The only option for Holden

A return to profitable manufacturing can only come out of workers' pockets, says MD

Asking lower-income workers to take a pay cut is the kind of industrial relations practice that will polarise opinion in the community – but there is no other effective option for Holden, according to Mike Devereux, the company's Managing Director.

During the Q&A session that followed Devereux's presentation to the press yesterday, when he formally announced Holden would seek labour cost reductions from its workforce, one Adelaide journalist described Holden's plans as a "kick in the guts" for the workers.

Devereux himself admits that Holden might have folded in the aftermath of the Global Financial Crisis, if not for the workers at the Elizabeth plant agreeing to a compromise solution to keep the production facility viable. But the Holden chief is once more looking to flush out cost savings from those same workers in a market environment such that imported cars make money, but the locally-manufactured Cruze and Commodore models don't.

"We frankly make a lot of money importing cars into this country, whether they're Captivas, Colorados or what-have-you..." he told motoring.com.au after the official presentation.

"The place where we need to address our cost structure is on the making of things – on the manufacturing side in Australia. We have very strong brand, we get great sales results each month [and] I think those sales results will improve over time, when our highest volume vehicle [VF Commodore] comes fully on-line..."

Devereux subsequently explained why the 'award' workers at Elizabeth are those required to make what promise to be tough concessions. According to the Holden chief, workers other than those on award are already being paid below the median pay rates for equivalent jobs in industry – and that includes those in executive positions. Of the 1700 workers at Elizabeth, 1600 are on award, so cost savings multiplied across that sort of number can make a significant impact on the bottom line.

Holden's aim, in effect, is to have its entire workforce earning less than the median rates of remuneration paid by other companies in Australia employing staff in similar roles. The award workers at Elizabeth are the only sector of Holden's staff yet to feel that pinch.

"I think what everybody in the country deserves is to have a fair go and make a reasonable wage for the work that they do. Every job classification within General Motors globally is benchmarked and targeted to pay the average wage for that type of job – in whatever country or business...

"On the award-free side of the equation we do that – and we have been doing that for the entire three-year period that I've been here. Less than half of our employees have gotten pay raises over the last three years, and we target the median – so we can attract talented people who are motivated to come to work. Whether it's a sales and marketing person, a lawyer, a purchasing person – at the executive level all the way down to non-managerial level – we're absolutely pure to that goal. In the manufacturing space our costs are too high."

But here's the thing, there are signs that the Australian dollar is losing some strength against the greenback, and the VF Commodore should rebuild sales lost during the runout of the VE series – with more export sales to come from the USA when it goes on sale in the guise of the Chevy SS. In the near future many of the challenges Holden faces to maintain profitability for its locally-built products could well evaporate. Why take on staff and union officials in the short term when it might be simply a matter of sitting tight for a few months?

"I'm trying to get ahead of the curve in dealing with the manufacturing cost-base challenges that we've got," Devereux replied. "They're difficult conversations, but they're necessary."

The Holden exec is making plans for the longer term. This is not just a stop-gap solution. Nor is it likely to be a once-only event.

"I wish I could tell you four or five years ago what the value of the Australian dollar might be, what consumer preference on how many Commodores or Cruzes or Captivas they purchase might be, but I don't have the answers to that equation. What I can deal with is the 'here and now'.

"[We're] trying to do everything we can in our power – our own power as a company, without any help from anyone else to reduce our cost base – that's what we're talking about today. [We] absolutely have to have the country along with us... you cannot have high input costs, higher wages, low scale, the world's lowest tariffs – and have no government policy that take that into account."

On the subject of government policy, Devereux suggests that the Bracks Review of 2008, which underpinned a substantial part of the federal government's plan for the local automotive manufacturing industry that same year, is now well out of date.

Furthermore, if government is committed to a local industry employing Australians to build cars, it will need to revisit its own policy more frequently. Devereux says that local manufacture is a 'stool' supported by three legs, one of which is government policy.

"The three things that I talked about... today... was the three-legged stool of 'world-class cars that people want to buy' – you don't have the right to exist if you don't do that, I'd say we're checking the box on that; 'cost structure' that actually is competitive and recognises that we need to make productivity improvements and lower our manufacturing cost per unit – that's what today's discussion... is all about; [and] the third leg of the stool – you need all three, right? – is clear, consistent, competitive policy over time... and competitive means that it's never static.

"You can't just create something in 2008 and assume that will be competitive forever more – 12 or 13 years – without taking a look at the situation that you face. Two years ago we made money out of our Adelaide plant. That's not true today. So to assume that everything around ATS could be exactly the same and that would work and be competitive with the changes that I know foreign governments are making to their own auto policies – I think it's illogical to assume that..."

While a distant second to labour costs, logistics in our large country and the strength of the Australian dollar both contribute to the cost of building Cruze and Commodore.

"We pay more to move things, broadly speaking," Devereux explained. "When you buy parts off-shore – and we have about 50 per cent local content in our locally-made Commodore, so some of the parts like the V8 engine comes from North America, the transmissions are coming from Strasbourg – when you're shipping components on boats, rather than shipping fully-made cars it is less efficient to ship a component than a car.

"It's quite efficiently packaged, right? You don't have boxes, you don't have wood, you don't have crates... you just have every part already assembled into a car. So there is definitely a logistical cost impost for making cars in this country. There is definitely a difference in the cost of labour between here and, certainly, South-East Asia – but broadly speaking, many European countries as well. And then there is also the cost impost that buying parts from local suppliers in Australia is more expensive than equivalent parts to be purchased overseas – those are the things that add up to that."

Asked whether managing the value of the Australian dollar, as the Japanese government has recently done with the yen, would be advisable, Devereux deflected the question.

"I think that's a question for Glenn Stevens at the Reserve Bank, in terms of managing the monetary side of the equation. And then it's a question for, frankly, the fiscal people in Canberra," he replied.

But it is an issue for Cruze (pictured), and one that Devereux himself has focused on to explain the 400 voluntary separation packages offered employees two months ago. The Japanese government is providing its manufacturers a free kick in export markets like Australia, by reducing the value of the yen.

"It certainly does make it more difficult for, most specifically, the Cruze, which is extremely trade-exposed – it's the only small car made in this country. Most small cars are denominated – I believe – in yen... 'most' being more than half, either in the content of materials that flow to Thailand, where some of them are assembled, and then a lot of them are indeed assembled in Japan. So what you've seen – even in the last year or so – is the price of small cars coming down dramatically. Even in our model year 14 iteration of Cruze we've had to reduce the price of the Cruze significantly to be able to maintain our market share and throughput of dealerships. That doesn't come without a cost..."

Devereux says that without the price cuts Cruze sales would have "dropped dramatically" and the company has to "build the good cars that people want," as well as "price them at the market price", and consequently "deal with what happens on the profitability side the best way" possible.

Cruze will be one of the two global platforms to be built at Elizabeth into the future, as Devereux confirmed.

"That's the current plan."

So what about different top hats on the next-gen Cruze's platform, for economies of scale?

"We would probably not want to talk too much about what we're going to do with the Delta architecture in the second half of the decade when we talk about those two new architectures. I think there's still quite a bit of water to flow under some bridges to make sure that we can move forward that investment. Today's discussions were part of that equation."

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The only option for Holden

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