FORD Australia's move to revive it flagging manufacturing business by producing the small four-cylinder Focus locally has put a question mark over the notion that building export markets should be the main strategy for car makers at a time when the dollar is soaring.

Faced with declining local demand for large cars, as consumers shift gears into smaller vehicles, Ford is betting that it can grab a big enough slice of the ultra competitive small-car market, rather than aggressively pursuing large-car exports to places such as the Middle East.

Emerging from a bruising over Ford's decision last week to close its Geelong six-cylinder engine plant, yesterday Ford Australia boss Tom Gorman questioned the strength of the larger export businesses of his local rivals Toyota and Holden, given the soaring Australian dollar.

"I'm not so sure how their economics are working at the moment," Mr Gorman said, noting the currency was now over US88c.

"An export portfolio is important but in the present environment I'd have to say the economics of it are difficult," Mr Gorman told a gathering of the Australia-British Chamber of Commerce in Melbourne.

While Ford hopes to export about 40 per cent of its Focus output, he said the strategy relied on the local market sustaining production volumes.

"It was a better decision for us to build our capacity with that mix of domestic and export as opposed to just trying to grab onto an export opportunity that can be quite fleeting and quite risky, depending on where exchange rates are moving," he said. While pursuing exports was an important part of Ford's strategy, they weren't "the saviour", he said.

But KPMG's head of automotive David Gelb said the strength of the dollar was widely tipped to ease later this year, and building export markets would remain a key source of additional volumes for Australian car makers.

"Certainly the export market does provide the opportunity to add to local volumes, and I think we can get too wrapped up in assuming the dollar is going to stay strong," Mr Gelb said.

The dollar was being partly fuelled by the commodity price boom, which Mr Gorman agreed showed little sign of abating.

But he said that based on Ford's future currency assumptions, an export business still worked in Australia.

Mr Gorman said the decision to close the Geelong plant from 2010 and instead import engines for the locally produced Falcon and Territory, and eventually for the Focus, had been "difficult", with 600 jobs to be lost.

But combined with plans to start building the Focus here, he said the move would leave Ford better positioned to respond to a changing Australian market, which he said remained strong.

Ford aims to produce 40,000 Focus vehicles a year in Australia, with 25,000-30,000 to go into the local market.

"If the small-car market continues to boom, (we can) put more emphasis in that," he said.

"If the large cars and SUVs strengthen we can manage in that direction. So we now have some good flexibility to go where the market wants us to go."

Mr Gorman said new-car sales this year were tracking to top 1million vehicles for the first time, up from 960,000 last year and a record 988,000 in 2005.

This was backed by Australia's strong economic fundamentals and consumer sentiment.

The imported six-cylinder engines also have a cleaner diesel version, providing the opportunity in the future for Ford to perhaps offer diesel versions of the Falcon and Territory.

Mr Gorman was upbeat on the outlook for diesel cars in Australia, as efforts to tackle climate change intensify.

Diesel engines emit 20 per cent less carbon dioxide than petrol engines, and in Europe more than half the new cars are diesels.

Mr Gorman said sales of diesel passenger cars in Australia doubled last year to 16,000, and 13,000 have already been sold in the first six month of this year.

Mr Gorman declined to be drawn on what extra federal assistance Ford may seek next year, as part of a planned review of the Government's $7.3 billion assistance package that expires in 2015.

The Federal Chamber of Automotive Industries is seeking additional funding to help offset the damage being done to local competitiveness by the strong currency.

But, in the wake of calls by South Australia and Victoria for the federal Government to delay a looming reduction in tariff protection for the industry, Mr Gorman said tariffs weren't a big issue when compared with currency movements.

"I'm sure (tariffs) will be part of the discussions, but I don't see that as a core issue," he said.

The import tariff on cars is due to fall to 5 per cent from 10 per cent in 2010.

Source: business journal