Bright future for Aussie small cars?

Industry pundits and employees at Holden's Elizabeth factory have rejoiced at the news that the company is to build a small car in the South Australian facility in 2010, but can a small market like Australia support such an initiative?

There's been a general perception that small-car manufacturing in Australia can't be profitable, although Ford reckons it can -- and now Holden agrees.

Toyota doesn't like to comment on the tactics and strategies of competitors, but it plainly believes Ford and Holden will fail to achieve their objectives with this strategy.

That's illustrated by the very fact Toyota is locked into building the Camry Hybrid from 2010 -- a car that will provide the fuel efficiency gains of a small car, but with the economies of scale for a car already in production and with the per-unit profitability of a mid-size car.

When it comes to small cars, conventional wisdom suggests there's not enough margin per unit, not enough volume in the domestic market, not enough competitive edge in export markets... How can the two local manufacturers make this strategy work?

With the relatively lower cost of production in Australia (see the current value of the Australian dollar!) local manufacturers can tailor the pricing and marketing of their products to optimise profit and volume.

Furthermore, Ford has repeatedly said that it would like to be selling 2000 units of Focus a month -- and it should be able to do at least that without the supply constraints (a side product of sourcing the car overseas) and with the flexibility to target buyer types more effectively.

Holden is in a similar position to Ford currently, further complicated by having two small cars in the same segment (Astra and Viva) and would gain by having a locally built car to offer the buying public.

Presuming the Delta-based car will replace both the current small cars, since the Astra and the Viva/Lacetti will be built on the same platform by then, Holden will have one small-car model that should outsell the current combined sales of Astra and Viva. Based on the $30 million estimate for the R&D costs for the small Holden, it doesn't appear that there'll be sweeping changes to the fundamental design.

Neither Ford nor Holden will reveal much about their prospective line-up for the locally-manufactured small cars, but diesel's on the cards for both and Holden has said it's investigating flex-fuel options also. The greater the diversity of each model range, the more cars the two companies will sell, but they will be watching over their shoulders to see what sort of cars companies such as Hyundai will bring to market in the meantime.

And one shouldn't discount the effect of cheap cars brought into the country from low-cost manufacturing nations, although Holden's MD, Mark Reuss does discount that threat.

Speaking during a recent address to local media, he asked rhetorically whether cheap imported cars were likely to establish more than a foothold in the market if they can't back up their low price with quality manufacturing and engineering.

"All three makers and the sophistication we do here isn't something you do in two years and I would say if you look at the countries that can do it well and make really good cars in mature markets, there's a few of those around the world," Reuss explained.

"And so there'll be people that get Chinese green cars in this market and [if] they do it at a five per cent tariff in 2010, then you're going to see cars here that are reflective of what they've done in that time frame and the maturity of the car that comes in here...  this is a very mature market, there's a very discerning buyer here.

"There'll be a price point in the market where people buy those -- but are you going to buy a second one, and a third one -- I can't answer that question."

Even if the anticipated threat from low-cost exporting nations materialises, Ford and Holden don't have to sell a lot of small-car volume in Australia if they, in return, can also export to other markets.

The National Australia Bank predicts that the Aussie dollar may rise to no more than about 70 cents US by the end of 2009, which would provide Australian exporters with a strong product at a relatively low cost in foreign markets. Whether the dollar will remain at that level and whether that's even a realistic threshold between profitability and failure are two questions remaining unanswered.

Ford expects small-car sales to blossom over the next five years (more here) and with Ford positioned to export its locally-manufactured Focus by then, it might reap a windfall, if demand for small cars exceeds global supply. If Ford is thinking along these lines, you can bet that Holden is also.