Holden’s future in voters’ hands

Cuts to government subsidies could see the end of the Australian car manufacturing industry

Holden has warned that there could be no car manufacturing industry in Australia, if the government decides not to support the industry.

GM Holden chairman and managing director Mike Devereux says that a change in government policy may force it to review its commitment to keep building cars in Australia. Of course there may be a certain amount of lobbying in his comments. The government currently has a $3.4 billion automotive scheme to subsidise auto plant upgrades, but the opposition has said it would cut $500 million from the plan.

In March, Holden committed to spend more than $1 billion over the next 10 years, in return for $275 million in state and federal funding. Mr Devereux went on to say that the need for government auto industry assistance in Australia would not at any point stop, because it never stops in any other country that builds cars.

Related: The end of the Australian car industry

The automotive industry has more than 55,000 employees and supports another 200,000 jobs, including industries such as car parts, steel manufacturers like BlueScope Steel Limited (ASX: BSL) and Arrium Limited (ASX: ARI) ex-OneSteel, and car dealerships owned by the likes of AP Eagers Limited (ASX: APE) and Automotive Holdings Limited (ASX: AHE).

It’s a brave government that tinkers with the subsidies to the automotive industry, and risks losing the support of that industry and the consequences it could have on unemployment and the economy. On the other hand, history has shown that over the long-term, subsidies, tariffs and handouts don’t work out all that well, and usually just delay the collapse of the industry.

The Foolish bottom line

Just because other countries subsidise auto making, that doesn’t mean Australia should. At the same time, taxpayers are supporting an industry that may collapse despite the billions being poured into it. The Productivity Commission has suggested that the government could better spend its money by focusing on removing barriers to help companies improve productivity and by boosting labour mobility. Sounds like a plan to me.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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