Introduction
This paper assesses the suitability of Australia as a host country of the headquarters of an American transnational firm, Keystone, operating in the automobile industry. High labor costs and perceived political uncertainty in the US informed the decision to relocate overseas. In this assessment, the SWOT framework is used to determine the strengths and opportunities in Australia’s automotive sector that make it an ideal market for Keystone’s multinational operations.
SWOT Analysis
Australia is among the fastest-growing OECD economies. In this SWOT matrix, information related to Australia’s automobile industry will be examined to determine the country’s suitability to host Keystone’s headquarters.
Strengths
Geography
Australia is a strategic location as an investment hub for multinationals planning to enter the Asian market. Its foreign trade agreements can foster the movement of goods across Asia, the Americas, and the EU.
A strong institutional framework
Australia provides a favorable macroeconomic environment – rated 14th and 5th globally in the ease of doing business and economic freedom (Australian Trade and Investment Commission [Austrade], 2018). It has a strong regulatory system and financial institutions, political stability, and low corruption levels. Lower interest rates (1.5%) set by the Reserve Bank of Australia (RBA) increases automotive financing (Singh& Barnes, 2018).
Human capital
Australia has a skilled and multicultural workforce, with over 45% of its population having a tertiary education (Austrade, 2018). It is rated seventh worldwide in global entrepreneurship and is culturally diverse, with about 27% of the locals being multilingual (Austrade, 2018).
Automobile research and design (R&D)
Australia is home to three automakers’ R&D units: GM Holden, Toyota Motor, and Ford Motor (BMI Research, 2018). These firms are subsidiaries of international car manufacturers, mainly from Japan and the US. Further, about 200 producers of motor vehicle components operate in Adelaide and Melbourne (Singh & Barnes, 2018). Thus, foremost, R&D capabilities and availability of suppliers are a key strength of Australia’s automobile industry.
High-income country
The net per capita income in Australia stands at $38,400 – among the highest in the OECD region (Organization for Economic Co-operation and Development [OECD], 2017). The annual growth rate of household disposable income is relatively high (at 1.5%), an indicator of improving consumption spending on new car purchases.
Competitive sales market
The Australian automotive industry has many players. The top-selling manufacturers in 2017 were Toyota, Mazda, and Hyundai, with market shares of 18.3%, 10.3%, and 8.3%, respectively (BMI Research, 2018). The vehicle sales (units) are projected to increase by 1.35 million in 2022, up from the current 1.22 million.
High demand
The market is characterized by a shift to the high-end segment (SUVs), and growth in the utilization of light commercial vehicles incorporates transportation (Stanwick, Circelli, & Lu, 2015). Further, increased infrastructural spending by the Australian authorities suggests strong growth in new car sales in the coming years. Consumer demand is projected to grow by 3% in 2018 (BMI Research, 2018).
Weaknesses
Unfavorable taxation regime
According to BMI Research (2018), Australia’s tax rate on high-end vehicles (>AUD63,184) stands at 33%. As a result, demand for top of the range of cars is likely to drop. Uncertainty over tax rates may also hurt the auto industry.
Cessation of operations
Australia’s top carmakers, Holden and Toyota, shut down their plants in 2017. The two firms accounted for around 92,300 vehicles manufactured in 2017 alone (Austrade, 2018). Thus, the closure will result in job losses, reduce output, and affect the domestic auto-component supply chain.
Low incentives in the electric vehicle (EV) subsector
Australia’s EV market is at its nascent stages. In 2016, EV sales reached only 1,369 cars (BMI Research, 2018). Therefore, the growth of this segment will depend on increased government incentives in terms of grants to EV producers. A lack of EV policy is a major challenge to the expansion of this subsector.
Political instability
The resignation of Australia’s deputy premier in February 2018 and divisions in the coalition government may impact the business environment (BMI Research, 2018). The policy-making process may stall due to a lack of a majority government, affecting the country’s economic performance.
Overdependence on mining
The Australian economy’s reliance on extractive industries weakens other sectors. It also exposes consumers to external demand and price fluctuations. Thus, diversification is required to strengthen the economy.
Opportunities
Design and engineering capabilities
The exit of three automakers – Holden, Toyota, and Ford – from Australia is likely to enhance the current R&D capacity. The engineering teams could focus on producing designs for foreign players or new entrants from North America (e.g., Keystone) and Asia. Ford and GM Holden have already converted their plants into R&D centers for their global operations (Stanwick et al., 2015). Thus, the country is poised to become a design hub for foreign automakers.
New entry
The ending of local production by carmakers will provide opportunities for international firms to enter the Australian market. An entry of Asian companies will open up Asia to Australian auto-component suppliers that need new foreign markets to sustain their growth (Weernink, 2014).
Heavy commercial vehicles (HCV) segment
This subsector is likely to grow as the government has increased its investments in large infrastructural projects. HCV sales will increase due to high demand in the mining and pipeline industries. Therefore, Keystone’s Australian headquarters will need to prioritize investment in the HCV segment as a competitive strategy.
Modifying imported cars
Since local production is expected to drop following the departure of top automakers, Australia will depend on other countries for its personal vehicle needs. Thus, opportunities exist for carmakers with adequate capabilities to adapt imported cars to local requirements.
Skilled labor
The closure of three local plants has resulted in mass layoffs. American firms, such as Keystone, with plans to move their operations to Australia, will have access to a skilled and experienced workforce to drive their strategic goals. Thus, the cost associated with personnel training or processing of expatriate labor will be minimal.
High demand forecast for imports
Local car production is likely to decline due to the ending of Australian operations by three automakers. Thus, the country will rely on imports to meet local demand. Opportunities exist for foreign players to increase their market shares by producing vehicles for the Australian market. In 2017, Japan was the leading net exporter of cars to Australia, followed by Thailand, at 27,500 and 21,900 units, respectively (BMI Research, 2018).
Threats
Taxation risks
Australia imposes a corporate tax of 30%, which is higher than the OECD average rate of 25% (OECD, 2017). Ad-hoc taxation policies present a threat to foreign direct investment flows into the country.
It is a weakening currency
The Australian dollar (AUD) fell by 2% and 3% against the Euro and Pound, respectively, in 2017 (Singh & Barnes, 2018). The drop in the AUD value against major currencies is attributed to the RBA interest rate that has increased inflation. The weakening dollar will raise the cost of imported vehicles entering the country.
Climate change impacts
Australia faces a long-run risk of drought that will affect economic growth. Climate change is projected to reduce GDP growth by 5% by the year 2050 (OECD, 2017). An economic slowdown will reduce the demand for new cars. Moreover, most of Australia’s infrastructural facilities are situated in coastal cities that are prone to sea level rises and floods (OECD, 2017).
High household indebtedness
A majority of Australia’s population services loans are taken due to the low-interest rates. According to Singh and Barnes (2018), the country’s indebtedness stood at 188.5% of disposable household income in 2017, attributed to high rental expenditure in major metropolises. As a result, spending on items such as cars is likely to be constrained, affecting foreign direct investments that are channeled to the automotive sector.
Conclusion
From the assessment, Australia is an attractive location for automobile firms. Its strong economic fundamentals (high GDP growth, disposable income, and rising demand for new cars), skilled labor, R&D capabilities, and strategic location make it an ideal country for establishing Keystone’s new headquarters. It is a gateway to the fast-growing Asian markets. Further, following the exit of top automakers, market opportunities exist in the HCV segment, an adaptation of imported cars to local conditions, and vertical integration with auto-component suppliers based in Australia. The recommended mode of entry is a merger and acquisition (M&A) solution, which will help cut labor costs, spread taxation risks, and capitalize on existing R&D capabilities in the country.
References
Australian Trade and Investment Commission [Austrade]. (2018). Why Australia: Benchmark report 2018. Adelaide, Australia: Austrade.
BMI Research. (2018). Australia: Autos report. London, UK: BMI Research.
Organization for Economic Co-operation and Development [OECD]. (2017). OECD economic surveys: Australia. Paris, France: OECD Publishing.
Organization for Economic Co-operation and Development [OECD]. (2018). Australia: Selected indicators for Australia. Web.
Singh, A., & Barnes, A. (2018). Country reports – Australia. London, UK: IHS Markit.
Stanwick, J., Circelli, M., & Lu, T. (2015). The end of car manufacturing in Australia: What is the role of training? Adelaide, Australia: National Centre for Vocational Education Research.
Weernink, M. (2014). Country report: Australia. Web.