The Holden Moment

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How about something a little simpler? Like Holden’s threat to close its manufacturing plant in Adelaide unless it can cut costs by $18 million per year. The cost target equates to a pay cut of around $200 per week for Holden’s workers, which is not something the government or the unions will allow to happen.

But Holden is in a powerful negotiating position. Its local manufacturing operations are loss-making, and that’s after receiving government assistance. It wants to be able to move back into profitability or leave, threating not just its 1,700 employees but the whole car manufacturing industry.

Taxpayers have given Holden a total of $2.17 billion in ‘co-investment’ funds since 2001 but the company still can’t make a profit. It’s not just Holden; the problems are structural. High labour costs, poor productivity relative to the cost of labour and a high dollar are all part of the problem.

This begs the question, should Australia try to maintain a local car-making industry when it can’t make money doing so?

The free market answer is no it shouldn’t. If you have a whole bunch of national resources aimed at producing a good that doesn’t actually create any profit or wealth, or doesn’t create a long term return above its cost of capital, then those resources should be directed towards more productive enterprises.

But free market thinking only exits in textbooks. In the real world you have vested interests and governments interfering in the market mechanism. And while we have sympathy for the view that governments should temper the vagaries of the markets, we have absolutely no faith in it being able to do so adequately and dispassionately. Anyway, who measures the ‘adequacy’ of any intervention?

So instead you get a situation where governments counter the harsh but necessary adjustments created by the market with misguided and one-dimensional responses.

Peter Roberts argues in today’s Australian Financial Review that if Holden pulled up stumps and left, it would be ‘catastrophic’ for the economy. It would lead to an exodus of car makers, with ‘44,000 direct car-making jobs lost immediately and perhaps three times that number in supporting industry.

That sounds pretty grim. After all, many industries, from the steel makers to the parts suppliers, rely on the car industry to make a living.

But if the government had not provided such large assistance payments over the years, and the car makers wound down their manufacturing facilities, would such a large support network exist? The resources (labour and capital) currently devoted to supplying the car industry would have, by economic necessity, looked elsewhere for their sustenance.

And if those resources instead went into productive enterprise, the long term wealth created would be much better for the country. There would be no need for government subsidies, and the returns received by the new enterprises’ (in excess of their cost of capital) would represent the accumulation of real wealth.

But in its well-intentioned effort to create jobs and maintain a manufacturing presence, the government has inadvertently created a very large work force almost entirely dependent on its continuing assistance payments. And while parts of that work force may be highly productive, they’re still feeding off an unproductive economic carcass.
   
Overall, that’s bad for the economy. But the interventionist view says the government is right to support an unprofitable industry because it keeps people in jobs. And to any half-caring person, especially those with kids or dependents, maintaining jobs is a worthy political goal.

That’s why the interventionist view is so seductive. And if you pooh-pooh it, you’re just a heartless, right-wing, George Bush loving a-hole who only cares about profits. 

But the free marketer says it’s not the government’s role to create jobs. That’s what entrepreneurs are for. The government is there to do as little as possible and make sure conditions are ripe for entrepreneurs to succeed…to create productive jobs and wealth, which, if redistributed via that old notion of philanthropy, creates a more prosperous and independent society.

In short, free marketers realise that government subsidies, no matter how well intentioned, create distortions and is ultimately detrimental to a society’s wealth.

This, by the way, is the whole point of Kris Sayce and Sam Volkering’s new Revolutionary Tech Investor. They’re searching for companies that have the potential to create a huge amount of wealth  for their shareholders and society as a whole via the application of ground-breaking technology.

But the flaw with the free market view is that it fails to take humans into account. It expects politicians to not be politicians. And it expects business to be more chivalrous than it really is.

So we’re stuck with the seductive view…the view that governments, central banks, and whoever is handing out wads of someone else’s cash really are doing the right thing.

Well, if you want to be seduced, go right ahead. But understand that the more interference you have, the more wealth destruction happens under the surface. It’s not immediately apparent, but one day, and all of a sudden, the market will face a ‘Holden’ moment, which will threaten the entire underlying infrastructure.   

Regards,
Greg Canavan
for The Daily Reckoning Australia

Join me on Google+

From the Archives…

Truth or Dare Time for the Investment Industry
14-06-13 – Vern Gowdie

The Launch of Revolutionary Tech Investor
13-06-13 – Kris Sayce

The Architecture of Oppression
12-06-13 ­– Dan Denning

The Upside of a Dive to 85 for the Australian Dollar
11-06-13 – Dan Denning

Courting Controversy Over Australian Property
10-06-13 – Dan Denning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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4 Comments on "The Holden Moment"

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JoeR_AUS
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You should read the Australian Trade & Assistance Review 2011-12 Every industry gets some form of assistance: eg Budgetary assistance by industry grouping 2012 Motor vehicle and parts 620m Financial and insurance services 914m Tax concessions by Industry Groups Motor vehicle and parts 40m Financial and insurance services 845m bit biased :-) Also, every country gets government assistance for manufacturing, check Korea, Japan, Germany, USA etc. ABC quote: in regards to the automotive subsidies provided by governments. From memory: $18 per annum per person here in Aus, approx $400 in Germany and over $1000 in the US. The major difference… Read more »
ex-ford slave
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it never ceases to amaze me that when the car manufacturers get into financial troubles, the first people they blame are the workers and their “greedy” union – to that i say BULLSH*T! The problem is management that has been unable or unwilling to read the consumer trends – give us fuel economical/efficient cars, not gas guzzlers, give us smaller cars, not yank tanks and stop being greedy by overpricing the product (during my time at ford aust the cost of producing a motor vehicle was approximately $AU8,000+ per vehicle – only 7% of that cost was labour cost –… Read more »
Jace
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Here are some facts worth considering …

http://www.fcai.com.au/library/keyfacts//mar2013automotivedatacard.pdf

http://www.fcai.com.au/library/keyfacts//australian_auto_industry_fact_sheet-07-09-12.doc

http://oica.net/wp-content/uploads/mazda-2011.pdf …Note to JoeR_AUS you’re out by and order of magnitude with Mazda production mate (it was ~1.6 million in 2011).

And this little video is well worth watching…
http://fapm.publish.viostream.com/fapm

Regards,
Jace.

Arthur Dent
Guest
Who would really be affected from the car industry succumbing to Globalisation? Who buys Australian steel? Do car manufacturers buy it? If they do, they would be the only ones. The factory where I work certainly does not. I recently had to catalogue all the steel certificates for pressure rated steel and all of them were written in Chinese. There were hundreds of certificates going back decades, representing hundreds of thousands, possibly millions, of dollars in steel purchases. We do not have boiler failure or steam line failures, so the steel must be good enough. Parts manufacturers perhaps would be… Read more »
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