Goodbye GM, hello Rudd Car

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Oliver Hartwich | March 17, 2009
Article from: The Australian
http://www.theaustralian.news.com.au...1-7583,00.html
IT was meant to be a bold statement in troubled times when Prime Minister Kevin Rudd and Industry Minister Kim Carr launched their New Car Plan for a Greener Future last November. The Government hailed the decision to provide $6.2 billion to the Australian car industry as "the most comprehensive plan ever devised for this vital sector of our economy". Their plan was designed to cover the industry until 2020. Only four months later, it is obsolete and dangerous.

The plan did not make sense when it was launched and makes even less sense now. It should have been obvious that the Australian car industry was facing existential difficulties. German newspapers were already discussing the end of General Motors' Opel and Vauxhall when Rudd was presenting his grand car plan.

It is odd, to say the least, to exclude petrol from the planned emissions trading system while trying to make transport greener by giving subsidies to domestic car producers. You don't have to be Einstein to realise this amounts to nothing but old-fashioned protectionism hiding behind a green smokescreen.

The Government has a far easier option to make us drive more fuel-efficient cars. Instead of paying GM Holden or Toyota Australia to develop four-cylinder or hybrid engines, simply scrapping import duties and abolishing the luxury car tax (which strangely sets in at about the price of a European premium sedan) would make Australians think twice before buying a thirsty Holden Commodore rather than a more fuel-efficient BMW, Mercedes or Honda.

The drama surrounding Holden's US parent, GM, makes the Government's plan look ridiculous. What's the point in planning the long-term future of a sector when one of the biggest players may go under next week?

When they launched their car plan last year, Rudd and Carr emphasised how important car manufacturing was to Australia. Rudd declared only about 15 nations in the world today could create a car from scratch, and Australia had to be one of them.

With such naive political backing the troubles of GM will be an enormous challenge not only for Holden but for the Government.

European politicians were far quicker to realise a GM insolvency would render their local GM subsidiaries unviable. In Germany and Britain, the homes of GM's Opel and Vauxhall, they feared a collapse of GM would lead to the collapse of the local car industry.

For months German and British politicians, trade unionists and car workers have been desperately trying to find a way to separate their companies from the moribund GM, only to discover that this is close to impossible. Not only do their cars share technologies and platforms with other GM companies but even the patents developed in Germany for Opel have been transferred to a US company, which in turn used them as collateral for the US Government's emergency loans to GM. So the taxpayer subsidies Rudd is giving Holden may end up in the coffers of its ailing parent in Detroit.

This leads to the next problem, the role of the US Government in GM's future. When the US Government agreed to provide emergency funding, the 294-page legal document outlining the terms and conditions contained a clause that in effect put the US Government in charge of GM's strategic policy. It says any transaction in excess of $US100 million ($152 million) must be approved by President Barack Obama. Moreover, in its restructuring plan, GM states that without Australian taxpayer support the company will quit the Australian market. So the fate of Holden must be on the agenda when Rudd meets Obama in Washington next week.

GM's auditors have raised substantial doubt about the company's ability to continue as a going concern. An insolvency would almost inevitably trigger the liquidation of GM's foreign assets, including Vauxhall, Opel and Holden. But it is unlikely that in the present economic climate -- with global excess capacity in car manufacturing estimated at 20 to 30per cent -- a private investor would be brave enough to buy these failing companies. And if Vauxhall and Opel are too small to survive as independent entities, then Holden won't succeed either.

When Rudd finally realises the dire straits Holden is in, he will probably nationalise it faster than you can say Commodore. So, after the Rudd Bank prepare for the Rudd Car. Then, just like their European counterparts, Rudd and Carr will find themselves in difficult negotiations with GM to do a deal that will depend on Obama's approval.

Committing $100,000 of taxpayer money to saving each job in the car industry was already a prodigious waste of money but this will look cheap compared with the cost of nationalising Holden. In time, Australians will come to rue the day Rudd decided to treat the car industry as an issue of systemic significance.

Oliver Hartwich is a research fellow at the Centre for Independent Studies. His paper No Particular Place To Go: The Federal Government's Ill-Conceived Support for the Australian Car Industry is published by CIS today.