Stuck in a Holden pattern

THERE'S no way of knowing if the government's $275m deal is a lemon.

Mike Devereux

AT the height of the Thatcher era in Britain when the country's manufacturing hit its nadir, if you bought a local vehicle you were haunted by the fear that it was a "Friday afternoon car" - one built when everyone was in a hurry to go home.

You never knew whether you were getting a lemon, because Friday afternoon cars could be churned out any day of the week.

Yesterday's announcement that the federal and state governments would put $275 million into GM Holden secures more than $1 billion of investment by General Motors, its US parent, and guarantees it makes cars in Australia until 2022.

"This is a great day for Australian car-making," Julia Gillard said in Canberra. "It's smart policy to ensure we shape the future, that it's not shaped around us.

"It will be a future of more innovation, of high-skill, high-value manufacturing."

Two models will be made here, as now, but beyond that little is clear. How will the $1.3bn be spent? If you go into a showroom in 2022 will you still be able to buy a Commodore? What about a Cruze, the small car added to Holden's Adelaide assembly line last year? We've been left in the dark. Holden hid behind a veil of commercial confidentiality.

"We're not going to talk about things that are commercially sensitive," said Holden chairman and managing director Mike Devereux yesterday.

"I'm not going to disclose the R&D amounts or the capex."

The result is that Australia has bought a Friday afternoon deal. There's no way of knowing if it's a lemon. Or lemons. Two cars are now an essential part of the formula for local manufacturing and the Cruze, which was originally sold as a Korean import, fits the bill as one of the models to continue.

As a small car, it competes for one in every four vehicle buyers and has hit the ground running, finishing fourth in the sales charts last year. This year it is already outselling the Commodore and will almost certainly finish ahead.

To come top, though, it will have to be more popular than the Mazda 3, a Japanese small car that last year ended the Commodore's 15-year reign as our bestseller.

That was confirmation, as though any were needed, that the writing has been on the wall for large sedans for a long time. In their heyday they accounted for one in three car sales and there was enough demand for all of Australia's carmakers to eat from the same bowl. For Toyota that meant, and still means, the Camry/Aurion and for Ford the Falcon, plus its Territory SUV. But as large car demand shrank, there was no longer enough to keep three plants busy.

Devereux says the days when one model could corner enough of the market in one country to survive are over. "No car company is ever going to be 7 to 8 per cent of the Australian market with one model," he says. "It doesn't happen anywhere on the planet and it will not happen in Australia."

During the noughties, the answer for Holden was exports and for a while this looked a sure path to success. Holden shipped the Monaro, rebadged as a Pontiac, to the US and combined with sales to the Middle East of Commodores rebadged as Chevrolets, its Adelaide plant was flat out producing more than 150,000 cars a year.

When the Monaro finished, the program was revived with the 2006 VE Commodore, which went stateside as a Pontiac G8.

But it all came crashing down in a hurry when the global financial crisis forced GM to axe brands, including Pontiac.

At a stroke, Holden's ability to keep going was thrown into doubt. Exports crashed from 56,000 in 2008 to fewer than 7000 the following year. Production fell by almost 100,000 from its peak a few years before.

Well before the dollar went north, a decision was made to add the Cruze and this undoubtedly saved Holden during the GFC, with $149m to massage the deal from Canberra.

Holden's business model shifted from a mix of domestic and exports to relying solely on domestic demand for two cars. To work, they must attract about 90,000 buyers a year between them.

"We have to have a business model that assumes parity for the Australian dollar in the long term and is capable of producing a return on what we do in this country," Devereux says. "Exports are going to have to be opportunistic."

The Cruze will be due for wholesale renewal before Commodore, and part of the funds announced yesterday will go to retooling to build the next generation from about 2015.

The Commodore enters another phase next year with the VF. Devereux describes this as "a massive change" and it incorporates some fruits of the Green Car Fund, especially work on lightweight components.

However, it evolves the previous VE model and question marks surround what happens when VF comes up for wholesale renewal in 2017-18.

One possibility is for Holden to do another Commodore in the same vein as the existing model: a large, rear-wheel drive sedan.

This type of vehicle has been at the core of Holden's local manufacturing since the first one rolled off the line in 1948. The format defined the Australian family car and doubled as a favourite with enthusiasts. Put a V8 under the bonnet and with rear-wheel drive, you have the basic ingredients for a performance car.

However, designing another Commodore looks increasingly unlikely. The default family car has become a mid-size SUV and the large sedan is desperately unfashionable.

Despite fitting more economical engines, local brands have been unable to arrest the slide. So far this year just 6 per cent of new vehicles are large sedans and there seems to be no floor to the fall.

But the main reason is that the VE Commodore is not a global car, although it was engineered with that goal in mind; its development cost, in pre-2006 dollars, was more than $1bn. Originally, the VE platform was earmarked to be the basis for many GM models but the plan was derailed as GM thrashed about in the prelude to bankruptcy, changing tack on development programs and priorities almost daily.

In the end, the engineering sits under one other car, Chevrolet's Camaro, and its long-term prospects seem grim. Large sedans, if made at all, are moving away from rear-wheel to front-wheel drive, which is inherently more efficient.

However, the VE did bring Holden to the notice of the parent, and its design and engineering team, numbering about 1000, began a phase of closer integration into GM's development network.

"GM wants to retain our design and engineering capability," Devereux said. "We do a lot of work on Buick (another GM brand) and on next-generation Delta (the engineering under Cruze). We're going to continue to design and engineer cars."

So taking the Commodore out of the picture doesn't mean Holden's local development capacity becomes redundant. It's already kept busy doing other things. More than that, it doesn't need co-investment by the government to survive because it's a valuable

GM asset.

Devereux agrees that the Commodore is not a global car, but declines to sign its death notice.

"We're going to have two global architectures, but we're not going to discuss specifically what they are. The current vehicle we produce is not a global architecture, per se."

One wild card here emerged recently via NASCAR, the popular US motorsport, which last week announced it would change its race car so that it was based on a different, as yet unnamed, production model for next season.

This set speculation flying with specialist US websites running hot with the idea that this could be a version of the long-wheelbase Commodore, the Caprice, which is sold in small numbers in the US as a specially equipped police vehicle. If the speculation is right, it suggests scope for a civilian version and a full-scale revival of Holden's export hopes.

Devereux admits reaching the production target for Adelaide is still challenging and says Holden remains alert to export opportunities. "We had anticipated selling quite a few more police cars (into the US)," he said, "but the dollar makes it pretty tough."

If the Caprice were to become a civilian model and have a hero role in NASCAR -- although this is where the argument starts to stretch -- then it is possible that Holden's involvement with rear-drive cars has life beyond the VF.

Devereux certainly believes there is a future for cars bigger than Cruze and nominates the mid-size segment as vital in some large markets, particularly the US.

"We have to figure out what that vehicle larger than a Cruze, Corolla or Mazda 3 looks like for Australia."

One possibility will arrive soon in Holden showrooms. The Malibu, a car almost as big as a Commodore but front-wheel drive, will be imported, badged as a Holden, from the last quarter this year.

The current generation will be an import but the next generation is a strong possibility as a replacement for the Commodore. It will be global, bigger than Cruze and, by then, Holden will know whether Australians have any appetite for the car.

If it does, it will come at a cost to Commodore, and Holden might then face some uncomfortable questions. Holden admits the Commodore's decline is partly down to Australia's open, competitive market.

"Ten years ago there were 144 different kinds of cars sold in this country; today there are over 230. Even if there wasn't a decline in the large car, we'd be selling fewer because there's more choice."

Holden is now bringing in the competition against itself -- or rather, GM is.

This will be compounded when GM's troubled European arm, Opel, begins importing its cars here in the third quarter. The line-up will include the Insignia, which is the same underneath as the Malibu, adding to the Commodore alternatives facing buyers.

The Opel range also includes the Astra, a small car familiar to Australians because Holden used to import them from Europe before switching to South Korea as its source for small cars.

It suggests life is going to get more difficult for Holden with its parent, GM, part of the problem as well as part of the solution.