and Automotive Repair and Maintenance sectors. This is primarily due to an expected rise in the retirement of small business owners within these sectors.”

Business trends

Since 2013/14 the automotive industry has exhibited annual business growth. This growth reached a peak during 2015/16, when the automotive industry grew by 785 businesses, or 1.1 per cent, representing the strongest industry growth in almost a decade.

“The business growth recorded in 2015/16, as well as in previous years, has predominantly been concentrated amongst small automotive businesses and, to a lesser degree, large businesses. The number of medium-size automotive businesses has, however, fallen over the past three years,” the report says.

“In terms of the spike of 785 businesses observed in 2015/16, sole traders with no employees accounted for more than 80 per cent of this growth and this was largely confined to the vehicle mechanical repair and vehicle body repair sub-sectors. This trend was most prominent in Queensland, Victoria and New South Wales, but was also present across all other states and territories.”

Consolidation

The report notes a trend towards business consolidation, especially in relation to Car Retailing and Car Wholesaling.

In Car Retailing the data shows a loss of 63 small businesses and a gain of 17 medium-size and 16 large businesses respectively during 2015/16.

Industry intelligence confirms there has been a focus on acquisitions with the Car Retailing sub-sector by larger industry players in recent periods. This is part of an overall strategy to increase market share and achieve greater economies of scale, thereby enabling the sale of vehicles at lower prices. This trend of acquisitions of small businesses by large and medium-size players is expected to continue, thereby reducing overall business numbers within the Car Retailing and Wholesaling sub-sectors over time.

Business projections

In terms of where the aggregate businesses population of the automotive industry is headed, VACC industry modelling shows a projected decrease in the number of automotive businesses from 69,365 in 2015/16 to new equilibrium levels of around 68,418 by 2018/19.

This represents a net decline of around 947 automotive businesses, or 1.4 per cent, over the period. These projections incorporate the net effects of the exit of car and component manufacturers, along with trend business entries and exits across all automotive sectors, as well as business owner retirements due to age and health-related reasons, as identified through the Automotive Industry National Survey.

“Overall, given the strength in trend growth within the small and large business sector, the exit of manufacturing companies is anticipated to have only a marginal impact on the total business population of the automotive industry over the next few years,” the report says.

Trend forecasts in new vehicle sales

“New motor vehicle sales represent more than simply the state of the new vehicle market. They impact the entire automotive supply chain and are a leading indicator of consumer and business spending and confidence within the economy, as most consumers undertake loans to finance new car or truck purchases,” the report says.

“Recent analysis conducted by the Reserve Bank of Australia (RBA), demonstrates that there is a unique relationship between growth in house prices and consumer spending. In particular, using new vehicle registrations as a proxy for consumer spending, a strong correlation was found between rising house prices and new motor vehicle registrations. Whilst the scope of the RBA analysis was confined to the Sydney, Melbourne and Brisbane real estate markets between 2006 and 2011, it was estimated with a high degree of precision that a one per cent increase in mean house prices was associated with a 0.4 to 0.5 per cent increase in new passenger vehicle registrations in these markets during the period.

“Furthermore, the strength of this relationship was found to be sustained over the longer run.”

Utilising the findings of the RBA research, VACC undertook a study to forecast annual new vehicle sales at a national level by modelling house price growth out to 2019. Whilst the RBA developed its own measure of mean house price growth based on individual property sales data by postcode in Sydney, Melbourne and Brisbane, VACC utilised the quarterly ABS mean residential dwelling price series for Australia, to forecast annual new vehicle sales nationally.

Apart from the year 2014, where new vehicle sales fell by two per cent despite a rise in mean house prices, the VACC research findings support those of the RBA in that there is a constant and fixed relationship observed between house price growth and new vehicle sales. Between 2012 and 2016 the VACC results indicate that a one per cent rise in the house price nationally is associated with between a 0.3 to 0.5 per cent rise in new vehicle sales. This correlates strongly with the results of the RBA study conducted for Sydney, Brisbane and Melbourne.

Carrying this relationship forward, the VACC modelling shows varying projections for annual new vehicle sales depending on the level of mean house price growth.

“Based on conservative assumptions of 3 per cent annual mean house price growth in the years 2017 through to 2019, new vehicle sales are forecast to fall just short of 1.2 million units by the end of 2017, whilst surpassing 1.2 million unit sales in 2018 and growing to over 1.23 million in 2019,” the report says.

“Sustained levels of growth in house prices are therefore anticipated to have positive flow-on effects for the new vehicle market and the automotive supply chain.”

This wealth effect is observed to be stronger amongst low income households, which have a higher propensity to purchase a new vehicle following a rise in housing wealth than high income households. The effect is not felt amongst renters.

NEW CHALLENGES FOR AUTO INDUSTRY

The automotive industry will continue to face challenges both in the immediate future and over the longer term, according to the comprehensive VACC report.

“Whilst the evidence points towards a leaner automotive industry in the future, it also raises many questions and challenges that the industry must overcome or progress beyond. The role of government will be an integral part in this process in supporting and facilitating this transition and through the application of coherent transport and infrastructure policy,” the report says.

Skill shortages

“Skill shortages within the automotive industry are at the highest proportions ever recorded, with a current national shortage of 27,377 skilled positions that is forecast to rise to over 35,000 positions in 2017/18. These skill shortages are affecting almost half of the automotive industry, constraining business productivity, planning, investment and growth,” the report says.

“Despite its economic significance, the automotive industry continues to struggle for appropriate recognition amongst government, and this is particularly important in view of the transition that is expected to envelop the automotive industry and society more broadly in the next decade. Over this time, the wider uptake of electric, connected and autonomous vehicles is anticipated to disrupt the structure and business models of the automotive industry to a degree never witnessed before.

“As electric, autonomous and connected vehicle technologies become more prevalent, this will require significant upskilling within the industry and the development of new automotive qualifications that incorporate the updating of software, coding and programming, as well as other specialised functions that will be inherent with these vehicles.”

The VACC argues that the industry will require a greater level of resources and government support for automotive trade based-training and qualifications development within the vocational education and training system.

“As the automotive industry moves through this transition period, it is critical that government provides better clarity of its policy intentions for the future. A signal from government about its proposed actions or intentions may help instigate a smoother transition process for the automotive business community.

“To this extent, the findings and recommendations contained in the Senate Economics Reference Committee report – The Future of Australia’s Automotive Industry, 1 December 2015 – are very pertinent. Recommendations 6 and 7 in the Senate report outline the case for economic recognition of the automotive industry and the establishment of an automotive industry taskforce with representatives from industry, unions and government to facilitate a national automotive policy framework encompassing all sectors of the industry. The development of an industry blueprint remains a necessary and key objective that will assist automotive businesses in their planning and development through this transition period.”

After the closure of passenger car manufacturing in October. Automotive Repair and Maintenance will now account for the largest share of the industry (54%), followed by Motor Vehicle Retailing (8.3%), Motor Vehicle and Parts Wholesaling (7.6%) and then a host of other sectors with smaller shares.

It’s not just cars

“Unbeknown to many, the automotive industry embodies a wide array of sectors and business activities beyond that of manufacturing of motor vehicles and associated componentry. Whilst some activities are inherently recognisable and interconnected, others remain less obvious,” the report says.

“A key factor unifying most automotive sectors is their reliance upon a workforce invested with nationally accredited automotive qualifications and skills training, thus drawing seemingly diverse sectors such as Marine, Bicycles, Agricultural Machinery Retailing and Repairs and Outdoor Power Equipment within the scope of the automotive industry.

“Whilst these aforementioned sectors are included within the scope of the industry, a profound problem is the lack of reliable statistical data in relation to these sectors. Official industry and occupational statistical classifications, such as ANZSIC and ANZSCO as provided by the Australian Bureau of Statistics (ABS), work poorly for the automotive industry, as they fail to adequately categorise and enumerate sectors such as Marine, Bicycles, Agricultural Machinery Retailing and Repairs, Outdoor Power Equipment, Towing and many others considered integral to the automotive industry.”

The new-look industry

Some manufacturing activity will still be in place after October, however this will be on a much smaller scale and largely comprised of specialist vehicles, bus, truck, trailer and associated component manufacturing, representing an estimated 4.4 per cent of the industry.

“Given the future profile of the automotive industry, it is pertinent to suggest that the trends and challenges facing the Automotive Repair and Maintenance and Motor Vehicle Retailing sectors, both now and over the near future, will be at the forefront of the automotive industry and its overall direction,” the report argues.

Growth of Mobile Mechanical Services

A trend the VACC is concern about is the growth of mobile mechanics operating essentially from a van or utility and conducting vehicle servicing and repairs at customers’ homes, workplaces and other locations. This trend has been particularly evident amongst migrant as well as local mechanics.

“The danger with these practices is that unlike a registered workshop that must legally comply with workplace safety, emergency and environmental requirements, there is no such compliance for mobile operators,” the report says.

“This raises concerns around actual personal safety, accountability and disposal of environmentally hazardous wastes. It is argued by many that comparable legal requirements for a business premise should be enforced on mobile operators.

“Whilst such compliance may or may not be viable, the broader issue for all industry participants is that of adaptation to a changing business environment. Without adaptation in a timely and efficient manner, the survival of any business is not guaranteed in future.”

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