Toyota Motor Corporation Australia - Submission to the Automotive Industry Review 14 May 2008
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Toyota Motor Corporation
Australia
Submission to the Automotive
Industry Review
14 May 2008
1Contents
Executive Summary 4
1 Introduction 8
2 Toyota in Australia 10
2.1 Background 10
2.2 Vision 13
2.3 Delivering on commitments; meeting past aspirations14
2.4 Future aspirations 15
3 Operating environment 2002-2007 16
3.1 Overview 16
3.2 Declining local market share 17
3.3 Exports 20
3.4 Erosion of ACIS support 21
3.5 Treatment of Domestic and Export vehicles
under ACIS 22
4 Environmental considerations 23
4.1 Heightened concern for the environment 23
4.2 Toyota Motor Corporation’s actions 24
4.3 Toyota Australia’s actions 25
4.4 Fuel Considerations 26
5 Toyota Australia’s challenges and actions 27
5.1 Changed operating environment 27
5.2 Challenges 27
5.3 Addressing the challenges 29
6 Analysis of current policy settings 33
6.1 ACIS 33
6.2 Tariff policy 34
6.3 Innovation Policy 35
26.4 Payroll Tax 35
6.5 Luxury Car Tax 36
6.6 Stamp Duties 36
6.7 Fringe Benefits Tax 36
7 Required future policy settings 37
7.1 Guiding principles 37
7.2 Future policies for consideration 38
8 Summary of requests 45
3Executive Summary
Introduction
The Australian automotive industry is at the crossroads.
The 2008 Automotive Industry Policy review presents a significant - and arguably a unique –
opportunity for the Federal Government to secure a strong future for the Australian
automotive industry through the implementation of effective industry policy.
This submission outlines Toyota Australia’s vision for future automotive industry policy. It
places significant emphasis on existing legislated settings for mechanisms such as ACIS and
tariffs.
However, Toyota Australia has taken a view beyond these policy settings by advocating
strong support for the automotive components sector to allow it to improve its global
competitiveness and financial security. This submission also recommends consideration of
issues around people and skills development, innovation, trade policy, environment and
harmonisation of Australian vehicle regulations.
Toyota Australia proposes that securing a long term future for the Australian automotive
industry will be built on a three-way partnership involving car manufacturers, the component
supply sector and the Federal and State Governments.
Through this strong partnership, the Australian automotive industry will be in a position to
transition to future competitiveness in a strong exchange rate and carbon constrained
economy.
Background
The 2002 Review of Automotive Assistance set out a decade long period of policy certainty
for the industry to facilitate its transition to a globally competitive sector.
However, the local and global operating environment has changed considerably since the
2002 review including:
• A strengthening exchange rate;
• Rising oil prices and the associated impact on petrol prices; and
• Reduced market share of locally produced vehicles.
The Australian automotive industry has no control over these factors, but they significantly
affect the global competitiveness of the local industry. It is timely to review current policy
settings in order to ensure the long term future of the industry in Australia.
The Australian automotive industry can achieve both operational stability & certainty and
global integration & innovation bringing significant benefits to the Australian community.
4Strong Domestic Sales Leading Innovator
Strong Exports Globally Integrated Supply
Chain
Increased LM Share of Total Future
market Automotive Global Best Practice Supply
Chain
Skilled workforce Industry
Lean & efficient
Harmony with Environment manufacturing
Operational Stability & Certainty Global Integration & Innovation
Challenge
In addition to the issues affecting the industry more broadly, Toyota Australia is facing a
number of other challenges. These include:
• Competition for investment from within the Toyota group;
• The desire of Toyota affiliates to access export markets to fully utilise plant and
equipment;
• Global benchmarking and efficiency performance;
• Profitability squeeze due to export revenue drop (caused by appreciation of A$ to US$
exchange rate); and
• Reduced supplier competitiveness in the current operating environment at current
exchange rates.
Toyota Australia has taken action since 2002 to address the challenges it faces including
spending more than $1 billion in investments aimed at cost and efficiency improvements;
considerable investment in improving staff skills and a company wide initiative aimed at
reducing costs and improve profitability.
Toyota Australia is also continuing to work towards Jiritsuka (self reliance), a manufacturing
program focussing on achieving self-sufficiency by 2011.
Aspiration
As Toyota Australia continues to work towards improving its global competitiveness, it has
set the following headline aspirations:
5• Produce the next model Camry/Aurion
• Invest in related tooling to support these aspirations
• Achieve Jiritsuka status (self reliance)
• Manufacture 200,000 vehicles per annum
• Achieve a balanced business with 50% of locally made cars sold in Australia and 50%
sold into export markets
• Total Australian sales (locally produced and imported cars) of 300,000 units per annum.
Request
Future government policy will be critical to assist the
automotive industry to competitively reposition itself and to
compete for global investment dollars Government
Toyota is seeking a partnership between suppliers,
government and vehicle producers to ensure a strong
industry and has identified critical policy areas as:
• ACIS Suppliers Vehicle
• tariff Producers
• supplier development focus
Other important areas which impact the industry include
environment, people, innovation, FTA’s, regulation, government purchasing and taxation.
ACIS
• Strengthen current ACIS (do not reduce from 2011) and remove modulation
• Maintain funding levels irrespective of tariff changes
• Pending modulation removal; increase ACIS support for export vehicles to match
treatment of domestic vehicles
• Provide some protection against exchange rate fluctuations
Tariff
• Toyota is a supporter of free trade. However, based on the current level of global cost
competitiveness of the Australian automotive industry, we recommend that the minimum
tariff should be at least 10%, subject to any changes resulting from the WTO Doha
round.
Suppliers
• Expand financial support of supplier development program to $20-$30 million per year
(includes ASEA, C21 and individual MVP programs)
• Immediate support of Stage 3 of ASEA
6• Improve the ability of suppliers to access capital, consolidate operations, develop global
affiliations and reinvest.
Green Car Fund
• Consider adequacy of 1:3 funding formula for Green Car Fund
• Involve industry in developing program guidelines
• Support should benefit local manufacturing
People
• Further support to attract and train people.
Innovation
• Adopt a wide definition of innovation.
FTAs
• FTA negotiations should not result in lowering of Australian tariffs ahead of WTO.
• Encourage the Federal Government to conclude the GCC FTA as soon as possible
Regulation
• Maintain one national system of vehicle regulation (ADR)
Government Purchasing
• Continue strong support for locally manufactured vehicles.
Taxation
• Abolish payroll tax.
• Abolish luxury car tax (or exempt hybrid vehicles as a minimum)
• Nationally standardise stamp duties.
These and other requests are addressed in detail in Section 7 (and summarised in Section 8)
of this submission.
71 Introduction
The Australian automotive industry is facing challenges that were not anticipated in the 2002
review. The competitiveness of the car manufacturers and component suppliers has been
reduced in both the local market and export markets. The increase in the value of the
Australian dollar, the reduction of the automotive tariff in 2005, the unequal access
arrangements resulting from some Free Trade Agreements and the shift from large family
sized cars to small cars and SUVs have all acted to reduce industry competitiveness.
The automotive industry remains a significant sector in Australia. It is the largest complex
manufacturing industry of any scale in Australia, accounting for over $5.08 billion in exports
in 20071 and over 67,000 jobs in 2005/062. The automotive industry is important in
developing a highly skilled, efficient workforce, and provides spill over benefits to other
industries and sectors.
Investment in the automotive industry is keenly sought by many industrialised and emerging
nations as the industry is seen as an important step on the path to higher incomes and high
quality jobs. It is also the channel by which many new technologies, supply chain
management systems and business models enter the Australian economy. The Australian
automotive industry invested over $650 million in research and development in 2005/063.
As well, the greater concerns about climate change and the emission of greenhouse gases
means that major new investments will be needed if the industry is to remain viable in a
carbon constrained future.
Without a strong, decisive and supportive automotive industry policy Toyota Australia’s
production operations in Australia are at risk. The loss of Toyota production in Australia
would remove 45% of local production volume, eliminate Toyota’s $2.5 billion annual
manufacturing related spend, see the loss of $1.7 billion of vehicle exports and threaten the
future of the entire Australian automotive industry.
With the right policy settings, and the ongoing efforts of the car manufacturers and
component producers to improve their performance to world standards, Toyota Australia
believes that there is a very real opportunity for Australia’s automotive industry to be
globally competitive and integrated.
The value proposition the automotive industry offers is excellent and Toyota Australia is
seeking a partnership with both the government and the component industry to ensure the
Australian community reaps the benefits of being a member of one of the most significant
and technically advanced consumer business sectors.
The structure of this Toyota Australia submission is as follows:
• Section 2 provides background to Toyota’s operations in Australia and the required
conditions for investment in Australia’s automotive industry.
• Section 3 describes how the operating environment has changed since the 2002 review.
1
Department of Innovation, Industry, Science and Research, available at
www.innovation.gov.au/Industry/Automotive/Pages/AutomotiveIndustry.aspx accessed 18 March
2008
2
Department of Innovation, Industry, Science and Research, Key Automotive Statistics 2006, p37
3
Department of Innovation, Industry, Science and Research, Key Automotive Statistics 2006, p40
8• Section 4 discusses the heightened concern for the environment, the important role that
the automotive industry will play, and the actions of Toyota Australia and Toyota Motor
Corporation.
• Section 5 outlines the challenges that Toyota Australia faces, and the actions it is taking
to meet these challenges.
• Section 6 analyses the current policy settings.
• Section 7 sets out Toyota Australia’s ideas for required future policy settings.
• Section 8 summarises Toyota Australia’s requests.
9Toyota in Australia
2 Toyota in Australia
• Toyota has been manufacturing in Australia since 1963 and is a
significant contributor to the Australian automotive industry
• Toyota’s global philosophy is to manufacture quality vehicles at
competitive cost levels where there is demand, taking a long term
view and investing in local communities
• A sustainable automotive industry is achievable in Australia
(operational stability and certainty, global integration and
innovation are required)
• Toyota Australia has significant aspirations for the Australian
operations; but future Government policy will have a significant
role in deciding whether future investment occurs.
2.1 Background
Toyota Australia is currently one of three car manufacturers in the Australian automotive
industry. At its Altona plant, Toyota Australia builds both the Camry and the Aurion models.
Some of the earliest Toyota cars made outside Japan were manufactured in Toyota
Australia’s Port Melbourne plant in April 1963. The manufacture of car engines in Australia
began in 1978.
Over three decades, Toyota Australia built up its manufacturing operations in Australia until,
by the early 1990s, it had become one of the leading car manufacturers. Refer Figure 1 for
chart showing models manufactured by Toyota in Australia.
Figure 1: Models manufactured by Toyota in Australia
Year Æ 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
ModelÈ
Tiara
Corona
Crown
Corolla
Camry
Apollo
Nova
Avalon
Aurion
Volume
.5 M 1M 1.5 M 2M 2.5M
(cum)
Toyota decided in the early 1990s to consolidate its vehicle production to a single, new car
manufacturing facility in Altona. This investment brought significant new efficiencies for
local production through a purpose-designed plant equipped with the latest production
10Toyota in Australia
facilities. The new plant was opened in 1994 and represented an investment of about A$400
million. Originally the plant produced the Camry and Corolla models.
Toyota Australia subsequently stopped producing the Corolla and focused primarily on
making the Camry. Later the 6 cylinder Avalon was also made at Altona to tap into the
significant market demand that existed for 6 cylinder vehicles in Australia. The Avalon was
replaced by another 6 cylinder Camry derived vehicle, the Aurion.
The Camry is one of Toyota’s global cars which is manufactured in nine locations around the
world including: Australia, Japan, the United States (2), China, Taiwan, Vietnam, Russia and
Thailand.
The Altona plant had an original capacity of 80,000 to 100,000 units per year. With
investment and efficiency improvements this has been increased with production of around
149,000 units in 2007. As shown in Figure 2, Toyota accounted for around 45% of all local
production in 2007.
Figure 2: Local production volume split 2007
45%
55%
Toyota Ford+GMH+Mitsu
In addition Toyota Australia is a significant local employer with approximately 4,500 staff
across its manufacturing site in Altona, Head Office in Port Melbourne, Sales and Marketing
operation in Sydney and sales and distribution centres in all mainland states.
As the largest elaborately transformed manufacturing sector in Australia the automotive
industry has a significant positive impact on the Australian economy. Toyota Australia alone
expects to spend around $2.5 billion in 2008/09 in respect of its local manufacturing
operations.
Additionally, significant capital expenditure also occurs, which means that state of the art
technology and know-how becomes dispersed through the Australian economy. The level of
further investment desired by Toyota Australia to 2012/13 (subject to approval) to meet its
aspirations is around $1billion.
11Toyota in Australia
The automotive industry is also a significant exporter and is the only elaborately transformed
manufacturer4 in the top 10 list of exports (ie others were resources, agriculture etc). Toyota
Australia originally produced Camry for the Australian market but in 1996 commenced
exports of the Camry to the Middle East. Since then Camry exports have grown faster than
local sales. Refer Figure 3 below showing the relative proportions of domestic and export
sales of locally made vehicles.
Figure 3: Relative proportions of domestic and export sales
100.0%
90.0%
Total Export Total Domestic
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
In 2007 around 98,000 Camry’s and Aurion’s were exported worth around A$1.7 billion in
revenue. In order to achieve and grow export sales, world class standards of quality and
finish had to be achieved (particularly to meet the extremely demanding operating and
customer requirements of Toyota Australia’s primary export markets in the Middle East).
To support this growth in production and exports Toyota Australia has invested over A$1
billion in plant and equipment, including the introduction of new models, since 2002. In
addition Toyota Australia has a strong commitment to partnering with its suppliers to assist
them to reach world class levels of performance in terms of quality and productivity.
As well as making cars in Australia, Toyota Australia also markets the complete range of
Toyota vehicles and sold 237,000 in 2007, maintaining Toyota’s market leadership in
Australia.
Globally the Toyota group now has 53 vehicle plants in over 20 countries, and is planning to
build new plants due to its growth. Toyota operates on a globally integrated basis and Toyota
Australia faces intense internal competition for investment and production contracts.
Toyota continues to see Australia as an important market and a location with a significant
manufacturing and engineering capability. But in order to remain viable it is essential that
Australia’s industry is supported by strong industry policy.
4
ABS- basic premise of this classification is that each manufactured product reaching the point of sale
will have been subjected to one or more processes beginning at a raw material state and passing
through a range of manufacturing processes and intermediate products to become a final end use
product. The number and complexity of such processes determine the category for degree of
transformation to which that product is classified. The concept of degree of transformation is also
related to the concept of value adding.
12Toyota in Australia
Toyota Technical Centre Asia Pacific
The Toyota Technical Centre Asia Pacific was formed in 2003. It was designed to be the
Australian advanced research and design engineering facility in Toyota’s new global
Technical Centre network. Two of the five centres are in Asia Pacific – Melbourne and
Bangkok.
2.2 Vision
Toyota’s global vision and philosophy is to:
• Manufacture quality cars at competitive cost levels where there is demand
• Approach localised production with a long-term view of the market and operations.
• Invest in local economies & contribute to communities (“Prosper together”)
“Open the Frontiers of Tomorrow”
3 Sustainable Concepts to Contribute to the Society of the Future
Striving to realize Making the manufacturing People, society and the
sustainable mobility location and processes earth. Things we can do to
sustainable exist in harmony
In turn, Toyota Australia believes that a strong, sustainable automotive industry can be
achieved in Australia and will bring significant benefits to the Australian community. A
sustainable Australian automotive industry will be centred on achieving operational stability
and certainty, whilst at the same time being an innovative and globally integrated industry.
This is illustrated in Figure 4.
13Toyota in Australia
Figure 4: Toyota’s vision for a sustainable automotive industry in Australia
Strong Domestic Sales Leading Innovator
Strong Exports Globally Integrated Supply
Chain
Increased LM Share of Total Future
market Automotive Global Best Practice Supply
Chain
Skilled workforce Industry
Lean & efficient
Harmony with Environment manufacturing
Operational Stability & Certainty Global Integration & Innovation
This vision is based on Australia being home to three globally competitive vehicle producers
which are used as global benchmarks by their parent companies and which are leading
innovators in technology, production systems, management techniques and socially
responsible business practices.
2.3 Delivering on commitments; meeting past
aspirations
Toyota Australia’s aspiration is to gradually build up the scale of production at its Altona
plant through a mix of sales in the local market and expanded exports.
In its submission to the 2002 automotive review, Toyota Australia expressed its aspirations
for the 2005-07 years to:
• Expand production to 150,000;
• Increase export sales to 75,000; and
• Achieve domestic sales of 75,000.
Although the overall production level achieved in 2007 was very close to aspiration (149,000
units produced in 2007) the mix was significantly in favour of exports as competition from
imported vehicles reduced sales of locally manufactured vehicles.
To meet these aspirations, Toyota Australia has made considerable investments in its Altona
plant since 2002. There has also been a significant focus on efficiency though the application
of the Toyota Production System and the philosophy of continuous improvement. Achieving
world class standards of quality and productivity are the company’s aim.
Further, Toyota Australia indicated that it intended to continue with its successful
partnership model to develop the Australia component supplier base. This commitment has
been met through the C21 program and the ASEA program, as well as Toyota Australia’s
own high intensity supplier development program.
14Toyota in Australia
2.4 Future aspirations
Toyota Australia aspires to become a strategically important element of Toyota Motor
Corporation’s global supply chain and to be “Australia’s most respected and admired
company”. Summaries of the company’s headline and other aspirations are provided below.
2.4.1 Headline aspirations
Toyota Australia has the following aspirations:
Manufacturing • Produce the next model Camry/Aurion
• Invest in related tooling to support these aspirations
• Achieve Jiritsuka status (self reliance)
• Manufacture 200,000 vehicles per annum (requiring increased local
sales of Australian made vehicles as a strong domestic base is a pre-
requisite to expanded production, especially with a strong Australian
dollar)
Sales • A balanced business with 50% of locally made cars sold in Australia
and 50% sold into export markets
• Total Australian sales (locally produced and imported cars) of 300,000
units per annum
2.4.2 Other Aspirations
Toyota Australia also has a number of other aspirations, which will contribute to its overall
aspirations. These include:
• Continue to strengthen partnership with suppliers (recognising the importance of a
healthy component supplier base to the automotive industry and its own operations,
Toyota Australia plans to continue its efforts to assist supplier development)
• Developing a highly skilled, world class, workforce
• Establishing a reputation as an employer of choice
• Be a leading company in terms of environmental performance
• Be a leading contributor to the Australian community
• Be a leading performer on customer service
• Produce the best quality Camry in the Toyota group
• Develop strong partnerships with State and Federal Governments
• Work with Toyota Motor Corporation in developing world leading innovation in process
and product.
15Operating environment 2002-2007
3 Operating environment
2002-2007
• Cost of production, exchange rates, tariff reduction and oil prices
have all impacted on local manufacturing to an extent that was not
envisaged at the time of the last automotive industry review
• Notwithstanding the above, the benefit of ACIS has eroded
primarily due to the extent of modulation
• Transition to deal with the changes in the operating environment is
more costly and likely to be over a longer period than was
envisaged at the time of the last automotive industry review
3.1 Overview
The Australian automotive market has evolved in a manner that was not expected at the time
of the 2002 review. Expectations at that time were for strong domestic market opportunities
for local manufacturers, a stable exchange rate and oil price and opportunities for growth in
export markets. Significant factors that have changed from 2002 to 2007 include:
• Exchange rate appreciation
• Market segmentation (reflecting changes in consumer preferences and fuel prices)
• Commercial pressures impacting manufacturing operations
• Tariff levels
• Increased environmental focus.
Table 1 presents an overview of both Toyota Australia’s performance and general operating
environment changes over this period.
Table 1: Overview - Toyota Australia’s performance and operating environment 2002-2007
2002 2007 % Change
Production volume 87,000 149,000 71%
Export volume 49,000 98,000 100%
Export revenue $1.1 bil $1.7 bil 55%
Locally made vehicles as % of total sales 30% 20% -33%
No. of employees ~4,100 ~4,500 10%
Wage cost $290 mil $441 mil 52%
Oil price (US$ per barrel) $25 $115 360%
There have been a number of significant changes in the Australian automotive market and
general economic conditions since 2002 that have placed the domestic automotive
manufacturing industry under significant pressure and threaten the advances that the industry
has made.
16Operating environment 2002-2007
3.2 Declining local market share
Significant changes in consumer preferences over the period 2002-2007 have resulted in the
market share of local manufacturers declining. Some factors that have influenced this shift
are:
• Strengthening exchange rate;
• Reduction in the tariff rate;
• Rising oil prices; and
• Trade policy.
These have increased the attractiveness of imported vehicles when compared to domestically
produced vehicles and eroded the market share of locally produced vehicles (from 30 per
cent of the Australian market in 2002 to 19.6 per cent in 2007 and 16.3 per cent for year to
date March 2008). The absolute number of locally manufactured vehicles sold in Australia
has also experienced a decline from its high of 287,158 vehicles in 2003 to 200,485 in 2007.5
In particular there has been a significant shift towards smaller vehicles particularly in the
period since 2004, which has almost entirely been at the expense of large vehicles, as
illustrated in Figure 1.
Figure 1: Percentage of total market by vehicle segment
40%
35%
30%
25%
20% 2004
2007
15%
10%
5%
0%
Light - small Medium Large SUV
3.2.1 Strengthening exchange rate
Since the 2002 review, the Australian dollar has appreciated by over 60 per cent against the
United States dollar and by over 50 per cent against the Japanese Yen6 – a result of the
unprecedented level of demand for Australian resource commodities, as illustrated in Figure
2.
5
Federal Chamber of Automotive Industries, VFACTS Database, and former Department of Industry
Tourism and Resources, 2006, Key Automotive Statistics 2005
6
ABS, Jan 2008, International Trade in Goods and Services, cat. no. 5368.0
17Operating environment 2002-2007
Figure 2: Appreciation of Australian dollar against major currencies
1.0
United States Dollar
Japanese Yen/100
0.9
Australian dollar buys
0.8
0.7
0.6
0.5
2002 2003 2004 2005 2006 2007 2008
Year YTD
Source: Australian Bureau of Statistics, International Trade in Goods and Services, Australia, cat. no. 5368.0.
The net effect of the appreciation of the Australian dollar adversely impacts the local motor
vehicle producers, and components suppliers, in both the domestic market as well as export
markets (refer to section 3.3).
3.2.2 Reduction in the tariff rate
The tariff rate has been falling since the 1980’s. The falling tariff has provided greater access
to the Australian market for importers, providing consumers with greater choice. However, it
has also meant that all of the growth in the overall market has been captured by importers, as
illustrated in Figure 3. This increased access has made the Australian automotive market one
of the most competitive in the world.
Figure 3: Tariff rate and the locally manufactured market share
60%
Locally produced Tariff
market share rate
Local market share/Tariff
50%
40%
30%
20%
10%
0%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
Year
3.2.3 Rising oil prices
Since 2002 the price of oil has more than quadrupled, from US$25 per barrel to US$115 per
barrel. Australia has, to a degree, been shielded from these increases through the
18Operating environment 2002-2007
appreciation in the exchange rate, but there has still been a significant increase in the price of
petrol in Australia since 2004 contributing to a move away from large cars manufactured in
Australia.
Figure 4: Oil price increases
140
120
Oil price
US$ per barrel
100
80
60
40
20
0
2002 2003 2004 2005 2006 2007 2008
(ytd)
3.2.4 Trade policy
Two key areas of trade policy for the automotive industry are tariffs and free trade
agreements.
As Australia’s largest importer of vehicles, Toyota Australia is generally supportive of free
trade. However, this support must be balanced by the fact that local manufacturing is
impacted significantly by tariffs and free trade arrangements, particularly where Australia
acts unilaterally ahead of international commitments on tariff reductions and our trading
partners have resisted reducing their automotive tariffs.
As a significant importer, Toyota Australia has benefited through vehicles and parts
imported under FTA’s. However such gains must be weighed up against the competitive
disadvantages to the local manufacturing operations arising from Australia acting
unilaterally and ahead of international commitments.
3.2.5 Other factors influencing the declining local market share
Purchasing practices of both the government and corporate sector have also played a role in
the declining market share of locally produced vehicles. Traditionally, one way in which
governments could continue to support the local automotive industry was through purchasing
locally manufactured vehicles for their fleets rather than imported vehicles.
As community concern over climate change has increased, Governments at Federal, State
and Territory level as well as the business community have sought ways in which to
minimise their climate impact. As a result, purchasing policies have shifted in some
jurisdictions towards favouring smaller engined vehicles. Toyota, as the only local
manufacturer of 4 cylinder vehicles, has benefited from this.
In addition, where once government and business maintained a vehicle fleet, providing only
a narrow range of vehicles to choose from (in order to simplify fleet management), user-
chooser arrangements have meant that the responsibility for vehicle selection has been
passed to individual employees, who now have access to the full range of vehicles – both
domestic and imports - available in the Australian market.
19Operating environment 2002-2007
3.3 Exports
3.3.1 Growth in exports
In the mid 1990’s Toyota Australia began Camry export to the states of the Gulf Co-
operative Council (GCC).
Toyota Australia has made significant exports over the past ten years, as illustrated in Figure
5. Since 2002, export volumes have almost doubled, with significant growth in 2006 and
2007.
Figure 5: Toyota Australia export volume
100,000
80,000
60,000
40,000
20,000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
The growth in export volume over the past few years has helped to offset the declining sales
of locally produced vehicles in the Australian market.
3.3.2 Declining export margins
Even though export volumes are increasing, the pegging of Middle Eastern currencies to the
United States dollar has meant that the Australian dollar has significantly appreciated against
the currencies of key motor vehicle export markets in this region. This in turn has had
financial implications for Toyota Australia.
3.3.3 Export market competitiveness
The GCC provides one of the few large automotive markets in the world that does not have
its own auto manufacturing sector and this makes it a desirable (and therefore highly
competitive) market. Increasing competitiveness means that price and specification levels
are important. Figure 6 below indicates how recent competitor product releases have
impacted Camry market share in the region. Consequently it is not possible for Toyota
Australia to substantially increase retail prices to recoup exchange losses in export revenue.
20Operating environment 2002-2007
3.4 Erosion of ACIS support
The two primary ways in which ACIS support has been eroded are through the impact of
exchange rates on export vehicle values (affecting Toyota in particular due to its high
proportion of exported vehicles) and modulation (ie reduction of ACIS paid to keep
outgoings within funding cap).
ACIS support for Toyota’s export vehicles has dropped significantly as the ACIS formula is
applied to wholesale value that is much reduced by the appreciation of the $AUD.
This problem is compounded by the extent of modulation. When initially developed, there
was no expectation that modulation of ACIS would be required, however, modulation started
to occur almost immediately, and is currently at 63 per cent for motor vehicle producers (ie
for each $1 ACIS entitlement calculated, only 63c is paid due to the capping of the scheme).
This has meant that, independently of other factors affecting the transition of the auto
industry, the industry assistance intended to be provided has been substantially under-
funded.
The extent of modulation has been quite dramatic and is evident in Figures 7 and 8 below
(Stage 1 and 2 respectively).
21Operating environment 2002-2007
Figure 6: ACIS Stage 1 Modulation Rates
Modulation Rate 1
0.9
0.8
0.7 Production
0.6 Investment
0.5
0.4
0.3
20 Q 1
20 Q 3
20 Q 1
20 Q 3
20 Q 1
20 Q 3
20 Q 1
20 Q 3
20 Q 1
3
Q
01
02
04
01
02
03
03
04
05
05
20
Year/Quarter
Figure 7: ACIS Stage 2 Modulation Rates
0.72
Modulation Rate
0.7
0.68
MVP's
0.66
Suppliers
0.64
0.62
0.6
20 1
20 2
20 3
20 4
20 1
20 2
20 3
20 4
1
Q
Q
Q
Q
Q
Q
Q
Q
Q
06
06
06
06
07
07
07
07
08
20
Year/Quarter
3.5 Treatment of Domestic and Export vehicles
under ACIS
The current ACIS calculations arguably discriminate against export vehicles in that the 25%
allowance is fully modulated (whilst for domestic vehicles only 10% is modulated).
Toyota Australia considers that, pending removal of modulation, support for export vehicles
should be increased to match the treatment of domestic vehicles.
22Environmental considerations
4 Environmental
considerations
• The automotive industry must transition to a carbon constrained
world at a faster rate than was contemplated at the time of the last
industry review
• Toyota (globally) is acting on its Earth Charter through an
Environment Action Plan and is taking significant actions to
reduce its environmental footprint
• There is a variety of State and Federal reporting requirements
which are duplicated and non-aligned and pose a significant
administrative and cost burden
• Breakthrough efficiency in production and waste reduction should
be recognised and supported
4.1 Heightened concern for the environment
In addition to the increased cost associated with the transition to a globally competitive
industry, the Australian (and global) automotive industries will also need to transition to a
carbon constrained world.
The European Union, Japan and the United States have established CO2 emission targets, or
mechanisms that are akin to this (such as a fuel economy standard) to manage the impacts of
automotive manufacture and/or vehicle use on climate change.
In the EU a target of an average emission of 120 grams of CO2 per kilometre will apply
across the new passenger car fleet by 2012. In addition, the EU has also implemented a ‘Cap
and Trade’ Emission Trading Scheme, which captures the manufacturing operations of the
automotive industry and currently imposes a cost of €25 per ton of CO2 emitted.
The US has adopted a Corporate Average Fuel Economy standard, which requires
manufacturers to individually meet the current criteria of 27.5 miles per gallon for passenger
cars7 (~203 grams of CO2 per kilometre)8.
In Australia, the industry has established a voluntary code that set a target of 222 grams of
CO2 per kilometre by 2010 for cars and light trucks. While the industry is on track to meet
this target well ahead of time, this may largely be a result of shifts in consumer preferences
in favour of smaller cars. This scheme will be supplemented by the Federal Governments
proposed Emission Trading Scheme from 2010, which will apply to major sources of C02
emissions such as fuel and energy use, thereby impacting on automotive manufacturing and
automotive use.
7
U.S. Department of Transportation, 2008, Revised Summary of Fuel Economy Performance
8
Note that many vehicles that may be considered passenger vehicles, such as SUVs, are considered
light trucks and therefore face a different CAFE standard.
23Environmental considerations
A comparison of emission standards by the PEW Centre on Global Climate Change shows
that the EU and Japan have the most stringent greenhouse gas emissions standards, while the
US has the least stringent.9
In order to successfully transition to a carbon constrained world, the automotive industry will
require significant new investment in the development of new product technologies as well
as production and manufacturing operations.
4.2 Toyota Motor Corporation’s actions
Toyota Motor Corporation has taken significant steps towards transitioning to a carbon
constrained world. The Toyota Earth Charter and the Toyota Environmental Action Plan are
the internal environmental policies that are focused on reducing Toyota’s impact on the
environment, focusing on:
• Energy and global warming;
• Recycling of resources;
• Substances of concern;
• Atmospheric quality; and
• Environmental Management
The Toyota Earth Charter is predicated on the following four aspects:
1. Zero emissions
A contribution to a prosperous 21st century society while aiming for growth that is in
harmony with the environment and the achievement of zero emissions.
2. Environment and the economy
The pursuit of all possible technologies that will enable the environment and the
economy to coexist harmoniously.
3. Environmental improvement
The development of a voluntary plan of continuous environmental improvement.
4. Environmental preservation
The building of close and co-operative relationships with individuals and
organisations involved in environmental preservation.
Toyota Motor Corporation has invested heavily in the development of new vehicle
technologies and manufacturing processes to reduce emissions and achieve greater overall
environmental sustainability.
Toyota’s leading position in hybrid power trains and associated technologies (such as
regenerative braking) is perhaps its most recognised investment in “clean” vehicle
technologies. It has also invested in aerodynamics, new fabrication materials (e.g. alloy
engines, bio-plastics), re-design of other systems to reduce weight (such as transmission
systems), computer technologies and software and alternative fuelled vehicles, all of which
reduce emission levels.
9
Pew Centre of Global Climate Change, 2004, Comparison of Passenger Vehicle Fuel Economy and
GHG Emission Standards Around the World
24Environmental considerations
4.3 Toyota Australia’s actions
Consistent with Toyota Motor Corporation’s environmental policies, Toyota Australia has
been taking action to reduce its environmental footprint.
Toyota Australia’s Environment Plan has set targets for reducing the environmental footprint
of its operations.
Strong performance to date has been achieved against the targets. Toyota Australia had
aimed to reduce CO2 emissions from the manufacture of each vehicle by 13 per cent by
2010/11, but a 22 per cent reduction has already been achieved.
Similarly, water consumption per vehicle manufactured has been reduced by 31 per cent,
already having exceeded the target of a 25 per cent reduction by 2010/11, while waste
generated per vehicle has been reduced by 36 per cent.
Toyota Australia is resetting the targets in order to continue to reduce its environmental
impact.
Some of the initiatives which have contributed to the improved performance include:
• Implementation of innovative water based painting technology to reduce energy and
solvent use;
• Installation of a Regenerative Thermal Oxidiser to provide world class emission
management, and
• Increased use of returnable stillages to reduce and minimise packaging materials and
associated logistics CO2 emissions.
Not only has Toyota Australia been working to improve its manufacturing environmental
performance, it has also been working in the non-production areas of the organisation
through programs with external stakeholders including its dealers and its supplier base.
This includes:
• A Supplier Environmental Management Policy, focusing on the implementation of
Environmental Management Systems and the inclusion of ‘Green Purchasing’
requirements;
• The Dealer Environmental Risk Audit Program, which seeks to identify and
countermeasure areas of Environmental risk within the Dealer network as well as sharing
‘Best Practice Case studies’; and
• Involvement with environmental stewardship and volunteering programs, including a
partnership with Conservation Volunteers Australia.
The environmental impacts of Toyota Australia’s operations are subject to rigorous internal
and external reporting requirements and verification.
In particular the increased requirements from a variety of State and Federal governments
now present some duplication of requirements, often with non-aligned reporting tools
including amongst others:
• The Energy Efficiency Opportunities program (EEO);
• The National Greenhouse Emission Reporting Scheme (NGER);
• The Greenhouse Challenge+ program;
• The National Pollutant Inventory (NPI);
• The Victorian State Government Energy and Resource Efficiency Plans (EREP); and
25Environmental considerations
• The Victorian State WaterMAP program.
The number of reporting requirements places an unnecessary burden on the automotive
industry and a streamlining is highly desirable. Meanwhile, Toyota Australia is proud to
continue to report on its ongoing environmental performance and improvement, as well as its
challenges, through its annual Sustainability Report.
Toyota Australia is also committed to continuing to pursue environmental improvements in
all areas of its business and is looking forward to improved clarity and direction from policy
makers to allow for the planning and implementation of long term business strategies. This
holds true especially with respect to medium and long term CO2 emission targets.
In addition, Australian industry must continue to look beyond the impact of its finished
goods and reduce the impact of production on the environment. A partnership with
government through programs and/or funding to support breakthrough production
efficiencies and waste reduction will improve the industry’s ability to make this transition.
4.4 Fuel Considerations
Fuel quality is a prime enabler for the uptake of advanced engine technology to reduce
exhaust emissions and fuel consumption.
Sulphur in Australia is currently at 50ppm (maximum) for 'Premium ULP' (95 RON min),
but will remain at 150ppm (maximum) indefinitely for 'Regular ULP' (91 RON min). For
Australia to achieve significant additional CO2 emission reductions from vehicles it is
essential that Australian motorists have access to fuel with sulphur content of 10ppm
(maximum). Without these changes to fuel standards in Australia vehicle retailers and
producers will be unable to make the latest Ultra Lean Burn engines available in Australian
vehicles.
26Toyota Australia’s challenges and actions
5 Toyota Australia’s
challenges and actions
• The challenges facing the automotive industry today are greater
than envisaged at the time of the 2002 automotive review,
necessitating a review of the extent and timing of transition for local
manufacturers
• Toyota Australia faces considerable internal and external
challenges and has undertaken (and is continuing to undertake)
intensive efforts to respond to the challenges. These efforts have
resulted in a vast range of improvements.
5.1 Changed operating environment
Changes in the operating environment of the local market have meant that local
manufacturers are coming under increasing transitional pressure (as outlined earlier in this
submission). Furthermore, the heightened concern for the environment, particularly around
climate change, is placing another further pressure on the local industry not foreseen when
the 2002 review was conducted.
These local market developments have been against a backdrop of change in the global
automotive industry. Toyota Motor Corporation has experienced significant growth, and has
expanded its global operations. China, India and Thailand have become established as global
hubs of automotive production.
The changes in the local and international automotive industry are presenting many
challenges to Toyota Australia, and it is taking substantial actions to address these challenges
on an ongoing basis.
5.2 Challenges
Toyota is faced with a number of internal and external challenges including:
• Competition for investment from within the Toyota group;
• Excess capacity at affiliates, and their desire to access export markets to fully utilise
their plant and equipment;
• Global benchmarking gaps;
• Efficiency gaps;
• Profitability squeeze due to export revenue drop (impacted by heightened competition in
the export markets and appreciation in A$ to US$ exchange rate);
• Low levels of supplier competitiveness in the current operating environment.
27Toyota Australia’s challenges and actions
5.2.1 Competition for investment
In 2002 Toyota Motor Corporation had 39 overseas manufacturing operations (located in
over 20 countries). Since then, the number of plants has increased to 53.
The global expansion of Toyota Motor Corporation has directly impacted Toyota Australia.
Toyota Australia was one of four subsidiaries producing the Camry model in 2002.
However, the Camry is now produced in nine locations, which has simultaneously reduced
the export opportunities for Toyota Australia and increased the competition to supply export
markets. If Toyota Australia is unable to meet demand in its export markets profitably those
export markets will be seriously threatened by other Camry plants.
Figure 1 provides an overview of Toyota Motor Corporations manufacturing operations, and
Camry production locations. As can be seen, there are a number of Camry production
facilities in the Asia Pacific region.
Figure 1: Toyota global manufacturing operations, and Camry production locations
+ new Russia Camry plant opened Dec 2007
Japan
Australia
China
Thailand
Taiwan
Vietnam
USA (2)
5.2.2 Available capacity at affiliates
A number of Toyota plants in the region, against which Toyota Australia’s performance is
benchmarked, currently have available plant capacity. These affiliates are seeking to expand
production in order to fully utilise assets and improve operating and financial performance.
The challenge at current exchange rates is that these affiliates will be able to offer lower cost
products or higher profit margins, particularly as some currencies are linked to the weak US
dollar and the Japanese yen has also weakened against the Australian dollar. Given that the
most of the GCC export markets also have their currencies tied to the US dollar, the
exchange rate risk would be minimised by sourcing from a location other than Australia.
These affiliate production locations are potential competitors to Toyota Australia when the
decision is made on sourcing the next Camry model.
5.2.3 Efficiency gaps
It should be noted that Toyota Australia is constantly benchmarked against affiliates in terms
of cost, efficiency, safety and other measures. Whilst Toyota Australia is working to achieve
best practice, other Toyota affiliates are also constantly seeking to improve their
competitiveness.
28Toyota Australia’s challenges and actions
Key challenges in Australia are the subject of intense improvement activities. For instance,
Toyota Australia has been working collaboratively with its production employees to improve
the efficiency and reliability of its production plant. Toyota Australia has demonstrated that
it is able to make significant improvements in its operational performance through ongoing
effort and continuous improvement.
5.2.4 Profitability squeeze
Factors affecting profitability are addressed in sections 3 and are not reproduced here.
5.2.5 Supplier challenges
An innovative, capable and cost competitive supplier base is critical to the viability and
global competitiveness of the Australian automotive industry. Toyota Australia’s financial
and operating performance is closely linked to the performance of its suppliers but relative
component cost competitiveness has actually deteriorated between the current and previous
model. The main reasons for higher component costs include exchange rate, high labour
rates, inefficient processes (relative to global best practice), low economies of scale and
insufficient investment in new equipment.
In order for Toyota Australia to be globally competitive its supplier base must also be
globally competitive. Consequently it is important to continue working towards global
integration of the supply chain via local vehicle producers. Improving global integration
requires suppliers to be globally competitive in capability, quality and delivery (CQD) and to
bridge the competitiveness gap between local and global best practice in terms of
management capability, process capability, technical capability and human resource
development.
An additional area that directly affects the local supplier industry is the ability of suppliers to
access capital. In some cases suppliers are struggling because of a lack of finance, resulting
in insufficient investment in new machinery and equipment. Access to capital is critical to
enable supplier investment on an ongoing basis.
The role of Toyota Australia’s suppliers is not unique as the company manufactures a global
product at a (relatively) small volume. However, there is the potential for suppliers to invest
in specific specialised capabilities in areas such as resin, press, welded assemblies and
aluminium engine components (particularly given the local availability of recycled
aluminium). This may enable Australian industry to develop some specialisation in niche
areas but it is important that the industry does not become too specialised as it will increase
the industry’s vulnerability to changes in global production requirements.
5.3 Addressing the challenges
5.3.1 Overview
Since the last industry review, Toyota Australia has undertaken (and is continuing to
undertake) significant and intensive efforts to address these challenges, including:
1. Investing more than $1 billion since 2002 in local manufacturing (including activities
aimed at cost and efficiency improvement such as the consolidation of Toyota Australia
facilities)
2. Human development
3. A company wide ground-up initiative focused on cost saving and export customer
satisfaction
29Toyota Australia’s challenges and actions
4. Continuous supplier development activities.
5. Jiritsuka (‘self reliance’) manufacturing program focussing on achieving self sufficiency
by 2011 resulting in significant advances towards meeting global benchmarks.
Each of the above is addressed in more detail below.
5.3.2 Investing in improvements
More that $1 billion has been invested by Toyota in Australia since 2002, primarily in local
manufacturing operations. Whilst this includes new model related expenditure, it also
includes expenditure on:
• consolidation of the production facilities
• logistics centre improvement
• various production innovation activities.
These improvements have resulted in improvements in areas such as efficiency, quality and
environmental impact.
5.3.3 Human Development
Toyota Australia is investing heavily in people through improving staff skills (refer Toyota
Institute below) and Human Resource Development improvement (team members through to
management).
During 2006 Toyota Australia rolled out the “Toyota Institute Australia” (TIA) to build best
practice learning and development programs through the global and local network and
disseminate them through the following streams:
• Employee development
• Supplier development; and
• Retail development.
Each stream is aimed at providing learning and development opportunities to fulfil the
potential of people and improve company competitiveness.
Employee development encompasses the following:
• Toyota Leaders; to address the development needs of current and future leaders, over
a 3 year period programs will focus on
o Toyota Way in problem-solving
o Toyota Way in planning
o Toyota Way in cost management
• Toyota Operations including
o a Certificate II in Automotive Manufacturing known as Success in
Automotive Manufacturing (SAM) to develop an introductory understanding
of Toyota’s production system, Toyota Way values etc
o Certificate I, IV and Diploma in Business (Frontline Management) for
development of understanding of skills and knowledge necessary to lead
effectively in the workplace by discussing and applying theories and
practices to best manage human resource development, safety, quality,
production and cost
30Toyota Australia’s challenges and actions
• Toyota Professionals;
o Floor management development system designed to provide supervisors
with the necessary skills, knowledge and tools in order to systematically
manage the workplace and develop people.
5.3.4 Team Australia
The Team Australia project was established by the Directors of Toyota Australia in March
2007 to improve the cost competitiveness of the locally produced Camry and Aurion. The
Project is chaired by the President and led by all Directors. The Toyota Technical Centre and
Toyota Japan participate.
Significant improvements have resulted from this Project and the activities are ongoing.
5.3.5 Supplier Development
Toyota Australia has a strong philosophical desire to work in partnership with suppliers for
mutual benefit. Toyota Australia also believes that sourcing components from the domestic
market is an important part of achieving self reliance, as it reduces the exposure to exchange
rate movements and strengthens the Australian community.
Toyota Australia has always had a focus (through its Purchasing Division) on supplier
development through sharing Toyota’s global philosophies on best practice and
manufacturing operations. This was enhanced by the supplier development stream of the
Toyota Institute Australia (focussing on training of supplier members in Toyota Way
fundamentals with an emphasis on the Toyota Production System and assisting some
suppliers to develop and implement Kaizen (continuous improvement) strategies).
In recent times, in order to further build the capability of local suppliers, Toyota Australia
has developed a high intensity supplier development program (additional to existing supplier
development activities) financed under the Supplier Capability Development Program taken
out of ACIS. The program was trialled with ten key suppliers during 2007 and is planned to
be rolled out to a further 30 suppliers.
The overall strategy of the program is focussed on improving the quality, cost and increasing
the ‘added value’ of suppliers. Significant improvements have already been realised and
further (already identified) opportunities are still being pursued.
With many suppliers being financially vulnerable, these programs deliver not only valuable
outcomes to vehicle manufacturers, but also help to ensure the viability of the suppliers
themselves.
Not only has Toyota Australia developed its own intensive supplier development program, it
is also a significant partner in industry wide programs, most notably the ASEA and C21
supplier development projects.
5.3.6 Jiritsuka
In 2006 Toyota Australia established a “roadmap to Jiritsuka”; which is a plan to achieve the
required level of self reliance to not only be viable as a manufacturer, but to be in a position
of regional co-leadership by 2011.
This ‘roadmap’ includes, but is not limited to, aspects already addressed in this submission
including productivity/efficiency, cost reduction and supplier development, but takes a
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