The Holden Moment


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.   

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.


  1. 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 in Australia is we are a local industry which was sustainable when volumes were over 60,000 a year. However, the car sales pie has got larger but we now have over 200 models fighting for sale in Australia. Therefore the largest seller, Mazda 3, struggle to get over 40,000. Hence the slices have become smaller. This, is not a problem for Mazda who produce 1.08 billion cars a year but for a competitor like Ford Australia who produce around 50,000 cars a year and have similar development costs but have 21600 times less sales to recoup there investment.

    So, what should a government do? Well you have two clear choices, shut down or go global as local will fail. To prove this point Toyota makes a profit in Australia as 70% of its production here is exported and the design was based on a global designed car not a local car. Caveat: If the government would shut down the Australian industry by not supporting it, in total they employee 250,000 people, the revenue short fall the government would experience would require increased taxation on the rest of the employed!

    In reality, the government will try to do something in between, feed the company a little more money to continue, keep Unions happy and keep collecting its taxes… After all a government is a business, a not very good business.

  2. 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 – yet the cars were being sold at approximately $AU30,000 to $AU40,000+ per car)

    The point i’m trying to make is that it is time to stop trashing the australian workers and their unions every time a corporation gets itself into financial difficulties. Without our labour you wouldnt have a business, without our purchasing your product you woulnt be making any money, without a decent wage we would not be able to buy your products – so we expect, and indeed demand, a fair return for our labour.

    But you also have to have a product that we want to buy, not because you made it, but because we like it and can afford it. Product decisions are made by management not their workers – so stop blaming workers when things go pearshaped.

    To expect the workers to take a $200/week paycut is obscene when you consider that management will not be hit with a paycut, indeed in all probability they will be handsomely rewarded if the paycut is implemented

    Its about time that all shareholders got a haircut, and not just a trim either and stop blackmailing our workers and our governments.

    Are these companies positioning themselves for the implementation of the TPP (Trans-Pacific-Partnership)so that they can go a third world country, use cheap, slave labour and then import their products into this country (without price reduction, of course) with our government not being able to do anything because the TPP would not allow any government action?

    One last point. It is time the government, after having given the auto manufacturers billions of taxpayers dollars, actually did an audit on these companies and exposes any dodgy accounting practices that they use (like, for example, selling components to their sites overseas on the cheap – less than cost of production and transport – and importing components at more than the cost of production and transport – a quick way of transfering cash overseas and a quick way of showing a loss on the local books. I cant help wondering how much of the australian taxpayer subsidies were transferred to America in this way)

    One very final point. I have not seen (tho i may have missed it) any discussion by this publication of any possible impacts on our markets etc caused by the probable implementation of the TPP.

    ex-ford slave
    June 24, 2013
  3. Here are some facts worth considering … …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…


  4. 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 affected, but I would guess that the number of parts made in Australia for our Australian manufactured cars is shrinking constantly. It also needs to be realised that people will still buy these cars even though they are manufactured in Indonesia rather than Australia. Perhaps people will buy more of these cars because they will now be cheaper.

    Australian parts manufacturers, if they are globally competitive, may still get orders from the overseas factories.

    I think the main entities affected are banks and government. Think of the mortgages these employees hold. Think of the tax revenue collected from these companies and employees.

    If we look closely I think we will see the real reason for keeping the uncompetitive, sinking ship floundering and afloat.

    Arthur Dent
    June 25, 2013

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