Have Tough Conditions in Australia Created a ‘Perfect Storm’ For GM?

General Motors“Competition in the Australian market is just brutal,” Mike Devereux, the head of General Motors’ (NYSE:GM) Holden unit, said in a statement seen by The Wall Street Journal on Monday. In an attempt to explain why the automobile manufacturer was cutting 500 jobs, approximately 12 percent of its workforce, Devereux cited the nation’s strong currency and the intense competition in the local automobile market.

But the layoffs will be a blow to Australia’s ailing manufacturing sector, already hurting because the strong dollar has made it cheaper for rivals to import competing products from abroad and pushed up costs for local labor and equipment.

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The Australian dollar is now equivalent to around $1.04. The currency passed parity with the greenback in late 2010, and it has appreciated against the U.S. dollar by about 70 percent over the past 10 years, partly as a result of sustained demand for Australia’s energy and mineral resources from the rapidly industrializing nations in Asia. As the Journal reported, the ascent of the Australian dollar has produced a “two-speed economy characterized by strength in the resources sector and opposing weakness among exporters, including manufacturers and tourism operators.”

This economic condition has played in a role in creating hostile market conditions for automobile manufacturers, said Devereux, and combined with low local important tariffs, a “perfect storm” has been created for GM…

Even though the Australian government has recently passed legislation to implement subsidies to protect jobs, downsizing in the automobiles sector has continued. The ruling Labor party reaffirmed Monday that it will invest 5.4 billion Australian dollars (or $5.6 billion) in the industry through 2020. Its funding package, named the New Car Plan, included grants for General Motors’ Holden and Ford’s (NYSE:F) Australian unit, and it was designed to support industry innovation.

General Motors, the largest American automaker by revenue, decided to cut back in Australia following a similar move made by its rival Toyota (NYSE:TM), which cut 7 percent of its staff in the country last year due to the high dollar and a persistently weak market for vehicle exports. In the past year, Ford has also announced that it will cut hundreds of jobs.

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The Australian government did acknowledge that the job cuts at GM were part of a larger effort by the company to keep its Australian operations strong and more efficient. “We will work with the industry to ensure it is sustainable in a period where the Australian dollar is very strong,” said Gary Gray, acting minister for climate change, industry, and innovation, according to the publication.

Despite the difficult economic conditions presented by Australia, in other parts of the Asian-Pacific region — including China —  increasingly large middle classes are stimulating demand for automobiles. However, due to huge losses in recession-plagued Europe, which offset earnings from GM’s operations in the United States and Asia, the company reported 2012 profit of $6.19 billion, a decrease of about one-third from the previous year’s results.

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